FWP 1 a08-15739_18fwp.htm FWP

 

Filed Pursuant to Rule 433

Registration No: 333-134553

 

Final Terms and Conditions, June 17, 2008

 

Telephone: +1 212 528 1009

 

100% Principal Protected Return-Enhanced Notes
Linked to a Basket of 10 Commodities

 

Lehman Brothers Holdings Inc. has filed a registration statement (including a prospectus) with the U.S. Securities and Exchange Commission (SEC) for this offering. Before you invest, you should read the prospectus dated May 30, 2006, the prospectus supplement dated May 30, 2006 for its Medium Term Notes, Series I, and other documents Lehman Brothers Holdings Inc. has filed with the SEC for more complete information about Lehman Brothers Holdings Inc. and this offering.  Buyers should rely upon the prospectus, prospectus supplement and any relevant free writing prospectus for complete details.  You may get these documents and other documents Lehman Brothers Holdings Inc. has filed for free by searching the SEC online database (EDGAR®) at www.sec.gov with “Lehman Brothers Holdings Inc.” as a search term. You may also access the prospectus and Series I MTN prospectus supplement on the SEC web site as follows:

 

Series I MTN prospectus supplement dated May 30, 2006:

http://www.sec.gov/Archives/edgar/data/806085/000104746906007785/a2170815z424b2.htm

Prospectus dated May 30, 2006:

http://www.sec.gov/Archives/edgar/data/806085/000104746906007771/a2165526zs-3asr.htm

 

Alternatively, Lehman Brothers Inc. will arrange to send you the prospectus, Series I MTN prospectus supplement and final pricing supplement (when completed) if you request it by calling your Lehman Brothers sales representative or 1-888-603-5847.

 

Issuer:

 

Lehman Brothers Holdings Inc. (A1/A/A+)(1)

Principal Amount:

 

$3,000,000

CUSIP:

 

5252M0GP6

Trade Date:

 

June 17, 2008

Issue Date:

 

June 24, 2008

Valuation Date:

 

June 17, 2011 or if such date is not a Valuation Business Day, the immediately preceding Valuation Business Day; provided that, if a Disruption Event is in effect on the scheduled Valuation Date, the Valuation Date may be postponed (as described below under “Disruption Events”)

Maturity Date:

 

June 24, 2011, or if such date is not a Business Day, subject to adjustment in accordance with the Business Day Convention

Component Commodities and Component Weightings:

 

The notes are linked to a Basket consisting of the Component Commodities. The Component Commodities and the Component Weighting for each Component Commodity are as set forth below:

 

 

 

 

 

Component Commodities

 

Component Weighting

 

 

 

 

 

 

 

Light sweet crude oil (“Crude Oil”)

 

10.0%

 

 

 

 

 

 

 

Henry Hub natural gas (“Natural Gas”)

 

10.0%

 

 

 

 

 

 

 

No. 2 fuel heating oil (“Heating Oil”)

 

10.0%

 

 

 

 

 

 

 

Reformulated gasoline blendstock for oxygen blending (“RBOB Gasoline”)

 

10.0%

 

 

 

 

 

 

 

Gold (“Gold”)

 

10.0%

 


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Lehman Brothers Holdings Inc. is rated A1 by Moody’s, A by Standard & Poor’s and A+ by Fitch. A credit rating reflects the creditworthiness of Lehman Brothers Holdings Inc. and is not a recommendation to buy, sell or hold securities, and it may be subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.

 

 

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Copper — Grade A (“Copper”)

 

10.0%

 

 

 

 

 

 

 

Primary Nickel (“Nickel”)

 

10.0%

 

 

 

 

 

 

 

No. 2 Yellow Soybean (“Soybeans”)

 

10.0%

 

 

 

 

 

 

 

No. 2 Yellow Corn (“Corn”)

 

10.0%

 

 

 

 

 

 

 

Coffee Robusta (“Coffee”)

 

10.0%

Issue Price:

 

100%

Interest:

 

The notes do not bear interest.

Redemption Amount:

 

A single U.S. dollar payment on the Maturity Date per $1,000 note equal to:

 

 

 

 

 

$1,000 + ($1,000 × Basket Return × Participation Rate)

if the Final Basket Level is greater than the Initial Basket Level;

 

 

 

 

 

 

$1,000

if the Final Basket Level is equal to or less than the Initial Basket Level

Participation Rate:

 

105%

Basket Return:

 

Final Basket Level – Initial Basket Level

 

 

 

Initial Basket Level

 

 

 

 

 

 

 

expressed as a percentage (rounded to three decimal places).

Initial Basket Level:

 

Set to 100 on the Trade Date

Final Basket Level:

 

100 × (1 + the sum of the Weighted Component Commodity Returns)

Weighted Component Commodity Returns:

 

For each Component Commodity:

 

 

 

 

Component Weighting

×

Final Commodity Price – Initial Commodity Price

 

 

 

Initial Commodity Price

 

Initial Commodity Price:

 

For each Component Commodity, the applicable Commodity Price on the Trade Date, as set forth below:

 

 

 

 

 

Component
Commodity

 

Initial Commodity Price

 

 

 

 

 

 

 

 

 

Crude Oil

 

$134.01

 

 

 

Natural Gas

 

$12.952

 

 

 

Heating Oil

 

$3.8222

 

 

 

RBOB Gasoline

 

$3.4179

 

 

 

Gold

 

$881.50

 

 

 

Copper

 

$8,181.00

 

 

 

Nickel

 

$23,500.00

 

 

 

Soybeans

 

$15.58

 

 

 

Corn

 

$7.4225

 

 

 

Coffee

 

$2,286.00

 

Final Commodity Price:

 

For each Component Commodity, the applicable Commodity Price on the Valuation Date.

 

 

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Commodity Price:

 

The Commodity Price for each Component Commodity is as set forth below:

 

 

 

 

 

 

 

Component
Commodity

 

Commodity Price

 

 

Crude Oil
Natural Gas
Heating Oil
RBOB Gasoline

 

For each of Crude Oil, Natural Gas, Heating Oil and RBOB Gasoline, the official settlement price of the first nearby month futures contract (or, in the case of the last trading day of the first nearby month contract, the second nearby month contract) for that Component Commodity, expressed (a) in the case of Crude Oil, as the U.S. dollar price per barrel, (b) in the case of Natural Gas, as the U.S. dollar price per million British thermal units (Btu) and (c) in the case of Heating Oil and RBOB Gasoline, as the U.S. dollar price per gallon, in each case as made public by the Relevant Exchange for that Component Commodity (subject to the occurrence of a Disruption Event).

 

 

 

 

 

 

 

Gold

 

For Gold, the official afternoon fixing price, stated in U.S. dollars per fine troy ounce, as calculated and quoted by the Relevant Exchange (subject to the occurrence of a Disruption Event).

 

 

 

 

 

 

 

Copper
Nickel

 

For each of Copper and Nickel, the official settlement price of that Component Commodity for cash delivery, expressed as the U.S. dollar price per metric ton of the Component Commodity, in each case as made public by the Relevant Exchange for that Component Commodity (subject to the occurrence of a Disruption Event).

 

 

 

 

 

 

 

Soybeans

 

The official settlement price of the first nearby month futures contract (or, in the case of the last 14 trading days of the first nearby month futures contract, the second nearby month futures contract), expressed as the U.S. cent price per bushel, as made public by the Relevant Exchange for that Component Commodity (subject to the occurrence of a Disruption Event).

 

 

 

 

 

 

 

Corn

 

The official settlement price of the relevant contract with the next succeeding “first notice date” (as defined below in “Information on the Component Commodities—Information on Corn and Soybeans and the CME”), expressed as the U.S. dollar price per bushel, as made public by the Relevant Exchange (subject to the occurrence of a Disruption Event).

 

 

 

 

 

 

 

Coffee

 

The official settlement price of the contract with the next succeeding “first notice date” (as defined below in “Information on the Component Commodities—Information on Coffee and the LIFFE”), expressed as the U.S. dollar price per metric ton, as made public by the Relevant Exchange (subject to the occurrence of a Disruption Event).

 

 

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Relevant Exchange:

 

For each Component Commodity, the exchange or trading market set forth opposite such Component Commodity below, or its successor, or if the exchange or trading market set forth below is no longer the principal exchange or trading market for a Component Commodity or options or futures contracts for such Component Commodity, such other exchange or principal trading market for the relevant Component Commodity as determined in good faith by the Calculation Agent which serves as the source of prices for that Component Commodity, and any principal exchanges or principal trading market where options or futures contracts on that Component Commodity are traded.

 

 

 

 

 

 

 

Component
Commodity

 

Relevant Exchange

 

 

Crude Oil

 

The NYMEX Division, or its successor, of the New York Mercantile Exchange, Inc. (“NYMEX”)

 

 

Natural Gas

 

NYMEX

 

 

Heating Oil

 

NYMEX

 

 

RBOB Gasoline

 

NYMEX

 

 

Gold

 

London Bullion Market Association (the “LBMA”)

 

 

Copper

 

London Metals Exchange (“LME”)

 

 

Nickel

 

LME

 

 

Soybeans

 

CME Group (“CME”) (as successor to The Chicago Board of Trade and the Chicago Mercantile Exchange)

 

 

Corn

 

CME

 

 

Coffee

 

Euronext.liffe (“LIFFE”)

Disruption Events:

 

If a Disruption Event identified in clauses (A), (B) or (C) below relating to one or more Component Commodities is in effect on the scheduled Valuation Date, the Calculation Agent will calculate the Final Basket Level using:

 

 

 

 

 

 

·

for each such Component Commodity that did not suffer a Disruption Event on the scheduled Valuation Date, the Final Commodity Price for that Component Commodity on the scheduled Valuation Date, and

 

 

 

 

 

 

·

for each such Component Commodity that did suffer a Disruption Event on the scheduled Valuation Date, the Final Commodity Price on the immediately succeeding trading day for such Component Commodity on which no Disruption Event occurs or is continuing with respect to such Component Commodity;

 

 

 

 

 

 

provided however that if a Disruption Event has occurred or is continuing with respect to a Component Commodity on each of the three scheduled trading days following the scheduled Valuation Date, then (a) that third scheduled trading day shall be deemed the Valuation Date for the affected Component Commodity; and (b) the Calculation Agent will determine the Final Commodity Price for the affected Component Commodity on such day in its sole and absolute discretion, taking into account the latest available quotation for the Commodity Price for the affected Component Commodity and any other information that in good faith it deems relevant.

 

 

 

 

 

 

If a Disruption Event identified in clauses (D) or (E) below relating to one or more Component Commodities (other than Gold) is in effect on the Valuation Date, the Calculation Agent will determine the Final Commodity Price for the affected Component Commodity on the scheduled Valuation Date in its sole and absolute discretion, taking into account the latest available quotation for the Commodity Price for the affected Component Commodity and any other information that in good faith it deems relevant.

 

 

 

 

 

 

A “Disruption Event” for a Component Commodity means, in each case as determined in good faith by the Calculation Agent:

 

 

 

 

 

 

(A)

the suspension of or material limitation on trading in the Component Commodity or futures contracts or options related to the Component Commodity, on the Relevant Exchange for that Component Commodity;

 

 

 

 

 

 

(B)

either (i) the failure of trading to commence, or permanent discontinuance of trading,

 

 

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in the Component Commodity, or futures contracts or options related to the Component Commodity, on the Relevant Exchange for that Component Commodity, or (ii) the disappearance of, or of trading in, the Component Commodity;

 

 

 

 

 

 

(C)

the failure of the Relevant Exchange for the Component Commodity to publish the official daily settlement price of the Component Commodity for that day (or the information necessary for determining the settlement price);

 

 

 

 

 

 

(D)

solely with respect to Component Commodities other than Gold, the occurrence since the Trade Date of a material change in the content, composition or constitution of the Component Commodity; or

 

 

 

 

 

 

(E)

solely with respect to Component Commodities other than Gold, the occurrence since the Trade Date of a material change in the formula for or the method of calculating the settlement price of the Component Commodity.

 

 

 

 

 

 

 

For the purpose of determining whether a Disruption Event for a Component Commodity has occurred:

 

 

 

 

 

 

 

 

(1)

a limitation on the hours in a trading day and/or number of days of trading will not constitute a Disruption Event if it results from an announced change in the regular business hours of the Relevant Exchange for the Component Commodity;

 

 

 

 

 

 

 

 

(2)

a suspension in trading in a Component Commodity on the Relevant Exchange for that Component Commodity (without taking into account any extended or after-hours trading session), by reason of a price change reflecting the maximum permitted price change from the previous trading day’s settlement price will constitute a Disruption Event; and

 

 

 

 

 

 

 

 

(3)

a suspension of or material limitation on trading on a Relevant Exchange for a Component Commodity will not include any time when the Relevant Exchange for that Component Commodity is closed for trading under ordinary circumstances.

 

 

 

 

 

For purposes of calculating the Final Basket Level in the event of a Disruption Event relating to one or more Component Commodities in accordance with the above, “trading day” means a day, as determined in good faith by the Calculation Agent, on which trading is generally conducted on the Relevant Exchange applicable to the affected Component Commodity.

Valuation Business Day:

 

A day, as determined in good faith by the Calculation Agent, on which the Relevant Exchange for each Component Commodity is scheduled to be (or, but for the occurrence of a Disruption Event, would have been) open for trading during its regular trading session (notwithstanding the Relevant Exchange closing prior to its scheduled closing time).

Business Days:

 

New York

Underwriter:

 

Lehman Brothers Inc.

Calculation Agent

 

Lehman Brothers Commodity Services Inc.

Denomination:

 

US$1,000 and integral multiples of US$1,000

Issue Type:

 

US MTN

Fees:

 

 

 

Price to Public(1)

 

Fees(2)

 

Proceeds to the Issuer

 

 

Per note

 

$1,000

 

$5.00

 

$995.00

 

 

Total

 

$3,000,000.00

 

$15,000.00

 

$2,985,000.00

 

 

 

 

 

 

(1)

The price to public includes Lehman Brothers Holdings Inc.’s cost of hedging its obligations under the notes through one or more of its affiliates, which includes such affiliates expected cost of providing such hedge as well as the profit the such affiliates expect to realize in consideration for assuming the risks inherent in providing such hedge.

 

 

 

 

 

 

(2)

Lehman Brothers Inc. will receive commissions of $5.00 per $1,000 principal amount, or of 0.50%, and may use all or a portion of these commissions to pay selling concessions or fees to other dealers. Lehman Brothers Inc. and/or an affiliate may earn additional income as a result of payments pursuant to any hedges.

 

 

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Risk Factors

 

An investment in the notes entails certain risks not associated with an investment in conventional floating rate or fixed rate medium-term notes. See “Risk Factors” in the Series I MTN prospectus supplement.

 

An investment in the notes is subject to risks associated with the performance of the Component Commodities.

 

The notes do not bear interest, and the return on the notes at maturity is dependent on the Basket Return, which in turn depends on the aggregate performance of the prices of the Component Commodities.  Because the notes do not bear interest, your return on the notes will depend solely on the whether the Final Basket Level is greater than the Initial Basket Level as of the Valuation Date.  If the Basket Return is equal to or less than zero as of the Valuation Date, you will receive at maturity only the return of the principal you invested with no additional return.

 

The prices of the Component Commodities are primarily affected by the global demand for and supply of such Component Commodities (including certain specific factors discussed below), but from time to time may also be significantly affected by speculative actions or currency exchange rates.  Demand for the Component Commodities is significantly linked to the level of global economic activity, but is also influenced by other factors such as government regulations (including environmental or consumption policies) and for certain commodities, growth in industrial production and gross domestic policy in emerging market countries, such as India or China, that have become oversized users of commodities and therefore increased the extent to which commodities rely on these markets.  In addition to general economic activity and demand, prices for a Component Commodity can be influenced by political events, changes in production and yields, weather, trade and diseases, as well as labor activity and supply disruptions in regions of the world that are major producers of the relevant Component Commodity, all of which will tend to affect worldwide prices of a Component Commodity, regardless of the location of the event.  It is impossible to predict what effect these factors will have on the value of any of the Component Commodities and thus, the return on the notes.

 

In the event of sudden disruptions in the supplies of a Component Commodity, such as those caused by war, natural events, or accidents, prices of a Component Commodity and futures contracts on a Component Commodity could become extremely volatile and unpredictable. Also, sudden and dramatic changes in the futures market may occur, for example, upon the introduction of new or previously withheld supplies of the Component Commodities into the market or the introduction of substitute products or commodities.

 

In addition, the Component Commodities are also subject to certain specific risks.

 

Specific factors affecting the price of Crude Oil. The price of crude oil is primarily affected by the global demand for and supply of crude oil. Demand for refined petroleum products by consumers, as well as the agricultural, manufacturing and transportation industries, affects the price of crude oil.  Crude oil’s end-use as a refined product is often as transport fuel, industrial fuel and in-home heating fuel. Potential for substitution in most areas exists, although considerations including relative cost often limit substitution levels. Because the precursors of demand for petroleum products are linked to economic activity, demand will tend to reflect economic conditions. Demand is also influenced by government regulations, such as environmental or consumption policies. In addition to general economic activity and demand, prices for crude oil are affected by political events, labor activity and, in particular, direct government intervention (such as embargos) or supply disruptions in major oil producing regions of the world. Such events tend to affect oil prices worldwide, regardless of the location of the event. Supply for crude oil may increase or decrease depending on many factors. These include production decisions by the Organization of Oil and Petroleum Exporting Countries and other crude oil producers. In the event of sudden disruptions in the supplies of oil, such as those caused by war, natural events, accidents or acts of terrorism, prices of oil futures contracts could become extremely volatile and unpredictable. Also, sudden and dramatic changes in the futures market may occur, for example, upon a cessation of hostilities that may exist in countries producing oil, the introduction of new or previously withheld supplies into the market or the introduction of substitute products or commodities. A decrease in the price of any of these commodities may have a material adverse effect on the price of crude oil and the return on an investment in the notes.

 

Specific factors affecting the price of Natural Gas.  Natural gas is used primarily for residential and commercial heating and in the production of electricity. The level of global industrial activity influences the demand for natural gas. Natural gas has also become an increasingly popular source of energy in the United States, both for consumers and industry, in part because it burns more cleanly and has minimal impact on the environment. Many utilities, for example, have shifted away from coal or oil to natural gas to produce electricity. The demand for natural gas has also traditionally been cyclical, with higher demand during the months of winter and lower demand during the warmer summer months. In addition, the seasonal temperatures in countries throughout the world can also heavily influence the demand for natural gas. The world’s supply of natural gas is concentrated in the Middle East, Europe, the former Soviet Union and Africa. In general, the supply of natural gas is based on competitive market forces: inadequate supply at any one time leads to price increases, which signal to production companies the need to increase the supply of natural gas to the market. Supplying natural gas in order to meet this demand, however, is dependent on a number of factors. These factors may be broken down into two segments: those factors that affect the short term supply and general barriers to increasing supply. In turn, factors that affect the short term supply are as follows: the availability of skilled workers and equipment, permitting and well development and weather and delivery disruptions (e.g., hurricanes, labor strikes and wars). Similarly, the other more general barriers to the increase in supply of natural gas are: access to land, the expansion of

 

6



 

pipelines and the financial environment. These factors, which are not exhaustive, are interrelated and can have complex and unpredictable effects on the supply for, and the price of, natural gas.

 

Specific factors affecting the price of Heating Oil.  The level of global industrial activity influences the demand for heating oil. In addition, the seasonal temperatures in countries throughout the world can heavily influence the demand for heating oil. Heating oil is generally used to fuel heat furnaces for buildings. Heat oil is derived from crude oil and as such, any factors that influence the supply of crude oil may also influence the supply of heating oil.

 

Specific factors affecting the price of RBOB Gasoline.  The level of global industrial activity influences the demand for non-oxygenated gasoline. In addition, the demand has seasonal variations, which occur during “driving seasons” usually considered the summer months in North America and Europe. Non-oxygenated gasoline is derived from crude oil and as such, any factors that influence the supply of crude oil may also influence the supply of non-oxygenated gasoline.

 

Specific factors affecting the price of Gold.  The price of gold is primarily affected economic factors, including, among other things, the structure of and confidence in the global monetary system, expectations of the future rate of inflation, the relative strength of, and confidence in, the U.S. dollar (the currency in which the price of gold is generally quoted), interest rates and gold borrowing and lending rates, and global or regional economic, financial, political, regulatory, judicial or other events.  Gold prices may also be affected by industry factors such as industrial and jewelry demand, lending, sales and purchases of gold by the official sector, including central banks and other governmental agencies and multilateral institutions which hold gold, levels of gold production and production costs, and short-term changes in supply and demand because of trading activities in the gold market.   In addition, the price of gold could be adversely affected by the promulgation of new laws or regulations or by the reinterpretation of existing laws or regulations (including, without limitation, those relating to taxes and duties on commodities or commodity components) by one or more governments, governmental agencies or instrumentalities, courts or other official bodies.

 

Specific factors affecting the price of Copper.  The price of copper is primarily affected by the global demand for and supply of copper. Copper is a conductor of electricity, and one of the most significant applications for copper is the production of cable, wire and electrical products for both the electrical and building industries. Construction is another principal industrial application for copper, which is used in pipes for plumbing, heating, ventilation, and air conditioning, along with masonry wiring and sheet metal facing.   Demand for copper products in recent years has been supported by strong consumption from newly industrializing countries due to their copper-intensive economic growth and infrastructure development.  Apart from the United States, Canada and Australia, the majority of copper concentrate supply (the raw material) comes from outside the Organization for Economic Cooperation and Development countries. In previous years, copper supply has been affected by strikes, financial problems and terrorist activity.

 

Specific factors affecting the price of Nickel.  The price of nickel is primarily affected by the global demand for and supply of nickel. Primary nickel improves the durability and strength of steel and provides corrosion resistance, allowing for the production of stainless steel, which is the primary consumer of primary nickel. It is also used in the production of special metal alloys, many of which are used in automotive parts.  Russia has the world’s largest nickel reserves and therefore is the largest nickel producer, while Australia and Canada are also significant producers.

 

Specific factors affecting the price of Soybeans.  The price of soybeans is primarily affected by the global demand for and supply of soybeans, but is also influenced significantly from time to time by speculative actions and by currency exchange rates. In addition, prices for soybeans are affected by governmental programs and policies regarding agriculture, including soybeans, specifically, and trade, fiscal and monetary issues, more generally. Extrinsic factors also affect soybean prices such as weather, crop yields, natural disasters, technological developments, wars and political and civil upheavals. Soy biodiesel, animal agriculture, edible soybean oil and new industrial uses are examples of major areas that may impact worldwide soybean demand. The United States, Argentina and Brazil are the three biggest suppliers of soybean crops.

 

Specific factors affecting the price of Corn. The price of corn is primarily affected by the global demand for, and supply of, corn. The demand for corn is in part linked to the development of industrial and energy uses for corn. This includes the use of corn in the production of ethanol. The demand for corn is also affected by the profitability of the pork and poultry sectors, which use corn for feed.  Troubles in those industries will lessen the demand for corn. For example, if avian flu were to have a negative effect on world poultry markets, the demand for corn might decrease.

 

Specific factors affecting the price of Coffee.  The price of Robusta coffee is primarily affected by the global demand for and supply of coffee.  The supply of coffee can be affected by weather conditions, the health of the coffee trees and harvesting practices. Historically, weather has played a major role in determining world supply. The internal policies of the governments of producing countries with regard to number of trees planted, price support programs and world export quotas can also impact the amount of coffee available for world trade.  The demand for coffee is primarily determined by its price, the price and availability of substitute drinks and consumers’ tastes.

 

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Many factors affect the market value of the notes; these factors interrelate in complex ways and the effect of any one factor may offset or magnify the effect of another factor.

 

The market value of the notes will be affected by factors that interrelate in complex ways. The effect of one factor may offset the increase in the market value of the notes caused by another factor and the effect of one factor may exacerbate the decrease in the market value of the notes caused by another factor.  For example, the market value of the notes will be affected by changes in the level of interest rates, the time to maturity of the notes (and any associated “time premium”) and the credit ratings of Lehman Brothers Holdings Inc.  In addition, the market value of the notes will also be affected by certain specific factors, which are described in the following paragraphs (along with the expected impact on the market value of the notes given a change in that specific factor, assuming all other conditions remain constant).

 

The prices of the Component Commodities will affect the market value of the notes. It is expected that the market value of the notes will depend on where the prices of the Component Commodities are trading relative to the Initial Commodity Prices.  If you choose to sell your notes when the price of one or more of the Component Commodities is trading at a level below its respective Initial Commodity Price, or when the market perceives an increased risk of this occurring, the trading price of the notes may be adversely affected, and you may receive substantially less than the principal amount of the notes sold.

 

The forward prices of Crude Oil, Natural Gas, Heating Oil, Copper, Nickel, Soybeans and Corn are currently lower than spot prices, which imply a decline in spot prices over time. Your return on the notes depends solely on the Final Basket Level being greater than the Initial Basket Level as of the Valuation Date, which in turn depends on the prices for the Component Commodities having appreciated relative to their prices on the Trade Date.  However, if prices for Crude Oil, Natural Gas, Heating Oil, Copper, Nickel, Soybeans and Corn are currently in “backwardation”, meaning that the forward prices are currently lower than the spot prices, which implies that the prices of such Component Commodities are expected to decrease in the future.  If the prices of such Component Commodities on the Valuation Date have declined sufficiently to offset any appreciation in one or more of the other Component Commodities, the Final Basket Level may be equal to or less than the Initial Basket Level, in which case, you will receive at maturity only the return of the principal you invested with no additional return.

 

Changes in the volatility of the Component Commodities and their prices are expected to affect the market value of the notes. Volatility is the term used to describe the size and frequency of price and/or market fluctuations. If the volatility of one or more of the Component Commodities or the prices of one or more of the Component Commodities increases or decreases, the market value of the notes may be adversely affected. The volatility of the Component Commodities and their prices are affected by a variety of factors, including weather, diseases, agricultural events or policies, governmental programs and policies, national and international political and economic events (including terrorist attacks and wars), changes in interest and exchange rates and trading activity in the Component Commodities and the futures contracts on the Component Commodities.

 

Suspension or disruptions of market trading in the commodity markets may adversely affect the value of the notes. The commodity markets are subject to temporary distortions or other disruptions due to various factors, including the lack of liquidity in the markets, the participation of speculators and government regulation and intervention. These circumstances could adversely affect the prices of one or more of the Component Commodities and, therefore, the value of your notes.

 

Active trading in options, futures contracts, options on futures contracts and underlying commodities may adversely affect the value of the notes.  Lehman Brothers Commodity Services Inc. and certain other affiliates of Lehman Brothers Holdings Inc. actively trade the Component Commodities, futures contracts on the Component Commodities on a spot and forward basis and other contracts and products in or related to the Component Commodities and other derivative products (including futures contracts, options on futures contracts and options and swaps on the Component Commodities).  Lehman Brothers Holdings Inc., Lehman Brothers Inc. or their affiliates may also issue or underwrite other financial instruments with returns indexed to one or more of the Component Commodities or futures contracts on the Component Commodities and derivative commodities. These trading and underwriting activities by Lehman Brothers Holdings Inc., Lehman Brothers Inc., Lehman Brothers Commodity Services Inc. or their affiliates, or by unaffiliated third parties, could adversely affect the prices of the Component Commodities, which could in turn affect the return on and the value of the notes.

 

The inclusion in the original issue price of the broker’s fee and Lehman Brothers Holdings Inc.’s cost of hedging its obligations under the notes through one or more of its affiliates is likely to adversely affect the value of the notes prior to maturity.

 

The original issue price of the notes includes the broker’s fee and Lehman Brothers Holdings Inc.’s cost of hedging its obligations under the notes through one or more of its affiliates.  Such cost includes such affiliates’ expected cost of providing a hedge, as well as the profit these 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 a broker will be willing to purchase notes from you in secondary market transactions, if at all, will likely be lower than the original issue price.  In addition, any such prices may differ from values determined by pricing models used by a broker, as a result of such compensation or other transaction costs.

 

8



 

The use of a return on a basket of Component Commodities instead of a single commodity or index return may adversely affect the return on your investment.

 

The Redemption Amount payable on the notes in excess of the principal invested, if any, is based on the Basket Return, which in turn is based on the Final Basket Level that represents the combined performance of the Component Commodities.  Because price movements in the Component Commodities may not correlate with each other, at a time when the price of one or more of the Component Commodities increases, the price of one or more of the other Component Commodities may increase to a lesser extent or may decline. Therefore, in calculating the Basket Return, increases in the value of one or more of the Component Commodities may be moderated, or wholly offset, by lesser increases or declines in the value of one or more of the other Component Commodities.

 

The return on your notes may not reflect all developments in the Component Commodities.

 

Because the payout will be based on the Basket Return, which in turn is calculated based on the Final Basket Level on the Valuation Date, a single Valuation Business Day near the end of the term of the notes, the prices of the Component Commodities at other times during the term of the notes or at the Maturity Date could be higher than the Final Basket Level on the Valuation Date.  This difference could be particularly large if there is a significant decrease in the prices of the Component Commodities during the latter portion of the term of the notes or if there is significant volatility in the prices of the Component Commodities during the term of the notes, especially on dates near the Valuation Date.

 

Lack of regulation.

 

The notes are debt securities that are direct obligations of Lehman Brothers Holdings Inc.  The net proceeds to be received by Lehman Brothers Holdings Inc. from the sale of the notes will not be used to purchase or sell the Component Commodities, or futures contracts on the Component Commodities on the Relevant Exchanges, for the benefit of holders of the notes. The notes are not themselves futures contracts, and an investment in the notes does not constitute either an investment in the Component Commodities or futures contracts on Component Commodities or in a collective investment vehicle that trades in the Component Commodities or futures contracts on the Component Commodities.

 

Unlike an investment in the notes, an investment in a collective investment vehicle that invests in commodities on behalf of its participants may be regulated as a commodity pool and its operator may be required to be registered with and regulated by the Commodity Futures Trading Commission (“CFTC”) as a “commodity pool operator” (“CPO”). Because the notes are not interests in a commodity pool, the notes will not be regulated by the CFTC as a commodity pool, Lehman Brothers Holdings Inc. will not be registered with the CFTC as a CPO, and you will not benefit from the CFTC’s or any non-U.S. regulatory authority’s regulatory protections afforded to persons who trade in commodities or who invest in regulated commodity pools.

 

The notes do not constitute investments by you in futures contracts traded on regulated futures exchanges.  Accordingly, you will not benefit from the CFTC’s or any other regulatory authority’s regulatory protections afforded to persons who trade in futures contracts on a regulated futures exchange.

 

You must rely on your own evaluation of the merits of an investment linked to the Component Commodities.

 

In the ordinary course of their businesses, affiliates of Lehman Brothers Holdings Inc. may from time to time express views on expected movements in the price of Component Commodities and other commodities. These views are sometimes communicated to clients who participate in the markets for the Component Commodities and other commodity sectors. However, these views, depending upon worldwide economic, political and other developments, may vary over differing time horizons and are subject to change. Moreover, other professionals who deal in the markets for the Component Commodities and other sectors may at any time have significantly different views from those of Lehman Brothers Holdings Inc. or its affiliates.  In connection with your purchase of the notes, you should investigate the Component Commodities and not rely on views which may be expressed by Lehman Brothers Holdings Inc. or its affiliates in the ordinary course of their businesses with respect to future Component Commodity price movements.

 

You should make such investigation as you deem appropriate as to the merits of an investment linked to the Component Commodities. Neither the offering of the notes nor any views which may from time to time be expressed by Lehman Brothers Holdings Inc. or its affiliates in the ordinary course of their businesses with respect to future price movements of the Component Commodities constitutes a recommendation as to the merits of an investment in your notes.

 

Suspension or disruption of market trading in the Component Commodities or other futures contracts on the Component Commodities and certain other events may require a postponement in the Valuation Date for one or more of the Component Commodities, and may adversely affect the value of the notes.

 

Certain events, including events involving the suspension or disruption of market trading in the Component Commodities or futures contracts on the Component Commodities constitute Disruption Events under the terms of the notes.  For further information on these events, see “Disruption Events” above.  To the extent any of these events occurs with respect to one or more of the Component Commodities and remains in effect on the scheduled Valuation Date for the notes, the Valuation Date for the affected Component Commodity may be postponed until the Disruption Event ceases to be in effect or, if the Disruption Event remains in effect for three scheduled trading days after the Valuation Date, the price for the affected Component Commodity used to calculate the Final Basket Level will be determined by the Calculation Agent in its sole and absolute discretion taking into account the latest available quotation for the price for the affected Component Commodity and any other information that in good faith it deems relevant.

 

9



 

In the event the Valuation Date for one or more Component Commodities is delayed, the Final Commodity Price for the affected Component Commodity may be lower, and could result in the Final Basket Level (and consequent Basket Return and Redemption Amount) being lower, than what you may have anticipated based on the last available price for the affected Component Commodity as of the scheduled Valuation Date.

 

There are specific risks you should consider relating to the trading of commodities on the London Metal Exchange.

 

The prices of Copper and Nickel will be determined by reference to the official cash delivery settlement price of contracts traded on the London Metal Exchange (the “LME”). The LME is a principals’ market which operates in a manner more closely analogous to the over-the-counter physical commodity markets than regulated futures markets, and certain features of regulated futures markets are not present in the context of LME trading. For example, there are no daily price limits on the LME, which would otherwise restrict the extent of daily fluctuations in the prices of LME contracts. In a declining market, therefore, it is possible that prices would continue to decline without limitation within a trading day or over a period of trading days. In addition, a contract may be entered into on the LME calling for delivery on any day from one day to three months following the date of such contract, weekly from three months to six months and monthly thereafter up to 63, 27 and 15 months forward depending on the commodity (63 months forward for Copper and 27 months forward for Nickel), in contrast to trading on futures exchanges, which call for delivery in stated delivery months. As a result, there may be a greater risk of a concentration of positions in LME contracts on particular delivery dates, which in turn could cause temporary aberrations in the prices of LME contracts for certain delivery dates. If such aberrations are occurring on the Valuation Date, the Final Commodity Price and, therefore, the Final Basket Level (and consequent Basket Return and Redemption Amount), could be adversely affected.

 

An investment in the notes is subject to risks associated with the London Bullion Market Association and the London bullion market.

 

Gold is traded on the London bullion market, which is the market in London on which the members of the London Bullion Market Association (LBMA) quote prices.  Investments in securities indexed to the value of commodities that are traded on non-U.S. exchanges involve risks associated with the markets in those countries, including risks of volatility in those markets and governmental intervention in those markets.  The LBMA is a self-regulatory association of bullion market participants.  Although all market-making members of the LBMA are supervised by the Bank of England and are required to satisfy a capital adequacy test, the LBMA itself is not a regulated entity. If the LBMA should cease operations, if bullion trading should become subject to a value added tax or other tax or any other form of regulation currently not in place, or if the LBMA should change any rule or bylaw or take emergency action under its rules, the market for gold, and consequently the Final Commodity Price of gold, as well as the Final Basket Level (and consequent Basket Return and Redemption Amount) or the value of the notes, may be affected.  The London bullion market is a principals’ market which operates in a manner more closely analogous to an over-the-counter physical commodity market than a regulated futures market, and certain features of U.S. futures contracts are not present in the context of London bullion market trading. For example, there are no daily price limits on the London bullion market which would otherwise restrict fluctuations in the prices of London bullion market contracts.  In a declining market, it is possible that prices would continue to decline without limitation within a trading day or over a period of trading days.

 

There are specific risks you should consider relating to the trading of commodities on unregulated exchanges.

 

Investments in securities indexed to the value of commodities that are traded on non-U.S. exchanges involve risks associated with the markets in those countries, including risks of volatility in those markets and governmental intervention in those markets.

 

United States Federal Income Tax Treatment

 

Lehman Brothers Holdings Inc. intends to treat the notes as contingent payment debt instruments, as described under “Supplemental United States Federal Income Tax Consequences—Contingent Payment Debt Instruments” in the Series I MTN prospectus supplement.

 

Lehman Brothers Holdings Inc. has determined that the comparable yield will be an annual rate of 6.09%, compounded semi-annually. You can obtain the projected payment schedule by submitting a written request to Lehman Brothers Holdings Inc. at the following address:

 

Controller’s Office

Lehman Brothers Holdings Inc.

745 Seventh Avenue

New York, New York 10019

(212) 526-7000

 

10



 

Information on the Component Commodities

 

The Redemption Amount payable on the Maturity Date will be determined by the Basket Return, which is dependent on the official settlement prices of the Component Commodities on the Valuation Date.  Lehman Brothers Holdings Inc. has derived all information regarding the commodities futures markets, the NYMEX, the LBMA, the LME, the CME, and the LIFFE from publicly available sources.  Information concerning the NYMEX, and Crude Oil, Natural Gas,  Heating Oil and RBOB Gasoline trading on the NYMEX, reflects the policies of, and is subject to change without notice by, the NYMEX.  Information concerning the LBMA, and Gold trading on the LBMA, reflects the policies of, and is subject to change without notice by, the LBMA.  Information concerning the LME, and Copper and Nickel trading on the LME, reflects the policies of, and is subject to change without notice by, the LME.  Information concerning the CME, and Corn and Soybean trading on the CME, reflects the policies of, and is subject to change without notice by, the CME.  Information concerning the LIFFE, and Coffee trading on the LIFFE, reflects the policies of, and is subject to change without notice by, the LIFFE.  Neither Lehman Brothers Holdings Inc. nor Lehman Brothers Inc. makes any representation or warranty as to the accuracy or completeness of such information.

 

The Commodity Price for each Component Commodity is displayed on Bloomberg under the following symbols:

 

Component Commodity

 

Bloomberg Symbol

 

Reuters Symbol

 

Crude Oil

 

CL1

 

0#2CL:

 

Natural Gas

 

NG1

 

0#NG:

 

Heating Oil

 

HO1*

 

0#2HO:

 

RBOB Gasoline

 

XB1*

 

0#RBO:

 

Gold

 

GOLDLNPM

 

XAUFIXPM=

 

Copper

 

LOCADY

 

RING=

 

Nickel

 

LONIDY

 

RING=

 

Corn

 

C 1**

 

0#C:

 

Soybeans

 

S 1***

 

0#S:

 

Coffee

 

CF1****

 

0#/LKD:

 


*

HO1 and XB1 are expressed on Bloomberg as cents per gallon, not USD per gallon.

 

 

**

C 1 is expressed on Bloomberg as cents per bushel, not USD per bushel. Between the first notice date and the last trading date for a particular contract, the relevant symbol is C 2.

 

 

***

S 1 is expressed on Bloomberg as cents per bushel, not USD per bushel. Between the first notice date and the last trading date for a particular contract, the relevant symbol is S 2.

 

 

****

Between the first notice date and the last trading date for a particular contract, the relevant symbol is CF2.

 

The Commodity Futures Markets

 

At present, the Component Commodities (excluding Copper and Nickel) are exchange-traded futures contracts. An exchange-traded futures contract is a bilateral agreement providing for the purchase and sale of a specified type and quantity of a commodity or financial instrument during a stated delivery month for a fixed price. A futures contract provides for a specified settlement month in which the commodity or financial instrument is to be delivered by the seller (whose position is described as “short”) and acquired by the purchaser (whose position is described as “long”) or in which the cash settlement amount is to be made.

 

Contracts on physical commodities are traded on regulated futures exchanges, in the over-the-counter market and on various types of physical and electronic trading facilities and markets.  Futures contracts are traded on organized exchanges, known as “contract markets” in the United States, through the facilities of a centralized clearing house and a brokerage firm which is a member of the clearing house. The clearing house guarantees the performance of each clearing member which is a party to the futures contract by, in effect, taking the opposite side of the transaction. At any time prior to the expiration of a futures contract, subject to the availability of a liquid secondary market, a trader may elect to close out its position by taking an opposite position on the exchange on which the trader obtained the position. This operates to terminate the position and fix the trader’s profit or loss.

 

U.S. contract markets, as well as brokers and market participants, are subject to regulation by the Commodity Futures Trading Commission.  Because the notes do not constitute futures contracts or commodity options, noteholders will not benefit from the aforementioned clearing house guarantees or the regulatory protections of the CFTC, the FSA or any other non-U.S. regulatory authority.

 

11



 

Information on Crude Oil, RBOB Gasoline, Heating Oil and Natural Gas and the NYMEX

 

The NYMEX was established in 1872 as the Butter and Cheese Exchange of New York, and has since traded a variety of commodity products. It is now the largest exchange in the world for the trading of energy futures and options contracts, including contracts for Crude Oil, RBOB Gasoline, Heating Oil and Natural Gas. It is also a leading North American exchange for the trading of platinum group metals and other precious metals contracts. The NYMEX conducts trading in its futures contracts through an open-outcry trading floor during the trading day and after hours through an internet-based electronic platform. The establishment of energy futures on the NYMEX occurred in 1979, with the introduction of heating oil futures contracts. The NYMEX opened trading in leaded gasoline futures in 1981, followed by the crude oil futures contract in 1983 and unleaded gasoline futures in 1984.

 

The Commodity Prices for each of Crude Oil, RBOB Gasoline, Heating Oil and Natural Gas are the U.S. dollar cash buyer settlement price (per barrel, in the case of Crude Oil, per million British thermal units (Btu) in the case of Natural Gas, and, as the U.S. dollar price per gallon in the case of RBOB Gasoline and Heating Oil) of the “first nearby month” contract traded on NYMEX.  The “first nearby month” contract is, at any given time, the contract next scheduled for settlement.  For example, in June 2008, prior to the termination of trading in a given commodity contract, the first nearby month futures contract for a given commodity will be the July 2008 futures contract, which is the contract for delivery of the commodity in July 2008.  After the contract terminates trading in that month, the first nearby contract will be the August 2008 futures contract, which is the contract for delivery of the commodity in August 2008.  See below for the dates in any given month in which trading terminates in the Crude Oil, RBOB Gasoline, Heating Oil and Natural Gas contracts.

 

The Crude Oil contract trades on NYMEX in units of 1,000 barrels and the delivery point is Cushing, Oklahoma. The Crude Oil Contract provides for delivery of several grades of domestic and internationally traded foreign crude oils. It may be settled by delivery of West Texas Intermediate, Low Sweet Mix, New Mexican Sweet, North Texas Sweet, Oklahoma Sweet or South Texas Sweet. Trading in the Crude Oil contract terminates at the close of business on the third business day prior to the 25th calendar day of the month preceding the delivery month (or if the 25th calendar day of the month is a non-business day, on the third business day prior to the business day preceding the 25th calendar day).

 

The contract for RBOB Gasoline (reformulated gasoline blendstock for oxygen blending) trades on NYMEX in units of 1,000 barrels, and the price is based on delivery at petroleum products terminals in the New York Harbor, the major East Coast trading center for imports and domestic shipments from refineries in the New York Harbor area or from the Gulf Coast refining centers.  RBOB Gasoline conforms to industry standards for reformulated regular gasoline blendstock for blending with 10% denatured fuel ethanol (92% purity), as listed by the Colonial Pipeline for fungible F grade for sales in New York and New Jersey, and is a wholesale non-oxygentated blendstock traded in the New York Harbor barge market.  Trading in the RBOB Gasoline contract terminates at the close of business on the last business day of the month preceding the delivery month.

 

The contract for Heating Oil — also known as No. 2 fuel oil — trades on NYMEX in units of 1,000 barrels, and the price is based on delivery in New York Harbor, the principal cash market trading center.  Heating Oil accounts for about 25% of the yield of a barrel of crude, the second largest “cut” after gasoline.  Trading in the Heating Oil contract terminates at the close of business on the last business day of the month preceding the delivery month.

 

The Natural Gas contract trades on NYMEX in units of 10,000 million British thermal units (Btu). The price is based on delivery at the Sabine Pipe Line Co. Henry Hub in Louisiana, the nexus of 16 intra- and interstate natural gas pipeline systems that draw supplies from the region’s prolific gas deposits. The pipelines serve markets throughout the U.S. East Coast, the Gulf Coast, the Midwest, and up to the Canadian border.  Trading in the Natural Gas contract terminates three business days prior to the first calendar day of the delivery month.

 

Information on Copper and Nickel and the LME

 

The LME was established in 1877 and is the principal metal exchange in the world on which contracts for delivery of copper and nickel — as well as zinc, lead, tin and aluminum alloy — are traded. In contrast to U.S. futures exchanges, the LME operates as a principals’ market for the trading of forward contracts, and is therefore more closely analogous to over-the-counter physical commodity markets than futures markets. As a result, members of the LME trade with each other as principals and not as agents for customers, although such members may enter into offsetting “back-to-back” contracts with their customers.  Further, the LME does not require client orders to be exposed to the market via LME Select (the LME’s official electronic trading platform), inter-office dealing or the floor of the exchange trading, and LME members may, at their option (unless they have specific client instructions to the contrary) cross the order against their own book or that of another customer, rather than expose it to the market.  As a result price discovery will take place against LME members’ net exposures during the relevant LME second ring (as discussed below).

 

12



 

In addition, while futures exchanges permit trading to be conducted in contracts for monthly delivery in stated delivery months, LME contracts are be established for delivery on any day (referred to as a “prompt date”) from one day to three months following the date of contract, weekly from three months to six months, and monthly thereafter up to 63, 27 and 15 months forward (depending on the commodity).  Further, there are no price limits applicable to LME contracts, and prices could decline without limitation over a period of time. Trading is conducted on the basis of warrants that cover physical material held in listed warehouses.

 

The trading on the LME is transacted through open-outcry sessions on the LME floor, electronically on LME Select and through inter-office dealing, which allows the LME to operate as a 24-hour market. Trading on the floor takes place in two sessions daily, from 11:45 am to 1:05 pm and from 2:55 to 4:15 pm, London time. The two sessions are each broken down into two rings made up of five minutes’ trading in each contract. After the second ring of the first session the official prices for the day are announced. Contracts may be settled by offset or delivery and can be cleared in U.S. dollars, pounds sterling, Japanese yen and euros.

 

The LME is not a cash-cleared market. Both inter-office and floor trading are cleared and guaranteed by a system run by the London Clearing House, whose role is to act as a central counterparty to trades executed between clearing members and thereby reduce risk and settlement costs. The LME is subject to regulation by the FSA.

 

Copper has traded on the LME since its establishment.  The Copper contract traded on the LME was upgraded to High Grade Copper in November 1981 and again to the current Copper — Grade A contract in June 1986.  Copper trades on the LME in units of 25 metric tons and the settlement price of Copper for cash delivery is the price for the contract, expressed as U.S. dollars per metric ton, scheduled for same-day settlement.  Copper contracts on the LME may be established for delivery daily from one day (cash delivery) to three months, weekly on each Wednesday from three months to six months, and monthly on every third Wednesday from seven months to 63 months.

 

Nickel has traded on the LME since 1979.  The Nickel contract is for Primary Nickel.  Nickel trades on the LME in units of 6 metric tons and the settlement price of Nickel for cash delivery is the price for the contract, expressed as U.S. dollars per metric ton, scheduled for same-day settlement.  Nickel contracts on the LME may be established for delivery daily from one day (cash delivery) to three months, weekly on each Wednesday from three months to six months, and monthly on every third Wednesday from seven months to 27 months.

 

The LME share (by weight) of world terminal market trading is over 90% of all copper and virtually all nickel.

 

Information on Gold and the LBMA

 

The LBMA is the principal global clearing center for over-the-counter gold bullion transactions, including transactions in spot, forward and options contracts, together with exchange-traded futures and options and other derivatives. The principal representative body of the London gold bullion market is the LBMA. The LBMA, which was formally incorporated in 1987, is a self-regulatory association currently comprised of 60 members, of which 9 are market-making members, plus a number of associate members around the world.

 

Twice daily during London trading hours, at 10:30 a.m. and 3:00 p.m., there is an official “fixing” which provides reference gold prices, quoted in U.S. dollars per fine troy ounce, for that day’s trading. Formal participation in the London gold fixing is traditionally limited to five market-making members of the LBMA.

 

Clients place orders with the dealing rooms of fixing members, who net all orders before communicating their interest to their representatives at the fixing. Orders may be changed at any time during these proceedings. Prices are adjusted to reflect whether there are more buyers or sellers at a given price until supply and demand are balanced, at which time the price is declared fixed. All fixing orders are then fulfilled at this price, which is communicated to the market through various media. There are no price limits applicable to LBMA contracts and, consequently, prices could decline without limitation over a period of time.

 

Information on Corn and Soybeans and the CME

 

The CME is a combined entity formed by the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade, and is one of the largest and most diverse financial exchanges in the world for trading futures and options. The CME offers a wide range of benchmark products, covering all major asset classes. Specifically, the CME offers futures and options based on interest rates, equity indexes, foreign exchange, commodities, energy, and alternative investment products such as weather and real estate.

 

The Commodity Price for Corn is the official U.S. dollar settlement price per bushel of the first nearby futures contract for #2 Yellow Corn.  The Corn contract trades on the CME in units of 5,000 bushels. It is settled in March, May, July,

 

13



 

September and December (each a “Contract Month”), and trading in the Corn contract terminates on the business day prior to the fifteenth calendar day of the Contract Month. The daily price limit for the Corn contract is twenty cents ($0.20) per bushel ($1,000/contract) above or below the previous day’s settlement price. There is no limit in the spot month. The last trading day is the business day prior to the 15th calendar day of the contract month. The last delivery day is the second business day following the last trading day of the delivery month. The notice date (the “first notice date”) is the business day immediately preceding the first delivery day of the delivery month, which is the first business day of the succeeding calendar month.

 

The Commodity Price for Soybeans is the official settlement price of the first nearby month futures contract (or, in the case of the last 14 trading days of the first nearby month futures contract, the second nearby month futures contract), stated as the U.S. cent price per bushel,  as made public by the CME.  The contract size for Soybeans is 5,000 bushels.  The last trading day is the business day prior to the 15th calendar day of the contract month.  The last trading day is the business day prior to the 15th calendar day of the contract month.

 

Information on Coffee and the LIFFE

 

The LIFFE, through its LIFFE CONNECT platform, provides an electronic exchange for a variety of derivative products. LIFFE was formed in 1982, after UK financial regulators relaxed controls on foreign exchange transactions; Euronext, which bought LIFFE in 2001, has combined all of its derivate trading operations under the Euronext.liffe name. Its parent became part of NYSE Euronext in 2007.   LIFFE lists a diverse range of commodity futures and options, which include cocoa, robusta coffee, raw sugar, white sugar, feed wheat, milling wheat, rapeseed, corn and rapeseed oil, which are all traded on LIFFE CONNECT.

 

The Commodity Price for Coffee is the official settlement price of the contract with the next succeeding First Notice Date (as defined below), stated in U.S. dollars per metric ton, as made public by the LIFFE.  The contract size for Coffee is five metric tons and the delivery points include nominated warehouses in the United Kingdom or warehouses deemed to be sufficiently close to Amsterdam, Antwerp, Barcelona, Bremen, Felixstowe, Genoa-Savona, Hamburg, Le Havre, Marseilles-Fos, New Orleans, New York, Rotterdam or Trieste.  The last trading day is the last business day of the delivery month at 12:30 pm, and the “first notice date” is the first business day of the delivery month.

 

14



 

Historical Component Commodity Prices and Basket Return

 

The following graphs show the daily Commodity Price of each of the Component Commodities on its Relevant Exchange from June 13, 2003 through June 13, 2008, using historical data obtained from Bloomberg Financial Markets; the daily closing price of the contract for RBOB Gasoline on the NYMEX is presented from October 3, 2005 (the date it commenced trading) through June 13, 2008; neither Lehman Brothers Inc. nor Lehman Brothers Holdings Inc. makes any representation or warranty as to the accuracy or completeness of these prices.  The historical data is not necessarily indicative of the future performance of the Commodity Prices for such Component Commodities, or what the value of the notes may be.  Fluctuations in the prices of each of the contracts for such Component Commodities make it difficult to predict whether the Final Commodity Price will be greater than the Initial Commodity Price of each such Component Commodity and, consequently, whether the Redemption Amount payable at maturity will be greater than the principal amount invested.  Historical fluctuations in the Commodity Prices may be greater or lesser than fluctuations in the Commodity Prices for the Component Commodities experienced by the holders of the notes.

 

 

15



 

 

 

16



 

 

 

17



 

 

 

18



 

 

 

19



 

 

20



 

The following graph shows the hypothetical daily historical Basket Return based on the hypothetical composite performance of the Commodity Prices for the Component Commodities on the Relevant Exchanges, using historical data from October 3, 2005 through June 13, 2008, obtained from Bloomberg Financial Markets; neither Lehman Brothers Inc. nor Lehman Brothers Holdings Inc. makes any representation or warranty as to the accuracy or completeness of these prices.  For purposes of illustration only, the Basket Return shown in the chart below was indexed to a level of 0.0 on October 3, 2005, based upon the Commodity Prices for the Component Commodities on that day, and the composite value of the Component Commodities on any subsequent day was obtained by using the calculation of the Basket Return described above.

 

Under the terms of the notes and for purposes of calculating the Redemption Amount, the Initial Basket Level will be indexed to a level of 100 on the Trade Date, based on the Initial Commodity Prices for the Component Commodities on the Trade Date.

 

 

21



 

Hypothetical Redemption Amount Payment Examples

 

If the Final Basket Level on the Valuation Date is greater than the Initial Basket Level, the notes will pay at maturity a Redemption Amount equal to the principal amount invested plus the principal amount multiplied by the Basket Return multiplied by the Participation Rate.  If the Final Basket Level on the Valuation Date is equal to or less than the Initial Basket Level, the notes will pay at maturity a Redemption Amount equal to only the principal amount invested with no additional return.

 

The table below illustrates the hypothetical Redemption Amount at maturity per $1,000 in principal amount of notes, based on a hypothetical range of performance for the Final Basket Level (which will be determined on the Valuation Date) from 0 to 200, as well as hypothetical values for the Basket Return (which will be calculated on the Valuation Date).  The Participation Rate of 105% and the Initial Basket Level of 100 were each set on the Trade Date.  The following results are based solely on the hypothetical examples cited; the Final Basket Levels have been chosen arbitrarily for the purpose of the table below and should not be taken as indicative of the future performance of the price of the Component Commodities.  Numbers in the examples have been rounded for ease of analysis.

 

Final Basket Level

 

Initial Basket Level

 

Basket Return

 

Redemption Amount
(per $1,000 principal amount)
1

 

200

 

100

 

100%

 

$2,050

 

190

 

100

 

90%

 

$1,945

 

180

 

100

 

80%

 

$1,840

 

170

 

100

 

70%

 

$1,735

 

160

 

100

 

60%

 

$1,630

 

150

 

100

 

50%

 

$1,525

 

140

 

100

 

40%

 

$1,420

 

130

 

100

 

30%

 

$1,315

 

120

 

100

 

20%

 

$1,210

 

110

 

100

 

10%

 

$1,105

 

100

 

100

 

0%

 

$1,000

 

90

 

100

 

–10%

 

$1,000

 

80

 

100

 

–20%

 

$1,000

 

70

 

100

 

–30%

 

$1,000

 

60

 

100

 

–40%

 

$1,000

 

50

 

100

 

–50%

 

$1,000

 

40

 

100

 

–60%

 

$1,000

 

30

 

100

 

–70%

 

$1,000

 

20

 

100

 

–80%

 

$1,000

 

10

 

100

 

–90%

 

$1,000

 

0

 

100

 

–100%

 

$1,000

 


1          If the Final Basket Level is greater than the Initial Basket Level, the Redemption Amount per $1,000 note will equal $1,000 + ($1,000 × Basket Return × Participation Rate).  If the Final Basket Level is equal to or less than the Initial Basket Level, the Redemption Amount per $1,000 note will equal $1,000.

 

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The examples below illustrate how the Final Basket Level, the Basket Return and the Redemption Amount are calculated.  The below examples are based on the Initial Commodity Price of each Component Commodity (which were determined on the Trade Date), the Final Commodity Price of each Component Commodity (which will be determined on the Valuation Date) and a Participation Rate of 105% (which was determined on the Trade Date).  The Initial Basket Level was set to 100 on the Trade Date.  The following results are based solely on the hypothetical examples cited; the Final Basket Levels and the Final Commodity Prices have been chosen arbitrarily for the purpose of these examples and should not be taken as indicative of the future performance of the price of the Component Commodities.  Numbers in the examples have been rounded for ease of analysis.

 

Example 1:  The Final Commodity Price of each Component Commodity increases relative to its Initial Commodity Price, resulting in a Final Basket Level of 130, a Basket Return of 30% and a Redemption Amount of $1,315 per $1,000 note.

 

The Basket Return equals (Final Basket Level – Initial Basket Level)/Initial Basket Level, and is calculated as follows:

 

Basket Return = (130 – 100)/100

 

The Redemption Amount per $1,000 principal amount equals $1,000 + ($1,000 × Basket Return × Participation Rate) and is calculated as follows:

 

Redemption Amount per $1,000 principal amount of notes = $1,000 + ($1,000 × 30% × 105%) = $1,315

 

The table below illustrates how the Final Basket Level in the above example was calculated:

 

Component
Commodity

 

Initial
Commodity Price
(on Trade Date)

 

Final
Commodity Price
(on Valuation Date)

 

Weighting

 

Weighted
Component
Commodity Return

 

Crude Oil

 

134.01

 

174.21

 

10%

 

0.030

 

Natural Gas

 

12.952

 

14.895

 

10%

 

0.015

 

Heating Oil

 

3.8222

 

4.2044

 

10%

 

0.010

 

RBOB Gasoline

 

3.4179

 

4.7851

 

10%

 

0.040

 

Copper

 

8181.00

 

11453.40

 

10%

 

0.040

 

Nickel

 

23500.00

 

37600.00

 

10%

 

0.060

 

Gold

 

881.50

 

1101.88

 

10%

 

0.025

 

Soybeans

 

15.58

 

18.70

 

10%

 

0.020

 

Corn

 

7.4225

 

9.6493

 

10%

 

0.030

 

Coffee

 

2286.00

 

2971.80

 

10%

 

0.030

 

 

 

Sum of Weighted Component Commodity Returns =

 

0.30

 

Final Basket Level = 100 × (1+ Sum of the Weighted Component Commodity Returns) =

 

130.0

 

 

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Example 2: The Final Commodity Price of each Component Commodity decreases relative to its Initial Commodity Price, resulting in a Final Basket Level of 90, a Basket Return of 10% and a Redemption Amount of $1,000 per $1,000 note.

 

The Basket Return equals (Final Basket Level – Initial Basket Level)/Initial Basket Level, and is calculated as follows:

 

Basket Return = (90 – 100)/100

 

The Redemption Amount per $1,000 principal amount equals $1,000, because the Final Basket Level was less than the Initial Basket Level.

 

The table below illustrates how the Final Basket Level in the above example was calculated:

 

Component
Commodity

 

Initial
Commodity Price
(on Trade Date)

 

Final
Commodity Price
(on Valuation Date)

 

Weighting

 

Weighted
Component
Commodity Return

 

Crude Oil

 

134.01

 

113.91

 

10%

 

–0.015

 

Natural Gas

 

12.952

 

12.304

 

10%

 

–0.005

 

Heating Oil

 

3.8222

 

3.4400

 

10%

 

–0.010

 

RBOB Gasoline

 

3.4179

 

3.2470

 

10%

 

–0.005

 

Copper

 

8181.00

 

7771.95

 

10%

 

–0.005

 

Nickel

 

23500.00

 

21150.00

 

10%

 

–0.010

 

Gold

 

881.50

 

793.35

 

10%

 

–0.010

 

Soybeans

 

15.58

 

14.80

 

10%

 

–0.005

 

Corn

 

7.4225

 

6.3091

 

10%

 

–0.015

 

Coffee

 

2286.00

 

1828.80

 

10%

 

–0.020

 

 

 

Sum of Weighted Component Commodity Returns =

 

0.10

 

Final Basket Level = 100 × (1+ Sum of the Weighted Component Commodity Returns) =

 

90.0

 

 

Example 3: The Final Commodity Prices of Crude Oil, RBOB Gasoline, Copper, Soybeans, Corn and Coffee, respectively, increase relative to their respective Initial Commodity Prices, while the Final Commodity Price of Natural Gas, Heating Oil, Nickel and Gold, respectively, decrease relative to their respective Initial Commodity Prices, resulting in a Final Basket Level of 110, a Basket Return of 10% and a Redemption Amount of $1,105 per $1,000 note.

 

The Basket Return equals (Final Basket Level – Initial Basket Level)/Initial Basket Level, and is calculated as follows:

 

Basket Return = (110 – 100)/100

 

The Redemption Amount per $1,000 principal amount equals $1,000 + ($1,000 × Basket Return × Participation Rate) and is calculated as follows:

 

Redemption Amount per $1,000 principal amount of notes = $1,000 + ($1,000 × 10% × 105%) = $1,105

 

The table below illustrates how the Final Basket Level in the above example was calculated:

 

Component
Commodity

 

Initial
Commodity Price
(on Trade Date)

 

Final
Commodity Price
(on Valuation Date)

 

Weighting

 

Weighted
Component
Commodity Return

 

Crude Oil

 

134.01

 

167.51

 

10%

 

0.025

 

Natural Gas

 

12.952

 

12.304

 

10%

 

–0.005

 

Heating Oil

 

3.8222

 

3.4400

 

10%

 

–0.010

 

RBOB Gasoline

 

3.4179

 

4.4433

 

10%

 

0.030

 

Copper

 

8181.00

 

9817.20

 

10%

 

0.020

 

Nickel

 

23500.00

 

21150.00

 

10%

 

–0.010

 

Gold

 

881.50

 

793.35

 

10%

 

–0.010

 

Soybeans

 

15.58

 

17.92

 

10%

 

0.015

 

Corn

 

7.4225

 

9.2781

 

10%

 

0.025

 

Coffee

 

2286.00

 

2743.20

 

10%

 

0.020

 

 

 

Sum of Weighted Component Commodity Returns =

 

0.10

 

Final Basket Level = 100 × (1+ Sum of the Weighted Component Commodity Returns) =

 

110.0

 

 

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Example 4: The Final Commodity Prices of Natural Gas, Copper and Coffee, respectively, increase relative to their respective Initial Commodity Prices, while the Final Commodity Prices of Crude Oil, Heating Oil, RBOB Gasoline, Nickel, Gold, Soybeans and Corn depreciate relative to their respective Initial Commodity Prices, resulting in a Final Basket Level of 60, a Basket Return of –40% and a Redemption Amount of $1,000 per $1,000 note.

 

The Basket Return equals (Final Basket Level – Initial Basket Level)/Initial Basket Level, and is calculated as follows:

 

Basket Return = (60 – 100)/100

 

The Redemption Amount per $1,000 principal amount equals $1,000, because the Final Basket Level was less than the Initial Basket Level.

 

The table below illustrates how the Final Basket Level in the above example was calculated:

 

Component
Commodity

 

Initial
Commodity Price
(on Trade Date)

 

Final
Commodity Price
(on Valuation Date)

 

Weighting

 

Weighted
Component
Commodity Return

 

Crude Oil

 

134.01

 

46.90

 

10%

 

–0.065

 

Natural Gas

 

12.952

 

13.600

 

10%

 

0.005

 

Heating Oil

 

3.8222

 

2.2933

 

10%

 

–0.040

 

RBOB Gasoline

 

3.4179

 

0.6836

 

10%

 

–0.080

 

Copper

 

8181.00

 

9408.15

 

10%

 

0.015

 

Nickel

 

23500.00

 

8225.00

 

10%

 

–0.065

 

Gold

 

881.50

 

528.90

 

10%

 

–0.040

 

Soybeans

 

15.58

 

38.95

 

10%

 

–0.075

 

Corn

 

7.4225

 

2.5979

 

10%

 

–0.065

 

Coffee

 

2286.00

 

2514.60

 

10%

 

0.010

 

 

 

Sum of Weighted Component Commodity Returns =

 

–0.40

 

Final Basket Level = 100 × (1+ Sum of the Weighted Component Commodity Returns) =

 

60.0

 

 

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