Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-112367
Prospectus Supplement to the Prospectus dated February 6, 2004
and the Prospectus Supplement dated February 6, 2004 -- No. 406
(GOLDMAN SACHS LOGO)
THE GOLDMAN SACHS GROUP, INC.
----------------------
$27,386,000
Medium-Term Notes, Series B
Index-Linked Notes due December 2009
(Linked to the FTSE(TM) 100 Index)
----------------------
The amount that you will be paid on your note on the stated maturity date,
December 29, 2009 (unless extended due to market disruption, currency disruption
or non-business days), is determined with reference to the U.S. dollar value of
the performance of the FTSE(TM) 100 Index during the period from the trade date
(June 22, 2004) to the determination date (the fifth business day prior to the
stated maturity date, unless extended due to market disruption or currency
disruption).
- If the USD final index level (the level of the FTSE(TM) 100 Index on the
determination date, converted from British pounds sterling into U.S.
dollars) increases from the USD initial index level, which is 8,136.24
(the index level on the trade date, converted from British pounds sterling
into U.S. dollars), you will be paid the face amount of your note plus the
supplemental payment amount. The supplemental payment amount will equal
the face amount of your note multiplied by the percentage increase from
the USD initial index level to the USD final index level multiplied by the
participation rate of 1.34.
- If the USD final index level is unchanged or declines from the USD initial
index level by not more than 30%, you will be paid the face amount of your
note.
- If the USD final index level declines from the USD initial index level by
more than 30%, you will be paid the outstanding face amount of your note
multiplied by 1.42857 multiplied by the number obtained by dividing the
USD final index level by the USD initial index level.
- For example, if the USD final index level is 50% of the USD initial index
level, the amount we will pay you on the stated maturity date for each
$1,000 face amount of your note will be $714.29, calculated as follows:
the face amount of your note multiplied by an amount equal to 1.42857
times 50%. If the USD final index level falls an additional 10% (so that
it is 40% of the USD initial index level), the amount we will pay you on
the stated maturity date ($571.43) will be 14.2857% lower than the amount
we would have paid had the USD final index level been 50% of the USD
initial index level.
DEPENDING ON THE PERFORMANCE OF THE U.S. DOLLAR VALUE OF THE FTSE(TM) 100
INDEX, YOU COULD LOSE ALL OR A SUBSTANTIAL PORTION OF YOUR INVESTMENT IN YOUR
NOTE. IN ADDITION, WE WILL NOT PAY INTEREST ON THE NOTES.
The return on your note will reflect changes in the value of the FTSE(TM)
100 Index and in the exchange rate between the U.S. dollar and the British pound
sterling. We will calculate the USD initial index level and the USD final index
level by converting the value of the index from British pounds sterling into
U.S. dollars on the trade date and on the determination date, respectively. AS A
RESULT, IF THE VALUE OF THE U.S. DOLLAR APPRECIATES AGAINST THE BRITISH POUND
STERLING, YOU MAY LOSE A SUBSTANTIAL PORTION OF YOUR INVESTMENT IN YOUR NOTE,
EVEN IF THERE HAS BEEN AN INCREASE IN THE FTSE(TM) 100 INDEX.
Because we have provided only a brief summary of the terms of your note
above, you should read the detailed description of the terms of the notes found
in "Summary Information" on page S-2 and "Specific Terms of Your Note" on page
S-17.
YOUR INVESTMENT IN THE NOTES INVOLVES CERTAIN RISKS. IN PARTICULAR,
ASSUMING NO CHANGES IN MARKET CONDITIONS OR OTHER RELEVANT FACTORS, THE VALUE OF
YOUR NOTE ON THE DATE OF THIS PROSPECTUS SUPPLEMENT (AS DETERMINED BY REFERENCE
TO PRICING MODELS USED BY GOLDMAN, SACHS & CO.) IS SIGNIFICANTLY LESS THAN THE
ORIGINAL ISSUE PRICE. WE ENCOURAGE YOU TO READ "ADDITIONAL RISK FACTORS SPECIFIC
TO YOUR NOTE" ON PAGE S-9 SO THAT YOU MAY BETTER UNDERSTAND THOSE RISKS.
ORIGINAL ISSUE DATE (SETTLEMENT DATE): June 29, 2004
ORIGINAL ISSUE PRICE: 100% of the face amount
UNDERWRITING DISCOUNT: 0.35% of the face amount
NET PROCEEDS TO THE GOLDMAN SACHS GROUP, INC.: 99.65% of the face amount
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------
Goldman Sachs may use this prospectus supplement in the initial sale of the
notes. In addition, Goldman, Sachs & Co. or any other affiliate of Goldman Sachs
may use this prospectus supplement in a market-making transaction in a note
after its initial sale. UNLESS GOLDMAN SACHS OR ITS AGENT INFORMS THE PURCHASER
OTHERWISE IN THE CONFIRMATION OF SALE, THIS PROSPECTUS SUPPLEMENT IS BEING USED
IN A MARKET-MAKING TRANSACTION.
GOLDMAN, SACHS & CO.
----------------------
Prospectus Supplement dated June 22, 2004.
"FTSE(TM)", "FT-SE(R)", and "Footsie(R)" are trademarks of the London Stock
Exchange Plc and The Financial Times Ltd and are used by FTSE International
Limited under license. The notes are not sponsored, endorsed or otherwise
promoted by FTSE International Ltd or by the London Stock Exchange Plc or by The
Financial Times Ltd.
SUMMARY INFORMATION
We refer to the notes we are offering by this prospectus supplement as the
"offered notes" or the "notes". Each of the offered notes, including your note,
has the terms described below and under "Specific Terms of Your Note" on page
S-17. Please note that in this prospectus supplement, references to "The Goldman
Sachs Group, Inc.", "we", "our" and "us" mean only The Goldman Sachs Group, Inc.
and do not include its consolidated subsidiaries. Also, references to the
"accompanying prospectus" mean the accompanying Prospectus, dated February 6,
2004, as supplemented by the accompanying Prospectus Supplement, dated February
6, 2004, of The Goldman Sachs Group, Inc.
KEY TERMS
ISSUER: The Goldman Sachs Group, Inc.
INDEX: the FTSE(TM) 100 Index (Bloomberg: "UKX")
FOREIGN EXCHANGE RATES: USD/GBP. In this prospectus supplement, when we refer
to "USD" and "GBP", we mean U.S. dollar and British pound sterling, respectively
INITIAL FOREIGN EXCHANGE RATE: 1.8208 USD/ GBP
FINAL FOREIGN EXCHANGE RATE: the spot foreign exchange rate as displayed on the
Reuters WMRPSPOT page following the close of the index on the determination date
(other than when a currency disruption event shall have occurred or be
continuing)
INITIAL INDEX LEVEL: 4,468.50
FINAL INDEX LEVEL: the closing level of the index on the determination date,
except in the limited circumstances described under "Specific Terms of Your Note
- --Consequences of a Market Disruption Event or Currency Disruption Event" on
page S-19 and subject to adjustment as provided under "Specific Terms of Your
Note -- Discontinuance or Modification of the Index" on page S-20
USD INITIAL INDEX LEVEL: 8,136.24, the initial index level, converted from
British pounds sterling into U.S. dollars at the initial foreign exchange rate
USD FINAL INDEX LEVEL: The final index level, converted from British pounds
sterling into U.S. dollars at the final foreign exchange rate
FACE AMOUNT: each note will have a face amount equal to $1,000; $27,386,000 in
the aggregate for all the offered notes
USD INDEX RETURN: the result of (1) the USD final index level minus the USD
initial index level divided by (2) the USD initial index level, expressed as a
percentage
USD INDEX LEVEL: The FTSE(TM) 100 Index converted from British pounds sterling
into U.S. dollars, at a given point in time
PAYMENT AMOUNT: on the stated maturity date, we will pay the holder of each
note an amount, if any, in cash equal to:
- - if the USD index return is greater than 0%, the outstanding face amount of the
note plus the supplemental payment amount. The supplemental payment amount
will equal the outstanding face amount of the note multiplied by the
participation rate of 1.34 multiplied by the USD index return
- - if the USD index return is equal to or less than 0% but equal to or greater
than -30%, the outstanding face amount of the note
- - if the USD index return is less than -30%, the outstanding face amount of the
note multiplied by 1.42857 multiplied by the result of the USD final index
level divided by the USD initial index level. For example,
S-2
if the USD final index level falls to 50% of the USD initial index level, the
amount we will pay you on the stated maturity date for each $1,000 face amount
of your note will be $714.29, calculated as follows: the face amount of your
note multiplied by a number equal to 1.42857 times 50%
PARTICIPATION RATE: 1.34
TRADE DATE: June 22, 2004
STATED MATURITY DATE: December 29, 2009, unless extended for up to six business
days
DETERMINATION DATE: the fifth business day prior to December 29, 2009, unless
extended for up to five business days
NO INTEREST: the offered notes will not bear interest prior to the stated
maturity date
NO LISTING: the offered notes will not be listed on any securities exchange or
interdealer market quotation system
CALCULATION AGENT: Goldman, Sachs & Co.
BUSINESS DAY: as described on page S-21
S-3
Q&A
HOW DO THE NOTES WORK?
The notes offered by this prospectus supplement will have a stated
maturity date five years and six months after the original issue date (unless
extended due to market disruption, currency disruption or non-business days).
The return on the notes will be linked to the performance of the FTSE(TM) 100
Index, which is comprised of the stocks of companies listed on the London Stock
Exchange. In addition, the return on the notes will also be linked to changes in
the exchange rate between the U.S. dollar and the British pound sterling. As a
result, if the value of the U.S. dollar appreciates against the British pound
sterling, you may not receive a positive return on your note, despite the fact
that there has been an increase in the index. The notes will not bear interest
and no other payments will be made on your note before the stated maturity date.
You may lose all or a significant amount of your initial investment. See
"Additional Risk Factors Specific to Your Note" on page S-9.
The payment amount, if any, for each note outstanding on the stated
maturity date will be an amount in cash equal to:
- - if the USD index return is greater than 0%, the outstanding face amount of the
note plus the supplemental payment amount. The supplemental payment amount
will equal the outstanding face amount of the note multiplied by the
participation rate of 1.34 multiplied by the USD index return.
- - if the USD index return is equal to or less than 0% but equal to or greater
than -30%, the outstanding face amount of the note.
- - if the USD index return is less than -30%, the face amount of the note
multiplied by 1.42857 multiplied by the result of the USD final index level
divided by the USD initial index level. For example, if the USD final index
level falls to 50% of the USD initial index level, the amount we will pay you
on the stated maturity date for each $1,000 face amount of your note will be
$714.29, calculated as follows: the face amount of your note multiplied by a
number equal to 1.42857 times 50%. If the USD final index level falls an
additional 10% (so that it is 40% of the USD initial index level), the amount
we will pay you on the stated maturity date ($571.43) will be 14.2857% lower
than the amount we would have paid had the USD final index level been 50% of
the USD initial index level. If the USD index return is less than -30%, the
payment on your note on the stated maturity date will be less than the face
amount of your note and may even be reduced to zero.
The return is calculated by subtracting the USD initial index level from
the USD final index level and dividing the result by the USD initial index
level, with the result expressed as a percentage.
The calculation agent will determine the final index level, which will be
the closing level of the index on the determination date as calculated and
published by the applicable index sponsor. The calculation agent will also
determine the final foreign exchange rate, which will be the spot foreign
exchange rate as displayed on the Reuters WMRPSPOT page following the close of
the index on the determination date (other than when a currency disruption event
shall have occurred or be continuing).
As discussed in the accompanying prospectus, the notes are indexed debt
securities and are part of a series of debt securities entitled "Medium-Term
Notes, Series B" issued by The Goldman Sachs Group, Inc. The notes will rank
equally with all other unsecured and unsubordinated debt of The Goldman Sachs
Group, Inc. For more details, see "Specific Terms of Your Note" on page S-17.
WHO SHOULD OR SHOULD NOT CONSIDER AN INVESTMENT IN THE NOTES?
We have designed the notes for investors who want to participate in the
potential increase in the dollar value of the FTSE(TM) 100 Index while
protecting their entire investment against a decline of up to 30% in the USD
index level from the USD initial index level. Because the entire principal
amount of your notes will be fully exposed to any potential depreciation beyond
30% in the USD index level over the term of the notes,
S-4
you should only consider purchasing the notes if you are willing to accept the
risk of loss of the entire principal amount of your note. To the extent that the
USD final index level declines by more than 30% from the USD initial index
level, the rate of decline in the amount you will be paid on your note on the
stated maturity date will exceed the rate of decline of the index (converted
into U.S. dollars).
In addition, if the amount payable on your note on the stated maturity
date is the face amount or even if the amount payable exceeds the face amount of
your note, the overall return you earn on your note may be less than you would
have earned by investing in a non-indexed debt security that bears interest at a
prevailing market rate. The notes may therefore not be a suitable investment for
you if you prefer the lower risk of fixed income investments with comparable
maturities issued by companies with comparable credit ratings. For more details,
see "Additional Risk Factors Specific to Your Note -- Your Note Does Not Bear
Interest" on page S-9.
WHAT WILL I RECEIVE IF I SELL THE NOTE PRIOR TO THE STATED MATURITY?
If you sell your note prior to the stated maturity date, you will receive
the market price for your note. The market price for your note may be influenced
by many factors, such as interest rates, the foreign exchange rate of British
pounds sterling into U.S. dollars and the volatility of the index. Depending on
the impact of these factors, you may receive significantly less than the face
amount of your note in any sale of your note before the stated maturity date. In
addition, assuming no changes in market conditions or any other relevant
factors, the value of your note on the date of this prospectus supplement (as
determined by reference to pricing models used by Goldman, Sachs & Co.) is
significantly less than the original issue price. For more information on the
value of your note in the secondary market, see "Additional Risk Factors
Specific to Your Note -- Assuming No Changes in Market Conditions Or Any Other
Relevant Factors, the Value of Your Note on the Date of this Prospectus
Supplement (As Determined By Reference to Pricing Models Used by Goldman, Sachs
& Co.) Is Significantly Less Than the Original Issue Price" on page S-9 and
"-- The Market Value of Your Note May Be Influenced by Many Factors That Are
Unpredictable and Interrelated in Complex Ways" on page S-11.
HYPOTHETICAL EXAMPLES
We have assumed for the following table and chart that the closing level
of the index on the determination date, as converted into U.S. dollars, will be
the same as it is on the stated maturity date. We have also assumed that the
note is purchased on the original issue date and held to the stated maturity
date. If you sell your note before the stated maturity date, your return will
depend upon the market value of your note at the time of sale, which may be
affected by a number of factors that are not reflected in the examples shown
below. For a discussion of some of these factors, see "Additional Risk Factors
Specific to Your Note" on page S-9.
The following table and chart are based on index returns and foreign
exchange returns that are entirely hypothetical and do not take into account any
taxes you may owe as a result of owning your note; no one can predict what the
value of the index or the final foreign exchange rate will be on the
determination date. The actual level of the index has been highly
volatile -- meaning that the index level has changed substantially in relatively
short periods -- in the past, and its future performance cannot be predicted.
The foreign exchange rate of British pounds sterling into U.S. dollars has
fluctuated in the past, and may, in the future, experience significant
fluctuations. The USD final index level can appreciate or depreciate due to
changes in both the index level and the foreign currency exchange rate. For more
details about hypothetical returns on your note, please see the following
examples and "Hypothetical Returns on Your Note" on page S-25.
The actual performance of the index and the fluctuations of the foreign
exchange rate over the life of the offered notes, as well as the amount payable
at maturity, may bear little relation to the hypothetical examples shown
S-5
below or to the historical levels of the index and the foreign exchange rate
shown elsewhere in this prospectus supplement. For information about the level
of the index during recent periods, see "The Index -- Historical Closing Levels
of the Index" on page S-29. For information about the foreign exchange rate
during recent periods, see "Historical Currency Exchange Rate Information" on
page S-31.
The table and chart below also assume that there is no change in or
affecting the composition of the index stocks in the index or the method by
which the index sponsor calculates the index level, that there is no change in
the relative weighting of any index stock in the index, and that no market
disruption event or currency disruption event occurs with respect to the index.
The levels in the left column of the table represent the hypothetical USD
final index levels and are expressed as percentages of the USD initial index
level, which is 8,136.24 and the participation rate of 1.34. The amounts in the
right column represent the hypothetical payment amounts, based on the
corresponding hypothetical USD final index level and the participation rate of
1.34 and are expressed as percentages of the face amount of a note.
<Table>
<Caption>
Hypothetical USD Final Index Level Hypothetical Payment Amount as
as Percentage of USD Percentage of Face Amount
Initial Index Level on the Stated Maturity Date
- ----------------------------------------------------- -----------------------------------------------------
250% 301.00%
225% 267.50%
200% 234.00%
175% 200.50%
150% 167.00%
140% 153.60%
130% 140.20%
120% 126.80%
110% 113.40%
100% 100.00%
90% 100.00%
80% 100.00%
70% 100.00%
60% 85.71%
50% 71.43%
40% 57.14%
30% 42.86%
20% 28.57%
0% 0%
</Table>
If the USD index level declines by more than 30% over the life of the
notes, then you will lose 1.42857 multiplied by the percentage decline in the
USD index level in excess of 30%. As a result, to the extent the USD index level
declines by more than 30%, the rate of decline in the amount you will be paid on
your note on the stated maturity date will exceed the rate of decline of the USD
index level. If, for example, the USD final index level were determined to be
50% of the USD initial index level, the payment amount that we would deliver to
you at maturity would be 71.43% of the face amount of your note, as shown in the
table above. As a result, if you purchased your note on the original issue date
and held it until the stated maturity date, you would lose 28.57% of your
investment.
The following chart also shows a graphical illustration of the
hypothetical payment amounts (expressed as a percentage of the face amount of
your note) that we would deliver to the holder of your note on the stated
maturity date, if the USD final index level (expressed as a percentage of the
USD initial index level) were any of the hypothetical levels shown on the
horizontal axis and based on the participation rate of 1.34. The chart shows
that any hypothetical USD final index level of less than 70% of the USD initial
index level (the section left of the 70% marker on the horizontal axis) would
S-6
result in a hypothetical payment amount of less than 100% of the face amount of
your note (the section below the 100% marker on the vertical axis) and,
accordingly, in a loss of principal to the holder of your note.
(HYPOTHETICAL PAYMENT AMOUNT GRAPH)
S-7
WHAT DOES THE INDEX MEASURE AND WHERE CAN I FIND MORE INFORMATION ABOUT IT?
Please see "The Index" on page S-29 for a description of the index.
WHAT ABOUT TAXES?
The U.S. federal income tax consequences of an investment in your note are
uncertain, both as to the timing and character of any inclusion in income in
respect of your note. Some of these tax consequences are summarized below, but
we urge you to read the more detailed discussion in "Supplemental Discussion of
Federal Income Tax Consequences" on page S-33.
Pursuant to the terms of the notes, The Goldman Sachs Group, Inc. and you
agree (in the absence of an administrative or judicial ruling to the contrary)
to characterize your note for all purposes as a pre-paid forward contract with
respect to the index. If your note is so treated, you will generally recognize
capital gain or loss upon the sale or maturity of your note in an amount equal
to the difference between the amount you receive upon the sale of your note or
on the stated maturity date and the amount you paid for your note. Such gain or
loss generally would be long-term capital gain or loss if you held your note for
more than one year.
S-8
ADDITIONAL RISK FACTORS SPECIFIC TO YOUR NOTE
An investment in your note is subject to the risks described below, as well as
the risks described under "Considerations Relating to Indexed Securities" in the
accompanying prospectus dated February 6, 2004. Your note is a riskier
investment than ordinary debt securities. Also, your note is not equivalent to
investing directly in the index stocks, i.e., the stocks comprising the index to
which your note is linked. You should carefully consider whether the offered
notes are suited to your particular circumstances.
ASSUMING NO CHANGES IN MARKET CONDITIONS OR ANY OTHER RELEVANT FACTORS, THE
VALUE OF YOUR NOTE ON THE DATE OF THIS PROSPECTUS SUPPLEMENT (AS DETERMINED BY
REFERENCE TO PRICING MODELS USED BY GOLDMAN, SACHS & CO.) IS SIGNIFICANTLY LESS
THAN THE ORIGINAL ISSUE PRICE
The value or quoted price of your note at any time, however, will reflect
many factors and cannot be predicted. If Goldman, Sachs & Co. makes a market in
the offered notes, the price quoted by Goldman, Sachs & Co. would reflect any
changes in market conditions and other relevant factors, and the quoted price
could be higher or lower than the original issue price, and may be higher or
lower than the value of your note as determined by reference to pricing models
used by Goldman, Sachs & Co.
If at any time a third party dealer quotes a price to purchase your note
or otherwise values your note, that price may be significantly different (higher
or lower) than any price quoted by Goldman, Sachs & Co. You should read "-- The
Market Value of Your Note May Be Influenced by Many Factors That Are
Unpredictable and Interrelated in Complex Ways" below.
Furthermore, if you sell your note, you will likely be charged a
commission for secondary market transactions, or the price will likely reflect a
dealer discount.
There is no assurance that Goldman, Sachs & Co. or any other party will be
willing to purchase your note; and, in this regard, Goldman, Sachs & Co. is not
obligated to make a market in the notes. See "-- Your Note May Not Have an
Active Trading Market" below.
THE PRINCIPAL OF YOUR NOTE IS NOT PROTECTED
The principal of your note is not protected if the USD final index level
declines by more than 30% from the USD initial index level. If the USD final
index level is less than 70% of the USD initial index level, you will lose the
outstanding face amount of your note multiplied by 1.42857 multiplied by the
percentage decline in the USD index level in excess of 30%. For example, if the
USD final index level falls to 50% of the USD initial index level, resulting in
an USD index return of -50%, you will be paid only 71.43% of your principal and
you will lose 28.57% of your principal. Therefore, to the extent that the USD
index level declines by more than 30%, the rate of decline in the amount you
will be paid on your note on the stated maturity date will exceed the rate of
decline in the USD index level. Thus, you may lose your entire investment in
your note, depending on the USD final index level, as calculated by the
calculation agent.
Our cash payment on your note on the stated maturity date will be based on
the USD final index level, which is affected by not only the final index level
but also the final foreign exchange rate.
Also, the market value of your note prior to the stated maturity date may
be significantly lower than the purchase price you pay for your note.
Consequently, if you sell your note before the stated maturity date, you may
receive far less than the amount of your investment in the note.
YOUR NOTE DOES NOT BEAR INTEREST
You will not receive any interest payments on your note. Even if the
amount payable on your note on the stated maturity date exceeds the face amount
of your note,
S-9
the overall return you earn on your note may be less than you would have earned
by investing in a non-indexed debt security of comparable maturity that bears
interest at a prevailing market rate.
THE RETURN ON YOUR NOTE WILL NOT REFLECT
ANY DIVIDENDS PAID ON THE INDEX STOCKS
The index sponsor calculates the level of the index by reference to the
prices of the common stocks included in the index, without taking account of the
value of dividends paid on those stocks. As a result, the return on your note
will not reflect the return you would realize if you actually owned the stocks
included in the index and received the dividends paid on those stocks. You will
not receive any dividends that may be paid on any of the index stocks by the
index stock issuers. See "-- You Have No Shareholder Rights or Rights to Receive
any Stock" below for additional information.
THE RETURN ON YOUR NOTE WILL DEPEND ON
CHANGES IN THE LEVEL OF THE
INDEX AND IS SUBJECT TO CURRENCY
EXCHANGE RATE RISK
Any amount we pay on the stated maturity date will be based upon the
difference between the USD final index level and the USD initial index level.
Fluctuations in the exchange rate between the British pound sterling (in which
the index is denominated) and the U.S. dollar (in which your note is
denominated) will affect the market price of your notes, the USD final index
level and the amount payable at maturity. For example, if the U.S. dollar
appreciates relative to the British pound sterling, we expect that the market
value of your note will decrease, and conversely, if the U.S. dollar depreciates
relative to the British pound sterling, we expect that the market value of your
note will increase.
The foreign exchange rate varies over time, and may vary considerably
during the life of your note. Changes in the exchange rate result from the
interaction of many factors directly or indirectly affecting economic and
political conditions in the United Kingdom and the United States, including
economic and political developments in other countries. Of particular importance
are:
- - rates of inflation;
- - interest rate levels;
- - the balances of payments among countries;
- - the extent of governmental surpluses or deficits in the United Kingdom and the
United States; and
- - other financial, economic, military and political factors.
All of these factors are, in turn, sensitive to the monetary, fiscal and
trade policies pursued by the governments of the United Kingdom, the United
States and other countries important to British trade and finance.
The price of the notes and payment on the stated maturity date could also
be adversely affected by delays in, or refusals to grant, any required
governmental approval for conversions of a local currency and remittances abroad
with respect to the British pound sterling or other de facto restrictions on the
repatriation of U.S. dollars, such as a currency disruption event (as defined
under "Specific Terms of Your Note - Special Calculation Provisions" below).
AN INVESTMENT IN THE OFFERED NOTES IS
SUBJECT TO RISKS ASSOCIATED WITH FOREIGN
SECURITIES MARKETS
The index stocks that comprise the index have been issued by foreign
companies. You should be aware that investments in securities linked to the
value of foreign equity securities involve particular risks. The foreign
securities markets may be more volatile than U.S. or other securities markets
and market developments may affect foreign markets differently from U.S. or
other securities markets. Direct or indirect government intervention to
stabilize the foreign securities markets, as well as cross-shareholdings in
foreign companies, may affect trading prices and volumes in those markets. Also,
there is generally less publicly available information about foreign companies
than about those U.S. companies that are
S-10
subject to the reporting requirements of the U.S. Securities and Exchange
Commission, and foreign companies are subject to accounting, auditing and
financial reporting standards and requirements that differ from those applicable
to U.S. reporting companies.
Securities prices in the United Kingdom are subject to political,
economic, financial and social factors that apply in the United Kingdom. These
factors, which could negatively affect British securities markets, include the
possibility of recent or future changes in the economic and fiscal policies of
the British government, the possible imposition of, or changes in, currency
exchange laws or other laws or restrictions applicable to British companies or
investments in British equity securities and the possibility of fluctuations in
the rate of exchange between currencies. Moreover, the British economy may
differ favorably or unfavorably from the U.S. economy in important respects such
as growth of gross national product, rate of inflation, capital reinvestment,
resources and self-sufficiency.
THE MARKET VALUE OF YOUR NOTE MAY BE
INFLUENCED BY MANY FACTORS THAT ARE
UNPREDICTABLE AND INTERRELATED IN
COMPLEX WAYS
When we refer to the market value of your note, we mean the value that you
could receive for your note if you chose to sell it in the open market before
the stated maturity date. The market value of your note will be affected by many
factors that are beyond our control and are unpredictable. For more information
about the value of your note in the secondary market, see "-- Assuming No
Changes in Market Conditions Or Any Other Relevant Factors, the Value of Your
Note on the Date of this Prospectus Supplement (As Determined By Reference to
Pricing Models Used by Goldman, Sachs & Co.) Is Significantly Less Than the
Original Issue Price" above.
Moreover, these factors interrelate in complex ways, and the effect of one
factor on the market value of your note may offset or enhance the effect of
another factor. For example, an increase in U.S. interest rates, which could
have a negative effect on the market value of your note, may offset any positive
effect that an increase in the level of the index (converted into U.S. dollars)
attributable to favorable political or economic developments in the United
Kingdom could have. The following paragraphs describe the expected impact on the
market value of your note given a change in a specific factor, assuming all
other conditions remain constant.
The Level of the Index (Converted into U.S. Dollars) Will Affect the
Market Value of Your Note
We expect that the market value of your note at any particular time will
depend substantially on the amount, if any, by which the level of the index
(converted into U.S. dollars) at that time has risen above or has fallen below
the USD initial index level. If you sell your note prior to maturity, you may
receive substantially less than the amount that would be payable on the stated
maturity date based on a USD final index level equal to that current level
because of an expectation that the level of the index (converted into U.S.
dollars) will continue to fluctuate until the USD final index level is
determined. Fluctuating foreign dividend rates may affect the level of the index
(converted into U.S. dollars) and, indirectly, the market value of your note.
Economic, financial, regulatory, political, military and other developments that
affect stock markets generally and the stocks underlying the index may also
affect the level of the index (converted into U.S. dollars) and, indirectly, the
market value of your note.
As indicated under "The Index -- Historical Closing Levels of the Index"
below, the levels of the index have been highly volatile at times in the past.
As indicated under "-- Historical Currency Exchange Rate Information", the
foreign exchange rate has fluctuated in the past, and may, in the future,
experience significant fluctuations. It is impossible to predict whether the
levels of the index (converted into U.S. dollars) will rise or fall. In
addition, we cannot predict whether future changes in the market prices of the
index stocks or future changes in the foreign
S-11
exchange rate will correlate with past changes.
Changes in Interest Rates are Likely to Affect the Market Value of Your
Note
Although we will not pay interest on your note, we expect that the market
value of your note, like that of a traditional debt security, will be affected
by changes in interest rates, although these changes may affect your note and a
traditional debt security to different degrees. In general, if U.S. interest
rates increase, we expect that the market value of your note will decrease.
Conversely, if U.S. interest rates decrease, we expect that the market value of
your note will increase.
Changes in the Volatility of the Level of the Index are Likely to Affect
the Market Value of Your Note
The volatility of the index refers to the magnitude and frequency of the
changes in the level of the index. In most scenarios, if the volatility of the
index increases, we expect that the market value of your note will increase and,
conversely, if the volatility of the index decreases, we expect that the market
value of your note will decrease.
Changes in the Foreign Exchange Rate Are Likely to Affect the Market Value
of Your Note as Are Changes in the Volatility of U.S. Dollar/British Pound
Sterling Exchange Rates, and the Correlation Between those Rates and the Index
Levels, Is Likely to Affect the Market Value of Your Note
The U.S. dollar to British pound sterling exchange rate refers to a
foreign exchange spot rate that measures the relative values of two currencies,
the British pound sterling and the U.S. dollar. This rate reflects the amount of
the U.S. dollar that can be purchased for one British pound sterling and thus
increases when the U.S. dollar appreciates relative to the British pound
sterling. The volatility of the U.S. dollar/British pound sterling rate refers
to the size and frequency of changes in that rate. Because your note is payable
in U.S. dollars, the value and volatility of the U.S. dollar to British pound
sterling exchange rate will affect the market value of your notes. In general,
if the U.S. dollar appreciates, we expect that the market value of your note
will decrease, and conversely, if the U.S. dollar depreciates, we expect that
the market value of your note will increase. In addition, in most scenarios, if
the volatility of the foreign exchange rate increases, we expect that the market
value of your note will increase and, conversely, if the volatility of that
foreign exchange rate decreases, we expect that the market value of your note
will decrease. The correlation between the foreign exchange rate and the index
level refers to the relationship between the percentage changes in that rate and
the percentage changes in the level of the index -- the greater the correlation,
the more closely the percentage changes in one resemble the percentage changes
in the other.
The Time Remaining to Maturity Is Likely to Affect the Market Value of
Your Note
Before the stated maturity date, the market value of your note may be
higher than one would expect if that value were based solely on the level of the
index (converted into U.S. dollars) and the level of interest rates. This
difference would reflect a "time value" due to expectations concerning the level
of the index (converted into U.S. dollars) and interest rates during the time
remaining to the stated maturity date. However, as the time remaining to the
stated maturity date decreases, we expect that this time value will decrease,
lowering the market value of your note.
Changes in Our Credit Ratings May Affect the Market Value of Your Note
Our credit ratings are an assessment of our ability to pay our
obligations, including those on the offered notes. Consequently, actual or
anticipated changes in our credit ratings may affect the market value of your
note. However, because your return on your note is dependent upon factors, such
as the level of the index (converted into U.S. dollars) and interest rates, in
addition to our ability to pay our obligation on your note, an improvement in
our credit ratings will not reduce the other investment risks related to your
note.
S-12
IF THE LEVEL OF THE INDEX CHANGES, THE
MARKET VALUE OF YOUR NOTE MAY NOT
CHANGE IN THE SAME MANNER
Your note may trade quite differently from the performance of the index.
Changes in the level of the index may not result in a comparable change in the
market value of your note. In part, this is because of the impact from changes
in foreign currency exchange rates. We discuss some of the reasons for this
disparity under "-- The Market Value of Your Note May Be Influenced by Many
Factors That Are Unpredictable and Interrelated in Complex Ways" above.
TRADING AND OTHER TRANSACTIONS BY
GOLDMAN SACHS IN INSTRUMENTS LINKED TO THE
INDEX, THE BRITISH POUND STERLING
OR THE INDEX STOCKS MAY
IMPAIR THE VALUE
OF YOUR NOTE
As we describe under "Use of Proceeds and Hedging" below, we, through
Goldman, Sachs & Co. or one or more of our other affiliates, have hedged our
obligations under the offered notes by purchasing futures and other instruments
linked to the index and the British pound sterling. We also expect to adjust the
hedge by, among other things, purchasing or selling any of the foregoing, and
perhaps other instruments linked to the index or one or more of the stocks
comprising the index, which we refer to as index stocks, or the British pound
sterling, at any time and from time to time, and to unwind the hedge by selling
any of the foregoing on or before the determination date for your note. We may
also enter into, adjust and unwind hedging transactions relating to other
index-linked notes whose returns are linked to changes in the level of the index
or one or more of the index stocks or the British pound sterling. Any of these
hedging activities may adversely affect the index level -- directly or
indirectly by affecting the price of the index stocks -- and the British pound
sterling, and therefore the market value of your note and the amount we will pay
on your note at maturity. It is possible that we, through our affiliates, could
receive substantial returns with respect to our hedging activities while the
value of your note may decline. See "Use of Proceeds and Hedging" below for a
further discussion of transactions in which we or one or more of our affiliates
may engage.
Goldman, Sachs & Co. and our other affiliates may also engage in trading
in one or more of the index stocks or instruments whose returns are linked to
the index, the index stocks or the British pound sterling for their proprietary
accounts, for other accounts under their management or to facilitate
transactions, including block transactions, on behalf of customers. Any of these
activities of Goldman, Sachs & Co. or our other affiliates could adversely
affect the index level -- directly or indirectly by affecting the price of the
index stocks -- and the British pound sterling and, therefore, the market value
of your note and the amount we will pay on your note at maturity. We may also
issue, and Goldman, Sachs & Co. and our other affiliates may also issue or
underwrite, other securities or financial or derivative instruments with returns
linked to changes in the level of the index, one or more of the index stocks or
the British pound sterling. By introducing competing products into the
marketplace in this manner, we or our affiliates could adversely affect the
market value of your note and the amount we will pay on your note at maturity.
YOU HAVE NO SHAREHOLDER RIGHTS OR RIGHTS TO
RECEIVE ANY STOCK
Investing in your note will not make you a holder of any of the index
stocks. Neither you nor any other holder or owner of your note will have any
voting rights, any right to receive dividends or other distributions or any
other rights with respect to the index stocks. Your note will be paid in cash,
and you will have no right to receive delivery of any index stocks.
OUR BUSINESS ACTIVITIES MAY CREATE CONFLICTS
OF INTEREST BETWEEN YOU AND US
As we have noted above, Goldman, Sachs & Co. and our other affiliates
expect to engage in trading activities related to the index, the index stocks
and in the British pound sterling that are not for your account or on your
behalf. These trading activities
S-13
may present a conflict between your interest in your note and the interests
Goldman, Sachs & Co. and our other affiliates will have in their proprietary
accounts, in facilitating transactions, including block trades, for their
customers and in accounts under their management. These trading activities, if
they influence the level of the index or the foreign exchange rate, could be
adverse to your interests as a beneficial owner of your note.
Goldman, Sachs & Co. and our other affiliates may, at present or in the
future, engage in business with the issuers of the index stocks, including
making loans to or equity investments in those companies or providing advisory
services to those companies. These services could include merger and acquisition
advisory services. These activities may present a conflict between the
obligations of Goldman, Sachs & Co. or another affiliate of Goldman Sachs and
your interests as a beneficial owner of a note. Moreover, one or more of our
affiliates have published and in the future expect to publish research reports
with respect to some of the issuers of the index stocks and with respect to the
index. Any of these activities by any of our affiliates may affect the level of
the index and, therefore, the market value of your note and the amount we will
pay on your note at maturity.
AS CALCULATION AGENT, GOLDMAN, SACHS & CO.
WILL HAVE THE AUTHORITY TO MAKE
DETERMINATIONS THAT COULD AFFECT THE
MARKET VALUE OF YOUR NOTE,
WHEN YOUR NOTE MATURES AND THE
AMOUNT YOU RECEIVE AT MATURITY
As calculation agent for your note, Goldman, Sachs & Co. will have
discretion in making various determinations that affect your note, including
determining the USD final index value on the determination date, which we will
use to determine how much cash we must pay on the stated maturity date, and
determining whether to postpone the stated maturity date because of a market
disruption event or a currency disruption event. See "Specific Terms of Your
Note" below. The exercise of this discretion by Goldman, Sachs & Co. could
adversely affect the value of your note and may present Goldman, Sachs & Co.
with a conflict of interest of the kind described under "-- Our Business
Activities May Create Conflicts of Interest Between You and Us" above. We may
change the calculation agent at any time without notice, and Goldman, Sachs &
Co. may resign as calculation agent at any time upon 60 days' written notice to
Goldman Sachs.
THE POLICIES OF THE INDEX SPONSOR AND
CHANGES THAT AFFECT THE INDEX OR THE INDEX
STOCKS COULD AFFECT THE AMOUNT PAYABLE ON
YOUR NOTE AND ITS MARKET VALUE
The policies of the index sponsor concerning the calculation of the index
level, additions, deletions or substitutions of index stocks and the manner in
which changes affecting the index stocks or their issuers, such as stock
dividends, reorganizations or mergers, are reflected in the index levels could
affect the index levels and, therefore, the amount payable on your note on the
stated maturity date and the market value of your note before that date. The
amount payable on your note and its market value could also be affected if the
index sponsor changes these policies, for example, by changing the manner in
which it calculates the index level, or if the index sponsor discontinues or
suspends calculation or publication of the index level, in which case it may
become difficult to determine the market value of your note. If events such as
these occur, or if the index level is not available on the determination date
because of a market disruption event or for any other reason, the calculation
agent -- which initially will be Goldman, Sachs & Co., our affiliate -- may
determine the index level on the determination date -- and thus the amount
payable on the stated maturity date -- in a manner it considers appropriate, in
its sole discretion. We describe the discretion that the calculation agent will
have in determining the index level on the determination date and the amount
payable on your note more fully under "Specific Terms of Your Note --
Discontinuance or Modification of the Index" and "-- Role of Calculation Agent"
below.
S-14
THERE IS NO AFFILIATION BETWEEN THE INDEX
STOCK ISSUERS OR THE INDEX SPONSOR AND US, AND WE ARE NOT
RESPONSIBLE FOR ANY DISCLOSURE
BY ANY OF THE INDEX STOCK ISSUERS OR THE INDEX SPONSOR
Goldman Sachs is not affiliated with the issuers of the index stocks or
the index sponsor. As we have told you above, however, we or our affiliates may
currently or from time to time in the future engage in business with the index
stock issuers. Nevertheless, neither we nor any of our affiliates assumes any
responsibility for the accuracy or the completeness of any information about the
index and the index stock issuers. You, as an investor in your note, should make
your own investigation into the index and the index stock issuers. See "The
Index" below for additional information about the index.
Neither the index sponsor nor the index stock issuers are involved in this
offering of your note in any way and none of them have any obligation of any
sort with respect to your note. Neither the index sponsor nor any of the index
stock issuers have any obligation to take your interests into consideration for
any reason, including when taking any corporate actions that might affect the
value of your note.
YOUR NOTE MAY NOT HAVE
AN ACTIVE TRADING MARKET
Your note will not be listed or displayed on any securities exchange or
included in any interdealer market quotation system, and there may be little or
no secondary market for your note. Even if a secondary market for your note
develops, it may not provide significant liquidity and we expect that
transaction costs in any secondary market would be high. As a result, the
difference between bid and asked prices for your note in any secondary market
could be substantial.
WE CAN POSTPONE THE STATED MATURITY DATE
IF A MARKET DISRUPTION EVENT OR CURRENCY
DISRUPTION EVENT OCCURS
If the calculation agent determines that, on the determination date, a
market disruption event or a currency disruption event has occurred or is
continuing, the determination date will be postponed until the first business
day on which no market disruption event or currency disruption event occurs or
is continuing. As a result, the stated maturity date for your note will also be
postponed, although not by more than six business days. Thus, you may not
receive the cash payment that we are obligated to deliver on the stated maturity
date until several days after the originally scheduled due date. Moreover, if
the closing level of the index or the final foreign exchange rate is not
available on the determination date because of a continuing market disruption
event, currency disruption event or for any other reason, the calculation agent
will nevertheless determine the USD final index level based on its assessment,
made in its sole discretion, of the level of the index or the relevant foreign
exchange rate, as the case may be, at that time.
CERTAIN CONSIDERATIONS FOR INSURANCE
COMPANIES AND EMPLOYEE BENEFIT PLANS
Any insurance company or fiduciary of a pension plan or other employee
benefit plan that is subject to the prohibited transaction rules of the Employee
Retirement Income Security Act of 1974, as amended, which we call "ERISA", or
the Internal Revenue Code of 1986, as amended, including an IRA or a Keogh plan
(or a governmental plan to which similar prohibitions apply), and that is
considering purchasing the offered notes with the assets of the insurance
company or the assets of such a plan, should consult with its counsel regarding
whether the purchase or holding of the offered notes could become a "prohibited
transaction" under ERISA, the Internal Revenue Code or any substantially similar
prohibition in light of the representations a purchaser or holder in any of the
above categories is deemed to make by purchasing and holding the offered notes.
This is discussed in more detail under "Employee Retirement Income Security Act"
below.
S-15
THE TAX CONSEQUENCES OF AN INVESTMENT
IN YOUR NOTE ARE UNCERTAIN
The tax consequences of an investment in your note are uncertain, both as
to the timing and character of any inclusion in income in respect of your note.
We discuss these matters under "Supplemental Discussion of Federal Income Tax
Consequences" below. Please also consult your own tax advisor concerning the
U.S. federal income tax and any other applicable tax consequences to you of
owning your note in your particular circumstances.
S-16
SPECIFIC TERMS OF YOUR NOTE
Please note that in this section entitled "Specific Terms of Your Note",
references to "holders" mean those who own notes registered in their own names,
on the books that we or the trustee maintain for this purpose, and not those who
own beneficial interests in notes registered in street name or in notes issued
in book-entry form through The Depository Trust Company. Please review the
special considerations that apply to owners of beneficial interests in the
accompanying prospectus, under "Legal Ownership and Book-Entry Issuance".
The offered notes are part of a series of debt securities, entitled
"Medium-Term Notes, Series B", that we may issue under the indenture from time
to time as described in the accompanying prospectus. The offered notes are also
"indexed debt securities", as defined in the accompanying prospectus.
This prospectus supplement summarizes specific financial and other terms
that apply to the offered notes, including your note; terms that apply generally
to all Series B medium-term notes are described in "Description of Notes We May
Offer" in the accompanying prospectus. The terms described here supplement those
described in the accompanying prospectus and, if the terms described here are
inconsistent with those described there, the terms described here are
controlling.
In addition to those terms described on the first two pages of this
prospectus supplement, the following terms will apply to your note:
NO INTEREST: we will not pay interest on your note
SPECIFIED CURRENCY:
- - U.S. dollars
FORM OF NOTE:
- - global form only: yes, at DTC
- - non-global form available: no
DENOMINATIONS: each note registered in the name of a holder must have a face
amount of $1,000 or any multiple of $1,000
DEFEASANCE APPLIES AS FOLLOWS:
- - full defeasance: no
- - covenant defeasance: no
OTHER TERMS:
- - the default amount will be payable on any acceleration of the maturity of your
note as described under "-- Special Calculation Provisions" below
- - a business day for your note will not be the same as a business day for our
other Series B medium-term notes, as described under "-- Special Calculation
Provisions" below
Please note that the information about the settlement or trade date, issue
price, discounts or commissions and net proceeds to The Goldman Sachs Group,
Inc. on the front cover page or elsewhere in this prospectus supplement relates
only to the initial issuance and sale of the notes. If you have purchased your
note in a market-making transaction after the initial issuance and sale of the
notes, any such relevant information about the sale to you will be provided in a
separate confirmation of sale.
We describe the terms of your note in more detail below.
INDEX, INDEX SPONSOR AND INDEX STOCKS
In this prospectus supplement, when we refer to the index, we mean the
index specified on the front cover page, or any successor to the index, as it
may be modified, replaced or adjusted from time to time as described under
"-- Discontinuance or Modification of the Index" below. When we refer to the
index sponsor as of any time, we mean the entity, including any successor
S-17
sponsor, that determines and publishes the index as then in effect. When we
refer to the index stocks as of any time, we mean the stocks that comprise the
index as then in effect, after giving effect to any additions, deletions or
substitutions.
PAYMENT OF PRINCIPAL ON STATED MATURITY DATE
On the stated maturity date, we will pay as principal, to the holder of
your note, an amount, if any, in cash equal to:
- - if the USD index return is greater than 0%, the outstanding face amount of the
note plus the supplemental payment amount. The supplemental payment amount
will equal the outstanding face amount of the note multiplied by the
participation rate of 1.34 multiplied by the USD index return.
- - if the USD index return is equal to or less than 0% but equal to or greater
than -30%, the outstanding face amount of the note.
- - if the USD index return is less than -30%, the outstanding face amount of the
note multiplied by 1.42857 multiplied by the result of the USD final index
level divided by the USD initial index level. For example, if the USD final
index level falls to 50% of the USD initial index level, the amount we will
pay you on the stated maturity date for each $1,000 face amount of your note
will be $714.29, calculated as follows: the face amount of your note
multiplied by an amount equal to 1.42857 times 50%. If the USD final index
level falls an additional 10% (so that it is 40% of the USD initial index
level), the amount we will pay you on the stated maturity date ($571.43) will
be 14.2857% lower than the amount we would have paid had the USD final index
level been 50% of the USD initial index level. If the USD index return is less
than -30%, the payment on your note on the stated maturity date will be less
than the face amount of your note and may even be reduced to zero.
The USD index return is calculated by subtracting the USD initial index
level from the USD final index level and by dividing the result by the USD
initial index level, with the result expressed as a percentage.
The calculation agent will determine the final index level, which will be
the closing level of the index on the determination date as calculated and
published by the index sponsor. However, the calculation agent will have
discretion to adjust the closing level on any particular day or to determine it
in a different manner as described under "-- Discontinuance or Modification of
the Index" below.
STATED MATURITY DATE
The stated maturity date will be December 29, 2009 unless that day is not
a business day, in which case the stated maturity date will be the next
following business day. If the fifth business day before this applicable day is
not the determination date referred to below, however, then the stated maturity
date will be the fifth business day following the determination date, provided
that the stated maturity date will never be later than the fifth business day
after December 29, 2009 or, if December 29, 2009 is not a business day, later
than the sixth business day after December 29, 2009. The calculation agent may
postpone the determination date -- and therefore the stated maturity date -- if
a market disruption event or a currency disruption event occurs or is continuing
on any day that would otherwise be the determination date. We describe market
disruption events and currency disruption events under "-- Special Calculation
Provisions" below.
The calculation agent may also postpone the stated maturity date if a
currency disruption event occurs on a day on which a spot foreign exchange
transaction executed on the determination date would otherwise settle and such
currency disruption event is continuing on each day up to and including the
business day immediately preceding the stated maturity date. The consequences of
such an event are discussed under "Consequences of a Market Disruption Event or
Currency Disruption Event" below.
DETERMINATION DATE
The determination date will be the fifth business day before December 29,
2009
S-18
unless the calculation agent determines that a market disruption event or a
currency disruption event occurs or is continuing on that fifth prior business
day. In that event, the determination date will be the first following business
day on which the calculation agent determines that a market disruption event or
a currency disruption event does not occur and is not continuing. In no event,
however, will the determination date be later than December 29, 2009 or, if
December 29, 2009 is not a business day, later than the first business day after
December 29, 2009.
FINAL FOREIGN EXCHANGE RATE
The final foreign exchange rate applicable to the currency in which the
index is quoted (USD/GBP), will be determined by the calculation agent to be the
spot foreign exchange rate as displayed on the Reuters WMRPSPOT page following
the close of the index on the determination date. In the event the foreign
exchange rate does not appear on that page, or in the event a currency
disruption event shall have occurred or be continuing, then the final foreign
exchange rate on the determination date shall be the arithmetic mean, as
determined by the calculation agent, of the currency mid-quotations obtained by
the calculation agent from as many recognized foreign exchange dealers (which
may include the calculation agent or any of its affiliates), but not exceeding
three, as will make such mid-quotations available to the calculation agent as of
12:00 noon, New York City time, on the determination date (other than when a
currency disruption event shall have occurred or be continuing).
CONSEQUENCES OF A MARKET DISRUPTION EVENT OR CURRENCY DISRUPTION EVENT
As indicated above, if a market disruption event or a currency disruption
event occurs or is continuing on a day that would otherwise be the determination
date, then the determination date will be postponed to the next following
business day on which a market disruption event or a currency disruption event
does not occur and is not continuing. In no event, however, will the
determination date be postponed by more than five business days.
If the determination date is postponed to the last possible day, but a
market disruption event or a currency disruption event occurs or is continuing
on that day, that day will nevertheless be the determination date. If the
calculation agent determines that the index level or the final foreign exchange
rate that must be used to determine the payment amount is not available on the
last possible determination date because of a market disruption event, currency
disruption event or for any other reason, the calculation agent will
nevertheless determine the USD final index level based on its assessment, made
in its sole discretion, of the closing level of the index or the relevant
foreign exchange rate, as the case may be, on that day.
If a currency disruption event occurs or is continuing on a day on which a
foreign exchange transaction executed on the determination date would otherwise
settle, then, if such currency disruption event is continuing on each day up to
and including the business day immediately preceding the stated maturity date,
the stated maturity date will be postponed to the next business day following
the date on which such currency disruption event ceases, provided that the
stated maturity date will never be later than the fifth business day after
December 29, 2009, or if December 29, 2009 is not a business day, no later than
the sixth business day after December 29, 2009. If the currency disruption event
is continuing on the business day immediately preceding the last possible day of
the postponed stated maturity date, then the calculation agent will,
notwithstanding the availability of a final foreign exchange rate on the
determination date, adjust the final foreign exchange rate to reflect a lack of
convertibility, based on the calculation agent's assessment, made in its sole
discretion of a lack of convertibility of the applicable currency.
For the avoidance of doubt, if a currency disruption event constitutes or
coincides with any market disruption event, the terms of the notes shall be
adjusted by the calculation agent, in its sole discretion to reflect the
S-19
currency disruption event only after any necessary adjustments have been made as
a result of the market disruption event.
DISCONTINUANCE OR MODIFICATION
OF THE INDEX
If the index sponsor discontinues publication of the index and the index
sponsor or anyone else publishes a substitute index that the calculation agent
determines is comparable to the index, then the calculation agent will determine
the amount payable on the stated maturity date by reference to the substitute
index. We refer to any substitute index approved by the calculation agent as a
successor index.
If the calculation agent determines that the publication of the index is
discontinued and there is no successor index, or that the level of the index is
not available on the determination date because of a market disruption event or
for any other reason, the calculation agent will determine the amount payable on
the stated maturity date, by a computation methodology that the calculation
agent determines will as closely as reasonably possible replicate the index.
If the calculation agent determines that the index, the stocks comprising
the index or the method of calculating the index is changed at any time in any
respect -- including any addition, deletion or substitution and any reweighting
or rebalancing of the index stocks and whether the change is made by the index
sponsor under its existing policies or following a modification of those
policies, is due to the publication of a successor index, is due to events
affecting one or more of the index stocks or their issuers or is due to any
other reason -- then the calculation agent will be permitted (but not required)
to make such adjustments in the index or the method of its calculation as it
believes are appropriate to ensure that the final index level used to determine
the amount payable on the stated maturity date is equitable.
All determinations and adjustments to be made by the calculation agent
with respect to the index may be made by the calculation agent in its sole
discretion. The calculation agent is not obligated to make any such adjustments.
DEFAULT AMOUNT ON ACCELERATION
If an event of default occurs and the maturity of your note is
accelerated, we will pay the default amount in respect of the principal of your
note at the maturity, instead of the amount payable on the stated maturity date
as described earlier. We describe the default amount under "-- Special
Calculation Provisions" below.
For the purpose of determining whether the holders of our Series B
medium-term notes, which include the offered notes, are entitled to take any
action under the indenture, we will treat the outstanding face amount of each
offered note as the outstanding principal amount of that note. Although the
terms of the offered notes differ from those of the other Series B medium-term
notes, holders of specified percentages in principal amount of all Series B
medium-term notes, together in some cases with other series of our debt
securities, will be able to take action affecting all the Series B medium-term
notes, including the offered notes. This action may involve changing some of the
terms that apply to the Series B medium-term notes, accelerating the maturity of
the Series B medium-term notes after a default or waiving some of our
obligations under the indenture. We discuss these matters in the accompanying
prospectus under "Description of Debt Securities We May Offer -- Default,
Remedies and Waiver of Default" and "-- Modification of the Debt Indentures and
Waiver of Covenants".
MANNER OF PAYMENT
Any payment on your note at maturity will be made to an account designated
by the holder of your note and approved by us, or at the office of the trustee
in New York City, but only when your note is surrendered to the trustee at that
office. We also may make any payment in accordance with the applicable
procedures of the depositary.
S-20
MODIFIED BUSINESS DAY
As described in the accompanying prospectus, any payment on your note that
would otherwise be due on a day that is not a business day may instead be paid
on the next day that is a business day, with the same effect as if paid on the
original due date. For your note, however, the term business day has a different
meaning than it does for other Series B medium-term notes. We discuss this term
under "-- Special Calculation Provisions" below.
ROLE OF CALCULATION AGENT
The calculation agent in its sole discretion will make all determinations
regarding the final index level, the final foreign exchange rate, the USD index
return, the USD initial index level, the USD final index level, market
disruption events, currency disruption events, business days, the default amount
and the payment amount on your note, if any, to be made at maturity. Absent
manifest error, all determinations of the calculation agent will be final and
binding on you and us, without any liability on the part of the calculation
agent.
Please note that Goldman, Sachs & Co., our affiliate, is currently serving
as the calculation agent as of the original issue date of your note. We may
change the calculation agent for your note at any time after the original issue
date without notice, and Goldman, Sachs & Co. may resign as calculation agent at
any time upon 60 days' written notice to Goldman Sachs.
SPECIAL CALCULATION PROVISIONS
BUSINESS DAY
When we refer to a business day with respect to your note, we mean a day
that is a business day of the kind described in the accompanying prospectus and
that is also a day on which the London Stock Exchange is open for trading and on
which the index sponsor is open for business and the closing level for the index
is calculated and published by the index sponsor.
DEFAULT AMOUNT
The default amount for your note on any day will be an amount, in the
specified currency for the principal of your note, equal to the cost of having a
qualified financial institution, of the kind and selected as described below,
expressly assume all of our payment and other obligations with respect to your
note as of that day and as if no default or acceleration had occurred, or to
undertake other obligations providing substantially equivalent economic value to
you with respect to your note. That cost will equal:
- - the lowest amount that a qualified financial institution would charge to
effect this assumption or undertaking, plus
- - the reasonable expenses, including reasonable attorneys' fees, incurred by the
holder of your note in preparing any documentation necessary for this
assumption or undertaking.
During the default quotation period for your note, which we describe
below, the holder and/or we may request a qualified financial institution to
provide a quotation of the amount it would charge to effect this assumption or
undertaking. If either party obtains a quotation, it must notify the other party
in writing of the quotation. The amount referred to in the first bullet point
above will equal the lowest -- or, if there is only one, the only -- quotation
obtained, and as to which notice is so given, during the default quotation
period. With respect to any quotation, however, the party not obtaining the
quotation may object, on reasonable and significant grounds, to the assumption
or undertaking by the qualified financial institution providing the quotation
and notify the other party in writing of those grounds within two business days
after the last day of the default quotation period, in which case that quotation
will be disregarded in determining the default amount.
DEFAULT QUOTATION PERIOD. The default quotation period is the period
beginning on the day the default amount first becomes due
S-21
and ending on the third business day after that day, unless:
- - no quotation of the kind referred to above is obtained, or
- - every quotation of that kind obtained is objected to within five business days
after the day the default amount first becomes due.
If either of these two events occurs, the default quotation period will continue
until the third business day after the first business day on which prompt notice
of a quotation is given as described above. If that quotation is objected to as
described above within five business days after that first business day,
however, the default quotation period will continue as described in the prior
sentence and this sentence.
In any event, if the default quotation period and the subsequent two
business day objection period have not ended before the determination date, then
the default amount will equal the principal amount of your note.
QUALIFIED FINANCIAL INSTITUTIONS. For the purpose of determining the
default amount at any time, a qualified financial institution must be a
financial institution organized under the laws of any jurisdiction in the United
States of America, Europe or Japan, which at that time has outstanding debt
obligations with a stated maturity of one year or less from the date of issue
and is rated either:
- - A-1 or higher by Standard & Poor's Ratings Group or any successor, or any
other comparable rating then used by that rating agency, or
- - P-1 or higher by Moody's Investors Service, Inc. or any successor, or any
other comparable rating then used by that rating agency.
MARKET DISRUPTION EVENT
Any of the following will be a market disruption event:
- - a suspension, absence or material limitation of trading in index stocks
constituting 20% or more, by weight, of the index on their respective primary
markets, in each case for more than two hours of trading or during the
one-half hour before the close of trading in that market, as determined by the
calculation agent in its sole discretion, or
- - a suspension, absence or material limitation of trading in option or futures
contracts relating to the index or to index stocks constituting 20% or more,
by weight, of the index, if available, in the respective primary markets for
those contracts, in each case for more than two hours of trading or during the
one-half hour before the close of trading in that market, as determined by the
calculation agent in its sole discretion, or
- - index stocks constituting 20% or more, by weight, of the index, or option or
futures contracts relating to the index or to index stocks constituting 20% or
more, by weight, of the index, if available, are not trading on what were the
respective primary markets for those index stocks or contracts, as determined
by the calculation agent in its sole discretion,
and, in the case of any of these events, the calculation agent determines in its
sole discretion that the event could materially interfere with the ability of
The Goldman Sachs Group, Inc. or any of its affiliates or a similarly situated
party to unwind all or a material portion of a hedge that could be effected with
respect to the offered notes. For more information about hedging by The Goldman
Sachs Group, Inc. and/or any of its affiliates, see "Use of Proceeds and
Hedging" below.
The following events will not be market disruption events with:
- - a limitation on the hours or numbers of days of trading, but only if the
limitation results from an announced change in the regular business hours of
the relevant market, and
- - a decision to permanently discontinue trading in the option or futures
contracts relating to the index or to any index stock.
For this purpose, an "absence of trading" in the primary securities market
on which an index stock, or on which option or futures contracts relating to the
index or an
S-22
index stock, are traded will not include any time when that market is itself
closed for trading under ordinary circumstances. In contrast, a suspension or
limitation of trading in an index stock or in option or futures contracts
relating to the index or an index stock, if available, in the primary market for
that stock or those contracts, by reason of:
- - a price change exceeding limits set by that market, or
- - an imbalance of orders relating to that stock or those contracts, or
- - a disparity in bid and ask quotes relating to that stock or those contracts,
will constitute a suspension or material limitation of trading in that stock or
those contracts in that market.
As is the case throughout this prospectus supplement, references to the
index in this description of market disruption events includes the index and any
successor index as it may be modified, replaced or adjusted from time to time.
CURRENCY DISRUPTION EVENT
A currency disruption event with respect to the currency applicable to
offered notes means the occurrence or continuance of any of the following, as
determined by the calculation agent:
- - the failure by the central bank of the local jurisdiction (or any successor to
the central bank of the local jurisdiction as the central and monetary
authority of the local jurisdiction) to approve to the extent legally required
or permit the exchange of local currency for U.S. dollars, or any other action
of the dominant authority (including the promulgation, operation or
enforcement of any law, act, decree, regulation, ordinance, order, policy or
determination, or modification of, or change in the interpretation of any of
the foregoing) or any event in the local jurisdiction that has the effect of
preventing such exchange, the transfer of any U.S. dollars from accounts in
the local jurisdiction to accounts outside of the local jurisdiction or the
transfer of local currency between accounts in the local jurisdiction to a
person that is a non-resident of the local jurisdiction by The Goldman Sachs
Group, Inc. or any of its affiliates, or if U.S. dollars are unavailable in
any legal exchange market for purchase with local currency settled through the
banking system of the local jurisdiction in accordance with normal commercial
practice; provided that any such failure, action, event or unavailability is
not the result of the failure by The Goldman Sachs Group, Inc. or any of its
affiliates to comply with all legal requirements of the local jurisdiction
(unless such legal requirements are imposed after June 22, 2004) except if and
when required by U.S. law;
- - the failure of the government of the local jurisdiction, or any agency or
subdivision thereof, to make timely payment in full of any principal, interest
or other amounts due on any security issued by such entity;
- - a declared moratorium, waiver, deferral, repudiation or rescheduling of any
security issued by the government of the local jurisdiction, or any agency or
subdivision thereof, or the amendment or modification of the terms and
conditions of the security issued by such entity in a way that in any such
case has a material adverse effect on the holders of such security;
- - the existence of any restriction on the receipt within the local jurisdiction
or the repatriation outside of the local jurisdiction of all or any portion of
the principal, interest, capital gains or other proceeds of assets owned by
foreign persons or entities in the local jurisdiction, including but not
limited to any restriction imposed by the government of the local jurisdiction
or any agency or subdivision thereof;
- - a declaration of a banking moratorium or any suspension of payments by banks
in the local jurisdiction;
- - any expropriation, confiscation, requisition, nationalization or other action
by any dominant authority that could deprive any party in the local
jurisdiction, including The Goldman Sachs Group, Inc. or any of its affiliates
which has an interest in the offered notes, of all or a substantial portion
S-23
of its assets (including rights to receive payment) in the local jurisdiction;
provided that such actions are not the result of the failure of The Goldman
Sachs Group, Inc. or any of its affiliates to comply with all legal
requirements of the local jurisdiction (unless such legal requirements are
imposed after June 22, 2004 or constitute an expropriation in and of
themselves) except if and when required by U.S. law; or
- - any war (whether or not declared), revolution, insurrection or hostile act
that prevents the transfer of U.S. dollars outside of the local jurisdiction
or lawfully converting local currency to U.S. dollars.
For purposes of determining the existence of a currency disruption event:
- - "dominant authority" means at any time the government of the United Kingdom or
any political subdivision thereof or any other authority asserting
governmental, military or political power of any kind in the local
jurisdiction at such time, whether or not such authority is recognized as de
facto or de jure government.
- - "local currency" means the British pound sterling.
- - "local jurisdiction" means the United Kingdom.
S-24
HYPOTHETICAL RETURNS ON YOUR NOTE
The following table and chart are provided for purposes of illustration
only. They should not be taken as an indication or prediction of future
investment results and are intended merely to illustrate the impact that various
hypothetical USD final index levels on the determination date could have on the
payment amount, assuming all other variables remain constant.
Any rate of return you may earn on an investment in the notes may be lower
than that which you could earn on a comparable investment in the index stocks.
Among other things, the return on the notes will not reflect any dividends that
may be paid on the index stocks. Also, the hypothetical examples shown below do
not take into account the effects of applicable taxes. Because of the U.S. tax
treatment applicable to your note, tax liabilities could affect the after-tax
rate of return on your note to a comparatively greater extent than the after-tax
return on the index stocks.
We have assumed for the following table and chart that the closing level
of the index on the determination date will be the same as it is on the stated
maturity date. We have also assumed that the note is purchased on the original
issue date and held until the stated maturity date and that no market or
currency disruption event occurs. If you sell your note before the stated
maturity date, your return will depend upon the market value of your note at the
time of sale, which may be affected by a number of factors that are not
reflected in the table below such as interest rates, the volatility of the
levels of the index and currency exchange rates. In addition, assuming no
changes in market conditions or any other relevant factors, the value of your
note on the date of this prospectus supplement (as determined by reference to
pricing models used by Goldman, Sachs & Co.) is significantly less than the
original issue price. For more information on the value of your note in the
secondary market, see "Additional Risk Factors Specific to Your Note -- Assuming
No Changes in Market Conditions Or any Other Relevant Factors, the Value of Your
Note on the Date of this Prospectus Supplement (As Determined By Reference to
Pricing Models Used by Goldman, Sachs & Co.) Is Significantly Less Than the
Original Issue Price" and "-- The Market Value of Your Note May Be Influenced by
Many Factors That Are Unpredictable and Interrelated in Complex Ways" above.
The following table and chart are based on index levels and foreign
exchange rates that are entirely hypothetical and do not take into account any
taxes that you may owe as a result of owning your note; no one can predict what
the value of the index or foreign exchange rate will be on the determination
date. The index has been highly volatile - meaning that its level has changed
substantially in relatively short periods - in the past and its performance
cannot be predicted for the future. The USD final index level can appreciate or
depreciate due to changes in both the index level and the foreign currency
exchange rate.
The actual performance of the index and the fluctuations of the foreign
exchange rate over the life of the offered notes, as well as the amount payable
at maturity, may bear little relation to the hypothetical examples shown below
or to the historical levels of the index and the foreign exchange rate shown
elsewhere in this prospectus supplement. For information about the level of the
index during recent periods, see "The Index -- Historical Closing Levels of the
Index" below. For information about the foreign exchange rate during recent
periods, see "Historical Currency Exchange Rate Information" below.
The levels in the left column of the table represent hypothetical USD
final index levels and are expressed as percentages of the USD initial index
level, which is 8,136.24. The amounts in the right column represent the
hypothetical payment amounts, based on the corresponding hypothetical USD final
index levels and the participation rate of 1.34 and are expressed as percentages
of the face amount of a note.
---------------
S-25
<Table>
<Caption>
Hypothetical USD Final Index Hypothetical Payment Amount as
Level as Percentage of USD Percentage of Face Amount on
Initial Index Level Stated Maturity Date
---------------------------- ------------------------------
250% 301.00%
225% 267.50%
200% 234.00%
175% 200.50%
150% 167.00%
140% 153.60%
130% 140.20%
120% 126.80%
110% 113.40%
100% 100.00%
90% 100.00%
80% 100.00%
70% 100.00%
60% 85.71%
50% 71.43%
40% 57.14%
30% 42.86%
20% 28.57%
0% 0%
</Table>
If the USD index level declines by more than 30% over the life of the
notes, then you will lose 1.42857 multiplied by the percentage decrease in the
USD index level in excess of 30%. As a result, to the extent the USD index level
declines by more than 30%, the rate of decline in the amount you will be paid on
your note on the stated maturity date will exceed the rate of decline of the USD
index level. If, for example, the USD final index level were determined to be
50% of the USD initial index level, the payment amount that we would pay at
maturity would be 71.43% of the face amount of your note, as shown in the table
above. As a result, if you purchased your note on the original issue date and
held it to the stated maturity date, you would lose 28.57% of your investment.
The following chart also shows a graphical illustration of the
hypothetical payment amounts (expressed as a percentage of the face amount of
your note) that we would deliver to the holder of your note on the stated
maturity date, if the USD final index level (expressed as a percentage of the
USD initial index level) were any of the hypothetical levels shown on the
horizontal axis based on the participation rate of 1.34. The chart shows that
any hypothetical USD final index level of less than 70% of the USD initial index
level (the section left of the 70% marker on the horizontal axis) would result
in a hypothetical payment amount of less than 100% of the face amount of your
note (the section below the 100% marker on the vertical axis) and, accordingly,
in a loss of principal to the holder of your note.
S-26
(HYPOTHETICAL PAYMENT AMOUNT GRAPH)
Payments on this note are economically equivalent to the amounts that
would be paid on a combination of other instruments. For example, payments on
the note are economically equivalent to the amounts that would be paid on a
combination of an interest-bearing bond and an option, in each case, bought by
the holder (with an implicit option premium paid over time by the holder). The
discussion in this paragraph does not modify or affect the terms of the note or
the United States income tax treatment of the note as described under
"Supplemental Discussion of Federal Income Tax Consequences" below.
We cannot predict the actual USD final index level on the determination
date or the market value of your note, nor can we predict the relationship
between the USD index level and the market value of your note at any time
prior to the stated maturity date. The actual amount that a holder of the
offered notes will receive at stated maturity and the rate of return on
the offered notes will depend on the actual USD final index level
determined by the calculation agent as described above. Moreover, the
assumptions on which the hypothetical returns are based may turn out to be
inaccurate. Consequently, the amount of cash to be paid in respect of your
note on the stated maturity date may be very different from the
information reflected in the table and chart above.
S-27
USE OF PROCEEDS AND HEDGING
We will use the net proceeds we receive from the sale of the offered notes
for the purposes we describe in the accompanying prospectus under "Use of
Proceeds". We or our affiliates may also use those proceeds in transactions
intended to hedge our obligations under the offered notes as described below.
In anticipation of the sale of the offered notes, we and/or our affiliates
have entered into hedging transactions involving purchases of futures and other
instruments linked to the index and the British pound sterling on the trade
date. In addition, from time to time after we issue the offered notes, we and/or
our affiliates expect to enter into additional hedging transactions and to
unwind those we have entered into, in connection with the offered notes and
perhaps in connection with other index-linked notes we issue, some of which may
have returns linked to the index or the index stocks or British pounds sterling.
Consequently, with regard to your note, from time to time, we and/or our
affiliates:
- - expect to acquire or dispose of positions in listed or over-the-counter
options, futures or other instruments linked to the index or some or all of
the index stocks or British pounds sterling,
- - may take or dispose of positions in the securities of the index stock issuers
themselves,
- - may take or dispose of positions in listed or over-the-counter options or
other instruments based on indices designed to track the performance of the
London Stock Exchange or other components of the British equity market, and/or
- - may take short positions in the index stocks or other securities of the kind
described above -- i.e., we and/or our affiliates may sell securities of the
kind that we do not own or that we borrow for delivery to purchaser and/or
- - may acquire or dispose of U.S. dollars in foreign exchange transactions
involving British pounds sterling.
We and/or our affiliates may acquire a long or short position in
securities similar to your note from time to time and may, in our or their sole
discretion, hold or resell those securities.
In the future, we and/or our affiliates expect to close out hedge
positions relating to the offered notes and perhaps relating to other notes with
returns linked to the index, the index stocks or the foreign currencies. We
expect these steps to involve sales of instruments linked to the index and the
British pound sterling on or shortly before the determination date. These steps
also may involve sales and/or purchases of some or all of the index stocks or
listed or over-the-counter options, futures or other instruments linked to the
index or the British pound sterling, some or all of the index stocks or indices
designed to track the performance of the London Stock Exchange or other
components of the British equity market.
The hedging activity discussed above may adversely affect the market value
of your note from time to time and the amount we will pay on your note at
maturity. See "Additional Risk Factors Specific to Your Note -- Trading
and Other Transactions by Goldman Sachs in Instruments Linked to the
Index, the British pound sterling or the Index Stocks May Impair the Value
of Your Note" and "-- Our Business Activities May Create Conflicts of
Interest Between You and Us" above for a discussion of these adverse
effects.
S-28
THE INDEX
We have derived all information regarding the index contained in this
prospectus supplement, from publicly available information without independent
verification. The index sponsor owns the copyright and all rights to the index.
The index sponsor has no obligation to continue to publish, and may discontinue
publication of, the index. The consequences of the index sponsor discontinuing
or modifying the index are described in the section entitled "Specific Terms of
Your Note -- Discontinuance or Modification of the Index" above.
FTSE(TM) 100 INDEX
The FTSE(TM) 100 Index is a capitalization-weighted index of the 100 most
highly capitalized companies traded on the London Stock Exchange. The index was
developed with a base level of 1,000 as of January 3, 1984. Additional
information about the index is available on the web site http://www.ftse.com.
HISTORICAL CLOSING LEVELS OF THE INDEX
The closing levels of the index have fluctuated in the past and may, in
the future, experience significant fluctuations. Any historical upward or
downward trend in the closing level of the index during any period shown below
is not an indication that the index is more or less likely to increase or
decrease at any time during the term of your note. You should not take the
historical levels of the index as an indication of future performance. We cannot
give you any assurance that the future performance of the index or the index
stocks will result in you receiving an amount greater than the outstanding face
amount of your note on the stated maturity date. Neither we nor any of our
affiliates make any representation to you as to the performance of the index.
The table below shows the high, the low and the last closing levels of the
index for each of the four calendar quarters in 2002 and 2003, and the first two
calendar quarters of 2004, through June 22, 2004. We obtained the closing levels
listed in the table below from Bloomberg Financial Services, without independent
verification. The levels in the table below do not reflect any application of
the foreign exchange rate or, therefore, the USD index level.
The actual performance of the index over the life of the offered notes, as
well as the amount payable at maturity may bear little relation to the
historical levels shown below.
S-29
QUARTERLY HIGH, LOW OR CLOSING LEVELS OF THE FTSE(TM) 100 INDEX
<Table>
<Caption>
HIGH LOW CLOSE
-------- -------- --------
2002
Quarter ended March 31.................................. 5,323.80 5,024.10 5,271.80
Quarter ended June 30................................... 5,263.90 4,531.00 4,656.40
Quarter ended September 30.............................. 4,685.80 3,671.10 3,721.80
Quarter ended December 31............................... 4,190.00 3,730.50 3,940.40
2003
Quarter ended March 31.................................. 4,009.50 3,287.00 3,613.30
Quarter ended June 30................................... 4,207.00 3,684.80 4,031.20
Quarter ended September 30.............................. 4,314.70 3,963.90 4,091.30
Quarter ended December 31............................... 4,476.90 4,169.20 4,476.90
2004
Quarter ended March 31.................................. 4,559.10 4,309.40 4,385.70
Quarter ending June 30 (through June 22, 2004).......... 4,575.70 4,395.20 4,468.50
Closing level on June 22, 2004.......................... 4,468.50
</Table>
----------------------
LICENSE AGREEMENTS
We, or an affiliate of ours, have entered into a non-exclusive license
agreement with the sponsor of the FTSE(TM) 100 Index whereby we and our
affiliates, in exchange for a fee, are permitted to use the index in connection
with the offer and sale of the offered notes. We are not affiliated with the
index sponsor; the only relationship between the index sponsor and us is the
licensing of the use of the index and trademarks relating to the index.
Neither The Goldman Sachs Group, Inc. nor any of its affiliates accepts
any responsibility for the calculation, maintenance or publication of the index
or any successor index.
LICENSE AGREEMENT OF THE FTSE(TM) 100 INDEX
The FTSE(TM) 100 Index is calculated by FTSE(TM). The license agreement
between FTSE International Limited and Goldman Sachs provides that the following
language must be set forth in the prospectus supplement: The notes are not in
any way sponsored, endorsed, sold or promoted by FTSE International Limited
("FTSE") or by the London Stock Exchange Plc (the "Exchange") or by the
Financial Times Limited ("FT") and neither FTSE(TM) nor Exchange nor FT makes
any warranty or representation whatsoever, expressly or impliedly, either as to
the results to be obtained from the use of the FTSE(TM) 100 Index and/or the
figure at which the FTSE(TM) 100 Index stands at any particular time on any
particular day or otherwise. The FTSE(TM) 100 Index is compiled and calculated
by FTSE(TM). However, neither FTSE(TM) nor Exchange nor FT shall be liable
(whether in negligence or otherwise) to any person for any error in the FTSE(TM)
Index and neither FTSE(TM) or Exchange or FT shall be under any obligation to
advise any person of any error therein.
"FTSE(TM)", "FT-SE(R)" and "Footsie(R)" are trademarks of the London Stock
Exchange Plc and The Financial Times Ltd. and are used by FTSE International
Limited under license.
S-30
HISTORICAL CURRENCY EXCHANGE RATE INFORMATION
Provided below are historical mid-exchange rates between the British pound
sterling and the U.S. dollar for each of the four calendar quarters in 2002 and
2003, and the first two calendar quarters in 2004, through June 22, 2004. We
make no representation that these foreign currency amounts could have been or
could be converted into U.S. dollars, as the case may be, at any particular rate
or at any rate. The data presented in this prospectus supplement relating to the
foreign exchange rate for the U.S. dollar are furnished for informational
purposes only and based on public information. We cannot assure you that such
disclosure is accurate. See "Additional Risk Factors Specific to Your Note - The
Return on Your Note Will Depend on Changes in the Level of the Index and is
Subject to Currency Exchange Rate Risk" above.
The foreign exchange rate has fluctuated in the past, and may, in the
future, experience significant fluctuations. The fluctuation in the exchange
rate between the British pound sterling and the U.S. dollar will affect the
amount payable at maturity.
Governmental actions affecting such exchange rate in the past and over the
life of the notes may include the imposition of exchange or regulatory controls
or taxes, the intervention by the central bank, the replacement of the
respective foreign currency or the alteration of the exchange rate or the
relative exchange characteristics by devaluation or revaluation of the
respective foreign currency. We cannot assure you that the British or United
States governments will not impose foreign currency exchange controls in the
future.
The exchange rate between the British pound sterling and the U.S. dollar
varies over time. Changes in the foreign exchange rate result from the
interaction of many factors directly or indirectly affecting economic and
political conditions in the United Kingdom and the United States, including
economic and political developments in other countries. Of particular importance
are rates of inflation, interest rate levels, the balance of payments and the
extent of governmental surpluses or deficits in the United Kingdom and the
United States and other countries important to international trade and finance.
The price of the notes could also be adversely affected by delays in, or
refusal to grant, any required government approval for conversions of British
pounds sterling and remittances abroad with respect to the index or other de
facto restrictions on the repatriation of U.S. dollars.
The following table shows for the periods indicated, the high, low and
closing mid-exchange rates. We obtained the exchange rates listed below from
Bloomberg Financial Services, without independent verification. The actual
fluctuations of the foreign exchange rate over the life of the offered notes may
bear little relation to the historical foreign exchange rates shown below.
S-31
USD/GBP
<Table>
<Caption>
HIGH LOW CLOSE
------ ------ ------
2002
Quarter ended March 31.................................... 1.4534 1.4082 1.4259
Quarter ended June 30..................................... 1.4335 1.4308 1.5335
Quarter ended September 30................................ 1.5844 1.5201 1.5684
Quarter ended December 31................................. 1.6100 1.5432 1.6100
2003
Quarter ended March 31.................................... 1.6552 1.5624 1.5827
Quarter ended June 30..................................... 1.6853 1.5541 1.6546
Quarter ended September 30................................ 1.6691 1.5674 1.6618
Quarter ended December 31................................. 1.7858.. 1.6624 1.7850
2004
Quarter ended March 31.................................... 1.9047 1.7830 1.8462
Quarter ending June 30 (through June 22, 2004)............ 1.8572 1.7559 1.8206
Mid-exchange closing rate on June 22, 2004................ 1.8206
</Table>
S-32
SUPPLEMENTAL DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES
The following section supplements the discussion of U.S. Federal income
taxation in the accompanying prospectus with respect to United States
holders. The following section is the opinion of Sullivan & Cromwell LLP,
counsel to The Goldman Sachs Group, Inc. In addition, it is the opinion of
Sullivan & Cromwell LLP that the characterization of the note for U.S.
federal income tax purposes that will be required under the terms of the
note, as discussed below, is a reasonable interpretation of current law.
This section applies to you only if you are a United States holder that
holds your note as a capital asset for tax purposes. You are a United States
holder if you are a beneficial owner of a note and you are:
- - a citizen or resident of the United States;
- - a domestic corporation;
- - an estate whose income is subject to United States federal income tax
regardless of its source; or
- - a trust if a United States court can exercise primary supervision over the
trust's administration and one or more United States persons are authorized to
control all substantial decisions of the trust.
This section does not apply to you if you are a member of a class of
holders subject to special rules, such as:
- - a dealer in securities or currencies;
- - a trader in securities that elects to use a mark-to-market method of
accounting for your securities holdings;
- - a bank;
- - a life insurance company;
- - a tax exempt organization;
- - a person that owns a note as a hedge or that is hedged against interest rate
risks;
- - a person that owns a note as part of a straddle or conversion transaction for
tax purposes; or
- - a person whose functional currency for tax purposes is not the U.S. dollar.
Although this section is based on the U.S. Internal Revenue Code of 1986,
as amended, its legislative history, existing and proposed regulations under the
Internal Revenue Code, published rulings and court decisions, all as currently
in effect, no statutory, judicial or administrative authority directly addresses
how your note should be treated for U.S. federal income tax purposes, and as a
result, the U.S. federal income tax consequences of your investment in your note
are uncertain. Moreover, these laws are subject to change, possibly on a
retroactive basis.
Please consult your own tax advisor concerning the U.S. federal income tax
and any other applicable tax consequences to you of owning your note in
your particular circumstances, including the application of state, local
or other tax laws and the possible effects of changes in federal or other
tax laws.
You will be obligated pursuant to the terms of the note -- in the absence
of an administrative determination or judicial ruling to the contrary -- to
characterize your note for all tax purposes as a forward contract to purchase
the index at the stated maturity date, for which payment was made on the issue
date.
If your note is characterized as described above, your tax basis in your
note generally would equal your cost for your note. Upon the sale or exchange of
your note, you would recognize gain or loss equal to the difference between the
amount realized on the sale or exchange and your tax basis in your note. The
gain or loss generally would be short-term capital gain or loss if you hold the
note for one year or less and would be long-term capital gain or loss if you
hold the
S-33
note for more than one year. If you purchase your note in the initial offering
and do not sell or exchange your note before the maturity date, you would
generally recognize long-term capital gain or loss equal to the difference
between the amount of cash received at maturity and your tax basis in the note.
There is no judicial or administrative authority discussing how your note
should be treated for U.S. federal income tax purposes. Therefore, the Internal
Revenue Service might assert that treatment other than that described above is
more appropriate. In particular, the Internal Revenue Service could treat your
note as a single debt instrument subject to special rules governing contingent
payment obligations. Under those rules, the amount of interest you are required
to take into account for each accrual period would be determined by constructing
a projected payment schedule for the note and applying rules similar to those
for accruing original issue discount on a hypothetical noncontingent debt
instrument with that projected payment schedule. This method is applied by first
determining the comparable yield -- i.e., the yield at which we would issue a
noncontingent fixed rate debt instrument with terms and conditions similar to
your note -- and then determining a payment schedule as of the issue date that
would produce the comparable yield. These rules may have the effect of requiring
you to include interest in income in respect of your note prior to your receipt
of cash attributable to that income.
If the rules governing contingent payment obligations apply, you would
recognize gain or loss upon the sale or maturity of your note in an amount equal
to the difference, if any, between the amount you receive at that time and your
adjusted basis in your note. In general, if you purchase your note on the
original issue date, your adjusted basis in your note will equal the amount you
paid for your note, increased by the amount of interest you previously accrued
with respect to your note, in accordance with the comparable yield and the
projected payment schedule for your note.
If the rules governing contingent payment obligations apply, any gain you
recognize upon the sale or maturity of your note would be ordinary interest
income. Any loss you recognize at that time would be treated as ordinary loss to
the extent of interest you included as income in the current or previous taxable
years in respect of your note, and, thereafter, as capital loss.
If the rules governing contingent payment obligations apply, special rules
would apply to persons who purchase a note at other than the adjusted issue
price as determined for tax purposes.
It is possible that the Internal Revenue Service could seek to
characterize your note in a manner that results in tax consequences to you
different from those described above. For example, the Internal Revenue Service
could seek to characterize your note as a collar or as a notional principal
contract. Again, you should consult your tax advisor as to possible alternative
characterizations of your note for U.S. federal income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Please see the discussion under "United States Taxation -- Taxation of
Debt Securities -- Backup Withholding and Information Reporting -- United States
Holders" in the accompanying prospectus for a description of the applicability
of the backup withholding and information reporting rules to payments made on
your note.
S-34
EMPLOYEE RETIREMENT INCOME SECURITY ACT
This section is only relevant to you if you are an insurance company or
the fiduciary of a pension plan or an employee benefit plan (including a
governmental plan, an IRA or a Keogh Plan) proposing to invest in the offered
notes.
The Employee Retirement Income Security Act of 1974, as amended, which we
call "ERISA" and the Internal Revenue Code of 1986, as amended, prohibit certain
transactions involving the assets of an employee benefit plan and certain
persons who are "parties in interest" (within the meaning of ERISA) or
"disqualified persons" (within the meaning of the Internal Revenue Code) with
respect to the plan; governmental plans may be subject to similar prohibitions.
Therefore, a plan fiduciary considering purchasing notes should consider whether
the purchase or holding of such instruments might constitute a prohibited
transaction".
The Goldman Sachs Group, Inc. and certain of its affiliates each may be
considered a "party in interest" or a "disqualified person" with respect to many
employee benefit plans by reason of, for example, The Goldman Sachs Group, Inc.
(or its affiliate) providing services to such plans. Prohibited transactions
within the meaning of ERISA or the Internal Revenue Code may arise, for example,
if notes are acquired by or with the assets of a pension or other employee
benefit plan that is subject to the fiduciary responsibility provisions of ERISA
or Section 4975 of the Internal Revenue Code (including individual retirement
accounts and other plans described in Section 4975(e)(1) of the Internal Revenue
Code), which we call collectively "Plans", and with respect to which The Goldman
Sachs Group, Inc. or any of its affiliates is a "party in interest" or a
"disqualified person", unless those notes are acquired under an exemption for
transactions effected on behalf of that Plan by a "qualified professional asset
manager" or an "in-house asset manager", for transactions involving insurance
company general accounts, for transactions involving insurance company pooled
separate accounts, for transactions involving bank collective investment funds,
or under another available exemption. The assets of a Plan may include assets
held in the general account of an insurance company that are deemed to be "plan
assets" under ERISA. The person making the decision on behalf of a Plan or a
governmental plan shall be deemed, on behalf of itself and the Plan, by
purchasing and holding the offered notes, or exercising any rights related
thereto, to represent that (a) such purchase, holding and exercise of the
offered notes will not result in a non-exempt prohibited transaction under ERISA
or the Internal Revenue Code (or, with respect to a governmental plan, under any
similar applicable law or regulation) and (b) neither The Goldman Sachs Group,
Inc. nor any of its affiliates is a "fiduciary" (within the meaning of Section
3(21) of ERISA) with respect to the purchaser or holder in connection with such
person's acquisition, disposition or holding of the offered notes, or any
exercise related thereto or as a result of any exercise by The Goldman Sachs
Group, Inc. or any of its affiliates of any rights in connection with the
offered notes, and no advice provided by The Goldman Sachs Group, Inc. or any of
its affiliates has formed a primary basis for any investment decision by or on
behalf of such purchaser or holder in connection with the offered notes and the
transactions contemplated with respect to the offered notes.
If you are an insurance company or the fiduciary of a pension plan or an
employee benefit plan, and propose to invest in the offered notes, you
should consult your legal counsel.
S-35
SUPPLEMENTAL PLAN OF DISTRIBUTION
The Goldman Sachs Group, Inc. has agreed to sell to Goldman, Sachs & Co.,
and Goldman, Sachs & Co. has agreed to purchase from The Goldman Sachs Group,
Inc., the aggregate face amount of the offered notes specified on the front
cover of this prospectus supplement. Goldman, Sachs & Co. intends to resell the
offered notes at the original issue price. In the future, Goldman, Sachs & Co.
or other affiliates of The Goldman Sachs Group, Inc. may repurchase and resell
the offered notes in market-making transactions, with resales being made at
prices related to prevailing market prices at the time of resale or at
negotiated prices. The Goldman Sachs Group, Inc. estimates that its share of the
total offering expenses, excluding underwriting discounts and commissions, will
be approximately $51,500. For more information about the plan of distribution
and possible market-making activities, see "Plan of Distribution" in the
accompanying prospectus.
The notes may not be offered or sold, transferred or delivered, as part of
their initial distribution or at any time thereafter, directly or indirectly, to
any individual or legal entity in the Netherlands other than to individuals or
legal entities who or which trade or invest in securities in the conduct of
their profession or trade, which includes banks, securities intermediaries,
insurance companies, pension funds, other institutional investors and commercial
enterprises which, as an ancillary activity, regularly trade or invest in
securities.
S-36
- ------------------------------------------------------------
- ------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the notes offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
----------------------
TABLE OF CONTENTS
Prospectus Supplement
<Table>
<Caption>
Page
----
Summary Information............................ S-2
Additional Risk Factors Specific to Your
Note......................................... S-9
Specific Terms of Your Note.................... S-17
Hypothetical Returns on Your Note.............. S-25
Use of Proceeds and Hedging.................... S-28
The Index...................................... S-29
Historical Currency Exchange Rate
Information.................................. S-31
Supplemental Discussion of Federal Income Tax
Consequences................................. S-33
Employee Retirement Income Security Act........ S-35
Supplemental Plan of Distribution.............. S-36
Prospectus Supplement dated February 6, 2004
Use of Proceeds................................ S-2
Description of Notes We May Offer.............. S-3
United States Taxation......................... S-20
Employee Retirement Income Security Act........ S-20
Supplemental Plan of Distribution.............. S-20
Validity of the Notes.......................... S-22
Prospectus
Available Information.......................... 2
Prospectus Summary............................. 4
Ratio of Earnings to Fixed Charges............. 8
Use of Proceeds................................ 8
Description of Debt Securities We May Offer.... 9
Description of Warrants We May Offer........... 31
Description of Purchase Contracts We May
Offer........................................ 48
Description of Units We May Offer.............. 53
Description of Preferred Stock We May Offer.... 58
The Issuer Trusts.............................. 66
Description of Capital Securities and Related
Instruments.................................. 69
Description of Capital Stock of The Goldman
Sachs Group, Inc. ........................... 93
Legal Ownership and Book-Entry Issuance........ 98
Considerations Relating to Securities Issued in
Bearer Form.................................. 104
Considerations Relating to Indexed
Securities................................... 109
Considerations Relating to Securities
Denominated or Payable in or Linked to a Non-
U.S. Dollar Currency......................... 112
Considerations Relating to Capital
Securities................................... 115
United States Taxation......................... 118
Plan of Distribution........................... 141
Employee Retirement Income Security Act........ 144
Validity of the Securities..................... 144
Experts........................................ 144
Cautionary Statement Pursuant to the Private
Securities Litigation Reform Act of 1995..... 145
</Table>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
$27,386,000
THE GOLDMAN SACHS
GROUP, INC.
Index-Linked Notes
due December 2009
(Linked to the FTSE(TM) 100 Index)
----------------------
[GOLDMAN SACHS LOGO]
----------------------
GOLDMAN, SACHS & CO.
------------------------------------------------------------
------------------------------------------------------------