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. 410
(GOLDMAN SACHS LOGO)
THE GOLDMAN SACHS GROUP, INC.
Medium-Term Notes, Series B
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Trigger Mandatory Exchangeable Notes
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GENERAL TERMS
Goldman Sachs may offer and sell trigger mandatory exchangeable notes from
time to time. This prospectus supplement describes terms that will apply
generally to the trigger mandatory exchangeable notes, including any note you
purchase. A separate pricing supplement will describe terms that apply
specifically to your note, including any changes to the terms specified below.
The general terms of the notes are described beginning on page S-8 and
include the following:
ISSUER: The Goldman Sachs Group, Inc.
INDEX STOCK: the common stock of the index stock issuer specified in the
relevant pricing supplement
INTEREST RATE (COUPON): as specified in the relevant pricing supplement
PRINCIPAL AMOUNT: on the stated maturity date, Goldman Sachs will exchange a
note for index stock at the exchange rate or, at the option of Goldman Sachs,
for the cash value of that stock based on the final index stock price
EXCHANGE RATE: If the final index stock price equals or exceeds the cap price,
this rate, subject to anti-dilution adjustment, will equal a number of shares of
the index stock, for each outstanding unit amount of the notes, equal to the cap
fraction, regardless of whether or not the market price of the index stock falls
below the threshold price at any time during the measurement period.
If the market price of the index stock does not fall below the threshold price
at any time during the measurement period, this rate, subject to anti-dilution
adjustment, will equal:
- - if the final index stock price is less than the cap price but equals or
exceeds the initial index stock price, one share of the index stock, for each
outstanding unit amount of the notes, or,
- - if the final index stock price is less than the initial index stock price, a
number of shares of the index stock, for each outstanding unit amount of the
notes, equal to the threshold fraction
If the market price of the index stock falls below the threshold price at any
time during the measurement period, this rate, subject to anti-dilution
adjustment, will equal one share of the index stock, for each outstanding unit
amount of the notes, if the final index stock price is less than the cap price.
INITIAL INDEX STOCK PRICE: as specified in the relevant pricing supplement
FINAL INDEX STOCK PRICE: the closing price of one share of the index stock on
the determination date, subject to anti-dilution adjustment
CAP PRICE: the initial index stock price times a multiplier, which will be
greater than or equal to 1.0 and will be specified in the relevant pricing
supplement
CAP FRACTION: the cap price divided by the final index stock price
THRESHOLD PRICE: the initial index stock price times a multiplier, which will
be less than 1.0 and will be specified in the relevant pricing supplement
THRESHOLD FRACTION: the initial index stock price divided by the final index
stock price
MEASUREMENT PERIOD: Any trading day from but not including the trade date up to
and including the determination date
UNIT AMOUNT: a face amount of the notes equal to the initial index stock price
BUSINESS DAY: as described on page S-17
CALCULATION AGENT: Goldman, Sachs & Co.
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See "Additional Risk Factors Specific to Your Note" beginning on page S-3 to
read about investment risks relating to the trigger mandatory exchangeable
notes. The principal of the trigger mandatory exchangeable notes is not
protected and you could lose your entire investment.
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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.
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Goldman Sachs may use this prospectus supplement in the initial sale of a
trigger mandatory exchangeable note. In addition, Goldman, Sachs & Co. or any
other affiliate of Goldman Sachs may use this prospectus supplement in a
market-making transaction in a trigger mandatory exchangeable 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.
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Prospectus Supplement dated July 6, 2004.
In this prospectus supplement, when we refer to a "note", including your note,
we mean a trigger mandatory exchangeable note unless the context requires
otherwise. 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. References to the "relevant pricing supplement" mean the pricing
supplement that describes the specific terms of your note.
THE NOTES ARE PART OF A SERIES
The trigger mandatory exchangeable notes, including your note, are part of
a series of debt securities, entitled "Medium-Term Notes, Series B", that we may
issue under our indenture from time to time. The trigger mandatory exchangeable
notes, including your note, are "indexed debt securities", as defined in the
accompanying prospectus. This prospectus supplement summarizes financial and
other terms that apply generally to the trigger mandatory exchangeable notes,
including your note. We describe terms that apply generally to all Series B
medium-term notes in "Description of Notes We May Offer" and "Description of
Debt Securities 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.
SPECIFIC TERMS WILL BE DESCRIBED IN
PRICING SUPPLEMENTS
The specific terms of your note will be described in the relevant pricing
supplement accompanying this prospectus supplement. The terms described there
supplement those described here and in the accompanying prospectus. If the terms
described in the relevant pricing supplement are inconsistent with those
described here or in the accompanying prospectus, the terms described in the
relevant pricing supplement are controlling.
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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. Your note is a riskier investment than ordinary debt
securities. Also, your note is not equivalent to investing directly in the stock
to which your note is indexed. You should carefully consider whether the trigger
mandatory exchangeable notes are suited to your particular circumstances.
THE PRINCIPAL OF YOUR NOTE WILL NOT BE PROTECTED. YOU MAY LOSE ALL OR A
SUBSTANTIAL PART OF YOUR INVESTMENT
The principal of your note will not be protected. Our payment to you on
the stated maturity date will be a number of shares of index stock, or its cash
equivalent, based on the final index stock price and the performance of the
market price of the index stock during the measurement period. Because of the
formula that we use to determine the payment amount, the amount you receive on
the stated maturity date will be less than the face amount of your note if the
closing price of the index stock on the determination date is lower than the
initial index stock price for your note, even if the closing index stock price
is higher than the threshold price, but only if the market price of the index
stock falls below the threshold price during the measurement period. If the
market price of the index stock falls below the threshold price at any time
during the measurement period, you may lose your entire investment in your note,
depending on the closing price of the index stock on the determination date. In
addition, because the payment amount on your note will be determined on the
determination date, in the event we deliver stock rather than cash, the share
price of the stock may be subject to price movement in the period between the
determination date and the stated maturity date. The longer the period of time
between those two dates, the more the stock we deliver to you on the stated
maturity date may be subject to price fluctuation.
Also, the market value of your note prior to the stated maturity date may
be 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.
THE POTENTIAL FOR THE VALUE OF YOUR NOTE
TO INCREASE WILL BE LIMITED
Your ability to participate in any rise in the market value of the index
stock will be limited. Because of the formula that we will use to determine the
payment amount, the amount you receive on the stated maturity date may result in
a lower return on your note than you would have received had you invested in the
index stock directly. In addition, the payment amount that you receive on the
stated maturity date for each outstanding unit amount of your note, or the value
of the shares we deliver, will not exceed the cap price specified in the
relevant pricing supplement, no matter how high the market price of the index
stock may rise.
YOUR NOTE MAY BEAR INTEREST AT A LOW RATE OR IT MAY BEAR NO INTEREST AT ALL
The relevant pricing supplement will state whether your note bears
interest. If your note does bear interest, it may do so at a rate that is below
the prevailing market rate for our debt securities that are not indexed to
stock. Consequently, unless the amount payable on your note on the stated
maturity date substantially exceeds the amount you paid for your note, the
overall return you earn on your note could be less than you would have earned by
investing in a non-indexed debt security that bears interest at the prevailing
market rate.
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THE MARKET PRICE OF YOUR NOTE MAY BE INFLUENCED BY MANY UNPREDICTABLE FACTORS
The following factors, many of which are beyond our control, will
influence the value of your note:
- - the market price of the index stock;
- - the volatility -- i.e., the frequency and magnitude of changes in the market
price -- of the index stock;
- - the dividend rate on the index stock;
- - economic, financial, regulatory, political, military and other events that
affect stock markets generally and the market segment of which the index stock
is a part, and which may affect the market price of the index stock;
- - interest and yield rates in the market;
- - the time remaining until your note matures; and
- - our creditworthiness.
These factors will influence the price you will receive if you sell your
note before maturity. If you sell your note prior to maturity, you may receive
less than the outstanding face amount of your note. You cannot predict the
future performance of the index stock based on its historical performance.
IF THE MARKET PRICE OF THE INDEX STOCK
CHANGES, THE MARKET VALUE OF YOUR NOTE
MAY NOT CHANGE IN THE SAME MANNER
Your note may trade quite differently from the index stock. Changes in the
market price of the index stock may not result in a comparable change in the
market value of your note. Even if the market price of the index stock equals or
exceeds the cap price for your note, the market value of your note will usually
be less than the cap price before the stated maturity date. We discuss some of
the reasons for this disparity under "-- The Market Price of Your Note May Be
Influenced by Many Unpredictable Factors" above.
WE WILL NOT HOLD INDEX STOCK
FOR YOUR BENEFIT
The indenture governing your note does not contain any restriction on our
ability or the ability of any of our affiliates to sell, pledge or otherwise
convey all or any portion of the index stock acquired by us or them. Neither we
nor our affiliates will pledge or otherwise hold shares of the index stock for
your benefit in order to enable you to exchange your note for shares under any
circumstances. Consequently, in the event of our bankruptcy, insolvency or
liquidation, any index stock owned by us will be subject to the claims of our
creditors generally and will not be available for your benefit specifically.
YOU WILL NOT HAVE ANY SHAREHOLDER
RIGHTS AND MAY NOT HAVE ANY RIGHTS TO
RECEIVE STOCK
Investing in your note will not make you a holder of the index stock.
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 stock. In addition, we may, at our sole option,
elect to pay cash in exchange for your note on the stated maturity date, in
which case you will have no right to receive any shares of index stock on that
date.
TRADING AND OTHER TRANSACTIONS BY
GOLDMAN SACHS IN THE INDEX STOCK
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, expect to hedge our
obligations under your note by purchasing the index stock, and perhaps listed or
over-the-counter options or futures on the index stock or other instruments
linked to the index stock. We also expect to adjust the hedge by, among other
things, purchasing or selling any of the foregoing at any time and from time to
time, and to unwind the hedge by selling any of the foregoing, perhaps on or
before the determination date for your note. We may also enter into, adjust and
unwind hedging transactions relating to other index-linked
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notes whose returns are linked to the same index stock. Any of these hedging
activities may adversely affect the price of the index stock and, therefore, the
market value of your note and the value of the consideration we will deliver 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 securities transactions in which we or one or more of our
affiliates may engage.
In addition, Goldman, Sachs & Co. and our other affiliates may engage in
trading in the index stock or instruments whose returns are linked to the index
stock 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 price of the index stock and, therefore,
the market value of your note and the value of the consideration we will deliver
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 or related to changes in the value of
the index stock. 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 value of the consideration we will deliver on your note at
maturity.
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 stock that are not
for your account or on your behalf. These trading activities 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
price of the index stock, 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 issuer of the index stock, including making
loans to or equity investments in that company or providing advisory services to
that company. 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 may have
published or may in the future publish research reports with respect to the
issuer of the index stock. Any of these activities by any of our affiliates may
affect the price of the index stock and, therefore, the market value of your
note and the value of the consideration we will deliver 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 closing price of the index stock, which we will use to determine
how much index stock or cash we must deliver on the stated maturity date;
determining whether to postpone the stated maturity date because of a market
disruption event; determining whether the market price of the index stock falls
below the threshold price during the measurement period; and determining whether
and how to make anti-dilution adjustments to the exchange rate. See "General
Terms of the Trigger Mandatory Exchangeable Notes -- Anti-dilution Adjustments"
and "-- Special Calculation Provisions" below for more information about these
determinations. 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
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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 for your note 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.
THERE WILL NOT BE ANY AFFILIATION BETWEEN
THE INDEX STOCK ISSUER AND US, AND
WE WILL NOT BE RESPONSIBLE FOR ANY DISCLOSURE BY THE INDEX STOCK ISSUER
As of the time any notes are issued, Goldman Sachs will not be affiliated
with the issuer of the index stock. 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 issuer. Nevertheless, neither we nor any of our
affiliates assumes any responsibility for the accuracy or completeness of any
information about the index stock issuer contained in the relevant pricing
supplement or in any of the index stock issuer's publicly available filings.
You, as an investor in your note, should make your own investigation into the
index stock issuer.
The index stock issuer will not be involved in this offering of your note
in any way and will not have any obligation of any sort with respect to your
note. Thus, the index stock issuer will not have any obligation to take your
interests into consideration for any reason, including taking any corporate
actions that might affect the value of your note.
YOUR NOTE MAY NOT HAVE
AN ACTIVE TRADING MARKET
Unless otherwise specified in the relevant pricing supplement, your note
will not be listed or displayed on any securities exchange or included in any
interdealer market or quotation system. Whether or not your note is listed,
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.
YOU WILL HAVE LIMITED ANTI-DILUTION PROTECTION
Goldman, Sachs & Co., as calculation agent for your note, will adjust the
exchange rate for stock splits, reverse stock splits, stock dividends,
extraordinary dividends and other events that affect the index stock issuer's
capital structure, but only in the situations we describe in "General Terms of
the Trigger Mandatory Exchangeable Notes -- Anti-dilution Adjustments" below.
The calculation agent will not be required to make an adjustment for every
corporate event that may affect the index stock. For example, the calculation
agent will not adjust the exchange rate for events such as an offering of the
index stock for cash by the index stock issuer, a tender or exchange offer for
the index stock at a premium to its then-current market price by the index stock
issuer or a tender or exchange offer for less than all the outstanding index
stock by a third party. Those events or other actions by the index stock issuer
or a third party may nevertheless adversely affect the market price of the index
stock and, therefore, adversely affect the value of your note. The index stock
issuer or a third party could make an offering or a tender or exchange offer, or
the index stock issuer could take any other action, that adversely affects the
value of the index stock and your note but does not result in an anti-dilution
adjustment for your benefit.
WE CAN POSTPONE THE STATED MATURITY DATE
IF A MARKET DISRUPTION EVENT OCCURS
If the calculation agent determines that, on the determination date, a
market disruption event has occurred or is continuing, the determination date
will be postponed until the first business day on which no market disruption
event occurs or is continuing. As a result, the stated maturity date for your
note will also be postponed and the measurement period may be extended, although
not by more than six business days. Thus, you may not receive the cash or index
stock that we are obligated to deliver on the stated maturity
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date until several days after the originally scheduled due date. Moreover, if
the closing price of the index stock is not available on the determination date
because of a market disruption event or for any other reason, the calculation
agent will nevertheless determine the final index stock price based on its
assessment, made in its sole discretion, of the market value of the index stock
at that time.
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 below under "Supplemental Discussion of Federal Income
Tax Consequences" below.
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 trigger mandatory exchangeable 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 trigger mandatory
exchangeable 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 trigger mandatory exchangeable notes. This
is discussed in more detail under "Employee Retirement Income Security Act"
below.
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GENERAL TERMS OF THE TRIGGER MANDATORY EXCHANGEABLE NOTES
Please note that in this section entitled "General Terms of the Trigger
Mandatory Exchangeable Notes", 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, while references to "Goldman Sachs" mean The
Goldman Sachs Group, Inc. together with its consolidated subsidiaries.
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".
In addition to the terms described on the front and inside cover of this
prospectus supplement, the following general terms will apply to the trigger
mandatory exchangeable notes, including your note:
SPECIFIED CURRENCY
Unless otherwise specified in the relevant pricing supplement, all
payments of principal and interest will be made in U.S. dollars.
FORM AND DENOMINATION
The notes will be issued only in global form through DTC. The face amount
of each note will be specified in the relevant pricing supplement.
NO LISTING
Unless otherwise specified in the relevant pricing supplement, your note
will not be listed or displayed on any securities exchange or included in any
interdealer market quotation system.
DEFEASANCE, DEFAULT AMOUNT, OTHER TERMS
Neither full defeasance nor covenant defeasance will apply to your note.
The following will apply to your note:
- - the default amount will be payable on any acceleration of the maturity of your
note as described under "-- Special Calculation Provisions" below;
- - anti-dilution provisions will apply to your note as described under
"-- Anti-dilution Adjustments" below; and
- - 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.
in the relevant pricing supplement relates only to the initial issuance and sale
of your note. If you have purchased your note in a market-making transaction
after the initial issuance and sale, any such relevant information about the
sale to you will be provided in a separate confirmation of sale.
INDEX STOCK AND INDEX STOCK ISSUER
In this prospectus supplement, when we refer to the index stock, we mean
the common stock of the issuer specified in the relevant pricing supplement and
when we refer to the index stock issuer, we mean that issuer, except as
described under "-- Anti-dilution Adjustments", "-- Reorganization Events" and
"-- Distribution Property" below.
PAYMENT OF PRINCIPAL ON STATED MATURITY DATE
On the stated maturity date, we will exchange your note for shares of the
index stock at the exchange rate. Alternatively, at our sole option, we may pay
cash in an amount equal to the number of shares of the index stock we would
otherwise be obligated to deliver in exchange for your note, multiplied by the
closing price of the index stock on the determination date. If we choose to
deliver cash, we will notify the holder of
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our election at least one business day before the determination date (or specify
our decision to deliver cash in the relevant pricing supplement); if we do not
notify the holder of our election, we will deliver shares of the index stock,
except in the limited circumstances described under "-- Consequences of a Market
Disruption Event" below.
The value of the shares or cash you receive in exchange for your note on
the stated maturity date may be less than 100% of the outstanding face amount of
your note. We describe this risk under "Additional Risk Factors Specific to Your
Note -- The Principal of Your Note Will Not Be Protected" above.
EXCHANGE RATE
If the final index stock price equals or exceeds the cap price, this rate,
subject to anti-dilution adjustment, will equal a number of shares of the index
stock, for each outstanding unit amount of the notes, equal to the cap fraction,
regardless of whether or not the market price of the index stock falls below the
threshold price at any time during the measurement period.
If the market price of the index stock does not fall below the threshold
price at any time during the measurement period, this rate, subject to
anti-dilution adjustment, will equal:
- - if the final index stock price is less than the cap price but equals or
exceeds the initial index stock price, one share of the index stock, for each
outstanding unit amount of the notes, subject to anti-dilution adjustment, or
- - if the final index stock price is less than the initial index stock price, a
number of shares of the index stock, for each outstanding unit amount of the
notes, equal to the threshold fraction.
If the market price of the index stock falls below the threshold price at
any time during the measurement period, this rate, subject to anti-dilution
adjustment, will equal one share of the index stock, for each outstanding unit
amount of the notes, if the final index stock price is less than the cap price.
The UNIT AMOUNT for a note will be a portion of the outstanding face
amount of the note equal to the initial index stock price for the note. For
example, if the initial index stock price is $10.00 for one share of index
stock, then the number of shares of index stock determined under the exchange
rate (or the cash value of that stock) will be exchangeable for each $10.00 of
the outstanding face amount of the note. We will specify the initial index stock
price, the cap price, the threshold price and the unit amount in the relevant
pricing supplement.
The exchange rate may be adjusted, with respect to both the amount and
type of consideration, as a result of dilution events, as we describe under
"-- Anti-dilution Adjustments" below. In addition, if an exchange would
otherwise involve a fractional share of the index stock, we will pay cash
instead of the fractional share, in an amount equal to that fraction multiplied
by the final index stock price.
The shares of the index stock, together with any cash payable for a
fractional share and after giving effect to any anti-dilution adjustments, that
we must deliver on the stated maturity date in exchange for your note represent
the principal amount of your note, unless we elect to deliver cash. In that
event, the cash we must pay in exchange for your note on the stated maturity
date represents the principal amount of your note.
STATED MATURITY DATE
The stated maturity date will be the date specified in the relevant
pricing supplement, unless that date 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 the relevant specified date is not the determination date
described 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 the relevant
specified date or, if the relevant specified date is not a business day, later
than the sixth business day after the relevant specified date. The calculation
agent may postpone the
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determination date -- and therefore the stated maturity date and extend the
measurement period -- if a market disruption event occurs or is continuing on a
day that would otherwise be the determination date. We describe market
disruption events under "-- Special Calculation Provisions" below.
DETERMINATION DATE
The determination date will be the fifth business day before the date
specified as the stated maturity date in the relevant pricing supplement, unless
the calculation agent determines that a market 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 does not occur and is not continuing.
In no event, however, will the determination date be later than the relevant
specified date or, if the relevant specified date is not a business day, later
than the first business day after the relevant specified date.
CONSEQUENCES OF A MARKET DISRUPTION EVENT
As indicated above, if a market 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 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 occurs or is continuing on that day, that day will nevertheless be the
determination date. If the final index stock price that must be used to
determine the exchange rate (and, if we elect not to deliver index stock on the
stated maturity date, the cash value of that stock) is not available on the
determination date, either because of a market disruption event or for any other
reason, the calculation agent will nevertheless determine the final index stock
price based on its assessment, made in its sole discretion, of the market value
of the index stock on that day.
In addition, if a market disruption event occurs or is continuing on the
determination date or on any later day through and including the stated maturity
date, we may choose to pay cash instead of delivering index stock on the stated
maturity date, even if we have not notified the holder of our election to pay
cash as described under "-- Payment of Principal on Stated Maturity Date" above.
INTEREST PAYMENTS
If the relevant pricing supplement specifies that your note will bear
interest, interest will accrue on the outstanding face amount of your note and
will be calculated and paid as described in the accompanying prospectus with
regard to fixed rate notes, except that the interest payment dates will be those
specified in the relevant pricing supplement and, as long as your note is in
global form, the regular record date for each interest payment date will be the
preceding business day, unless otherwise specified in the relevant pricing
supplement. If the stated maturity date does not occur on the date specified in
the relevant pricing supplement, however, the interest payment date scheduled
for that date will instead occur on the stated maturity date.
ANTI-DILUTION ADJUSTMENTS
The calculation agent will adjust the exchange rate as described below,
but only if an event described under one of the six subsections beginning with
"-- Stock Splits" below occurs and only if the relevant event occurs during the
period described under the applicable subsection.
The adjustments described below do not cover all events that could affect
the exchange rate, such as an issuer tender or exchange offer for the index
stock at a premium to its market price or a tender or exchange offer made by a
third party for less than all outstanding shares of the index stock. We describe
the risks relating to dilution under "Additional Risk Factors Specific to Your
Note -- You Will Have Limited Anti-dilution Protection" above.
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HOW ADJUSTMENTS WILL BE MADE
In this prospectus supplement, we refer to anti-dilution adjustment of the
exchange rate. If an event requiring anti-dilution adjustment occurs, the
calculation agent will make the adjustment by taking the following steps:
- - STEP ONE. The calculation agent will adjust the reference amount. This term
refers to the amount of the index stock or other property for which the final
index stock price is to be determined on the determination date. For example,
if no adjustment is required, the final index stock price will be the closing
price of one share of the index stock on the determination date. In that case,
the reference amount will be one share of the index stock. We describe how the
closing price will be determined under "-- Special Calculation Provisions"
below.
If an adjustment is required because one of the dilution events described in
the first five subsections below -- these involve stock splits, reverse stock
splits, stock dividends, other dividends and distributions and issuances of
transferable rights and warrants -- occurs, then the final index stock price
might instead be, for example, the closing price, on the determination date,
of two shares of the index stock or a half share of the index stock, depending
on the event. In that example, the adjusted reference amount would be two
shares of the index stock or one half share of the index stock, as applicable.
If an adjustment is required because one of the reorganization events
described under "-- Reorganization Events" below -- these involve events in
which cash, securities or other property is distributed in respect of the
index stock -- occurs, then the final index stock price will be as follows,
assuming there has been no prior anti-dilution adjustment: the value, on the
determination date, of the property distributed in the reorganization event in
respect of one share of the index stock, plus one share of the index stock if
the index stock remains outstanding. In that case, the adjusted reference
amount will be the property so distributed plus one share of the index stock,
if applicable. In addition, on the stated maturity date, your note will be
exchangeable for the kind or kinds of property comprising the adjusted
reference amount, or the cash value of that property, as described in more
detail under "-- Reorganization Events" below.
The manner in which the calculation agent adjusts the reference amount in step
one will depend on the type of dilution event requiring adjustment. These
events and the nature of the required adjustments are described in the six
subsections that follow.
- - STEP TWO. Having adjusted the reference amount in step one, the calculation
agent will determine the final index stock price, which will be the closing
price of the adjusted reference amount on the determination date. If a
reorganization event occurs, the final index stock price will be the value of
the adjusted reference amount as determined by the calculation agent in the
manner described under "-- Reorganization Events" below.
- - STEP THREE. Having determined the final index stock price in step two, the
calculation agent will use this price to calculate the cap fraction or the
threshold fraction, if applicable, and the exchange rate.
- - STEP FOUR. Having calculated the exchange rate in step three, the calculation
agent will multiply this rate by the reference amount as adjusted in step one.
The resulting rate will be the number of shares of index stock that will be
exchangeable on the stated maturity date for each outstanding unit amount of
your note.
- - STEP FIVE. If we elect to deliver cash to the holder on the stated maturity
date, the amount we deliver will equal the cash value of the index stock that
we would otherwise deliver, based on the adjusted rate calculated in step
four. The calculation agent will determine the cash value of that stock by
multiplying the number of shares involved by the closing price for one share
on the determination date, rather than by the final index stock price, which
will be the
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closing price for the adjusted reference amount. If your note would be
exchangeable for property other than the index stock because of a
reorganization event, then the calculation agent will determine the cash value
of that property in the manner described under "-- Reorganization Events"
below.
If more than one event requiring adjustment of the exchange rate occurs,
the calculation agent will first adjust the reference amount as described in
step one above for each event, sequentially, in the order in which the events
occur, and on a cumulative basis. Thus, having adjusted the reference amount for
the first event, the calculation agent will repeat step one for the second
event, applying the required adjustment to the reference amount as already
adjusted for the first event, and so on for each event. Having adjusted the
reference amount for all events, the calculation agent will then take the
remaining applicable steps in the process described above, determining the final
index stock price, the cap fraction or the threshold fraction, if applicable,
and the adjusted exchange rate using the reference amount as sequentially and
cumulatively adjusted for all the relevant events. The calculation agent will
make all required determinations and adjustments no later than the determination
date.
If an event requiring anti-dilution adjustment of the exchange rate occurs
as described in this prospectus supplement, the calculation agent will also, on
each trading day on or after the day on which the adjustment becomes required,
adjust the market price of the index stock in order to determine whether the
market price of the index stock falls below the threshold price during the
measurement period. The adjusted market price will be the adjusted reference
amount as described in step one above multiplied by the market price of the
index stock during that trading day. If a reorganization event occurs, the
adjusted market price of the index stock will be the value of the adjusted
reference amount as determined by the calculation agent in the manner described
under "-- Reorganization Events" below.
The calculation agent will adjust the exchange rate for each
reorganization event described under "-- Reorganization Events" below. For any
other dilution event described below, however, the calculation agent will not be
required to adjust the exchange rate (or the market price) unless the adjustment
would result in a change of at least 0.1% in the exchange rate (or the market
price) that would apply without the adjustment. The exchange rate (and any
market price) resulting from any adjustment will be rounded up or down, as
appropriate, to the nearest ten-thousandth, with five hundred-thousandths being
rounded upward -- e.g., 0.12344 will be rounded down to 0.1234 and 0.12345 will
be rounded up to 0.1235.
If an event requiring anti-dilution adjustment occurs, the calculation
agent will make the adjustment with a view to offsetting, to the extent
practical, any change in the economic position of the holder and The Goldman
Sachs Group, Inc., relative to your note, that results solely from that event.
The calculation agent may, in its sole discretion, modify the anti-dilution
adjustments as necessary to ensure an equitable result.
The calculation agent will make all determinations with respect to
anti-dilution adjustments, including any determination as to whether an event
requiring adjustment has occurred, as to the nature of the adjustment required
and how it will be made or as to the value of any property distributed in a
reorganization event, and will do so in its sole discretion. In the absence of
manifest error, those determinations will be conclusive for all purposes and
will be binding on you and us, without any liability on the part of the
calculation agent. The calculation agent will provide information about the
adjustments it makes upon written request by the holder.
In this prospectus supplement, when we say that the calculation agent will
adjust the exchange rate for one or more dilution events, we mean that the
calculation agent will take all the applicable steps described above with
respect to those events.
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Regardless of the anti-dilution adjustments that may apply to your note,
the index stock or cash you receive on the stated maturity date, valued as
of the determination date, will not under any circumstances exceed the cap
price for each outstanding unit amount of your note.
The following six subsections describe the dilution events for which the
exchange rate is to be adjusted. Each subsection describes the manner in which
the calculation agent will adjust the reference amount -- the first step in the
adjustment process described above -- for the relevant event.
STOCK SPLITS
A stock split is an increase in the number of a corporation's outstanding
shares of stock without any change in its stockholders' equity. Each outstanding
share will be worth less as a result of a stock split.
If the index stock is subject to a stock split, then the calculation agent
will adjust the reference amount to equal the sum of the prior reference
amount -- i.e., the reference amount before that adjustment -- plus the product
of (1) the number of new shares issued in the stock split with respect to one
share of the index stock times (2) the prior reference amount. The reference
amount -- and thus the exchange rate -- will not be adjusted, however, unless
the first day on which the index stock trades without the right to receive the
stock split occurs after the date of the relevant pricing supplement and on or
before the determination date.
REVERSE STOCK SPLITS
A reverse stock split is a decrease in the number of a corporation's
outstanding shares of stock without any change in its stockholders' equity. Each
outstanding share will be worth more as a result of a reverse stock split.
If the index stock is subject to a reverse stock split, then once the
reverse stock split becomes effective, the calculation agent will adjust the
reference amount to equal the product of the prior reference amount and the
quotient of (1) the number of shares of the index stock outstanding immediately
after the reverse stock split becomes effective divided by (2) the number of
shares of the index stock outstanding immediately before the reverse stock split
becomes effective. The reference amount -- and thus the exchange rate -- will
not be adjusted, however, unless the reverse stock split becomes effective after
the date of the relevant pricing supplement and on or before the determination
date.
STOCK DIVIDENDS
In a stock dividend, a corporation issues additional shares of its stock
to all holders of its outstanding stock in proportion to the shares they own.
Each outstanding share will be worth less as a result of a stock dividend.
If the index stock is subject to a stock dividend, then the calculation
agent will adjust the reference amount to equal the sum of the prior reference
amount plus the product of (1) the number of shares issued in the stock dividend
with respect to one share of the index stock times (2) the prior reference
amount. The reference amount -- and thus the exchange rate -- will not be
adjusted, however, unless the ex-dividend date occurs after the date of the
relevant pricing supplement and on or before the determination date.
The ex-dividend date for any dividend or other distribution is the first
day on which the index stock trades without the right to receive that dividend
or other distribution.
OTHER DIVIDENDS AND DISTRIBUTIONS
The reference amount will not be adjusted to reflect dividends or other
distributions paid with respect to the index stock, other than:
- - stock dividends described above,
- - issuances of transferable rights and warrants as described under
"-- Transferable Rights and Warrants" below,
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- - distributions that are spin-off events described under "-- Reorganization
Events" below, and
- - extraordinary dividends described below.
A dividend or other distribution with respect to the index stock will be
deemed to be an extraordinary dividend if its per share value exceeds that of
the immediately preceding non-extraordinary dividend, if any, for the index
stock by an amount equal to at least 10% of the closing price of the index stock
on the first business day before the ex-dividend date.
If an extraordinary dividend occurs, the calculation agent will adjust the
reference amount to equal the product of (1) the prior reference amount times
(2) a fraction, the numerator of which is the closing price of the index stock
on the business day before the ex-dividend date and the denominator of which is
the amount by which that closing price exceeds the extraordinary dividend
amount. The reference amount -- and thus the exchange rate -- will not be
adjusted, however, unless the ex-dividend date occurs after the date of the
relevant pricing supplement and on or before the determination date.
The extraordinary dividend amount with respect to an extraordinary
dividend for the index stock equals:
- - for an extraordinary dividend that is paid in lieu of a regular quarterly
dividend, the amount of the extraordinary dividend per share of the index
stock minus the amount per share of the immediately preceding dividend, if
any, that was not an extraordinary dividend for the index stock, or
- - for an extraordinary dividend that is not paid in lieu of a regular quarterly
dividend, the amount per share of the extraordinary dividend.
To the extent an extraordinary dividend is not paid in cash, the value of
the non-cash component will be determined by the calculation agent. A
distribution on the index stock that is a stock dividend, an issuance of
transferable rights or warrants or a spin-off event and also an extraordinary
dividend will result in an adjustment to the exchange rate only as described
under "-- Stock Dividends" above, "-- Transferable Rights and Warrants" below or
"-- Reorganization Events" below, as the case may be, and not as described here.
TRANSFERABLE RIGHTS AND WARRANTS
If the index stock issuer issues transferable rights or warrants to all
holders of the index stock to subscribe for or purchase index stock at an
exercise price per share that is less than the closing price of the index stock
on the business day before the ex-dividend date for the issuance, then the
reference amount will be adjusted by multiplying the prior reference amount by
the following fraction:
- - the numerator will be the number of shares of the index stock outstanding at
the close of business on the day before that ex-dividend date plus the number
of additional shares of the index stock offered for subscription or purchase
under those transferable rights or warrants, and
- - the denominator will be the number of shares of the index stock outstanding at
the close of business on the day before that ex-dividend date plus the number
of additional shares of the index stock that the aggregate offering price of
the total number of shares of the index stock so offered for subscription or
purchase would purchase at the closing price of the index stock on the
business day before that ex-dividend date, with that number of additional
shares being determined by multiplying the total number of shares so offered
by the exercise price of those transferable rights or warrants and dividing
the resulting product by the closing price on the business day before that ex-
dividend date.
The reference amount -- and thus the exchange rate -- will not be adjusted,
however, unless the ex-dividend date described above occurs after the date of
the relevant pricing supplement and on or before the determination date.
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REORGANIZATION EVENTS
Each of the following is a reorganization event:
- - the index stock is reclassified or changed,
- - the index stock issuer has been subject to a merger, consolidation or other
combination and either is not the surviving entity or is the surviving entity
but all the outstanding index stock is exchanged for or converted into other
property,
- - a statutory share exchange involving the outstanding index stock and the
securities of another entity occurs, other than as part of an event described
in the two bullet points above,
- - the index stock issuer sells or otherwise transfers its property and assets as
an entirety or substantially as an entirety to another entity,
- - the index stock issuer effects a spin-off -- that is, issues to all holders of
the index stock equity securities of another issuer, other than as part of an
event described in the four bullet points above,
- - the index stock issuer is liquidated, dissolved or wound up or is subject to a
proceeding under any applicable bankruptcy, insolvency or other similar law,
or
- - another entity completes a tender or exchange offer for all the outstanding
index stock.
ADJUSTMENTS FOR REORGANIZATION EVENTS. If a reorganization event occurs,
then the calculation agent will adjust the reference amount so that it consists
of each type of distribution property distributed in respect of one share of the
index stock -- or in respect of whatever the prior reference amount may be -- in
the reorganization event, taken together. We define the term "distribution
property" below. For purposes of the five-step adjustment process of the
exchange rate described under "-- How Adjustments Will Be Made" above, the
distribution property so distributed will be the adjusted reference amount
described in step one, the value of that property on the determination date will
be the final index stock price described in step two and the calculation agent
will determine and adjust the exchange rate based on these items as described in
steps three and four.
Consequently, if a reorganization event occurs, your note will be
exchangeable on the stated maturity date as follows:
- - If we do not elect to exchange your note for cash, we will deliver to the
holder, for each outstanding unit amount of your note, each type of
distribution property distributed in the reorganization event in respect of
the prior reference amount.
- - If we elect to exchange your note for cash, we will pay the holder, for each
outstanding unit amount of your note, cash in an amount equal to the value of
each type of distribution property distributed in the reorganization event in
respect of the prior reference amount.
For the purpose of making an adjustment required by a reorganization
event, the calculation agent will determine the value of each type of
distribution property, in its sole discretion. For any distribution property
consisting of a security, the calculation agent will use the closing price for
the security on the determination date. The calculation agent may value other
types of property in any manner it determines, in its sole discretion, to be
appropriate. If more than one type of distribution property is involved, the
reference amount will be adjusted so that your note is exchangeable for each
type, or for the cash value of each type, in the same proportion as the value of
each type bears to the total value of the distribution property distributed in
respect of the prior reference amount. If a holder of the index stock may elect
to receive different types or combinations of types of distribution property in
the reorganization event, the distribution property will consist of the types
and amounts of each type distributed to a holder that makes no election, as
determined by the calculation agent in its sole discretion.
If a reorganization event occurs and the calculation agent adjusts the
reference amount to consist of the distribution property distributed in the
event, as described above,
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the calculation agent will make further anti-dilution adjustments for later
events that affect the distribution property, or any component of the
distribution property, comprising the new reference amount. The calculation
agent will do so to the same extent that it would make adjustments if the index
stock were outstanding and were affected by the same kinds of events. If a
subsequent reorganization event affects only a particular component of the
reference amount, the required adjustment will be made with respect to that
component, as if it alone were the reference amount.
For example, if the index stock issuer merges into another company and
each share of the index stock is converted into the right to receive two common
shares of the surviving company and a specified amount of cash, the reference
amount will be adjusted to consist of two common shares and the specified amount
of cash for each share of index stock (adjusted proportionately for any partial
share) comprising the reference amount before the adjustment. The calculation
agent will adjust the common share component of the new reference amount to
reflect any later stock split or other event, including any later reorganization
event, that affects the common shares of the surviving company, to the extent
described in this subsection entitled "-- Anti-dilution Adjustments" as if the
common shares were the index stock. In that event, the cash component will not
be adjusted but will continue to be a component of the reference amount.
Consequently, the final index stock price used to calculate the adjusted
exchange rate will be the total value, as determined by the calculation agent on
the determination date, of all components of the reference amount, with each
component having been adjusted on a sequential and cumulative basis for all
relevant events requiring adjustment on or before the determination date.
The calculation agent will not make any adjustment for a reorganization
event, however, unless the event becomes effective (or, if the event is a
spin-off, unless the ex-dividend date for the spin-off occurs) after the date of
the relevant pricing supplement and on or before the determination date.
DISTRIBUTION PROPERTY. When we refer to distribution property, we mean the
cash, securities and other property or assets distributed in a reorganization
event in respect of one outstanding share of the index stock -- or in respect of
whatever the applicable reference amount may then be if any anti-dilution
adjustment has been made in respect of a prior event. In the case of a spin-
off, the distribution property also includes one share of the index stock -- or
other applicable reference amount -- in respect of which the distribution is
made.
If a reorganization event occurs, the distribution property distributed in
the event will be substituted for the index stock as described above.
Consequently, in this prospectus supplement, when we refer to the index stock,
we mean any distribution property that is distributed in a reorganization event
and comprises the adjusted reference amount. Similarly, when we refer to the
index stock issuer, we mean any successor entity in a reorganization event.
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. 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 trigger mandatory exchangeable notes, are
entitled to take any action under the indenture, we will treat the outstanding
face amount of each trigger mandatory exchangeable note as the outstanding
principal amount of that note. Although the terms of the trigger mandatory
exchangeable 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
trigger mandatory exchangeable notes. This action may involve changing some of
the terms that apply to the Series B medium-term
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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 AND DELIVERY
Any payment or delivery 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 may pay interest due on any interest payment
date by check mailed to the person who is the holder on the regular record date.
We also may make any payment or delivery in accordance with the applicable
procedures of the depositary. We may make any delivery of index stock or
distribution property ourselves or cause our agent to do so on our behalf.
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. The same will apply to any delivery of the index stock that
would otherwise be due on a day that is not a business day. 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 exchange rate, anti-dilution adjustments, market
disruption events, business days, the closing price, market price or other value
of the index stock, whether the market price of the index stock falls below the
threshold price during the measurement period, the default amount and the amount
of the index stock, cash or distribution property to be delivered in exchange
for your note. 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 for the trigger mandatory exchangeable notes. We may
change the calculation agent for your note 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.
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 principal securities market for the index stock
is open for trading.
CLOSING PRICE
The closing price for any security on any day will equal the closing sale
price or last reported sale price, regular way, for the security, on a per-share
or other unit basis:
- - on the principal national securities exchange on which that security is listed
for trading on that day, or
- - if that security is not listed on any national securities exchange, on the
Nasdaq National Market System on that day, or
- - if that security is not quoted on the Nasdaq National Market System on that
day, on any other U.S. national market system that is the primary market for
the trading of that security.
If that security is not listed or traded as described above, then the closing
price for that security on any day will be the average, as determined by the
calculation agent, of the bid prices for the security obtained from as many
dealers in that security selected by the calculation agent as will make those
bid
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prices available to the calculation agent. The number of dealers need not exceed
three and may include the calculation agent or any of its or our affiliates.
MARKET PRICE
The market price for any security on any day will equal the intra-day sale
price at any time or last reported sale price, regular way, for the security, on
a per-share or other unit basis:
- - on the national securities exchange on which that security is listed for
trading on that day, or
- - if that security is not listed on any national securities exchange, on the
Nasdaq National Market System on that day, or
- - if that security is not quoted on the Nasdaq National Market System on that
day, on any other U.S. national market system that is the primary market for
the trading of that security.
If that security is not listed or traded as described above, then the market
price for that security on any day will be determined by the calculation agent
in its sole discretion.
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 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 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.
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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 the index stock on
its primary market 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 stock, if available, in the primary market for
those contracts 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
- - the index stock is not trading on what was the primary market for the index
stock, 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 trigger mandatory exchangeable 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:
- - 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 stock.
For this purpose, an "absence of trading" in the primary securities market
on which an index stock is traded, or on which option or futures contracts
relating to the 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 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.
In this subsection about market disruption events, references to the index
stock include securities that are part of any adjusted reference amount, as
determined by the calculation agent in its sole discretion.
S-19
HYPOTHETICAL PAYMENT AMOUNTS ON YOUR NOTE
The relevant pricing supplement may include a table or chart showing a
hypothetical number of shares of index stock that could be delivered -- or the
cash value of which could be delivered -- for each outstanding unit amount of
your note on the stated maturity date, based on a range of hypothetical final
index stock prices and on various key assumptions shown in the relevant pricing
supplement.
Any table or chart showing hypothetical payment amounts will be provided
for purposes of illustration only. It should not be viewed as an indication or
prediction of future investment results. Rather, it is intended merely to
illustrate the impact that various hypothetical market prices of the index stock
on the determination date could have on the exchange rate, as calculated in the
manner described in the relevant pricing supplement and assuming all other
variables remained constant. The hypothetical payment amounts listed in the
relevant pricing supplement will be entirely hypothetical. They will be based on
market prices for the index stock that may not be achieved on the relevant date
and on assumptions that may prove to be erroneous.
As calculated in the relevant pricing supplement, the hypothetical payment
amounts on your note on the stated maturity date may bear little or no
relationship to the actual market value of your note on that date or at any
other time, including any time you might wish to sell your note. In addition,
you should not view the hypothetical payment amounts as an indication of the
possible financial return on an investment in your note, since the financial
return will be affected by various factors, including taxes, that the
hypothetical information does not take into account. Moreover, whatever the
financial return on your note might be, it may bear little relation to -- and
may be much less than -- the financial return that you might achieve were you to
invest in the index stock directly. Among other things, the financial return on
the index stock would not be limited by the cap price and could include
substantial dividend payments, which you will not receive as an investor in your
note, and an investment in the index stock is likely to have tax consequences
that are different from an investment in your note.
We describe various risk factors that may affect the market value of your
note, and the unpredictable nature of that market value, under "Additional Risk
Factors Specific to Your Note" above.
We cannot predict the market price of the index stock or, therefore, the
final index stock price or the exchange rate for your note. Moreover, the
assumptions we make in connection with any hypothetical information in the
relevant pricing supplement may not reflect actual events. Consequently,
that information may give little or no indication of the number of shares
that will be delivered (or the cash value of which will be delivered) in
respect of your note on the stated maturity date, nor should it be viewed
as an indication of the financial return on your note or of how that
return might compare to the financial return on an investment directly in
the index stock.
S-20
USE OF PROCEEDS AND HEDGING
We will use the net proceeds we receive from the sale of the trigger
mandatory exchangeable notes for the purposes we describe in the accompanying
prospectus under "Use of Proceeds". We or our affiliates also expect to use
those proceeds in transactions intended to hedge our obligations under the
trigger mandatory exchangeable notes as described below.
In anticipation of the sale of each trigger mandatory exchangeable note,
we and/or our affiliates expect to enter into hedging transactions involving
purchases of the index stock, and perhaps listed or over-the-counter options,
futures or other instruments linked to the index stock, on or before the trade
date. In addition, from time to time after we issue a trigger mandatory
exchangeable note, we and/or our affiliates expect to enter into additional
hedging transactions, and to unwind those we have entered into, in connection
with that particular note and perhaps in connection with other index-linked
notes we may issue, some of which may have returns linked to the same index
stock. Consequently, with regard to your note, from time to time, we and/or our
affiliates:
- - expect to acquire or dispose of the index stock or other securities of the
index stock issuer,
- - may take short positions in the index stock or other securities of the index
stock issuer -- 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 the purchaser,
- - may take or dispose of positions in listed or over-the-counter options or
other instruments based on the index stock, and/or
- - 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
New York Stock Exchange, the American Stock Exchange or other components of
the U.S. equity market.
We and/or our affiliates may acquire a long or short position in
securities similar to the trigger mandatory exchangeable notes from time to time
and may, in our or their sole discretion, hold or resell those securities.
We and/or our affiliates may close out a hedge position relating to your
note and perhaps relating to other notes with returns linked to the same index
stock. These steps, which could occur on or before the determination date for
your note, are likely to involve sales of the index stock and they may involve
sales and/or purchases of listed or over-the-counter options or futures on the
index stock or listed or over-the-counter options, futures or other instruments
based on the indices designed to track the performance of the New York Stock
Exchange, the American Stock Exchange or other components of the U.S. equity
market.
The hedging activity discussed above may adversely affect the market value
of your note from time to time and the value of the consideration that we
will deliver on your note at maturity. See "Additional Risk Factors
Specific to Your Note -- Trading and Other Transactions by Goldman Sachs
in the Index Stock 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-21
INDEX STOCK ISSUER
In the relevant pricing supplement, we will provide summary information on
the business of the index stock issuer based on its publicly available
documents.
WHERE INFORMATION ABOUT THE INDEX STOCK ISSUER CAN BE OBTAINED
The index stock will be registered under the Securities Exchange Act of
1934. Companies with securities registered under the Exchange Act are required
to file financial and other information specified by the SEC periodically.
Information filed with the SEC can be inspected and copied at the SEC's public
reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. You may obtain information on the operation of the public
reference room by calling the SEC at 1-800-SEC-0330. In addition, information
filed by the index stock issuer with the SEC electronically can be reviewed
through a web site maintained by the SEC. The address of the SEC's web site is
http://www.sec.gov. Information filed with the SEC by the index stock issuer
under the Exchange Act can be located by referencing its SEC file number, which
will be specified in the relevant pricing supplement.
Information about the index stock issuer may also be obtained from other
sources such as press releases, newspaper articles and other publicly
disseminated documents.
We do not make any representation or warranty as to the accuracy or
completeness of any materials referred to above, including any filings made by
the index stock issuer with the SEC.
WE WILL OBTAIN THE INFORMATION ABOUT THE INDEX STOCK ISSUER IN THE RELEVANT
PRICING SUPPLEMENT FROM THE INDEX STOCK ISSUER'S PUBLIC FILINGS
The relevant pricing supplement will relate only to your note and will not
relate to the index stock or other securities of the index stock issuer. We will
derive all information about the index stock issuer in the relevant pricing
supplement from the publicly available document referred to in the preceding
subsection. We will not participate in the preparation of any of those documents
or make any "due diligence" investigation or inquiry with respect to the index
stock issuer in connection with the offering of your note. We will not make any
representation that any publicly available document or any other publicly
available information about the index stock issuer is accurate or complete.
Furthermore, we will not know whether all events occurring before the date of
the relevant pricing supplement -- including events that would affect the
accuracy or completeness of the publicly available documents referred to above,
the trading price of the index stock and, therefore, the exchange rate -- have
been publicly disclosed. Subsequent disclosure of any events of this kind or the
disclosure of or failure to disclose material future events concerning the index
stock issuer could affect the value you will receive at maturity and, therefore,
the market value of your note.
Neither we nor any of our affiliates will make any representation to you
as to the performance of the index stock.
We or any of our affiliates may currently or from time to time engage in
business with the index stock issuer, including making loans to or equity
investments in the index stock issuer or providing advisory services to the
index stock issuer, including merger and acquisition advisory services. In the
course of that business, we or any of our affiliates may acquire non-public
information about the index stock issuer and, in addition, one or more of our
affiliates may publish research reports about the index stock issuer. As an
investor in a note, you should undertake such independent investigation of the
index stock issuer as in your judgment is appropriate to make an informed
decision with respect to an investment in a note.
HISTORICAL TRADING PRICE INFORMATION
We may provide historical price information on the index stock in the
relevant pricing supplement. You should not take any such historical prices of
the index stock as an indication of future performance. We cannot
S-22
give you any assurance that the price of the index stock will increase
sufficiently for you to receive an amount in excess of, or even equal to, the
face amount of your note at maturity.
Because the payment amount on your note is linked to the price of the
index stock on the determination date and is to be determined under a formula
that caps the rate of return, the principal of your note is not protected and
the rate of return on your note may be less than that on the index stock over a
comparable period. See "Additional Risk Factors Specific to Your Note -- The
Principal of Your Note Will Not Be Protected" above for more information about
this risk.
S-23
SUPPLEMENTAL DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain United States federal
income tax consequences relating to the notes. It does not purport to be a
complete analysis of all tax considerations relating to the notes. You should
consult your tax advisor concerning the United States federal income tax and
other tax consequences of your investment in the notes, including the
application of state, local or other tax laws, and the possible effects of
changes in federal or other tax laws.
SUPPLEMENTAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The discussion below supplements the discussion of United States 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 your note
only if your note matures in more than one year, the cap price is equal to the
initial index stock price and there is a reasonable probability that the index
stock price will be less than the threshold price at some time during the life
of your note. The tax consequences of owning a note that does not fit these
criteria will be discussed in the applicable pricing supplement.
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 regulated investment company;
- - a common trust fund;
- - a person that owns a note as a hedge or that is hedged against interest rate
or currency risks;
- - a United States holder whose functional currency for tax purposes is not the
U.S. dollar.
Although this section is based on the United States Internal Revenue Code
of 1986, as amended, its legislative history, existing and proposed regulations
under the Internal Revenue Code, published rulings and count decisions, all as
currently in effect, no statutory, judicial or administrative authority directly
discusses how your note should be treated for United States federal income tax
purposes and as a result, the United States federal income tax consequences of
your investment in your note are uncertain. Moreover, these laws are subject to
change, possibly on a retroactive basis.
In the opinion of Sullivan & Cromwell LLP, it would be reasonable to treat
your notes as an investment unit consisting of a non-contingent debt instrument
issued by us to you (the "debt portion") and a put option on the index stock
written by you and purchased by us (the "put option"). The terms of your notes
require you and us (in the absence of an administrative determination or
judicial ruling to the
S-24
contrary) to treat your notes for all tax purposes as an investment unit
consisting of the debt portion and put option. By purchasing your notes, you
agree to these terms.
NO STATUTORY, JUDICIAL OR ADMINISTRATIVE AUTHORITY DIRECTLY DISCUSSES HOW
YOUR NOTES SHOULD BE TREATED FOR UNITED STATES FEDERAL INCOME TAX
PURPOSES. AS A RESULT, THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
OF YOUR INVESTMENT IN A NOTE ARE UNCERTAIN. ACCORDINGLY, WE URGE YOU TO
CONSULT YOUR TAX ADVISOR AS TO THE TAX CONSEQUENCES OF HAVING AGREED TO
THE REQUIRED TAX TREATMENT OF YOUR NOTES DESCRIBED ABOVE AND AS TO THE
APPLICATION OF STATE, LOCAL OR OTHER TAX LAWS TO YOUR INVESTMENT IN YOUR
NOTES.
TREATMENT AS AN INVESTMENT UNIT. If your notes are properly treated as an
investment unit consisting of a debt portion and put option, it is likely that
the debt portion of your notes would be treated as having been issued for the
principal amount of your notes and that interest payments on your notes would be
treated in part as payments of interest and in part as payments for the put
option. Amounts treated as interest would be includible in income by you in
accordance with your regular method of accounting for interest for United States
federal income tax purposes. Amounts treated as payment for the put option would
be deferred and would either be included in income by you upon the maturity or
sale of your notes or would reduce the basis of any index stock you receive upon
the maturity of your notes. The applicable pricing supplement will disclose the
amounts that you and we are required to treat as the debt portion that pays
annual interest and the put option in respect of which we are deemed to make
annual payments.
A cash payment of the principal amount of your notes upon the maturity of
your notes would likely be treated as (i) payment in full of the principal
amount of the debt portion, which would likely not result in the recognition of
gain or loss if you are an initial purchaser of your notes and (ii) the lapse of
the put option which would likely result in your recognition of short-term
capital gain in an amount equal to the amount paid to you for the put option and
deferred as described in the preceding paragraph.
A payment in shares of index stock upon the maturity of your notes would
likely be treated as (i) payment in full of the principal amount of the debt
portion, which would likely not result in the recognition of gain or loss if you
are an initial purchaser of your notes and (ii) the exercise by us of the put
option and your purchase of shares of index stock for an amount equal to the
principal amount of your notes. Your tax basis in the index stock you receive
would equal the principal amount of your notes less the amount of payments you
received for the put option and deferred as described in the second preceding
paragraph. Your holding period in the index stock you receive would begin on the
day after you beneficially receive such stock. If you receive cash in lieu of a
fractional share of the index stock, you would recognize a short-term capital
gain or loss in an amount equal to the difference between the amount of cash you
receive and your tax basis (determined in the manner described above) in the
fractional share.
Upon a sale of your notes, you would be required to apportion the value of
the amount you receive between the debt portion and put option on the basis of
the values thereof on the date of the sale. You would recognize gain or loss
with respect to the debt portion in an amount equal to the difference between
(i) the amount apportioned to the debt portion and (ii) your adjusted tax basis
in the debt portion (which would generally be equal to the principal amount of
your notes if you are an initial purchaser of your notes). Except to the extent
attributable to accrued but unpaid interest (or, as discussed below with respect
to secondary purchasers, accrued market discount) with respect to the debt
portion, such gain or loss would be long-term capital gain or loss if your
holding period in your notes is greater than one year. The amount of cash that
you receive that is apportioned to the put option (together with any amount of
premium received in respect thereof and deferred as described in the
S-25
preceding paragraph) would be treated as short-term capital gain. If the value
of the debt portion on the date of the sale of your notes is in excess of the
amount you receive upon such sale, you would likely be treated as having made a
payment to the purchaser equal to the amount of such excess in order to
extinguish your rights and obligations under the put option. In such a case, you
would likely recognize short-term capital gain or loss in an amount equal to the
difference between the premium you previously received in respect of the put
option and the amount of the deemed payment made by you to extinguish the put
option.
If you are a secondary purchaser of your notes, you would be required to
allocate your purchase price for your notes between the debt portion and put
option based on the respective fair market values of each on the date of
purchase. If, however, the portion of your purchase price allocated to the debt
portion in accordance with the preceding sentence is in excess of your purchase
price for your notes, you would likely be treated for tax purposes as having
paid nothing for the put option (i.e., your purchase price for the put option
would be zero) and as having received a payment for obligating yourself under
the put option (which will be deferred as described in the fourth preceding
paragraph) in an amount equal to such excess. If the portion of your purchase
price allocated to the debt portion is at a discount from, or is in excess of,
the principal amount of your notes, you may be subject to the market discount or
amortizable bond premium rules described in the accompanying prospectus under
"United States Taxation -- Taxation of Debt Securities -- United States
Holders -- Original Issue Discount -- Market Discount" and "United States
Taxation -- Taxation of Debt Securities -- United States Holders -- Notes
Purchased at a Premium" with respect to the debt portion. The portion of your
purchase price that is allocated to the put option would likely be offset for
tax purposes against amounts you subsequently receive with respect to the put
option (including amounts received upon a sale of the notes that are
attributable to the put option), thereby reducing the amount of gain or
increasing the amount of loss you would recognize with respect to the put option
or with respect to the sale of any index stock you receive upon the exercise of
the put option.
EXAMPLE OF TAX TREATMENT AS AN INVESTMENT UNIT. The following example is
for illustrative purposes only. Assume that you purchased a note on the initial
issuance with an underlying stock issued by a hypothetical XYZ Company at par
for $1,000 and will receive a 10% annual coupon. Assume further that the
threshold price of the XYZ common stock is $90, and the $100 annual coupon
consists of an interest payment on the debt portion of 3%, or $30, and a payment
with respect to the put option of 7%, or $70. Under the treatment agreed to, you
would include the interest portion of $30 in ordinary income in the year it is
received or accrued, depending on your accounting method for tax purposes.
Initially, the portion of the coupon attributable to the put option ($70) would
not be subject to tax.
For a 12-month and one-day note that is not sold prior to maturity, the
coupon payments would total approximately $100, $30 of which would be taxed as
ordinary interest income in the year it is received or accrued and $70 of which
would not be subject to tax until maturity. If the share price of XYZ Company is
equal to or higher than the initial stock price of $100 at maturity or the price
of XYZ common stock has never fallen below the threshold price, you would
receive $1,000 cash or stock and recognize a short-term capital gain of $70
(that is, the amount of the payments previously received by you with respect to
the put option). If the share price of XYZ Company at maturity is below the $100
initial stock price and the price of XYZ common stock has fallen below the
threshold price at any time during the life of the note, you would receive 10
shares or, at our option, the cash value of 10 shares of XYZ Company stock for
your note (that is, $1,000 principal amount/$100 per share initial price = 10
shares). Your basis in any shares received would be $930, which is the initial
purchase price of your notes ($1,000) less the payments previously made to you
with respect to the put option ($70).
S-26
The above example can be summarized as follows:
INITIAL INVESTMENT
<Table>
Dollars invested in the note................................ $1000
Annual coupon............................................... 10%
Fixed income component of coupon............................ 3%
Option premium component of coupon.......................... 7%
Initial stock price of XYZ company.......................... $100
Number of shares received or deemed received if stock price
at maturity has declined from the initial price and has
fallen below the threshold price ($1,000 par amount/initial
stock price of $100 = 10 shares of XYZ common stock)........ 10
</Table>
S-27
<Table>
<Caption>
-----------------------------------------------------------------
EVERY 6 TOTAL FOR
COUPON PAYMENT MONTHS 367 DAYS
- -----------------------------------------------------------------
Fixed income component of coupon (taxed as ordinary income
in year received or accrued) $15 $30
- -----------------------------------------------------------------
Option premium component of coupon (tax impact deferred
until maturity) $35 $70
--- ------
- -----------------------------------------------------------------
Total coupon $50 $100
- -----------------------------------------------------------------
THERE ARE TWO POTENTIAL OUTCOMES AT MATURITY
- -----------------------------------------------------------------
1) If XYZ common stock is at or above $100 at maturity or
has never fallen below the threshold price, then:
- -----------------------------------------------------------------
Investor receives payment of principal in the form of
cash or stock $1,000
- -----------------------------------------------------------------
Investor recognizes short term capital gains on the
option premium component of coupon $70
- -----------------------------------------------------------------
2) If XYZ common stock is below $100 at maturity and the
price of XYZ stock has fallen below the threshold price
at any time during the life of your note, then:
- -----------------------------------------------------------------
Investor receives 10 shares of XYZ common stock, or at
our option, the cash equivalent of 10 shares, the market
value of which depends on the stock price of XYZ company.
- -----------------------------------------------------------------
The cost basis of any stock received is:
- -----------------------------------------------------------------
Initial investment $1,000
- -----------------------------------------------------------------
Less: option premium component of coupon -$70
------
- -----------------------------------------------------------------
Net cost basis of any stock received $930
- ---------------------------------------------------------------------------------
</Table>
ALTERNATIVE CHARACTERIZATIONS. There is no judicial or administrative
authority discussing how your note should be treated for United States federal
income tax purposes. Therefore, the Internal Revenue Service might assert that
treatment other than that described above is more appropriate. For example, the
Internal Revenue Service could treat your note as a single debt instrument
subject to the special United States Treasury Regulations governing contingent
debt instruments. Under those rules, the amount of interest you would be
required to take into account for each accrual period would be determined by
constructing a projected payment schedule for your note and applying rules
similar to those for accruing original issue discount on a hypothetical non-
contingent debt instrument with that projected payment schedule. This method is
applied by first determining the yield at which we would issue a non-contingent
fixed rate debt instrument with other terms and conditions similar to your note
and then determining as of the issue date a payment schedule (including all
fixed payments of interest
S-28
actually provided for and a hypothetical payment at maturity) that would produce
the comparable yield. These rules would generally have the effect of (i)
treating each payment of stated interest on your note in part as taxable
interest income (to the extent of the comparable yield) and thereafter as a tax-
free return of capital and (ii) requiring you to use an accrual (rather than the
cash receipts and disbursements) method of accounting with respect to interest
on your note.
If your note is treated as a contingent debt instrument, 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 cash or the fair market value of any
index stock received at such time and your adjusted United States federal income
tax basis in your note. In general, your adjusted United States federal income
tax basis in your note would 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) and
decreased by the amount of interest payments you received with respect to your
note. Any gain recognized by you upon the sale or maturity of your note would be
ordinary interest income and any loss recognized by you at such time would be
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, capital loss.
Your holding period in any index stock received upon the maturity of your note
would begin on the day after your receipt of the index stock.
If your note is treated as a contingent debt instrument and you purchase
your note in the secondary market at a price that is at a discount from, or in
excess of, the adjusted issue price of your note, such excess or discount would
not be subject to the generally applicable market discount and amortizable bond
premium rules described in the accompanying prospectus but rather would be
subject to special rules set forth in Treasury Regulations governing contingent
debt instruments. Accordingly, if you purchase your note in the secondary market
at a price other than the adjusted issue price of your note, you should consult
your tax advisor as to the possible application of such rules to you.
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 allocate less than all the amounts you paid for a note to the cash
deposit described above and treat the cash deposit as a debt instrument acquired
at a discount. In that case, you would be required to include such original
issue discount in income as it accrues in addition to stated interest on your
note. The Internal Revenue Service could also seek to characterize your note as
a notional principal contract, or as a prepaid forward without a cash deposit
component. You should consult your tax advisors 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-29
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 trigger
mandatory exchangeable 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 trigger mandatory exchangeable notes, or exercising
any rights related thereto, to represent that (a) such purchase, holding and
exercise of the trigger mandatory exchangeable 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 trigger mandatory exchangeable 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
trigger mandatory exchangeable 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 trigger mandatory exchangeable notes and the transactions contemplated
with respect to the trigger mandatory exchangeable 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 trigger mandatory
exchangeable notes, you should consult your legal counsel.
S-30
SUPPLEMENTAL PLAN OF DISTRIBUTION
With respect to each trigger mandatory exchangeable note to be issued, The
Goldman Sachs Group, Inc. will agree to sell to Goldman, Sachs & Co., and
Goldman, Sachs & Co. will agree to purchase from The Goldman Sachs Group, Inc.,
the face amount of the note specified, at the price specified under "Net
proceeds to the issuer", in the relevant pricing supplement. Goldman, Sachs &
Co. intends to resell each note it purchases at the original issue price
specified in the relevant pricing supplement. In the future, Goldman, Sachs &
Co. or other affiliates of The Goldman Sachs Group, Inc. may repurchase and
resell outstanding 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. For more information about the plan of distribution and
possible market-making activities, see "Plan of Distribution" in the
accompanying prospectus.
S-31
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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 or a solicitation of an offer to buy the securities it describes, 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.
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TABLE OF CONTENTS
Prospectus Supplement
<Table>
<Caption>
Page
----
Additional Risk Factors Specific to Your
Note........................................ S-3
General Terms of the Trigger Mandatory
Exchangeable Notes.......................... S-8
Hypothetical Payment Amounts on Your Note..... S-20
Use of Proceeds and Hedging................... S-21
Index Stock Issuer............................ S-22
Supplemental Discussion of Federal Income Tax
Consequences................................ S-24
Employee Retirement Income Security Act....... S-30
Supplemental Plan of Distribution............. S-31
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>
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THE GOLDMAN SACHS
GROUP, INC.
Trigger Mandatory
Exchangeable Notes
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(GOLDMAN SACHS LOGO)
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GOLDMAN, SACHS & CO.
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