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. 418.
[GOLDMAN SACHS LOGO]
THE GOLDMAN SACHS GROUP, INC.
------------------------
$18,580,000
Medium-Term Notes, Series B
Enhanced Participation Notes due November 2005
(Linked to the S&P 500(R) Index)
------------------------
The amount that you will be paid on your note on November 10, 2005 (unless
extended due to market disruption or non-business days), is linked on a
one-to-one basis to a decline in the S&P 500(R) Index and a three-to-one basis
to an increase in the S&P 500(R) Index, subject to a maximum gain of 15.00%.
YOU COULD LOSE YOUR ENTIRE INVESTMENT IN YOUR NOTE; A NEGATIVE PERCENTAGE
RETURN ON THE S&P 500(R) INDEX WILL REDUCE THE PAYMENT YOU WILL RECEIVE AT
STATED MATURITY BY THE SAME PERCENTAGE. HOWEVER, THE MAXIMUM PAYMENT THAT YOU
COULD RECEIVE ON THE STATED MATURITY DATE WITH RESPECT TO A $2,000 FACE AMOUNT
NOTE (THE MINIMUM DENOMINATION) IS LIMITED TO $2,300 (115.00% OF THE FACE
AMOUNT). IN ADDITION, WE WILL NOT PAY INTEREST ON THE NOTES AND WE WILL NOT PAY
ANY OTHER AMOUNT WITH RESPECT TO YOUR NOTE PRIOR TO THE STATED MATURITY.
We will determine the amount to be paid to you on your note by first
calculating the percentage increase or decrease, if any, in the S&P 500(R) Index
from the initial index level of 1,099.69 (the closing level on the trade date)
to the final index level (the closing level on the determination date, which
will be the fifth business day prior to the stated maturity date, unless
extended due to market disruption). We will then calculate the amount, if any,
which you will be paid for each $2,000 face amount of your note (the minimum
denomination) on the stated maturity date as follows:
- If the return on the S&P 500(R) Index is greater than or equal to 5.00%,
we will pay you $2,300 (the face amount of your note plus the face amount
of your note times 15.00%).
- If the return on the S&P 500(R) Index is greater than zero, but less than
5.00%, we will pay you the face amount of your note plus the face amount
of your note multiplied by three times the percentage increase.
- If the return on the S&P 500(R) Index is zero, we will pay you $2,000
(the face amount of your note).
- If the return on the S&P 500(R) Index is negative, we will pay you the
face amount of your note minus the face amount of your note multiplied by
the percentage decrease (with the product of that multiplication
expressed as a positive amount).
Because we have provided only a brief summary of the terms of your note
above, you should read the detailed description of the terms of the notes found
in "Summary Information" on page S-2 and "Specific Terms of Your Note" on page
S-12.
YOUR INVESTMENT IN THE NOTES INVOLVES CERTAIN RISKS. IN PARTICULAR,
ASSUMING NO CHANGES IN MARKET CONDITIONS OR OTHER RELEVANT FACTORS, THE VALUE OF
YOUR NOTE ON THE DATE OF THIS PROSPECTUS SUPPLEMENT (AS DETERMINED BY REFERENCE
TO PRICING MODELS USED BY GOLDMAN, SACHS & CO.) IS SIGNIFICANTLY LESS THAN THE
ORIGINAL ISSUE PRICE. WE ENCOURAGE YOU TO READ "ADDITIONAL RISK FACTORS SPECIFIC
TO YOUR NOTE" ON PAGE S-7 SO THAT YOU MAY BETTER UNDERSTAND THOSE RISKS.
ORIGINAL ISSUE DATE (SETTLEMENT DATE): August 10, 2004
ORIGINAL ISSUE PRICE: 100% of the face amount
UNDERWRITING DISCOUNT: 0.1% of the face amount
NET PROCEEDS TO THE GOLDMAN SACHS GROUP, INC.: 99.9% of the face amount
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------
Goldman Sachs may use this prospectus supplement in the initial sale of the
notes. In addition, Goldman, Sachs & Co. or any other affiliate of Goldman Sachs
may use this prospectus supplement in a market-making transaction in a note
after its initial sale. UNLESS GOLDMAN SACHS OR ITS AGENT INFORMS THE PURCHASER
OTHERWISE IN THE CONFIRMATION OF SALE, THIS PROSPECTUS SUPPLEMENT IS BEING USED
IN A MARKET-MAKING TRANSACTION.
"Standard & Poor's 500(R)", "S&P(R)", "Standard & Poor's(R)" and "S&P
500(R)" are trademarks of McGraw-Hill Inc. and are licensed for use by Goldman,
Sachs & Co. and its affiliates. The notes are not sponsored, sold or promoted by
Standard & Poor's and Standard & Poor's makes no representations regarding the
advisability of investing in the notes.
GOLDMAN, SACHS & CO.
------------------------
Prospectus Supplement dated August 3, 2004.
SUMMARY INFORMATION
- --------------------------------------------------------------------------------
We refer to the notes we are offering by this prospectus supplement as
the "offered notes" or the "notes". Each of the offered notes, including your
note, has the terms described below and under "Specific Terms of Your Note" on
page S-12. Please note that in this prospectus supplement, references to "The
Goldman Sachs Group, Inc.", "we", "our" and "us" mean only The Goldman Sachs
Group, Inc. and do not include its consolidated subsidiaries. Also, references
to the "accompanying prospectus" mean the accompanying Prospectus, dated
February 6, 2004, as supplemented by the accompanying Prospectus Supplement,
dated February 6, 2004, of The Goldman Sachs Group, Inc.
- --------------------------------------------------------------------------------
KEY TERMS
ISSUER: The Goldman Sachs Group, Inc.
INDEX: S&P 500(R) Index, as published by Standard & Poor's Ratings Group
(Bloomberg: SPX)
FACE AMOUNT: $18,580,000 in the aggregate for all the offered notes
PAYMENT AMOUNT: on the stated maturity date, we will pay the holder of each note
an amount, if any, in cash equal to:
- - if the index return is greater than or equal to 5.00%, (1) the outstanding
face amount of the note plus (2) the outstanding face amount of the note
multiplied by the maximum gain
- - if the index return is greater than zero, but less than 5.00%, (1) the
outstanding face amount of the note plus (2) the outstanding face amount of
the note multiplied by three times the index return
- - if the index return is zero, the outstanding face amount of the note
- - if the index return is negative, (1) the outstanding face amount of the note
minus (2) the outstanding face amount of the note multiplied by the index
return (with the product of that multiplication expressed as a positive
amount)
TRADE DATE: August 3, 2004
INITIAL INDEX LEVEL: 1,099.69
FINAL INDEX LEVEL: the closing level of the index on the determination date,
except in the limited circumstances described under "Specific Terms of Your
Note -- Consequences of a Market Disruption Event" on page S-14 and subject to
adjustment as provided under "Specific Terms of Your Note -- Discontinuance or
Modification of the Index" on page S-14
INDEX RETURN: the result of (i) the final index level minus the initial index
level divided by (ii) the initial index level, expressed as a percentage
MAXIMUM GAIN: 15.00%
STATED MATURITY DATE: November 10, 2005, unless extended for up to six business
days
DETERMINATION DATE: the fifth business day prior to November 10, 2005 unless
extended for up to five business days
NO INTEREST: the offered notes will not bear interest
NO LISTING: the notes will not be listed on any securities exchange or
interdealer market quotation system
CALCULATION AGENT: Goldman, Sachs & Co.
BUSINESS DAY: as described on page S-15
S-2
Q&A
HOW DO THE NOTES WORK?
The enhanced participation notes offered by this prospectus supplement has
a stated maturity date of November 10, 2005 (unless extended due to market
disruption or non-business days). The amount that you will be paid on your note
on the stated maturity date will be linked on a one-to-one basis to a decline in
the S&P 500(R) Index and a three-to-one basis to an increase in the S&P 500(R)
Index, subject to a maximum gain of 15.00%. The entire principal amount of your
note is at risk if the S&P 500(R) Index declines, so you may lose all or a
significant amount of your initial investment. The notes will not bear interest
and no payments will be made prior to the stated maturity date. See "Additional
Risk Factors Specific to Your Note" on page S-7.
As discussed in the accompanying prospectus, the notes are indexed debt
securities and are part of a series of debt securities entitled "Medium-Term
Notes, Series B" issued by The Goldman Sachs Group, Inc. The notes will rank
equally with all other unsecured and unsubordinated debt of The Goldman Sachs
Group, Inc. For more details, see "Specific Terms of Your Note" on page S-12.
WHO SHOULD OR SHOULD NOT CONSIDER AN INVESTMENT IN THE NOTES?
We have designed the enhanced participation notes for investors who want
to participate in the potential increase in the S&P 500(R) Index on a
three-to-one basis, up to a maximum gain of 15.00%, while having their entire
principal subject, on a one-to-one basis, to the risk of a decline in the S&P
500(R) Index. Because the entire principal amount of your notes will be fully
exposed to any potential depreciation of the S&P 500(R) Index over the term of
the notes, you should only consider purchasing the notes if you are willing to
accept the risk of loss of the entire principal amount of your note.
In addition, if the amount payable on your note on the stated maturity
date is the face amount or even if the amount payable exceeds the face amount of
your note, the overall return you earn on your note may be less than you would
have earned by investing in a non-indexed debt security that bears interest at a
prevailing market rate. The notes may therefore not be a suitable investment for
you if you prefer the lower risk of fixed income investments with comparable
maturities issued by companies with comparable credit ratings. For more details,
see "Additional Risk Factors Specific to Your Note -- Your Note Does Not Bear
Interest" on Page S-8 below.
WHAT WILL I RECEIVE AT THE STATED MATURITY OF THE NOTES?
The payment amount, if any, for each offered note outstanding on the
stated maturity date will be an amount in cash equal to:
- - if the index return is greater than or equal to 5.00%, (1) the outstanding
face amount of the note plus (2) the outstanding face amount of the note
multiplied by the maximum gain
- - if the index return is greater than zero, but less than 5.00%, (1) the
outstanding face amount of the note plus (2) the outstanding face amount of
the note multiplied by three times the index return
- - if the index return is zero, the outstanding face amount of the note
- - if the index return is negative, (1) the outstanding face amount of the note
minus (2) the outstanding face amount of the note multiplied by the index
return (with the product of that multiplication expressed as a positive
amount)
The index return is calculated by subtracting the initial index level from
the final index level and by dividing the result by the initial index level,
with the result expressed as a percentage.
If the final index level is greater than the initial index level, i.e.,
the index return is positive due to an increase in the S&P 500(R) Index, you
will participate in any such
S-3
increase on a three-to-one basis, subject to the maximum gain of 15.00%.
Consequently, the maximum payment the holder of your note could receive at
maturity will be 115.00% of the face amount of your note and the holder of your
note will therefore not benefit from any positive index return in excess of
5.00% (that is, one-third of the maximum gain).
If the final index level is less than the initial index level, i.e., the
index return is negative due to a decline in the S&P 500(R) Index, the entire
principal of your note is exposed to any such decline on a one-to-one basis. As
a result, the payment the holder of your note would receive at maturity would be
less than the face amount of your note and might even be reduced to zero.
The calculation agent will determine the final index level, which will be
the closing level of the index on the determination date as calculated and
published by the index sponsor.
WHAT WILL I RECEIVE IF I SELL THE NOTE PRIOR TO THE STATED MATURITY?
If you sell your note prior to the stated maturity date, you will receive
the market price for your note. The market price for your note may be influenced
by many factors, such as interest rates and the volatility of the index.
Depending on the impact of these factors, you may receive significantly less
than the face amount of your note in any sale of your note before the stated
maturity date. In addition, assuming no changes in market conditions and any
other relevant factors, the value of your note on the date of this prospectus
supplement (as determined by reference to pricing models used by Goldman, Sachs
& Co.) is significantly less than the original issue price. For more information
on the value of your note in the secondary market, see "Additional Risk Factors
Specific to Your Note -- Assuming No Changes in Market Conditions Or Any Other
Relevant Factors, the Value of Your Note on the Date of this Prospectus
Supplement (As Determined By Reference to Pricing Models Used by Goldman, Sachs
& Co.) Is Significantly Less Than the Original Issue Price" on page S-7 and
"-- The Market Value of Your Note May Be Influenced by Many Unpredictable
Factors" on page S-8 below.
HYPOTHETICAL EXAMPLES
If the final index level is greater than the initial index level, the
payment on each offered note at the stated maturity will exceed the face amount.
If the final index level is equal to the initial index level, the holder of each
offered note will receive only the face amount. If the final index level is less
than the initial index level, the holder of each offered note will receive less
than the face amount. The entire principal amount of your notes is at risk in
the event the S&P 500(R) Index declines, so you may lose all or a significant
amount of your initial investment in your note. For more detail about
hypothetical returns on your note, please see the following examples and
"Hypothetical Returns on Your Note" on page S-18.
The table below shows the hypothetical payment amounts that we would
deliver on the stated maturity date in exchange for each $2,000 of the
outstanding face amount of your note, if the final index level (expressed as a
percentage of the initial index level) were any of the hypothetical levels shown
in the left column.
The levels in the left column of the table represent hypothetical final
index levels on the determination date and are expressed as percentages of the
initial index level. The amounts in the right column represent the hypothetical
payment amounts, based on the corresponding hypothetical final index levels and
a maximum gain of 15.00% and are expressed as percentages of the face amount of
a note.
The information in the table reflects hypothetical rates of return on the
offered notes assuming that they are purchased on the original issue date and
held to the stated maturity date. If you sell your note prior to the stated
maturity date, your return will depend upon the market value of your note at the
time of sale, which may be affected by a number of factors that are not
reflected in the examples shown below. For a discussion of
S-4
some of these factors, see "Additional Risk Factors Specific to Your Note" on
page S-7. We have also assumed that the closing level of the index on the
determination date will be the same as on the stated maturity date and that no
market disruption event occurs.
The examples below are based on a range of index levels that are entirely
hypothetical; no one can predict what the final index level will be on the
determination date. The index has been highly volatile -- meaning that the index
level has changed substantially in relatively short periods -- in the past, and
its future performance cannot be predicted.
The actual performance of the index over the life of the offered notes, as
well as the amount payable at maturity, may bear little relation to the
hypothetical examples shown below and cannot be predicted.
<Table>
<Caption>
HYPOTHETICAL FINAL HYPOTHETICAL PAYMENT
INDEX LEVEL AMOUNTS AS
AS PERCENTAGE OF PERCENTAGE OF FACE
INITIAL INDEX LEVEL AMOUNT
- ------------------- --------------------
125% 115%
110% 115%
105% 115%
102% 106%
100% 100%
75% 75%
50% 50%
25% 25%
0% 0%
</Table>
If, for example, the final index level were determined to be 25% of the
initial index level, the payment amount that we would deliver to you at maturity
would be 25% of the face amount of your note, as shown in the table above. As a
result, if you purchased your note on the original issue date and held it until
the stated maturity date, you would lose 75% of your investment.
The following chart also shows a graphical illustration of the
hypothetical payment amounts (expressed as a percentage of the face amount of
your note) that we would deliver to the holder of your note on the stated
maturity date, if the final index level (expressed as a percentage of the
initial index level) were any of the hypothetical levels shown on the horizontal
axis. The chart shows that any hypothetical final index level of less than 100%
of the initial index level (the section left of the 100% marker on the
horizontal axis) would result in a hypothetical payment amount of less than 100%
of the face amount of your note (the section below the 100% marker on the
vertical axis) and, accordingly, in a loss of principal to the holder of your
note.
S-5
[HYPOTHETICAL PAYMENT AMOUNTS GRAPH]
WHO PUBLISHES THE INDEX AND WHAT DOES IT MEASURE?
The S&P 500(R) Index is intended to provide an indication of the pattern
of common stock price movement. The calculation of the value of the index is
based on the relative value of the aggregate market value of the common stocks
of 500 companies as of a particular time compared to the aggregate average
market value of the common stocks of 500 similar companies during the base
period of the years 1941 through 1943. As of July 30, 2004, 423 companies or
84.4% of the index traded on the New York Stock Exchange, 75 companies or 15.4%
of the index traded on The Nasdaq Stock Market and 2 companies or 0.2% of the
index traded on the American Stock Exchange. Standard & Poor's chooses companies
for inclusion in the index with the aim of achieving a distribution by broad
industry groupings that approximates the distribution of these groupings in the
common stock population of its stock guide database of over 7,160 equities,
which Standard & Poor's uses as an assumed model for the composition of the
total market.
The index is determined, comprised and calculated by Standard & Poor's
without regard to the offered notes.
For further information, please see "The Index" on page S-22.
WHAT ABOUT TAXES?
The U.S. federal income tax consequences of an investment in your note are
uncertain, both as to the timing and character of any inclusion in income in
respect of your note. Some of these tax consequences are summarized below, but
we urge you to read the more detailed discussion in "Supplemental Discussion of
Federal Income Tax Consequences" on page S-26.
Pursuant to the terms of the notes, The Goldman Sachs Group, Inc. and you
agree (in the absence of an administrative or judicial ruling to the contrary)
to characterize your note for all purposes as a pre-paid forward contract with
respect to the index. If your note is so treated, you will generally recognize
capital gain or loss upon the sale or maturity of your note in an amount equal
to the difference between the amount you receive upon the sale of your note or
on the stated maturity date and the amount you paid for your note. Such gain or
loss generally would be long-term capital gain or loss if you held your note for
more than one year.
S-6
ADDITIONAL RISK FACTORS SPECIFIC TO YOUR NOTE
- --------------------------------------------------------------------------------
An investment in your note is subject to the risks described below, as
well as the risks described under "Considerations Relating to Indexed
Securities" in the accompanying prospectus dated February 6, 2004. Your note
is a riskier investment than ordinary debt securities. Also, your note is not
equivalent to investing directly in the index stocks, i.e., the stocks
comprising the index to which your note is linked. You should carefully
consider whether the offered notes are suited to your particular
circumstances.
- --------------------------------------------------------------------------------
ASSUMING NO CHANGES IN MARKET CONDITIONS OR ANY OTHER RELEVANT FACTORS, THE
VALUE OF YOUR NOTE ON THE DATE OF THIS PROSPECTUS SUPPLEMENT (AS DETERMINED BY
REFERENCE TO PRICING MODELS USED BY GOLDMAN, SACHS & CO.) IS SIGNIFICANTLY LESS
THAN THE ORIGINAL ISSUE PRICE
The value or quoted price of your note at any time, however, will reflect
many factors and cannot be predicted. If Goldman, Sachs & Co. makes a market in
the offered notes, the price quoted by Goldman, Sachs & Co. would reflect any
changes in market conditions and other relevant factors, and the quoted price
could be higher or lower than the original issue price, and may be higher or
lower than the value of your note as determined by reference to pricing models
used by Goldman, Sachs & Co.
If at any time a third party dealer quotes a price to purchase your note
or otherwise values your note, that price may be significantly different (higher
or lower) than any price quoted by Goldman, Sachs & Co. You should read "-- The
Market Value of Your Note May Be Influenced by Many Unpredictable Factors"
below.
Furthermore, if you sell your note, you will likely be charged a
commission for secondary market transactions, or the price will likely reflect a
dealer discount.
There is no assurance that Goldman, Sachs & Co. or any other party will be
willing to purchase your note; and, in this regard, Goldman, Sachs & Co. is not
obligated to make a market in the notes. See "-- Your Note May Not Have an
Active Trading Market" below.
THE PRINCIPAL OF YOUR NOTE IS NOT PROTECTED
The principal of your note is not protected. Our cash payment on your note
on the stated maturity date will be based on the final index level. Thus, you
may lose your entire investment in your note, depending on the final index
level, as calculated by the calculation agent.
Also, the market value of your note prior to the stated maturity date may
be significantly lower than the purchase price you pay for your note.
Consequently, if you sell your note before the stated maturity date, you may
receive far less than the amount of your investment in the note.
THE POTENTIAL RETURN ON YOUR NOTE IS LIMITED
The maximum gain on your note at maturity is 15.00%. If the index return
is positive, i.e., there has been an increase in the index, you will participate
in any such increase on a three-to-one basis, subject to the maximum gain of
15.00%, which we will pay if the index return is 5.00% or more (that is,
one-third of the maximum gain on your note). As a result, you will not benefit
from any positive index return in excess of 5.00%. Accordingly, the maximum
payment at maturity for each $2,000 principal amount of the notes will be
$2,300, no matter how high the level of the index may rise.
If the index return exceeds 5.00%, your return on the notes at maturity
will be less than the return on a direct investment in the index without taking
into account taxes and other costs related to such a direct investment.
S-7
YOUR NOTE DOES NOT BEAR INTEREST
You will not receive any interest payments on your note. Even if the
amount payable on your note on the stated maturity date exceeds the face amount
of your note, the overall return you earn on your note may be less than you
would have earned by investing in a non-indexed debt security of comparable
maturity that bears interest at a prevailing market rate.
THE RETURN ON YOUR NOTE WILL NOT REFLECT ANY DIVIDENDS PAID ON THE INDEX STOCKS
The index sponsor calculates the level of the index by reference to the
prices of the common stocks included in the index, without taking account of the
value of dividends paid on those stocks. As a result, the return on your note
will not reflect the return you would realize if you actually owned the stocks
included in the index and received the dividends paid on those stocks. You will
not receive any dividends that may be paid on any of the index stocks by the
index stock issuers. See "-- You Have No Shareholder Rights or Rights to Receive
any Stock" below for additional information.
THE MARKET VALUE OF YOUR NOTE MAY BE INFLUENCED BY MANY UNPREDICTABLE FACTORS
When we refer to the market value of your note, we mean the value that you
could receive for your note if you chose to sell it in the open market before
the stated maturity date. The following factors, many of which are beyond our
control, will influence the market value of your note:
- - the index level;
- - the volatility -- i.e., the frequency and magnitude of changes in the level of
the index;
As indicated under "The Index -- Historical Closing Levels of the Index",
the level of the index has been highly volatile at times. It is impossible
to predict whether the index level will rise or fall;
- - the dividend rate of the index stocks;
- - economic, financial, regulatory, political, military and other events that
affect stock markets generally and the market segments of which the index
stocks are a part, and which may affect the level of the index;
- - 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 before maturity, you may receive
less than the outstanding face amount of your note. For more information about
the value of your note in the secondary market, see "-- Assuming No Changes in
Market Conditions or Any Other Relevant Factors, the Value of Your Note on the
Date of this Prospectus Supplement (As Determined By Reference to Pricing Models
Used by Goldman, Sachs & Co.) is Significantly Less than the Original Issue
Price" above.
You cannot predict the future performance of the index based on its
historical performance. The actual performance of the index over the life of the
offered notes, as well as the amount payable at maturity, may bear little
relation to the historical levels of the index or to the hypothetical return
examples shown elsewhere in this prospectus supplement.
IF THE LEVEL OF THE INDEX CHANGES, THE
MARKET VALUE OF YOUR NOTE MAY NOT
CHANGE IN THE SAME MANNER
Your note may trade quite differently from the performance of the index.
Changes in the level of the index may not result in a comparable change in the
market value of your note. In part, this is because your note is subject to a
maximum gain of 15.00%. The market value of your note likely will be less than
it would have been had your note not been subject to a maximum gain. Even if the
level of the index increases above the initial index level during the term of
the notes, the market value of your note may not increase by the same amount. We
discuss some of the reasons for this disparity under "-- The
S-8
Market Value of Your Note May Be Influenced by Many Unpredictable Factors"
above.
TRADING AND OTHER TRANSACTIONS BY GOLDMAN SACHS IN INSTRUMENTS LINKED TO THE
INDEX OR INDEX STOCKS MAY IMPAIR THE VALUE OF YOUR NOTE
As we describe under "Use of Proceeds and Hedging" below, we, through
Goldman, Sachs & Co. or one or more of our other affiliates, have hedged our
obligations under the offered notes by purchasing futures and other instruments
linked to the index or index stocks. We also expect to adjust the hedge by,
among other things, purchasing or selling any of the foregoing, and perhaps
other instruments linked to the index or the stocks comprising the index, which
we refer to as index stocks, at any time and from time to time, and to unwind
the hedge by selling any of the foregoing, on or before the determination date
for your note. We may also enter into, adjust and unwind hedging transactions
relating to other index-linked notes whose returns are linked to changes in the
level of the index or one or more of the index stocks. Any of these hedging
activities may adversely affect the index level -- directly or indirectly by
affecting the price of the index stocks -- and therefore the market value of
your note and the amount we will pay on your note at maturity. It is possible
that we, through our affiliates, could receive substantial returns with respect
to our hedging activities while the value of your note may decline. See "Use of
Proceeds and Hedging" below for a further discussion of transactions in which we
or one or more of our affiliates may engage.
Goldman, Sachs & Co. and our other affiliates may also engage in trading
in one or more of the index stocks or instruments whose returns are linked to
the index or index stocks for their proprietary accounts, for other accounts
under their management or to facilitate transactions, including block
transactions, on behalf of customers. Any of these activities of Goldman, Sachs
& Co. or our other affiliates could adversely affect the index level -- directly
or indirectly by affecting the price of the index stocks -- and, therefore, the
market value of your note and the amount we will pay on your note at maturity.
We may also issue, and Goldman, Sachs & Co. and our other affiliates may also
issue or underwrite, other securities or financial or derivative instruments
with returns linked to changes in the level of the index or one or more of the
index stocks. By introducing competing products into the marketplace in this
manner, we or our affiliates could adversely affect the market value of your
note and the amount we will pay on your note at maturity.
YOU HAVE NO SHAREHOLDER RIGHTS OR RIGHTS TO RECEIVE ANY STOCK
Investing in your note will not make you a holder of any of the index
stocks. Neither you nor any other holder or owner of your note will have any
voting rights, any right to receive dividends or other distributions or any
other rights with respect to the index stocks. Your note will be paid in cash,
and you will have no right to receive delivery of any index stocks.
OUR BUSINESS ACTIVITIES MAY CREATE CONFLICTS
OF INTEREST BETWEEN YOU AND US
As we have noted above, Goldman, Sachs & Co. and our other affiliates
expect to engage in trading activities related to the index and the index stocks
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
level of the index, could be adverse to your interests as a beneficial owner of
your note.
Goldman, Sachs & Co. and our other affiliates may, at present or in the
future, engage in business with the issuers of the index stocks, including
making loans to or equity investments in those companies or providing advisory
services to those companies. These services could include merger and acquisition
advisory services. These activities may present a conflict
S-9
between the obligations of Goldman, Sachs & Co. or another affiliate of Goldman
Sachs and your interests as a beneficial owner of a note. Moreover, one or more
of our affiliates have published and in the future expect to publish research
reports with respect to the index and some or all of the issuers of the index
stocks. Any of these activities by any of our affiliates may affect the level of
the index and, therefore, the market value of your note and the amount we will
pay on your note at maturity.
AS CALCULATION AGENT, GOLDMAN, SACHS & CO. WILL HAVE THE AUTHORITY TO MAKE
DETERMINA-TIONS 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 final index value on the determination date, which we will use
to determine how much cash we must pay on the stated maturity date, and
determining whether to postpone the stated maturity date because of a market
disruption event. See "Specific Terms of Your Note" below. The exercise of this
discretion by Goldman, Sachs & Co. could adversely affect the value of your note
and may present Goldman, Sachs & Co. with a conflict of interest of the kind
described under "-- Our Business Activities May Create Conflicts of Interest
Between You and Us" above. We may change the calculation agent at any time
without notice and Goldman, Sachs & Co. may resign as calculation agent at any
time upon 60 days' written notice to Goldman Sachs.
THE POLICIES OF THE INDEX SPONSOR AND CHANGES THAT AFFECT THE INDEX OR THEINDEX
STOCKS COULD AFFECT THE AMOUNT PAYABLE ON YOUR NOTE AND ITS MARKET VALUE
The policies of the index sponsor concerning the calculation of the index
level, additions, deletions or substitutions of index stocks and the manner in
which changes affecting the index stocks or their issuers, such as stock
dividends, reorganizations or mergers, are reflected in the index level could
affect the index level and, therefore, the amount payable on your note on the
stated maturity date and the market value of your note before that date. The
amount payable on your note and its market value could also be affected if the
index sponsor changes these policies, for example, by changing the manner in
which it calculates the index level, or if the index sponsor discontinues or
suspends calculation or publication of the index level, in which case it may
become difficult to determine the market value of your note. If events such as
these occur, or if the index level is not available on the determination date
because of a market disruption event or for any other reason, the calculation
agent -- which initially will be Goldman, Sachs & Co., our affiliate -- may
determine the index level on the determination date -- and thus the amount
payable on the stated maturity date -- in a manner it considers appropriate, in
its sole discretion. We describe the discretion that the calculation agent will
have in determining the index level on the determination date and the amount
payable on your note more fully under "Specific Terms of Your Note --
Discontinuance or Modification of the Index" and "-- Role of Calculation Agent"
below.
EXCEPT TO THE EXTENT WE ARE ONE OF THE 500 COMPANIES WHOSE COMMON STOCK
COMPRISES THE S&P 500(R) INDEX, THERE IS NO AFFILIATION BETWEEN THE INDEXSTOCK
ISSUERS OR THE INDEX SPONSOR AND US, AND WE ARE NOT RESPONSIBLE FOR
ANYDISCLOSURE BY ANY OF THE OTHER INDEX STOCKISSUERS OR THE INDEX SPONSOR
The common stock of Goldman Sachs is one of the 500 index stocks
comprising the S&P 500(R) Index. Goldman Sachs is not otherwise affiliated with
the issuers of the index stocks or the index sponsor. As we have told you above,
however, we or our affiliates may currently or from time to time in the future
engage in business with the index stock issuers. Nevertheless, neither we nor
any of our affiliates assumes any responsibility for the accuracy or the
completeness of any information about the index or any of the other index stock
issuers. You, as an investor in your note, should make your own investigation
into the index and the index stock issuers. See "The Index" below for additional
information about the index.
S-10
Neither the index sponsor nor any of the other index stock issuers are
involved in this offering of your note in any way and none of them have any
obligation of any sort with respect to your note. Neither the index sponsor nor
any of the index stock issuers have any obligation to take your interests into
consideration for any reason, including when taking any corporate actions that
might affect the value of your note.
YOUR NOTE MAY NOT HAVE
AN ACTIVE TRADING MARKET
Your note will not be listed or displayed on any securities exchange or
included in any interdealer market quotation system, and there may be little or
no secondary market for your note. Even if a secondary market for your note
develops, it may not provide significant liquidity and we expect that
transaction costs in any secondary market would be high. As a result, the
difference between bid and asked prices for your note in any secondary market
could be substantial.
WE CAN POSTPONE THE STATED MATURITY DATE
IF A MARKET DISRUPTION EVENT 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, although not by more than six business days. Thus,
you may not receive the cash payment that we are obligated to deliver on the
stated maturity date until several days after the originally scheduled due date.
Moreover, if the 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 calculation agent determines that
the index level that must be used to determine the payment amount 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 level based on its assessment, made in its sole discretion, of the
level of the index on that day.
CERTAIN CONSIDERATIONS FOR INSURANCE
COMPANIES AND EMPLOYEE BENEFIT PLANS
Any insurance company or fiduciary of a pension plan or other employee
benefit plan that is subject to the prohibited transaction rules of the Employee
Retirement Income Security Act of 1974, as amended, which we call "ERISA", or
the Internal Revenue Code of 1986, as amended, including an IRA or a Keogh plan
(or a governmental plan to which similar prohibitions apply), and that is
considering purchasing the offered notes with the assets of the insurance
company or the assets of such a plan, should consult with its counsel regarding
whether the purchase or holding of the offered notes could become a "prohibited
transaction" under ERISA, the Internal Revenue Code or any substantially similar
prohibition in light of the representations a purchaser or holder in any of the
above categories is deemed to make by purchasing and holding the offered notes.
This is discussed in more detail under "Employee Retirement Income Security Act"
below.
THE TAX CONSEQUENCES OF AN INVESTMENT
IN YOUR NOTE ARE UNCERTAIN
The tax consequences of an investment in your note are uncertain, both as
to the timing and character of any inclusion in income in respect of your note.
We discuss these matters under "Supplemental Discussion of Federal Income Tax
Consequences" below. Please also consult your own tax advisor concerning the
U.S. federal income tax and any other applicable tax consequences to you of
owning your note in your particular circumstances.
S-11
SPECIFIC TERMS OF YOUR NOTE
- --------------------------------------------------------------------------------
Please note that in this section entitled "Specific Terms of Your Note",
references to "holders" mean those who own notes registered in their own
names, on the books that we or the trustee maintain for this purpose, and not
those who own beneficial interests in notes registered in street name or in
notes issued in book-entry form through The Depository Trust Company. Please
review the special considerations that apply to owners of beneficial interests
in the accompanying prospectus, under "Legal Ownership and Book-Entry
Issuance".
- --------------------------------------------------------------------------------
The offered notes are part of a series of debt securities, entitled
"Medium-Term Notes, Series B", that we may issue under the indenture from time
to time as described in the accompanying prospectus. The offered notes are also
"indexed debt securities", as defined in the accompanying prospectus.
This prospectus supplement summarizes specific financial and other terms
that apply to the offered notes, including your note; terms that apply generally
to all Series B medium-term notes are described in "Description of Notes We May
Offer" in the accompanying prospectus. The terms described here supplement those
described in the accompanying prospectus and, if the terms described here are
inconsistent with those described there, the terms described here are
controlling.
In addition to those terms described on the first two pages of this
prospectus supplement, the following terms will apply to your note:
NO INTEREST: we will not pay interest on your note
SPECIFIED CURRENCY:
- - U.S. dollars
FORM OF NOTE:
- - global form only: yes, at DTC
- - non-global form available: no
DENOMINATIONS: each note registered in the name of a holder must have a
face amount of $2,000, or integral multiples thereof
DEFEASANCE APPLIES AS FOLLOWS:
- - full defeasance: no
- - covenant defeasance: no
OTHER TERMS:
- - the default amount will be payable on any acceleration of the maturity of your
note as described under "-- Special Calculation Provisions" below
- - a business day for your note will not be the same as a business day for our
other Series B medium-term notes, as described under "-- Special Calculation
Provisions" below
Please note that the information about the settlement or trade date, issue
price, discounts or commissions and net proceeds to The Goldman Sachs Group,
Inc. on the front cover page or elsewhere in this prospectus supplement relates
only to the initial issuance and sale of the notes. If you have purchased your
note in a market-making transaction after the initial issuance and sale of the
notes, any such relevant information about the sale to you will be provided in a
separate confirmation of sale.
We describe the terms of your note in more detail below.
INDEX, INDEX SPONSOR AND INDEX STOCKS
In this prospectus supplement, when we refer to the index, we mean the
index specified on the front cover page, or any successor index, as it may be
modified, replaced or adjusted from time to time as described under
"-- Discontinuance or Modification of the Index" below. When we refer to the
index sponsor as of any time, we mean the entity, including any successor
sponsor, that determines and publishes the index as then in effect. When we
refer to the index stocks as of any time, we mean the stocks that comprise the
index as then in
S-12
effect, after giving effect to any additions, deletions or substitutions.
PAYMENT OF PRINCIPAL ON STATED MATURITY DATE
On the stated maturity date, we will pay as principal, to the holder of
your note, an amount, if any, in cash equal to:
- - if the index return is greater than or equal to 5.00%, (1) the outstanding
face amount of the note plus (2) the outstanding face amount of the note
multiplied by the maximum gain
- - if the index return is greater than zero, but less than 5.00%, (1) the
outstanding face amount of the note plus (2) the outstanding face amount of
the note multiplied by three times the index return
- - if the index return is zero, the outstanding face amount of the note
- - if the index return is negative, (1) the outstanding face amount of the note
minus (2) the outstanding face amount of the note multiplied by the index
return (with the product of that multiplication expressed as a positive
amount)
The index return is calculated by subtracting the initial index level from
the final index level and by dividing the result by the initial index level,
with the result expressed as a percentage.
If the final index level is greater than the initial index level, i.e.,
the index return is positive due to an increase in the S&P 500(R) Index, you
will participate in any such increase on a three-to-one basis, subject to the
maximum gain of 15.00%. Consequently, the maximum payment the holder of your
note could receive at maturity will be 115.00% of the face amount of your note
and the holder of your note will therefore not benefit from any positive index
return in excess of 5.00% (that is, one-third of the maximum gain).
If the final index level is less than the initial index level, i.e., the
index return is negative due to a decline in the S&P 500(R) Index, the entire
principal of your note is exposed to any such decline on a one-to-one basis. As
a result, the payment the holder of your note would receive at maturity would be
less than the face amount of your note and might even be reduced to zero.
The calculation agent will determine the final index level, which will be
the closing level of the index on the determination date as calculated and
published by the index sponsor. However, the calculation agent will have
discretion to adjust the closing level on any particular day or to determine it
in a different manner as described under "-- Discontinuance or Modification of
the Index" below.
STATED MATURITY DATE
The stated maturity date will be November 10, 2005 unless that day is not
a business day, in which case the stated maturity date will be the next
following business day. If the fifth business day before this applicable day is
not the determination date referred to below, however, then the stated maturity
date will be the fifth business day following the determination date, provided
that the stated maturity date will never be later than the fifth business day
after November 10, 2005 or, if November 10, 2005 is not a business day, later
than the sixth business day after November 10, 2005. The calculation agent may
postpone the determination date -- and therefore the stated maturity date -- if
a market disruption event occurs or is continuing on the determination date. We
describe market disruption events under "-- Special Calculation Provisions"
below.
DETERMINATION DATE
The determination date will be the fifth business day prior to November
10, 2005 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 November 10, 2005 or, if November 10, 2005 is not a business day, later
than the first business day after November 10, 2005.
S-13
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 calculation agent determines that
the index level that must be used to determine the payment amount 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 level based on its assessment, made in its sole discretion, of the
level of the index on that day.
DISCONTINUANCE OR MODIFICATION OF THE INDEX
If the index sponsor discontinues publication of the index and the index
sponsor or anyone else publishes a substitute index that the calculation agent
determines is comparable to the index, then the calculation agent will determine
the amount payable on the stated maturity date by reference to the substitute
index. We refer to any substitute index approved by the calculation agent as a
successor index.
If the calculation agent determines that the publication of the index is
discontinued and there is no successor index, or that the level of the index is
not available on the determination date because of a market disruption event or
for any other reason, the calculation agent will determine the amount payable on
the stated maturity date, by a computation methodology that the calculation
agent determines will as closely as reasonably possible replicate the index.
If the calculation agent determines that the index, the stocks comprising
the index or the method of calculating the index is changed at any time in any
respect -- including any addition, deletion or substitution and any reweighting
or rebalancing of the index stocks and whether the change is made by the index
sponsor under its existing policies or following a modification of those
policies, is due to the publication of a successor index, is due to events
affecting one or more of the index stocks or their issuers or is due to any
other reason -- then the calculation agent will be permitted (but not required)
to make such adjustments in the index or the method of its calculation as it
believes are appropriate to ensure that the final index level used to determine
the amount payable on the stated maturity date, is equitable.
All determinations and adjustments to be made by the calculation agent
with respect to the index may be made by the calculation agent in its sole
discretion. The calculation agent is not obligated to make any such adjustments.
DEFAULT AMOUNT ON ACCELERATION
If an event of default occurs and the maturity of your note is
accelerated, we will pay the default amount in respect of the principal of your
note at the maturity, instead of the amount payable on the stated maturity date
as described earlier. We describe the default amount under "-- Special
Calculation Provisions" below.
For the purpose of determining whether the holders of our Series B
medium-term notes, which include the offered notes, are entitled to take any
action under the indenture, we will treat the outstanding face amount of each
offered note as the outstanding principal amount of that note. Although the
terms of the offered notes differ from those of the other Series B medium-term
notes, holders of specified percentages in principal amount of all Series B
medium-term notes, together in some cases with other series of our debt
securities, will be able to take action affecting all the Series B medium-term
notes, including the offered notes. This action may involve changing some of the
terms that apply to the Series B medium-term notes, accelerating the maturity of
the
S-14
Series B medium-term notes after a default or waiving some of our obligations
under the indenture. We discuss these matters in the accompanying prospectus
under "Description of Debt Securities We May Offer -- Default, Remedies and
Waiver of Default" and "-- Modification of the Debt Indentures and Waiver of
Covenants".
MANNER OF PAYMENT
Any payment on your note at maturity will be made to an account designated
by the holder of your note and approved by us, or at the office of the trustee
in New York City, but only when your note is surrendered to the trustee at that
office. We also may make any payment in accordance with the applicable
procedures of the depositary.
MODIFIED BUSINESS DAY
As described in the accompanying prospectus, any payment on your note that
would otherwise be due on a day that is not a business day may instead be paid
on the next day that is a business day, with the same effect as if paid on the
original due date. For your note, however, the term business day has a different
meaning than it does for other Series B medium-term notes. We discuss this term
under "-- Special Calculation Provisions" below.
ROLE OF CALCULATION AGENT
The calculation agent in its sole discretion will make all determinations
regarding the index, market disruption events, business days, the index return,
the final index level, the default amount and the payment amount on your note,
if any, to be made at maturity. Absent manifest error, all determinations of the
calculation agent will be final and binding on you and us, without any liability
on the part of the calculation agent.
Please note that Goldman, Sachs & Co., our affiliate, is currently serving
as the calculation agent as of the original issue date of your note. We may
change the calculation agent for your note at any time after the original issue
date without notice and Goldman, Sachs & Co. may resign as calculation agent at
any time upon 60 days' written notice to Goldman Sachs.
SPECIAL CALCULATION PROVISIONS
BUSINESS DAY
When we refer to a business day with respect to your note, we mean a day
that is a business day of the kind described in the accompanying prospectus and
that is also a day on which the New York Stock Exchange, the Nasdaq National
Market System and the American Stock Exchange are all open for trading and on
which the index sponsor is open for business and the closing level for the index
is calculated and published by the index sponsor.
DEFAULT AMOUNT
The default amount for your note on any day will be an amount, in the
specified currency for the principal of your note, equal to the cost of having a
qualified financial institution, of the kind and selected as described below,
expressly assume all of our payment and other obligations with respect to your
note as of that day and as if no default or acceleration had occurred, or to
undertake other obligations providing substantially equivalent economic value to
you with respect to your note. That cost will equal:
- - the lowest amount that a qualified financial institution would charge to
effect this assumption or undertaking, plus
- - the reasonable expenses, including reasonable attorneys' fees, incurred by the
holder of your note in preparing any documentation necessary for this
assumption or undertaking.
During the default quotation period for your note, which we describe
below, the holder and/or we may request a qualified financial institution to
provide a quotation of the amount it would charge to effect this assumption or
undertaking. If either party obtains a quotation, it must notify the other party
in writing of the quotation. The amount referred to in the first bullet point
above will equal the lowest -- or, if there is only one, the only -- quotation
obtained, and as to which notice is so given, during the default
S-15
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.
QUALIFIED FINANCIAL INSTITUTIONS
For the purpose of determining the default amount at any time, a qualified
financial institution must be a financial institution organized under the laws
of any jurisdiction in the United States of America, Europe or Japan, which at
that time has outstanding debt obligations with a stated maturity of one year or
less from the date of issue and is rated either:
- - A-1 or higher by Standard & Poor's Ratings Group or any successor, or any
other comparable rating then used by that rating agency, or
- - P-1 or higher by Moody's Investors Service, Inc. or any successor, or any
other comparable rating then used by that rating agency.
MARKET DISRUPTION EVENT
Any of the following will be a market disruption event:
- - a suspension, absence or material limitation of trading in index stocks
constituting 20% or more, by weight, of the index on their respective primary
markets, in each case for more than two hours of trading or during the
one-half hour before the close of trading in that market, as determined by the
calculation agent in its sole discretion, or
- - a suspension, absence or material limitation of trading in option or futures
contracts relating to the index or to index stocks constituting 20% or more,
by weight, of the index, if available, in the respective primary markets for
those contracts, in each case for more than two hours of trading or during the
one-half hour before the close of trading in that market, as determined by the
calculation agent in its sole discretion, or
- - index stocks constituting 20% or more, by weight, of the index, or option or
futures contracts relating to the index or to index stocks constituting 20% or
more, by weight, of the index, if available, are not trading on what were the
respective primary markets for those index stocks or contracts, as determined
by the calculation agent in its sole discretion,
and, in the case of any of these events, the calculation agent determines in its
sole discretion that the event could materially interfere with the ability of
The Goldman Sachs Group, Inc. or any of its affiliates or a similarly situated
party to unwind all or a material portion of a hedge that could be effected with
respect to the offered notes. For
S-16
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 or to any index stock.
For this purpose, an "absence of trading" in the primary securities market
on which an index stock, or on which option or futures contracts relating to the
index or an index stock, are traded will not include any time when that market
is itself closed for trading under ordinary circumstances. In contrast, a
suspension or limitation of trading in an index stock or in option or futures
contracts relating to the index or an index stock, if available, in the primary
market for that stock or those contracts, by reason of:
- - a price change exceeding limits set by that market, or
- - an imbalance of orders relating to that stock or those contracts, or
- - a disparity in bid and ask quotes relating to that stock or those contracts,
will constitute a suspension or material limitation of trading in that stock or
those contracts in that market.
As is the case throughout this prospectus supplement, references to the
index in this description of market disruption events includes the index and any
successor index as it may be modified, replaced or adjusted from time to time.
S-17
HYPOTHETICAL RETURNS ON YOUR NOTE
The following table is provided for purposes of illustration only. It
should not be taken as an indication or prediction of future investment results
and is intended merely to illustrate the impact that various hypothetical index
levels on the determination date could have on the payment amount assuming all
other variables remain constant.
The levels in the left column of the table represent hypothetical closing
levels for the index on the determination date and are expressed as percentages
of the initial index level. The amounts in the right column represent the
hypothetical payment amounts, based on the corresponding hypothetical final
index levels and a maximum gain of 15.00% and are expressed as percentages of
the face amount of a note. Thus, a hypothetical payment amount of 100% means
that the value of the cash payment that we would pay for the outstanding face
amount of a note on the stated maturity date would equal 100% of the face
amount, or $2,000, based on the corresponding hypothetical final index stock
price and the assumptions noted below.
The information in the table reflects hypothetical rates of return on the
offered notes assuming that they are purchased on the original issue date and
held to the stated maturity date, which we assume to be 15 months after the
original issue date. If you sell your note prior to the stated maturity date,
your return will depend upon the market value of your note at the time of sale,
which may be affected by a number of factors that are not reflected in the table
below such as interest rates and the volatility of the index. In addition,
assuming no changes in market conditions or any other relevant factors, the
value of your note on the date of this prospectus supplement (as determined by
reference to pricing models used by Goldman, Sachs & Co.) is significantly less
than the original issue price. For more information on the value of your note in
the secondary market, see "Additional Risk Factors Specific to Your
Note -- Assuming No Changes in Market Conditions or Any Other Relevant Factors,
the Value of Your Note on the Date of this Prospectus Supplement (As Determined
By Reference to Pricing Models Used by Goldman, Sachs & Co.) Is Significantly
Less Than the Original Issue Price" and "-- The Market Value of Your Note May Be
Influenced by Many Unpredictable Factors" above. The information in the table
also reflects the key terms and assumptions in the box below. In addition, we
have assumed that the closing level of the index on the determination date will
be the same as on the stated maturity date.
- --------------------------------------------------------------------------------
<Table>
<Caption>
KEY TERMS AND ASSUMPTIONS
Face amount $2,000
Maximum gain 15.00%*
Maximum payment at maturity $2,300
Maturity 15 months
</Table>
- --------------------------------------------------------------------------------
* Potential gains on the notes at maturity will be calculated by tripling the
positive index return up to the maximum gain. Since the maximum gain on the
notes is 15.00%, an investor would not participate in an index return of more
than 5.00% at maturity.
The index has been highly volatile -- meaning that the index level has
changed substantially in relatively short periods -- in the past and its
performance cannot be predicted for any future period.
The actual performance of the index over the life of the notes, as well as
the amount payable at maturity, may bear little relation to the hypothetical
examples shown below or to the historical levels of the index shown elsewhere in
this prospectus supplement. For information about the level of the index during
recent periods, see "The Index -- Historical Closing Levels of the Index" below.
Any rate of return you may earn on an investment in the notes may be lower
than that which you could earn on a comparable investment in the index stocks.
Among other things, the return on the notes will not reflect any dividends that
may be paid on the index stocks.
Also, the hypothetical examples shown below do not take into account the
effects of applicable taxes. Because of the U.S. tax
S-18
treatment applicable to your note, tax liabilities could affect the after-tax
rate of return on your note to a comparatively greater extent than the after-tax
return on the index stocks.
<Table>
<Caption>
HYPOTHETICAL FINAL HYPOTHETICAL
INDEX LEVEL AS PAYMENT AMOUNTS
PERCENTAGE OF INITIAL AS PERCENTAGE
INDEX LEVEL OF FACE AMOUNT
- --------------------- ---------------
125% 115%
110% 115%
105% 115%
102% 106%
100% 100%
75% 75%
50% 50%
25% 25%
0% 0%
</Table>
---------------------
If, for example, the final index level were determined to be 25% of the
initial index level, the payment amount that we would deliver on your note at
maturity would be 25% of the face amount of your note, as shown in the table
above. As a result, if you purchased your note on the original issue date and
held it to the stated maturity date, you would lose 75% of your investment.
The following chart also shows a graphical illustration of the
hypothetical payment amounts (expressed as a percentage of the face amount of
your note) that we would deliver to the holder of your note on the stated
maturity date, if the final index level (expressed as a percentage of the
initial index level) were any of the hypothetical levels shown on the horizontal
axis. The chart shows that any hypothetical final index level of less than 100%
of the initial index level (the section left of the 100% marker on the
horizontal axis) would result in a hypothetical payment amount of less than 100%
of the face amount of your note (the section below the 100% marker on the
vertical axis) and, accordingly, in a loss of principal to the holder of your
note.
S-19
[HYPOTHETICAL PAYMENT AMOUNTS GRAPH]
Payments on this note are economically equivalent to the amounts that
would be paid on a combination of other instruments. For example, payments on
the note are economically equivalent to the amounts that would be paid on a
combination of an interest-bearing bond and an option, in each case, bought by
the holder (with an implicit option premium paid over time by the holder). The
discussion in this paragraph does not modify or affect the terms of the note or
the United States income tax treatment of the note as described under
"Supplemental Discussion of Federal Income Tax Consequences" below.
- --------------------------------------------------------------------------------
We cannot predict the actual final index level on the determination date or
the market value of your note, nor can we predict the relationship between the
index level and the market value of your note at any time prior to the stated
maturity date. The actual amount that a holder of the offered notes will
receive at stated maturity and the rate of return on the offered notes will
depend on the initial index level and on the actual final index level
determined by the calculation agent as described above. Moreover, the
assumptions on which the hypothetical returns are based may turn out to be
inaccurate. Consequently, the amount of cash to be paid in respect of your
note on the stated maturity date may be very different from the information
reflected in the table and chart above.
- --------------------------------------------------------------------------------
S-20
USE OF PROCEEDS AND HEDGING
We will use the net proceeds we receive from the sale of the offered notes
for the purposes we describe in the accompanying prospectus under "Use of
Proceeds". We or our affiliates may also use those proceeds in transactions
intended to hedge our obligations under the offered notes as described below.
In anticipation of the sale of the offered notes, we and/or our affiliates
have entered into hedging transactions involving purchases of futures and other
instruments linked to the index on or before the trade date. In addition, from
time to time after we issue the offered notes, we and/or our affiliates expect
to enter into additional hedging transactions and to unwind those we have
entered into, in connection with the offered notes and perhaps in connection
with other index-linked notes we issue, some of which may have returns linked to
the index or the index stocks. Consequently, with regard to your note, from time
to time, we and/or our affiliates:
- - expect to acquire, or dispose of positions in listed or over-the-counter
options, futures or other instruments linked to the index or some or all of
the index stocks,
- - may take or dispose of positions in the securities of the index stock issuers
themselves,
- - may take or dispose of positions in listed or over-the-counter options or
other instruments based on indices designed to track the performance of the
New York Stock Exchange or other components of the U.S. equity market and/or
- - may take short positions in the index stocks or other securities of the kind
described above -- i.e., we and/or our affiliates may sell securities of the
kind that we do not own or that we borrow for delivery to purchaser.
We and/or our affiliates may acquire a long or short position in
securities similar to your note from time to time and may, in our or their sole
discretion, hold or resell those securities.
In the future, we and/or our affiliates expect to close out hedge
positions relating to the offered notes and perhaps relating to other notes with
returns linked to the index or the index stocks. We expect these steps to
involve sales of instruments linked to the index on or shortly before the
determination date. These steps may also involve sales and/or purchases of some
or all of the index stocks, or listed or over-the-counter options, futures or
other instruments linked to the index, some or all of the index stocks or
indices designed to track the performance of the New York 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 amount we will pay on your
note at maturity. See "Additional Risk Factors Specific to Your
Note -- Trading and Other Transactions by Goldman Sachs in Instruments
Linked to the Index or Index Stocks May Impair the Value of Your Note" and
"-- Our Business Activities May Create Conflicts of Interest Between You
and Us" above for a discussion of these adverse effects.
- --------------------------------------------------------------------------------
S-21
THE INDEX
We have derived all information regarding the index contained in this
prospectus supplement, including its make-up, method of calculation and changes
in its components, from publicly available information. That information
reflects the policies of, and is subject to change by, Standard and Poor's
Ratings Group, which is the index sponsor and is commonly referred to as
Standard & Poor's. Standard and Poor's owns the copyright and all other rights
to the index. Standard & Poor's has no obligation to continue to publish, and
may discontinue publication of, the index. Standard & Poor's does not assume any
responsibility for the accuracy or completeness of such information. The
consequences of Standard & Poor's discontinuing the index are described in the
section entitled "Specific Terms of Your Note -- Discontinuance or Modification
of the Index" above. Current information regarding the market value of the index
is available from Standard & Poor's and from numerous public information
sources. We do not make any representation that the publicly available
information about the index is accurate or complete. The index is determined,
comprised and calculated by Standard & Poor's without regard to the offered
notes. Neither we nor any of our affiliates accept any responsibility for the
calculation, maintenance or publication of, or for any error, omission or
disruption in the index.
Standard & Poor's publishes the S&P 500(R) Index. The index is intended to
provide an indication of the pattern of common stock price movement. The
calculation of the value of the index, discussed below in further detail, is
based on the relative value of the aggregate market value of the common stocks
of 500 companies as of a particular time compared to the aggregate average
market value of the common stocks of 500 similar companies during the base
period of the years 1941 through 1943. As of July 30, 2004, 423 companies or
84.4% of the S&P 500(R) Index traded on the New York Stock Exchange; 75
companies or 15.4% of the S&P 500(R) Index traded on The Nasdaq Stock Market;
and 2 companies or 0.2% of the S&P 500(R) Index traded on the American Stock
Exchange. As of July 30, 2004, the aggregate market value of the 500 companies
included in the S&P 500(R) Index represented approximately 78% of the aggregate
market value of stocks included in the Standard & Poor's Stock Guide Database of
domestic common stocks traded in the United States, excluding American
depositary receipts and shares of real estate investment trusts, limited
partnerships and mutual funds. Standard & Poor's chooses companies for inclusion
in the index with the aim of achieving a distribution by broad industry
groupings that approximates the distribution of these groupings in the common
stock population of the New York Stock Exchange, which Standard & Poor's uses as
an assumed model for the composition of the total market. Relevant criteria
employed by Standard & Poor's include the viability of the particular company,
the extent to which that company represents the industry group to which it is
assigned, the extent to which the market value of that company's common stock is
generally responsive to changes in the affairs of the respective industry and
the market price and trading activity of the common stock of that company. Ten
main groups of companies comprise the index with the number of companies
currently included in each group indicated in parentheses: consumer
discretionary (85), consumer staples (37), energy (27), financials (81), health
care (53), industrials (59), information technology (81), materials (33),
telecommunication services (11) and utilities (33). Standard & Poor's may from
time to time, in its sole discretion, add companies to, or delete companies
from, the index to achieve the objectives stated above.
The S&P 500(R) Index does not reflect the payment of dividends on the
stocks included in the S&P 500(R) Index. Because of this the return on the
offered notes will not be the same as the return you would receive if you were
to purchase these stocks and hold them for a period equal to the term of the
offered notes.
S-22
COMPUTATION OF THE INDEX
Standard & Poor's currently computes the S&P 500(R) Index as of a
particular time as follows:
(a) the product of the market price per share and the number of then
outstanding shares of each component stock is determined as of that
time (referred to as the "market value" of that stock);
(b) the market values of all component stocks as of that time are
aggregated;
(c) the mean average of the market values as of each week in the base
period of the years 1941 through 1943 of the common stock of each
company in a group of 500 substantially similar companies is
determined;
(d) the mean average market values of all these common stocks over the
base period are aggregated (the aggregate amount being referred to as
the "base value");
(e) the current aggregate market value of all component stocks is divided
by the base value; and
(f) the resulting quotient, expressed in decimals, is multiplied by ten.
While Standard & Poor's currently employs the above methodology to
calculate the index, no assurance can be given that Standard & Poor's will not
modify or change this methodology in a manner that may affect the payment amount
for the offered notes upon maturity or otherwise.
Standard & Poor's adjusts the foregoing formula to offset the effects of
changes in the market value of a component stock that are determined by Standard
& Poor's to be arbitrary or not due to true market fluctuations. These changes
may result from causes such as:
- - the issuance of stock dividends,
- - the granting to shareholders of rights to purchase additional shares of stock,
- - the purchase of shares by employees pursuant to employee benefit plans,
- - consolidations and acquisitions,
- - the granting to shareholders of rights to purchase other securities of the
issuer,
- - the substitution by Standard & Poor's of particular component stocks in the
S&P 500(R) index, and
- - other reasons.
In these cases, Standard & Poor's first recalculates the aggregate market
value of all component stocks, after taking account of the new market price per
share of the particular component stock or the new number of outstanding shares
of that stock or both, as the case may be, and then determines the new base
value in accordance with the following formula:
<Table>
Old Base Value X New Market Value = New Base Value
----------------
Old Market Value
</Table>
The result is that the base value is adjusted in proportion to any change
in the aggregate market value of all component stocks resulting from the causes
referred to above to the extent necessary to negate the effects of these causes
upon the S&P 500(R) Index.
HISTORICAL CLOSING LEVELS OF THE INDEX
The first table below shows the closing levels of the index on the last
business day of each year from 1999 through 2001. The second table below shows
the high, the low and the last closing levels of the index for each of the four
calendar quarters in 2002 and 2003, and for the three calendar quarters of 2004,
through August 3, 2004. We obtained the closing levels listed in the tables
below from Bloomberg Financial Services, without independent verification.
Since its inception, the level of the index has experienced significant
fluctuations. Any historical upward or downward trend in the closing level of
the index during any period shown below is not an indication that the index is
more or less likely to increase or decrease at any time during the term of your
note. You should not take the historical levels
S-23
of the index as an indication of future performance. We cannot give you any
assurance that the future performance of the index or the index stocks will
result in you receiving an amount greater than the outstanding face amount of
your note on the stated maturity date. Neither we nor any of our affiliates make
any representation to you as to the performance of the index.
The actual performance of the index over the life of the offered notes may
bear little relation to the historical levels shown below.
YEAR-END CLOSING LEVELS OF THE INDEX
<Table>
<Caption>
YEAR CLOSING LEVEL
- ---- -------------
1999......................... 1,469.25
2000......................... 1,320.28
2001......................... 1,148.08
</Table>
QUARTERLY HIGH, LOW AND CLOSING LEVELS OF THE INDEX
<Table>
<Caption>
HIGH LOW CLOSE
---- --- -----
2002
Quarter ended March 31.................................... 1,172.51 1,080.17 1,147.39
Quarter ended June 30..................................... 1,146.54 973.53 989.82
Quarter ended September 30................................ 989.03 797.70 815.28
Quarter ended December 31................................. 931.66 776.76 879.82
2003
Quarter ended March 31.................................... 935.05 788.90 848.18
Quarter ended June 30..................................... 1,011.66 858.48 974.50
Quarter ended September 30................................ 1,039.58 956.46 995.97
Quarter ended December 31................................. 1,111.92 1,018.22 1,111.92
2004
Quarter ended March 31.................................... 1,157.76 1,091.33 1,126.21
Quarter ended June 30..................................... 1,150.57 1,084.10 1,140.84
Quarter ending September 30 (through August 3, 2004)...... 1,128.94 1,084.07 1,099.69
Closing price on August 3, 2004........................... 1,099.69
</Table>
-------------------------
LICENSE AGREEMENT
Standard & Poor's and Goldman, Sachs & Co. have entered into a non-
transferable, non-exclusive license agreement granting Goldman, Sachs & Co. and
its affiliates, in exchange for a fee, the right to use the index in connection
with the issuance of certain securities, including the offered notes. The
Goldman Sachs Group, Inc. is also a party to the license agreement.
The offered notes are not sponsored, endorsed, sold or promoted by
Standard & Poor's, a division of McGraw-Hill, Inc. Standard & Poor's has not
passed on the legality or suitability of, or the accuracy or adequacy of
descriptions and disclosures relating to, the offered notes. Standard & Poor's
makes no representation or warranty, express or implied, to the owners of the
offered notes or any member of the public regarding the advisability of
investing in securities generally or in the offered notes particularly or the
ability of the index to track general stock market performance. Standard &
Poor's only relationship to Goldman Sachs (other than transactions entered into
in the ordinary course of business) is the licensing of certain trademarks and
trade names of Standard & Poor's and of the use of the index which is
determined, composed and calculated by
S-24
Standard & Poor's without regard to Goldman Sachs or the offered notes. Standard
& Poor's has no obligation to take the needs of Goldman Sachs or the owners of
the offered notes into consideration in determining, composing or calculating
the index. Standard & Poor's is not responsible for and has not participated in
the determination of the timing of, prices at, or quantities of the offered
notes to be issued or in the determination or calculation of the equation by
which the offered notes are to be exchanged into cash. Standard & Poor's has no
obligation or liability in connection with the administration, marketing or
trading of the offered notes.
STANDARD & POOR'S DOES NOT GUARANTEE THE ACCURACY AND/OR COMPLETENESS OF
THE INDEX OR ANY DATA INCLUDED THEREIN AND STANDARD & POOR'S SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. STANDARD & POOR'S
MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY GOLDMAN
SACHS, OWNERS OF THE OFFERED NOTES, OR ANY OTHER PERSON OR ENTITY FROM THE USE
OF THE INDEX OR ANY DATA INCLUDED THEREIN. STANDARD & POOR'S MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDEX OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL
STANDARD & POOR'S HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
All disclosures contained in this prospectus supplement regarding the
index, including its make-up, method of calculation and changes in its
components, are derived from publicly available information prepared by Standard
& Poor's. Goldman Sachs does not assume any responsibility for the accuracy or
completeness of that information.
S-25
SUPPLEMENTAL DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES
The following section supplements the discussion of U.S. Federal income
taxation in the accompanying prospectus with respect to United States holders.
The following section is the opinion of Sullivan & Cromwell LLP, counsel to The
Goldman Sachs Group, Inc. In addition, it is the opinion of Sullivan & Cromwell
LLP that the characterization of the note for U.S. federal income tax purposes
that will be required under the terms of the note, as discussed below, is a
reasonable interpretation of current law.
This section applies to you only if you are a United States holder that
holds your note as a capital asset for tax purposes. You are a United States
holder if you are a beneficial owner of a note and you are:
- - a citizen or resident of the United States;
- - a domestic corporation;
- - an estate whose income is subject to United States federal income tax
regardless of its source; or
- - a trust if a United States court can exercise primary supervision over the
trust's administration and one or more United States persons are authorized to
control all substantial decisions of the trust.
This section does not apply to you if you are a member of a class of
holders subject to special rules, such as:
- - a dealer in securities or currencies;
- - a trader in securities that elects to use a mark-to-market method of
accounting for your securities holdings;
- - a bank;
- - a life insurance company;
- - a tax exempt organization;
- - a person that owns a note as a hedge or that is hedged against interest rate
risks;
- - a person that owns a note as part of a straddle or conversion transaction for
tax purposes; or
- - a person whose functional currency for tax purposes is not the U.S. dollar.
Although this section is based on the U.S. Internal Revenue Code of 1986,
as amended, its legislative history, existing and proposed regulations under the
Internal Revenue Code, published rulings and court decisions, all as currently
in effect, no statutory, judicial or administrative authority directly addresses
how your note should be treated for U.S. federal income tax purposes, and as a
result, the U.S. federal income tax consequences of your investment in your note
are uncertain. Moreover, these laws are subject to change, possibly on a
retroactive basis.
- --------------------------------------------------------------------------------
Please consult your own tax advisor concerning the U.S. federal
income tax and any other applicable tax consequences to you of owning your
note in your particular circumstances, including the application of state,
local or other tax laws and the possible effects of changes in federal or
other tax laws.
- --------------------------------------------------------------------------------
You will be obligated pursuant to the terms of the note -- in the absence
of an administrative determination or judicial ruling to the contrary -- to
characterize your note for all tax purposes as a forward contract to purchase
the index at the stated maturity date, for which payment was made on the issue
date.
If your note is characterized as described above, your tax basis in your
note generally would equal your cost for your note. Upon the sale or exchange of
your note, you would recognize gain or loss equal to the difference between the
amount realized on the sale or exchange and your tax basis in your note. The
gain or loss generally would be short-term capital gain or loss if you hold the
note for one year or less and would be long-term capital gain or loss if you
hold the note for more than one year. If you purchase your note in the initial
offering and do not sell or exchange your note before the maturity date, you
would generally recognize long-term capital gain or loss equal to the difference
between the amount of cash received at maturity and your tax basis in the note.
S-26
There is no judicial or administrative authority discussing how your note
should be treated for U.S. federal income tax purposes. Therefore, the Internal
Revenue Service might assert that treatment other than that described above is
more appropriate. In particular, the Internal Revenue Service could treat your
note as a single debt instrument subject to special rules governing contingent
payment obligations.
Under those rules, the amount of interest you are required to take into
account for each accrual period would be determined by constructing a projected
payment schedule for the note and applying rules similar to those for accruing
original issue discount on a hypothetical noncontingent debt instrument with
that projected payment schedule. This method is applied by first determining the
comparable yield -- i.e., the yield at which we would issue a noncontingent
fixed rate debt instrument with terms and conditions similar to your note -- and
then determining a payment schedule as of the issue date that would produce the
comparable yield. These rules may have the effect of requiring you to include
interest in income in respect of your note prior to your receipt of cash
attributable to that income.
If the rules governing contingent payment obligations apply, you would
recognize gain or loss upon the sale or maturity of your note in an amount equal
to the difference, if any, between the amount you receive at that time and your
adjusted basis in your note. In general, if you purchase your note on the
original issue date, your adjusted basis in your note will equal the amount you
paid for your note, increased by the amount of interest you previously accrued
with respect to your note, in accordance with the comparable yield and the
projected payment schedule for your note.
If the rules governing contingent payment obligations apply, any gain you
recognize upon the sale or maturity of your note would be ordinary interest
income. Any loss you recognize at that time would be treated as ordinary loss to
the extent of interest you included as income in the current or previous taxable
years in respect of your note, and, thereafter, as capital loss.
If the rules governing contingent payment obligations apply, special rules
would apply to persons who purchase a note at other than the adjusted issue
price as determined for tax purposes.
It is possible that the Internal Revenue Service could seek to
characterize your note in a manner that results in tax consequences to you
different from those described above. For example, the Internal Revenue Service
could seek to characterize your note as a collar or as a notional principal
contact. Again, you should consult your tax advisor as to possible alternative
characterizations of your note for U.S. federal income tax purposes.
BACKUP WITHHOLDING AND
INFORMATION REPORTING
Please see the discussion under "United States Taxation -- Taxation of
Debt Securities -- Backup Withholding and Information Reporting -- United
States Holders" in the accompanying prospectus for a description of the
applicability of the backup withholding and information reporting rules to
payments made on your note.
S-27
EMPLOYEE RETIREMENT INCOME SECURITY ACT
This section is only relevant to you if you are an insurance company or
the fiduciary of a pension plan or an employee benefit plan (including a
governmental plan, an IRA or a Keogh Plan) proposing to invest in the offered
notes.
The Employee Retirement Income Security Act of 1974, as amended, which we
call "ERISA" and the Internal Revenue Code of 1986, as amended, prohibit certain
transactions involving the assets of an employee benefit plan and certain
persons who are "parties in interest" (within the meaning of ERISA) or
"disqualified persons" (within the meaning of the Internal Revenue Code) with
respect to the plan; governmental plans may be subject to similar prohibitions.
Therefore, a plan fiduciary considering purchasing notes should consider whether
the purchase or holding of such instruments might constitute a prohibited
transaction".
The Goldman Sachs Group, Inc. and certain of its affiliates each may be
considered a "party in interest" or a "disqualified person" with respect to many
employee benefit plans by reason of, for example, The Goldman Sachs Group, Inc.
(or its affiliate) providing services to such plans. Prohibited transactions
within the meaning of ERISA or the Internal Revenue Code may arise, for example,
if notes are acquired by or with the assets of a pension or other employee
benefit plan that is subject to the fiduciary responsibility provisions of ERISA
or Section 4975 of the Internal Revenue Code (including individual retirement
accounts and other plans described in Section 4975(e)(1) of the Internal Revenue
Code), which we call collectively "Plans", and with respect to which The Goldman
Sachs Group, Inc. or any of its affiliates is a "party in interest" or a
"disqualified person", unless those notes are acquired under an exemption for
transactions effected on behalf of that Plan by a "qualified professional asset
manager" or an "in-house asset manager", for transactions involving insurance
company general accounts, for transactions involving insurance company pooled
separate accounts, for transactions involving bank collective investment funds,
or under another available exemption. The assets of a Plan may include assets
held in the general account of an insurance company that are deemed to be "plan
assets" under ERISA. The person making the decision on behalf of a Plan or a
governmental plan shall be deemed, on behalf of itself and the Plan, by
purchasing and holding the offered notes, or exercising any rights related
thereto, to represent that (a) such purchase, holding and exercise of the
offered notes will not result in a non-exempt prohibited transaction under ERISA
or the Internal Revenue Code (or, with respect to a governmental plan, under any
similar applicable law or regulation) and (b) neither The Goldman Sachs Group,
Inc. nor any of its affiliates is a "fiduciary" (within the meaning of Section
3(21) of ERISA) with respect to the purchaser or holder in connection with such
person's acquisition, disposition or holding of the offered notes, or any
exercise related thereto or as a result of any exercise by The Goldman Sachs
Group, Inc. or any of its affiliates of any rights in connection with the
offered notes, and no advice provided by The Goldman Sachs Group, Inc. or any of
its affiliates has formed a primary basis for any investment decision by or on
behalf of such purchaser or holder in connection with the offered notes and the
transactions contemplated with respect to the offered notes.
- --------------------------------------------------------------------------------
If you are an insurance company or the fiduciary of a pension plan or an
employee benefit plan, and propose to invest in the offered notes, you should
consult your legal counsel.
- --------------------------------------------------------------------------------
S-28
SUPPLEMENTAL PLAN OF DISTRIBUTION
The Goldman Sachs Group, Inc. has agreed to sell to Goldman, Sachs & Co.,
and Goldman, Sachs & Co. has agreed to purchase from The Goldman Sachs Group,
Inc., the aggregate face amount of the offered notes specified on the front
cover of this prospectus supplement. Goldman, Sachs & Co. intends to resell the
offered notes at the original issue price. In the future, Goldman, Sachs & Co.
or other affiliates of The Goldman Sachs Group, Inc. may repurchase and resell
the offered notes in market-making transactions, with resales being made at
prices related to prevailing market prices at the time of resale or at
negotiated prices. The Goldman Sachs Group, Inc. estimates that its share of the
total offering expenses, excluding underwriting discounts and commissions, will
be approximately $51,000. For more information about the plan of distribution
and possible market-making activities, see "Plan of Distribution" in the
accompanying prospectus.
S-29
- ------------------------------------------------------------
- ------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the notes offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
----------------------
TABLE OF CONTENTS
Prospectus Supplement
<Table>
<Caption>
Page
----
Summary Information............................ S-2
Additional Risk Factors Specific to Your
Note......................................... S-7
Specific Terms of Your Note.................... S-12
Hypothetical Returns on Your Note.............. S-18
Use of Proceeds and Hedging.................... S-21
The Index...................................... S-22
Supplemental Discussion of Federal Income Tax
Consequences................................. S-26
Employee Retirement Income Security Act........ S-28
Supplemental Plan of Distribution.............. S-29
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>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
$18,580,000
THE GOLDMAN SACHS
GROUP, INC.
Enhanced Participation Notes
due November 2005
(Linked to the S&P 500(R) Index)
----------------------
[GOLDMAN SACHS LOGO]
----------------------
GOLDMAN, SACHS & CO.
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