THE INFORMATION IN THIS PRELIMINARY PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND
MAY BE CHANGED. THIS PRELIMINARY PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL
NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED.
Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-112367
Subject to Completion. Dated August 18, 2004.
Prospectus Supplement to the Prospectus dated February 6, 2004
and the Prospectus Supplement dated February 6, 2004 -- No.
(GOLDMAN SACHS LOGO)
THE GOLDMAN SACHS GROUP, INC.
Medium-Term Notes, Series B
------------------------
$
Inflation and Equity Linked Notes due 2011
(Linked to the Consumer Price Index and the S&P 500(R) Index)
------------------------
INTEREST. The amount of annual interest payable on the notes will be
linked to increases, if any, in the Consumer Price Index. The Consumer Price
Index, or CPI, is the non-seasonally adjusted U.S. City Average All Items
Consumer Price Index for All Urban Consumers, as reported by the Bureau of Labor
Statistics of the U.S. Department of Labor. Interest on your note will be paid
on each , beginning on , 2005. The annual interest payment
amount for each interest payment date will equal the face amount of your note
multiplied by the percentage change in the Consumer Price Index from (i) the
fifteenth month prior to that interest payment date to (ii) the third month
prior to that interest payment date. The annual interest payment, however, will
never be less than zero. BECAUSE THE AMOUNT OF INTEREST PAYABLE ON YOUR NOTE
DEPENDS OF THE PERCENTAGE INCREASE IN THE CONSUMER PRICE INDEX OVER THESE
12-MONTH PERIODS, AND BECAUSE IN ANY PERIOD THERE MAY BE NO INCREASE IN THE
CONSUMER PRICE INDEX OR ONLY A SMALL INCREASE, YOU MAY RECEIVE LITTLE OR NO
INTEREST ON SOME OR ALL OF THE INTEREST PAYMENT DATES.
PRINCIPAL. The principal amount that you will be paid on your note on the
stated maturity date, , 2011 (unless extended due to market disruption
or non-business days), is 100% of the face amount of your note plus the
supplemental payment amount, if any. We will calculate the supplemental payment
amount on each note as follows:
- - First, we will determine the final averaged equity return by:
- Calculating the arithmetic average of the closing levels of the S&P
500(R) Index on the of each month, beginning on , 2004 and up
to and including , 2011 for a total of 84 observation dates. The
resulting number is the "final average index value";
- Taking the final average index value and then subtracting the initial
index value (which is , the closing level of the S&P 500(R)
Index on the trade date), and dividing by the initial index value. The
resulting number, expressed as a percentage, is the "final averaged
equity return".
- - Second, we will compare (i) the final averaged equity return to (ii) the
cumulative CPI return, which is the sum of the interest payments on your note
through maturity (expressed as a percentage of the face amount of the note).
- If the final averaged equity return is (i) equal to or less than zero
(that is, the final average index value is not greater than the initial
index value) or (ii) more than zero but less than or equal to the
cumulative CPI return, then no supplemental payment amount will be
payable on your note.
- If the final averaged equity return is greater than the cumulative CPI
return, the supplemental payment amount will be the face amount of your
note multiplied by the result of the final averaged equity return minus
the cumulative CPI return.
BECAUSE THE FINAL AVERAGED EQUITY RETURN ON THE S&P 500(R) INDEX CAN BE
NEGATIVE OR LESS THAN THE CUMULATIVE CPI RETURN, THERE MAY BE NO SUPPLEMENTAL
PAYMENT AMOUNT PAYABLE AT MATURITY AND, IN THAT CASE, YOU WILL RECEIVE ONLY THE
FACE AMOUNT OF YOUR NOTE AT MATURITY. IN ADDITION, YOU SHOULD NOTE THAT THE
CUMULATIVE CPI RETURN IS CALCULATED BASED ON ANNUAL PERIODS THAT START THREE
MONTHS BEFORE THE ORIGINAL ISSUE DATE AND END THREE MONTHS BEFORE THE STATED
MATURITY DATE. AS A RESULT, THE MEASUREMENT PERIODS FOR THE CUMULATIVE CPI
RETURN DIFFER FROM THE MEASUREMENT PERIODS FOR THE FINAL AVERAGED EQUITY RETURN.
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-19.
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-12 SO THAT YOU MAY BETTER UNDERSTAND THOSE RISKS.
ORIGINAL ISSUE DATE (SETTLEMENT DATE): , 2004
ORIGINAL ISSUE PRICE: 100% of the face amount
UNDERWRITING DISCOUNT: % of the face amount
NET PROCEEDS TO THE GOLDMAN SACHS GROUP, INC.: % of the face amount
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------
Goldman Sachs may use this prospectus supplement in the initial sale of the
notes. In addition, Goldman, Sachs & Co. or any other affiliate of Goldman Sachs
may use this prospectus supplement in a market-making transaction in a note
after its initial sale. UNLESS GOLDMAN SACHS OR ITS AGENT INFORMS THE PURCHASER
OTHERWISE IN THE CONFIRMATION OF SALE, THIS PROSPECTUS SUPPLEMENT IS BEING USED
IN A MARKET-MAKING TRANSACTION.
GOLDMAN, SACHS & CO.
------------------------
Prospectus Supplement dated , 2004.
"Standard & Poor's", "S&P", "Standard & Poor's 500" and "S&P 500" 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.
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-19. 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.
INDICES: non-seasonally adjusted U.S. City Average All Items Consumer Price
Index for All Urban Consumers, as reported by the Bureau of Labor Statistics of
the U.S. Department of Labor (Bloomberg: "CPURNSA"), and the S&P 500(R) Index,
as published by Standard & Poor's Ratings Group (Bloomberg: "SPX")
FACE AMOUNT: $ in the aggregate for all the offered notes
ISSUE PRICE: 100% of the face amount
INTEREST PAYMENT AMOUNT: the outstanding face amount of your note multiplied by
the applicable interest rate paid on each applicable interest payment date. All
interest payment amounts will be rounded to the nearest fourth decimal place,
with 0.00005 rounded up to 0.0001
INTEREST PAYMENT DATES: of each year, beginning , 2005 until
the stated maturity date for a total of seven annual interest payments. If any
interest payment date falls on a day that is not a business day, payment will be
made on the immediately succeeding business day and no interest will accrue as a
result of the delayed payment
INTEREST CALCULATION DATES: fourth business day prior to the applicable interest
payment date
INTEREST RATE: the annual interest rate, as determined on each interest
calculation date, is calculated as the percentage change in the Consumer Price
Index by dividing (i) the final CPI reference value minus the initial CPI
reference value by (ii) the initial CPI reference value. The interest rate will
never be less than zero. If the Consumer Price Index declines or does not
increase during a measurement period, no interest will be paid on the related
interest payment date. All values used in the interest rate calculation for the
notes and all percentages resulting from any calculation of interest will be
rounded to the nearest one ten-thousandth of a percentage point, with 0.00005%
rounded up to 0.0001%
INITIAL CPI REFERENCE VALUE: the Consumer Price Index value for the fifteenth
month prior to the applicable interest payment date. With respect to the first
interest calculation date, the initial CPI reference value will be ,
the CPI value for 2004. With respect to all subsequent interest calculation
dates, the initial CPI reference value will always be the final CPI reference
value for the preceding interest calculation date, even if the CPI value has
been subsequently adjusted
FINAL CPI REFERENCE VALUE: the Consumer Price Index value for the third month
prior to the applicable interest payment date
INTEREST RATE PERIOD: the period from and including an interest payment date (or
the original issue date, in the case of the initial interest rate period) to but
excluding the immediately succeeding interest payment date
S-2
PAYMENT AMOUNT AT STATED MATURITY: we will pay the holder of each note an amount
in cash equal to the sum of
- - 100% of the outstanding face amount, and
- - the supplemental payment amount
SUPPLEMENTAL PAYMENT AMOUNT: the outstanding face amount of your note multiplied
by the result of the final averaged equity return minus the cumulative CPI
return. If the final averaged equity return is (i) equal to or less than zero or
(ii) more than zero but less than the cumulative CPI return, then the
supplemental payment amount will be zero. If the supplemental payment amount is
zero, you will only receive 100% of the outstanding face amount of your note
FINAL AVERAGED EQUITY RETURN: the final averaged equity return is determined by
- - calculating the final average index value;
- - taking the final average index value and then subtracting the initial index
value, and dividing by the initial index value
The final averaged equity return will be expressed as a percentage and will be
rounded to the nearest one ten-thousandth of a percentage point, with 0.00005%
rounded up to 0.0001%. All dollar amounts used in or resulting from such
calculation on the notes will be rounded to the nearest fourth decimal place,
with 0.00005 rounded up to 0.0001.
INITIAL INDEX VALUE: the closing level of the S&P 500(R) Index on the trade date
FINAL AVERAGE INDEX VALUE: the arithmetic average of the closing levels of the
S&P 500(R) Index on all monthly observation dates, calculated as follows:
- - taking the official closing level of the S&P 500(R) Index on each of the
observation dates and
- - adding together each closing level and dividing by 84
OBSERVATION DATES: the day of each month, unless extended for up to
four business days in the limited circumstances described under "Specific Terms
of Your Note -- Consequences of a Market Disruption Event" on page S-22 and
subject to adjustment as provided under "Specific Terms of Your
Note -- Discontinuance or Modification of the S&P 500(R) Index" on page S-22,
beginning on , 2004 up to and including four business days before the
stated maturity date, for a total of 84 observation dates
DETERMINATION DATE: the fourth business day prior to the stated maturity date
, 2011 unless the calculation agent determines that a market
disruption event occurs or is continuing on that fourth 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 , 2011 or, if , 2011 is not a business day,
later than the first business day after , 2011. This is also the last
observation date and the last interest calculation date
CUMULATIVE CPI RETURN: the sum of the seven annual interest payments expressed
as a percentage of the face amount of your note
TRADE DATE: , 2004
ORIGINAL ISSUE DATE (SETTLEMENT DATE): , 2004
STATED MATURITY DATE: , 2011 unless extended for up to five business
days
NO LISTING: the offered notes will not be listed on any securities exchange or
interdealer market quotation system
CALCULATION AGENT: Goldman, Sachs & Co.
BUSINESS DAY: as described on page S-24
S-3
Q&A
HOW DO THE NOTES WORK?
The notes offered by this prospectus supplement will have a stated
maturity date of seven years (unless extended due to market disruption or
non-business days). The amount of annual interest payable on the notes will be
linked to increases, if any, in the Consumer Price Index. On the stated maturity
date, we will pay the holders of the notes 100% of the face amount, plus a
supplemental payment amount, if any. The supplemental payment amount is the
outstanding face amount of your note multiplied by the result of the final
averaged equity return minus the cumulative CPI return, if that result is
positive. The final averaged equity return is the percentage change of the
average monthly S&P 500(R) Index during the term of the note from the S&P 500(R)
Index on the trade date. The cumulative CPI return is the sum of the seven
annual interest payments, expressed as a percentage of the face amount of your
note.
See "Additional Risk Factors Specific to Your Note" on page S-12. 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-19.
WHO PUBLISHES THE CONSUMER PRICE INDEX AND WHAT DOES IT MEASURE?
The Consumer Price Index, for purposes of the notes, is the non-seasonally
adjusted U.S. City Average All Items Consumer Price Index for All Urban
Consumers published monthly by the Bureau of Labor Statistics of the U.S.
Department of Labor and reported on Bloomberg page CPURNSA or any successor
service or successor page. The Bureau of Labor Statistics makes almost all
Consumer Price Index data publicly available. This material may be accessed
electronically by means of the Bureau of Labor Statistics' home page on the
internet at http://www.bls.gov/cpi/. The Consumer Price Index for a particular
month is published during the following month.
According to publicly available information provided by the Bureau of
Labor Statistics, the Consumer Price Index is a measure of the average change in
consumer prices over time in a fixed market basket of goods and services,
including food, clothing, shelter, fuels, transportation, drugs and charges for
the services of doctors and dentists. User fees (such as water and sewer
service) and sales and excise taxes paid by the consumer are also included.
Income taxes and investment items such as stocks, bonds and life insurance are
not included. The Consumer Price Index includes expenditures by urban wage
earners and clerical workers, professional, managerial and technical workers,
the self-employed, short-term workers, the unemployed, retirees and others not
in the labor force. In calculating the Consumer Price Index, price changes for
the various items are averaged together with weights that represent their
significance in the spending of urban households in the United States.
The contents of the market basket of goods and services and the weights
assigned to the various items are updated periodically to take into account
changes in consumer expenditure patterns. The Consumer Price Index is expressed
in relative terms based on a reference period for which the level is set at 100
(currently the base reference period used by the Bureau of Labor Statistics is
1982-1984). For example, because the Consumer Price Index for the 1982-1984
reference period is 100, an increase of 16.5 percent from that period would be
shown as 116.5.
The U.S. Department of Treasury also uses the Consumer Price Index in the
interest calculations of inflation-indexed securities issued by the Department.
The reference Consumer Price Index used by the U.S. Department of Treasury for
the first day of any calendar month is the Consumer Price Index for the third
preceding calendar month.
S-4
Accordingly, the reference Consumer Price Index for the first day of September
is the Consumer Price Index for June, published by the Bureau of Labor
Statistics in July.
WHAT INTEREST PAYMENTS WILL I RECEIVE
ON THE NOTES?
We will pay interest on the notes on of each year beginning on
, 2005 and ending on , 2011, each of which we refer to as an
"interest payment date", for a total of seven annual interest payments.
The rate of interest that will apply to an interest payment date will be
determined by the calculation agent on the interest calculation date immediately
preceding that interest payment date. The annual interest rate is calculated as
the percentage change in the Consumer Price Index by dividing (i) the final CPI
reference value minus the initial CPI reference value by (ii) the initial CPI
reference value. The initial CPI reference value is the Consumer Price Index
value for the fifteenth month prior to the applicable interest payment date. The
final CPI reference value is the Consumer Price Index value for the third month
prior to the applicable interest payment date. For example, for the interest
rate period from September 2005 to September 2006, the rate of interest will be
the percentage change in the Consumer Price Index from June 2005 to June 2006.
The interest rate will never be less than zero. If the Consumer Price
Index declines or does not increase during the applicable 12-month period, no
interest will be paid on the related interest payment date. All values used in
the interest rate calculation for the notes and all percentages resulting from
any calculation of interest will be rounded to the nearest one ten-thousandth of
a percentage point, with 0.00005% rounded up to 0.0001%.
The interest calculation date will be four business days prior to the
applicable interest payment date.
WHAT IF THE CONSUMER PRICE INDEX IS REVISED, REBASED OR DISCONTINUED?
In determining the final CPI reference value used to determine the
interest rate on each applicable interest calculation date, the calculation
agent will use the most recently available value of the Consumer Price Index for
the relevant month, even if such value has been adjusted from a prior reported
value for that month. In contrast, the initial CPI reference value for each
interest calculation date (except for the first interest calculation date) will
always be the final CPI reference value for the preceding interest calculation
date, even if such value has been adjusted since that preceding interest
calculation date. For the first interest calculation date, the initial CPI
reference value will be , the CPI level for 2004. If the CPI
level for 2004 is adjusted after the date of this prospectus supplement,
the interest rate determined on the first interest calculation date will not be
revised, and in the case of a subsequent downward adjustment in the Consumer
Price Index value for 2004, you will not receive any additional interest on
the first interest payment date or any other interest payment date.
The Bureau of Labor Statistics occasionally rebases the Consumer Price
Index. The Consumer Price Index was last rebased in January 1988. The current
standard reference base period is 1982-1984 = 100. Prior to the release of the
Consumer Price Index for January 1988, the standard reference base was 1967 =
100. If the Bureau of Labor Statistics rebases the Consumer Price Index during
the time the notes are outstanding, the calculation agent will continue to
calculate the increase in the Consumer Price Index using the existing base year
in effect for the Consumer Price Index at the time of issuance of the notes as
long as the old Consumer Price Index is still published. The conversion to a new
reference base does not affect the measurement of the percentage changes in a
given index series from one time period to another, except for rounding
differences. Thus, rebasing might affect the published "headline" number often
quoted in the financial press; however, the inflation calculation for the notes
should not
S-5
be adversely affected by any such rebasing because changes in the old-based
Consumer Price Index can be calculated by using the percentage changes of the
new rebased Consumer Price Index. If the old-based Consumer Price Index is not
published, the calculation agent will calculate inflation using the new Consumer
Price Index. However, as stated above, the conversion to a new reference base
does not affect the measurement of the percentage changes in a given index
series from one time period to another, except for rounding differences.
If, while the notes are outstanding, the Consumer Price Index is
discontinued or, if in the opinion of the Bureau of Labor Statistics, as
evidenced by a public release, the Consumer Price Index is substantially
altered, the calculation agent will determine the interest rate on the notes by
reference to an applicable substitute index. The calculation agent will
determine the substitute index, in its sole discretion, by a computation
methodology that the calculation agent determines will as closely as reasonably
possible replicate the Consumer Price Index or is in accordance with general
market practice at the time. In doing this, the calculation agent may (but is
not required to) determine the substitute index by selecting any substitute
index that is chosen by the Secretary of the Treasury for the Department of The
Treasury's Inflation-Linked Treasuries, as described at 62 Federal Register
846-874 (January 6, 1997).
HOW HAS THE CONSUMER PRICE INDEX PERFORMED HISTORICALLY?
The following table shows the value of the Consumer Price Index from
January 1998 to June 2004, as reported by the Bureau of Labor Statistics and
reported on Bloomberg page CPURNSA. This historical data is presented for
informational purposes only. Past movements of the Consumer Price Index are not
necessarily indicative of future values.
<Table>
<Caption>
1998 1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ---- ----
January............................. 161.6 164.3 168.8 175.1 177.1 181.7 185.2
February............................ 161.9 164.5 169.8 175.8 177.8 183.1 186.2
March............................... 162.2 165.0 171.2 176.2 178.8 184.2 187.4
April............................... 162.5 166.2 171.3 176.9 179.8 183.8 188.0
May................................. 162.8 166.2 171.5 177.7 179.8 183.5 189.1
June................................ 163.0 166.2 172.4 178.0 179.9 183.7 189.7
July................................ 163.2 166.7 172.8 177.5 180.1 183.9
August.............................. 163.4 167.1 172.8 177.5 180.7 184.6
September........................... 163.6 167.9 173.7 178.3 181.0 185.2
October............................. 164.0 168.2 174.0 177.7 181.3 185.0
November............................ 164.0 168.3 174.1 177.4 181.3 184.5
December............................ 163.9 168.3 174.0 176.7 180.9 184.3
</Table>
---------------------
WHAT WOULD THE HISTORICAL HYPOTHETICAL ANNUAL INTEREST PAYMENTS BE?
Provided below are the hypothetical interest rates for the period from
April 1999 to June 2004 that would have resulted from the historical levels of
the Consumer Price Index presented above. These are intended to illustrate the
effect of general trends in the Consumer Price Index on the amount of interest
payable to you on the notes. The Consumer Price Index may not increase or
decrease over the term of the notes in accordance with any of the trends
depicted by the historical information in the table below, and the size and
frequency of any fluctuations in the Consumer Price Index level over the term of
the notes may be significantly different than those shown in the table. As a
result, the hypothetical interest rates depicted in the table below should not
be taken as an indication of the actual
S-6
interest rates that will be paid on the interest payment dates over the term of
the notes.
<Table>
<Caption>
1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ----
January..................... 2.5610% 3.4483% 2.1264% 2.0259% 2.0408%
February.................... 2.6220% 3.4462% 1.8955% 2.1984% 1.7650%
March....................... 2.6846% 3.3868% 1.5517% 2.3769% 1.8795%
April....................... 1.6708% 2.7389% 3.7322% 1.1422% 2.5974% 1.9263%
May......................... 1.6059% 3.2219% 3.5336% 1.1377% 2.9809% 1.6931%
June........................ 1.7263% 3.7576% 2.9206% 1.4756% 3.0201% 1.7372%
July........................ 2.2769% 3.0686% 3.2691% 1.6393% 2.2247%
August...................... 2.0885% 3.1889% 3.6152% 1.1818% 2.0578%
September................... 1.9632% 3.7304% 3.2483% 1.0674% 2.1123%
October..................... 2.1446% 3.6593% 2.7199% 1.4648% 2.1099%
November.................... 2.2644% 3.4111% 2.7199% 1.8028% 2.1583%
December.................... 2.6284% 3.4544% 2.6482% 1.5143% 2.3204%
</Table>
---------------------
To illustrate the interest rate basis applicable to the note, assuming
September 3, 2002 were an interest calculation date, based on the historical
information on the Consumer Price Index presented above, the interest rate
payable on the note on the next succeeding interest payment date would have been
1.0674%, calculated as follows:
(CPI Level for June 2002 -- CPI Level for June 2001)/CPI Level for June 2001 =
(179.9 - 178.0)/178.0 = 1.0674%. Accordingly, for a hypothetical investment of
$100,000, the applicable interest payment amount for September 2002 would have
been $1,067.40.
WHAT WILL I RECEIVE IF I HOLD THE NOTES UNTIL THE STATED MATURITY DATE?
We have designed the notes for investors who want to protect their
investment by receiving at least 100% of the principal amount of their
investment at maturity, who want to receive annual interest payments based on
inflation during a seven-year term and who want to participate in a possible
increase in the average monthly S&P 500(R) Index during the term of the note to
the extent that such increase exceeds the cumulative CPI return. On the stated
maturity date, you will receive a payment per note equal to 100% of the
outstanding face amount of your note plus the supplemental payment amount, if
any. Under no circumstances will the supplemental payment amount be less than
zero.
HOW WILL THE SUPPLEMENTAL PAYMENT AMOUNT BE CALCULATED?
The calculation agent will determine the supplemental payment amount on
the determination date as follows:
- - First, the calculation agent will determine the final averaged equity return
by:
- Calculating the arithmetic average of the closing levels of the S&P
500(R) Index on the of each month, beginning on ,
2004 and up to and including , 2011 for a total of 84
observation dates. The resulting number is the "final average index
value";
- Taking the final average index value and then subtracting the initial
index value (which is , the closing level of the S&P 500(R)
Index on the trade date), and dividing by the initial index value. The
resulting number, expressed as a percentage, is the "final averaged
equity return".
- - Second, the calculation agent will compare (i) the final averaged equity
return to (ii) the cumulative CPI return, which is the sum of the interest
payments on your note through maturity (expressed as a
S-7
percentage of the face amount of your note).
- If the final averaged equity return is (i) equal to or less than zero
(that is, the final average index value is not greater than the initial
index value) or (ii) more than zero but less than or equal to the
cumulative CPI return, then no supplemental payment amount will be
payable on your note.
- If the final averaged equity return is greater than the cumulative CPI
return, the supplemental payment amount will be the face amount of your
note multiplied by the result of the final averaged equity return minus
the cumulative CPI return.
Because the final average index value will be based on the average of 84
monthly closing levels (the closing levels on the observation dates), the actual
S&P 500(R) Index level at the stated maturity date or at many other times during
the term of the notes could be significantly higher than the final average index
value. For example, the difference between the final average index level and the
level of the S&P 500(--Registered Mark--) Index on the stated maturity date
could be particularly large if there is a significant increase in the value of
the S&P 500(R) Index during the latter portion of the term of the notes. In this
situation, the supplemental payment amount, and then the return on your note,
could be significantly less than the return on the S&P 500(R) Index.
BECAUSE THE FINAL AVERAGED EQUITY RETURN ON THE S&P 500(R) INDEX CAN BE
NEGATIVE OR LESS THAN THE CUMULATIVE CPI RETURN, THERE MAY BE NO SUPPLEMENTAL
PAYMENT AMOUNT PAYABLE AT MATURITY AND, IN THAT CASE, YOU WILL RECEIVE ONLY THE
FACE AMOUNT OF YOUR NOTE AT MATURITY.
The observation dates are the day of each month, unless extended for
up to four business days, beginning , 2004 up to and including four
business days before the stated maturity date for a total of 84 observation
dates.
AMOUNT PAYABLE AT STATED MATURITY -- HYPOTHETICAL EXAMPLES
The table below shows the hypothetical payment amount that we would
deliver on the stated maturity date (expressed as a percentage of the face
amount of your note), if the final averaged equity return were any of the
hypothetical levels shown in the first column, and the cumulative CPI return
were any of the hypothetical levels shown in the table.
The percentages in the first column of the table represent hypothetical
final averaged equity returns. The second and third columns present hypothetical
payment amounts at maturity assuming a cumulative CPI return of 0%. The second
column is the payment amount at maturity as a percentage of the face amount of
your note. As discussed, the payment amount at maturity is equal to 100% of the
face amount on your note plus the supplemental payment amount, if any. As shown
in the table, the payment amount at maturity will never be less than 100 of the
face amount of your note. The third column shows the result of the payment
amount plus the cumulative CPI return, expressed as a percentage of the face
amount. The fourth and fifth columns repeat the hypothetical analysis but with
an assumed cumulative CPI return of 15%. The last two columns show the
hypothetical results assuming a cumulative CPI return of 30%. For example, if
the final averaged equity return were 50% and the cumulative CPI return were
15%, we would pay you at maturity 135% (that is, 100% + (50% - 15%)) of the face
amount.
The information in the table and in the example that follows reflects
hypothetical payments 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
some of these factors, see "Additional Risk Factors Specific to Your Note" on
page S-12. We have also assumed no market disruption event occurs.
S-8
The examples below are based on a range of S&P 500(R) Index levels and a
range of cumulative CPI returns based on the Consumer Price Index that are
entirely hypothetical; no one can predict what the S&P 500(R) Index level and
the Consumer Price Index level will be.
Moreover, we have not yet set the initial index value, which will serve as
the baseline for determining the final averaged equity return and the amount we
will pay you on your note at maturity. We will not do so until the trade date.
As a result, the initial index value may differ substantially from current S&P
500(R) Index levels and may also differ substantially from the S&P 500(R) Index
level at the time you purchase your note. Before investing in the offered notes,
you should consult publicly available news sources to determine the S&P 500(R)
Index level between the dates of this prospectus supplement and your purchase of
the offered notes.
For these reasons, the actual performance of the S&P 500(R) 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.
HYPOTHETICAL CUMULATIVE CPI RETURN
<Table>
<Caption>
0% 15% 30%
------------------------------- ------------------------------- -------------------------------
PAYMENT PAYMENT PAYMENT
AMOUNT AT AMOUNT AT AMOUNT AT
HYPOTHETICAL PAYMENT MATURITY, AS A PAYMENT MATURITY, AS A PAYMENT MATURITY, AS A
FINAL AMOUNT AT % OF FACE AMOUNT AT % OF FACE AMOUNT AT % OF FACE
AVERAGED MATURITY AS A AMOUNT, PLUS MATURITY AS A AMOUNT, PLUS MATURITY AS A AMOUNT, PLUS
EQUITY % OF FACE CUMULATIVE % OF FACE CUMULATIVE % OF FACE CUMULATIVE
RETURN AMOUNT CPI RETURN AMOUNT CPI RETURN AMOUNT CPI RETURN
- ------------ ------------- -------------- ------------- -------------- ------------- --------------
150% 250% 250% 235% 250% 220% 250%
100% 200% 200% 185% 200% 170% 200%
50% 150% 150% 135% 150% 120% 150%
25% 125% 125% 110% 125% 100% 130%
20% 120% 120% 105% 120% 100% 130%
0% 100% 100% 100% 115% 100% 130%
-10% 100% 100% 100% 115% 100% 130%
-20% 100% 100% 100% 115% 100% 130%
-25% 100% 100% 100% 115% 100% 130%
-50% 100% 100% 100% 115% 100% 130%
-80% 100% 100% 100% 115% 100% 130%
</Table>
---------------------
DETAILED HYPOTHETICAL EXAMPLE
The table below shows the detailed calculations of one hypothetical
example.
<Table>
<Caption>
Assumed initial index value................................. 1100
Assumed final average index value........................... 1391
Assumed cumulative CPI return............................... 14%
Final averaged equity return................................ 26.45%
Supplemental payment amount (as a % of the face amount)..... 12.45%
Payment amount at maturity (as a % of the face amount)...... 112.45%
</Table>
---------------------
WHO PUBLISHES THE S&P 500(R) 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
S-9
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 two
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 Indices" on page S-31.
WHO SHOULD CONSIDER AN
INVESTMENT IN THE NOTES?
We have designed the notes for investors who want to protect their initial
investment by receiving at the stated maturity 100% of the face amount of their
notes, while also capturing the annual increase in the Consumer Price Index
through annual interest payments, and having the opportunity to participate in
the potential appreciation of the S&P 500(R) Index based on the average of the
monthly levels during the term of the note, if the final averaged equity return
exceeds the cumulative CPI return.
WHO SHOULD NOT CONSIDER AN
INVESTMENT IN THE NOTES?
The annual interest payment of the note may vary and may be zero,
depending on the change in the Consumer Price Index. 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 fixed
income investments with comparable maturities issued by companies with
comparable credit ratings. For more details, see "Additional Risk Factors
Specific to Your Note."
On the stated maturity date you may not receive any supplemental payment
amount if the final averaged equity return is zero or is more than zero but less
than or equal to the cumulative CPI return based on changes to the Consumer
Price Index. The final averaged equity return could be less than the return you
would realize if you invest directly in the S&P 500(R) Index. Therefore, the
notes may not be suitable for you if you prefer to have investments with returns
that track the S&P 500(R) Index.
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 not
receive further annual interest payments and 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, changes in the Consumer Price Index since the original
issue date, changes in the expected inflation and the volatility and the level
of the S&P 500(R) Index. Depending on the impact of these factors, you may
receive significantly less than the face amount of your note in any sale of your
note before the stated maturity date. In addition, assuming no changes in market
conditions or any other relevant factors, the value of your note on the date of
this prospectus supplement (as determined by reference to pricing models used by
Goldman, Sachs & Co.) is significantly less than the original issue price. For
more information on the value of your note in the secondary market, see
"Additional Risk Factors Specific to Your Note -- Assuming No Changes in Market
Conditions or Any Other Relevant Factors, the Value of Your Note on the Date of
this Prospectus Supplement (As Determined By Reference to Pricing Models Used by
Goldman, Sachs & Co.) is Significantly Less than the Original Issue Price" on
page S-12 and "-- The Market Value of Your Note May Be Influenced by Many
Unpredictable Factors" on page S-13.
S-10
WHAT ABOUT TAXES?
If you are a U.S. individual or taxable entity, you generally will be
required to pay taxes on ordinary income from the notes over their term based
upon an estimated yield for the notes plus or minus any required positive or
negative adjustment if the cash interest you receive is more or less than the
projected amount of contingent interest, even though your actual annual interest
payments may be different. This estimated yield is determined solely to
calculate the amount you will be taxed on prior to maturity and is neither a
prediction nor a guarantee of what the actual yield will be. In addition, any
gain you may recognize upon the sale or maturity of the notes will be taxed as
ordinary interest income. If you purchase the notes at a time other than the
original issue date, the tax consequences to you may be different.
For further information you should refer to "Supplemental Discussion of
Federal Income Tax Consequences" on page S-36.
S-11
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 notes
involve risks not associated with ordinary floating rate notes. 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.
INTEREST PAYMENT ON THE NOTE COULD BE ZERO
Interest payable on the notes is linked to changes in the level of the
Consumer Price Index determined on each interest calculation date over the term
of the notes. The interest rate on the notes could be zero on some or all of the
interest payment dates if the Consumer Price Index for the applicable interest
rate period does not increase, which is likely to occur over periods of
deflation or little or no inflation.
THE INTEREST RATE ON THE NOTES
MAY BE BELOW THE RATE OTHERWISE
PAYABLE ON SIMILAR FLOATING RATE
SECURITIES ISSUED BY US
If there are only minimal increases, no changes or decreases in the
monthly Consumer Price Index measured year over year, the interest rate on the
notes will be below what we would currently expect to pay as of the date of this
prospectus supplement if we issued a floating rate debt instrument with the same
maturity and other terms similar to those of the notes.
YOUR INTEREST RATE IS BASED UPON THE CONSUMER PRICE INDEX. THE CONSUMER PRICE
INDEX ITSELF AND THE WAY THE BUREAU OF LABOR STATISTICS CALCULATES THE CONSUMER
PRICE INDEX MAY CHANGE IN THE FUTURE
There can be no assurance that the Bureau of Labor Statistics will not
change the method by which it calculates the Consumer Price Index. In addition,
changes in the way the Consumer Price Index is calculated could reduce the level
of the Consumer Price Index and lower the interest payment with respect to the
notes. Accordingly, the amount of interest, if any, payable on the notes, and
therefore the value of the notes, may be
S-12
significantly reduced. If the Consumer Price Index is substantially altered, a
substitute index may be employed to calculate the interest payable on the notes,
as described above, and that substitution may adversely affect the value of the
notes.
In determining the final CPI reference value used to determine the
interest rate on each applicable interest calculation date, the calculation
agent will use the most recently available value of the Consumer Price Index for
the relevant month, even if such value has been adjusted from a prior reported
value for that month. In contrast, the initial CPI reference value for each
interest calculation date (except for the first interest calculation date) will
always be the final CPI reference value for the preceding interest calculation
date, even if such value has been adjusted since that preceding interest
calculation date. For the first interest calculation date, the initial CPI
reference value will be , the CPI level for 2004. If the CPI
level for 2004 is adjusted after the date of this prospectus supplement,
the interest rate determined on the first interest calculation date will not be
revised, and in the case of a subsequent downward adjustment in the Consumer
Price Index value for 2004, you will not receive any additional interest on
the first interest payment date or any other interest payment date.
If, while the notes are outstanding, the Consumer Price Index is
discontinued or, if in the opinion of the Bureau of Labor Statistics, as
evidenced by a public release, the Consumer Price Index is substantially
altered, the calculation agent will determine the interest rate on the notes by
reference to an applicable substitute index. The calculation agent will
determine the substitute index, in its sole discretion, by a computation
methodology that the calculation agent determines will as closely as reasonably
possible replicate the Consumer Price Index or is in accordance with general
market practice at the time. In doing this, the calculation agent may (but is
not required to) determine the substitute index by selecting any substitute
index that is chosen by the Secretary of the Treasury for the Department of The
Treasury's Inflation-Linked Treasuries, as described at 62 Federal Register
846-874 (January 6, 1997).
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 S&P 500(R) Index level;
- - The Consumer Price Index level;
- - The volatility of the S&P 500(R) Index and the Consumer Price Index -- i.e.,
the frequency and magnitude of changes in the level of the respective indices;
- As indicated under "The Historical Levels of the Consumer Price Index
are not an Indication of the Future Levels of the Consumer Price Index"
and "The Indices -- Historical Closing Levels of the S&P 500(R) Index"
below, the levels of the indices have been volatile at times. It is
impossible to predict whether these index levels will rise or fall;
- - The correlation among the S&P 500(R) Index, the Consumer Price Index and
interest rates -- i.e., the relationship of the direction and magnitude of
movements of these indices and rates;
- - The dividend rate of the S&P 500(R) Index stocks;
- - Economic, financial, regulatory, political, military or other events that
affect inflation and stock markets generally and the market segments of which
the index stocks are a part, and which may affect the level of the indices;
- - Interest rate 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
S-13
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 S&P 500(R) Index and the
Consumer Price Index based on their historical performance. Before investing in
the offered notes, you should consult publicly available news sources to
determine the S&P 500(R) Index level between the date of this prospectus
supplement and your purchase of the offered notes. The initial index value,
which will serve as the baseline for determining the final averaged equity
return, has not yet been set and may differ substantially from the index level
on the date of this prospectus supplement. Moreover, the actual performance of
the S&P 500(R) 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
S&P 500(R) Index or to the hypothetical return examples shown elsewhere in this
prospectus supplement.
THE HISTORICAL LEVELS OF THE CONSUMER PRICE INDEX ARE NOT AN INDICATION OF THE
FUTURE LEVELS OF THE CONSUMER PRICE INDEX
The historical levels of the Consumer Price Index are not an indication of
the future levels of the Consumer Price Index during the term of the notes. In
the past, the Consumer Price Index has experienced periods of volatility and
such volatility may occur in the future. Fluctuations and trends in the Consumer
Price Index that have occurred in the past are not necessarily indicative,
however, of fluctuations that may occur in the future.
You will receive interest payments that will be affected by changes in the
Consumer Price Index. Such changes may be significant. Changes in the Consumer
Price Index are a function of the changes in specified consumer prices over
time, which result from the interaction of many factors over which we have no
control.
In addition, we expect that the trading value of the notes will depend in
part on the level of the Consumer Price Index relative to the level for the
preceding , the initial CPI reference value for the interest rate
period. If you decide to sell your notes when the level of the Consumer Price
Index exceeds the level of the Consumer Price Index for the preceding
, you may nonetheless receive substantially less than the amount
expected based on that level because of expectations that the level will
continue to fluctuate until the subsequent and thereafter.
YOU MAY ONLY RECEIVE THE FACE AMOUNT OF YOUR NOTE ON THE STATED MATURITY DATE
The payment amount on your note depends on the excess return of the final
averaged equity return for the S&P 500(R) Index over the cumulative CPI return.
If the final averaged equity return is less than or equal to the cumulative CPI
return, the payment amount on your note on the stated maturity date will be 100%
of the face amount.
THE PAYMENT AMOUNT ON YOUR NOTE ON THE STATED MATURITY DATE MAY BE LESS THAN IT
WOULD HAVE BEEN HAD THE PAYMENT AMOUNT BEEN LINKED TO THE ACTUAL, RATHER THAN
AVERAGED, RETURN ON THE INDEX
The payment amount on your note depends on the final averaged equity
return. Because the final averaged equity return is based on the average of 84
monthly closing levels for the S&P 500(R) Index, the final averaged equity
return may be significantly less than the actual return on the S&P 500(R) Index
over the life of the notes. As a result, the payment amount on your note on the
stated maturity date may be significantly less than it would have been had the
calculation of the payment amount been linked to the actual return on the S&P
500(R) Index.
S-14
These situations may arise even if the level of the S&P 500(R) Index
significantly exceeds the index level for the S&P 500(R) Index at maturity or at
other times during the term of the notes. It is also possible that the actual
index level at the stated maturity date or at other times during the term of the
notes will be higher than the final average index value. For example, the
difference between the final average index value and the level of the S&P 500(R)
Index on the stated maturity date could be particularly large if there is a
significant increase in the level of the S&P 500(R) Index during the latter
portion of the term of the notes.
THE MEASUREMENT PERIODS FOR THE CONSUMER PRICE INDEX DIFFER FROM THE MEASUREMENT
PERIOD FOR THE S&P 500(R) INDEX
The final average index value is calculated by taking the arithmetic
average of the closing levels on all monthly observation dates, which includes
the observation date which falls four business days prior to the maturity date.
The annual interest payments, on the other hand, are calculated as the
percentage change in the Consumer Price Index value from the fifteenth month
prior to each interest payment date to the Consumer Price Index value for the
third month prior to that interest payment date. As a result, the cumulative CPI
return is calculated based on annual periods that start three months before the
original issue date and end three months before the stated maturity date.
Due to the method of calculating the applicable interest payment, you will
not participate in increases in the levels of the Consumer Price Index from
to of each year until the interest payment date in the subsequent
year. In the case of the final interest payment date, you will not participate
at all in any increase in the CPI in the last three months prior to that
interest payment date. See "The Indices" below for a discussion of how the S&P
500(R) Index and the Consumer Price Index are calculated.
THE RETURN ON YOUR NOTE WILL NOT
REFLECT ANY DIVIDENDS PAID ON THE
S&P 500(R) INDEX STOCKS
The index sponsor calculates the level of the S&P 500(R) Index by
reference to the prices of the common stocks included in the S&P 500(R) Index,
without taking into account 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 S&P 500(R) 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 S&P 500(R) Index Stock" below for
additional information.
IF THE LEVEL OF EITHER OF THE INDICES 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 indices.
Changes in the level of the indices may not result in a comparable change in the
market value of your note. We discuss some of the reasons for this disparity
under "-- The 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 S&P
500(R) 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, expect to hedge our
obligations under the offered notes by purchasing futures and other instruments
linked to the indices. 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 S&P 500(R) Index or the 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
S-15
notes whose returns are linked to changes in the level of the S&P 500(R) Index
or one or more of the index stocks. Any of these hedging activities may
adversely affect the S&P 500(R) 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 instruments whose returns are linked to the S&P 500(R) Index or one or more
of the 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 S&P 500(R) 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 Consumer Price Index, S&P
500(R) 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 S&P 500(R) INDEX 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 S&P 500(R) 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 S&P 500(R) 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 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 S&P 500(R) 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 S&P 500(R) Index and, therefore, the market value of your note and the
amount we will pay on your note at maturity.
AS CALCULATION AGENT, GOLDMAN, SACHS & CO. WILL HAVE THE AUTHORITY TO MAKE
DETERMINATIONS THAT COULD AFFECT THE
MARKET VALUE OF YOUR NOTE, WHEN
YOUR NOTE MATURES AND THE AMOUNT
YOU RECEIVE AT MATURITY
As calculation agent for your note, Goldman, Sachs & Co. will have
discretion in
S-16
making various determinations that affect your note, including determining the
interest rate payable on each interest payment date, the observation dates, the
final average index value, the final averaged equity return and the supplemental
payment amount 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 S&P 500(R) INDEX SPONSOR AND CHANGES THAT AFFECT THE S&P
500(R) INDEX OR THE INDEX STOCKS COULD AFFECT THE AMOUNT PAYABLE ON YOUR NOTE
AND ITS MARKET VALUE
The policies of the index sponsor concerning the calculation of the S&P
500(R) 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 S&P 500(R) Index".
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 INDEX STOCK
ISSUERS AND US OR THE S&P 500(R) INDEX SPONSOR, AND WE ARE NOT RESPONSIBLE FOR
ANY DISCLOSURE BY ANY OF THE OTHER INDEX STOCK ISSUERS OR THE S&P 500(R) 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 S&P 500(R) 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 S&P 500(R) Index or any of the
other index stock issuers. You, as an investor in your note, should make your
own investigation into the S&P 500(R) Index and the index stock issuers. See
"The Indices" below for additional information about the S&P 500(R) Index.
Neither the S&P 500(R) 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 S&P
500(R) 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.
S-17
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 OR ANY OF THE OBSERVATION DATES AND
THE DETERMINATION DATE IF A MARKET DISRUPTION EVENT OCCURS
If the calculation agent determines that, on the determination date or on
any of the observation dates, a market disruption event has occurred or is
continuing, such observation date or the determination date will be postponed
until the first business day on which no market disruption event occurs or is
continuing. As a result, in the case of postponement of the determination date,
the stated maturity date for your note will also be postponed, although not by
more than five business days. Thus, you may not receive the cash payment that we
are obligated to deliver on the stated maturity date until several days after
the originally scheduled due date. Moreover, if the closing level of the S&P
500(R) Index is not available on any postponed observation date or the postponed
determination date because there continues to be a market disruption event or
for any other reason, the calculation agent will nevertheless determine the S&P
500(R) Index closing level on that day based on its assessment, made in its sole
discretion.
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.
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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 interest
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:
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 of $1,000 in excess 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.
INDICES, INDEX SPONSORS AND INDEX STOCKS
In this prospectus supplement, when we refer to the indices, we mean both
indices specified on the front cover page, or any successor to either of the
indices, as it may be modified, replaced or adjusted from time to time as
described under "-- Discontinuance or Modification of the S&P 500(R) 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 applicable
index as then in effect. When we refer to the index stocks as of any time, we
mean the stocks that comprise the S&P 500(R) Index as
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then in effect, after giving effect to any additions, deletions or
substitutions.
INTEREST
We will pay you interest on your notes on of each year,
beginning on , 2005 until the stated maturity date, for a total of
seven annual interest payments. If any interest payment date falls on a day that
is not a business day, payment will be made on the immediately succeeding
business day and no interest will accrue as a result of the delayed payment.
The interest that we will pay you on an interest payment date, as
determined on the interest calculation date, will be equal to the percentage
change in the Consumer Price Index calculated by dividing (i) the final CPI
reference value minus the initial CPI reference value by (ii) the initial CPI
reference value. The initial CPI reference value is the Consumer Price Index
value for the fifteenth month prior to the applicable interest payment date.
With respect to the first interest calculation date, the initial CPI reference
value will be , the CPI value for 2004. With respect to all
subsequent interest calculation dates, the initial CPI reference value will
always be the final CPI reference value for the preceding interest calculation
date, even if the CPI value has been subsequently adjusted. The final CPI
reference value is the Consumer Price Index value for the third month prior to
the applicable interest payment date.
The interest rate will never be less than zero. If the Consumer Price
Index declines or does not increase during the applicable 12-month period, no
interest will be paid on the related interest payment date. All values used in
the interest rate calculation for the notes and all percentages resulting from
any calculation of interest will be rounded to the nearest one ten-thousandth of
a percentage point, with 0.00005% rounded up to 0.0001%.
The interest calculation date is the fourth business day prior to the
applicable interest payment date.
PAYMENT OF PRINCIPAL ON STATED MATURITY DATE
On the stated maturity date, we will pay you an amount in cash equal to
100% of the face amount of your note plus the supplemental payment amount, if
any.
CALCULATING THE SUPPLEMENTAL PAYMENT AMOUNT
The calculation agent will calculate the supplemental payment amount on
each note as follows:
- - First, the calculation agent will determine the final averaged equity return
by:
- Calculating the arithmetic average of the closing levels of the S&P
500(R) Index on the of each month, beginning on ,
2004 and up to and including , 2011 for a total of 84
observation dates. The resulting number is the "final average index
value";
- Taking the final average index value and then subtracting the initial
index value (which is , the closing level of the S&P 500(R)
Index on the trade date), and dividing by the initial index value. The
resulting number, expressed as a percentage, is the "final averaged
equity return". The calculation of the final averaged equity return will
be rounded to the nearest one ten-thousandth of a percentage point, with
0.00005% rounded up to 0.0001%. All dollar amounts used in or resulting
from such calculation on the notes will be rounded to the nearest fourth
decimal place, with 0.00005 rounded up to 0.0001.
- - Second, the calculation agent will compare (i) the final averaged equity
return to (ii) the cumulative CPI return, which is the sum of the interest
payments on your note through maturity (expressed as a percentage of the face
amount of the note).
- If the final averaged equity return is (i) equal to or less than zero
(that is, the final average index value is not greater than the initial
index value) or
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(ii) more than zero but less than or equal to the cumulative CPI return,
then no supplemental payment amount will be payable on your note.
- If the final averaged equity return is greater than the cumulative CPI
return, the supplemental payment amount will be: the face amount of your
note multiplied by the result of the final averaged equity return minus
the cumulative CPI return.
Because the final average index value will be based on the average of 84
monthly closing levels (the closing levels on the observation dates), the actual
S&P 500(R) Index level at the stated maturity date or at many other times during
the term of the notes could be significantly higher than the final average index
value. For example, the difference between the final average index level and the
level of the S&P 500(R) Index on the stated maturity date could be particularly
large if there is a significant increase in the value of the S&P 500(R) Index
during the latter portion of the term of the notes. In this situation, the
supplemental payment amount, and then the return on your note, could be
significantly less than the return on the S&P 500(R) Index.
BECAUSE THE FINAL AVERAGED EQUITY RETURN ON THE S&P 500(R) INDEX CAN BE
NEGATIVE OR LESS THAN THE CUMULATIVE CPI RETURN, THERE MAY BE NO SUPPLEMENTAL
PAYMENT AMOUNT PAYABLE AT MATURITY AND, IN THAT CASE, YOU WILL RECEIVE ONLY THE
FACE AMOUNT OF YOUR NOTE AT MATURITY.
The calculation agent will determine the final averaged equity return
based on the closing level of the S&P 500(R) Index on the observation dates 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 S&P 500(R) Index" below.
STATED MATURITY DATE
The stated maturity date will be , 2011 unless that day is not a
business day, in which case the stated maturity date will be the next following
business day. If the fourth 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 fourth business day after
, 2011 or, if , 2011 is not a business day, later than the
fifth business day after , 2011. The calculation agent may postpone
the determination date -- and therefore the stated maturity date -- if a market
disruption event occurs or is continuing on any day that would otherwise be the
determination date. We describe market disruption events under "-- Special
Calculation Provisions" below.
OBSERVATION DATES
The observation dates will be the day of each month, unless the
calculation agent determines that a market disruption event occurs or is
continuing on that fourth 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,
beginning , 2004 up to and including four business days before the
stated maturity date for a total of 84 observation dates
DETERMINATION DATE
The determination date will be the fourth business day before ,
2011 unless the calculation agent determines that a market disruption event
occurs or is continuing on that fourth 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 , 2011 or, if , 2011 is not a business day, later than
the first business day after , 2011. This is also the last observation
date and the last interest calculation date.
S-21
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 an observation date or the determination date,
such observation date or 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 that observation date or
determination date be postponed by more than four business days. If that
observation date or 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 observation date or determination date. If the calculation
agent determines that the S&P 500(R) Index level that must be used to determine
the payment amount is not available on any postponed observation date or the
postponed determination date, either because of a market disruption event or for
any other reason, the calculation agent will nevertheless determine the S&P
500(R) Index closing on that day, based on its assessment, made in its sole
discretion.
DISCONTINUANCE OR MODIFICATION OF THE
S&P 500(R) INDEX
If the S&P 500(R) Index sponsor discontinues publication of the S&P 500(R)
Index and the index sponsor or anyone else publishes a substitute index that the
calculation agent determines is comparable to the S&P 500(R) Index, then the
calculation agent will determine the closing level on each observation date, the
final averaged equity return and the supplemental payment 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 S&P 500(R)
Index is discontinued and there is no successor index, or that the level of the
S&P 500(R) Index is not available on an observation date or the determination
date because of a market disruption event or for any other reason, the
calculation agent will determine the closing level on the applicable observation
date, the final averaged equity return and the supplemental payment amount
payable on the stated maturity date, by a computation methodology that the
calculation agent determines will as closely as reasonably possible replicate
the S&P 500(R) Index.
If the calculation agent determines that the S&P 500(R) Index, the stocks
comprising the S&P 500(R) Index or the method of calculating the S&P 500(R)
Index is changed at any time in any respect -- including any addition, deletion
or substitution and any reweighting or rebalancing of index stocks and whether
the change is made by the S&P 500(R) 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 S&P 500(R) Index
or the method of its calculation as it believes are appropriate to ensure that
the final average index value used to determine the final averaged equity return
and the supplemental amount payable on the stated maturity date, are equitable.
All determinations and adjustments to be made by the calculation agent
with respect to the S&P 500(R) Index may be made by the calculation agent in its
sole discretion. The calculation agent is not obligated to make any such
adjustments.
REVISION, REBASEMENT OR DISCONTINUANCE OF THE CONSUMER PRICE INDEX
There can be no assurance that the Bureau of Labor Statistics will not
change the method by which it calculates the Consumer Price Index. In addition,
changes in the way the Consumer Price Index is calculated could reduce the level
of the Consumer Price Index and lower the interest payment with respect to the
notes. Accordingly, the amount of interest, if any, payable on the notes, and
therefore the value of the notes, may be significantly reduced. If the Consumer
Price Index is substantially altered, a substitute index may be employed to
calculate the
S-22
interest payable on the notes, as described below, and that substitution may
adversely affect the value of the notes.
In determining the final CPI reference value used to determine the
interest rate on each applicable interest calculation date, the calculation
agent will use the most recently available value of the Consumer Price Index for
the relevant month, even if such value has been adjusted from a prior reported
value for that month. In contrast, the initial CPI reference value for each
interest calculation date (except for the first interest calculation date) will
always be the final CPI reference value for the preceding interest calculation
date, even if such value has been adjusted since that preceding interest
calculation date. For the first interest calculation date, the initial CPI
reference value will be , the CPI level for 2004. If the CPI
level for 2004 is adjusted after the date of this pricing supplement,
the interest rate determined on the first interest calculation date will not be
revised, and in the case of a subsequent downward adjustment in the Consumer
Price Index value for 2004, you will not receive any additional
interest on the first interest payment date or any other interest payment date.
The Bureau of Labor Statistics occasionally rebases the Consumer Price
Index. The Consumer Price Index was last rebased in January 1988. The current
standard reference base period is 1982-1984 = 100. Prior to the release of the
Consumer Price Index for January 1988, the standard reference base was
1967 = 100. If the Bureau of Labor Statistics rebases the Consumer Price Index
during the time the notes are outstanding, the calculation agent will continue
to calculate increases in the Consumer Price Index using the existing base year
in effect for the Consumer Price Index at the time of issuance of the notes as
long as the old Consumer Price Index is still published. The conversion to a new
reference base does not affect the measurement of the percentage changes in a
given index series from one time period to another, except for rounding
differences. Thus, rebasing might affect the published "headline" number often
quoted in the financial press; however, the inflation calculation for the notes
should not be adversely affected by any such rebasing because changes in the
old-based Consumer Price Index can be calculated by using the percentage changes
of the new rebased Consumer Price Index. If the old-based Consumer Price Index
is not published, the calculation agent will calculate inflation using the new
Consumer Price Index. However, as stated above, the conversion to a new
reference base does not affect the measurement of the percentage changes in a
given index series from one time period to another, except for rounding
differences.
If, while the notes are outstanding, the Consumer Price Index is
discontinued or, if in the opinion of the Bureau of Labor Statistics, as
evidenced by a public release, the Consumer Price Index is substantially
altered, the calculation agent will determine the interest rate on the notes by
reference to an applicable substitute index. The calculation agent will
determine the substitute index, in its sole discretion, by a computation
methodology that the calculation agent determines will as closely as reasonably
possible replicate the Consumer Price Index or is in accordance with general
market practice at the time. In doing this, the calculation agent may (but is
not required to) determine the substitute index by selecting any substitute
index that is chosen by the Secretary of the Treasury for the Department of The
Treasury's Inflation-Linked Treasuries, as described at 62 Federal Register
846-874 (January 6, 1997).
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
S-23
outstanding principal amount of that note. Although the terms of the offered
notes differ from those of the other Series B medium-term notes, holders of
specified percentages in principal amount of all Series B medium-term notes,
together in some cases with other series of our debt securities, will be able to
take action affecting all the Series B medium-term notes, including the offered
notes. This action may involve changing some of the terms that apply to the
Series B medium-term notes, accelerating the maturity of the Series B
medium-term notes after a default or waiving some of our obligations under the
indenture. We discuss these matters in the accompanying prospectus under
"Description of Debt Securities We May Offer -- Default, Remedies and Waiver of
Default" and "-- Modification of the Debt Indentures and Waiver of Covenants".
MANNER OF PAYMENT
Any payment on your note at maturity will be made to an account designated
by the holder of your note and approved by us, or at the office of the trustee
in New York City, but only when your note is surrendered to the trustee at that
office. We also may make any payment in accordance with the applicable
procedures of the depositary.
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 indices, the interest rate payable on any interest payment date,
market disruption events, business days, the cumulative CPI return, the final
average index value, the final averaged equity return, the default amount, the
supplemental payment amount and the cash to be paid on your note 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 closing level of the S&P 500(R) Index is calculated and published by
the S&P 500(R) 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
S-24
documentation necessary for this assumption or undertaking.
During the default quotation period for your note, which we describe
below, the holder and/or we may request a qualified financial institution to
provide a quotation of the amount it would charge to effect this assumption or
undertaking. If either party obtains a quotation, it must notify the other party
in writing of the quotation. The amount referred to in the first bullet point
above will equal the lowest -- or, if there is only one, the only -- quotation
obtained, and as to which notice is so given, during the default quotation
period. With respect to any quotation, however, the party not obtaining the
quotation may object, on reasonable and significant grounds, to the assumption
or undertaking by the qualified financial institution providing the quotation
and notify the other party in writing of those grounds within two business days
after the last day of the default quotation period, in which case that quotation
will be disregarded in determining the default amount.
DEFAULT QUOTATION PERIOD. The default quotation period is the period beginning
on the day the default amount first becomes due and ending on the third business
day after that day, unless:
- - no quotation of the kind referred to above is obtained, or
- - every quotation of that kind obtained is objected to within four 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 RELATED TO THE S&P 500(R) INDEX
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 S&P 500(R) 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 S&P 500(R) 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 S&P 500(R) Index, or
option or futures contracts relating to the S&P 500(R) Index or to index
stocks constituting 20% or more, by weight, of the S&P 500(R) Index, if
available, are not trading on what were
S-25
the respective primary markets for those index stocks or contracts, as
determined by the calculation agent in its sole discretion,
and, in the case of any of these events, the calculation agent determines in its
sole discretion that the event could materially interfere with the ability of
The Goldman Sachs Group, Inc. or any of its affiliates or a similarly situated
party to unwind all or a material portion of a hedge that could be effected with
respect to the offered notes. For more information about hedging by The Goldman
Sachs Group, Inc. and/or any of its affiliates, see "Use of Proceeds and
Hedging" below.
The following events will not be market disruption events:
- - 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 S&P 500(R) 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
S&P 500(R) 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 S&P 500(R) 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
S&P 500(R) Index in this description of market disruption events includes the
S&P 500(R) Index and any successor index as it may be modified, replaced or
adjusted from time to time.
S-26
HYPOTHETICAL PAYMENTS ON YOUR NOTE
The table below shows the hypothetical payment amount that we would
deliver on the stated maturity date (expressed as a percentage of the face
amount of your note), if the final averaged equity return were any of the
hypothetical levels shown in the first column, and the cumulative CPI return
were any of the hypothetical levels shown in the table.
The percentages in the first column of the table represent hypothetical
final averaged equity returns. The second and third columns present hypothetical
payment amounts at maturity assuming a cumulative CPI return of 0%. The second
column is the payment amount at maturity as a percentage of the face amount of
your note. As discussed, the payment amount at maturity is equal to 100% of the
face amount on your note plus the supplemental payment amount, if any. As shown
in the table, the payment amount at maturity will never be less than 100 of the
face amount of your note. The third column shows the result of the payment
amount plus the cumulative CPI return, expressed as a percentage of the face
amount. The fourth and fifth columns repeat the hypothetical analysis but with
an assumed cumulative CPI return of 15%. The last two columns show the
hypothetical results assuming a cumulative CPI return of 30%. For example, if
the final averaged equity return were 50% and the cumulative CPI return were
15%, we would pay you at maturity 135% (that is, 100% + (50% -- 15%)) of the
face amount.
The information in the table reflects hypothetical payments 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 some of these factors, see "Additional
Risk Factors Specific to Your Note" on page S-12. We have also assumed no market
disruption event occurs.
The examples below are based on a range of S&P 500(R) Index levels and a
range of cumulative CPI returns based on the Consumer Price Index that are
entirely hypothetical; no one can predict what the S&P 500(R) Index level and
the Consumer Price Index level will be.
Moreover, we have not yet set the initial index value, which will serve as
the baseline for determining the final averaged equity return and the amount we
will pay you on your note at maturity. We will not do so until the trade date.
As a result, the initial index value may differ substantially from current S&P
500(R) Index levels and may also differ substantially from the S&P 500(R) Index
level at the time you purchase your note. Before investing in the offered notes,
you should consult publicly available news sources to determine the S&P 500(R)
Index level between the dates of this prospectus supplement and your purchase of
the offered notes.
For these reasons, the actual performance of the S&P 500(R) Index over the
life of the offered notes, as well as the
S-27
amount payable at maturity, may bear little relation to the hypothetical
examples shown below and cannot be predicted.
HYPOTHETICAL CUMULATIVE CPI RETURN
<Table>
<Caption>
0% 15% 30%
---------------------------- ---------------------------- ----------------------------
PAYMENT PAYMENT PAYMENT
AMOUNT AT AMOUNT AT AMOUNT AT
HYPOTHETICAL PAYMENT MATURITY, AS PAYMENT MATURITY, AS PAYMENT MATURITY, AS
FINAL AMOUNT AT A % OF FACE AMOUNT AT A % OF FACE AMOUNT AT A % OF FACE
AVERAGED MATURITY AS A AMOUNT, PLUS MATURITY AS A AMOUNT, PLUS MATURITY AS A AMOUNT, PLUS
EQUITY % OF FACE CUMULATIVE % OF FACE CUMULATIVE % OF FACE CUMULATIVE
RETURN AMOUNT CPI RETURN AMOUNT CPI RETURN AMOUNT CPI RETURN
- ------------ ------------- ------------ ------------- ------------ ------------- ------------
150% 250% 250% 235% 250% 220% 250%
100% 200% 200% 185% 200% 170% 200%
50% 150% 150% 135% 150% 120% 150%
25% 125% 125% 110% 125% 100% 130%
20% 120% 120% 105% 120% 100% 130%
0% 100% 100% 100% 115% 100% 130%
-10% 100% 100% 100% 115% 100% 130%
-20% 100% 100% 100% 115% 100% 130%
-25% 100% 100% 100% 115% 100% 130%
-50% 100% 100% 100% 115% 100% 130%
-80% 100% 100% 100% 115% 100% 130%
</Table>
---------------------
Provided below are the hypothetical interest rates for the period from
April 1999 to June 2004 that would have resulted from the historical levels of
the Consumer Price Index levels. These are intended to illustrate the effect of
general trends in the Consumer Price Index on the amount of interest payable to
you on the notes. However, the Consumer Price Index may not increase or decrease
over the term of the notes in accordance with any of the trends depicted by the
historical information in the table below, and the size and frequency of any
fluctuations in the Consumer Price Index level over the term of the notes may be
significantly different than those shown in the table. As a result, the
hypothetical interest rates depicted in the table below should not be taken as
an indication of the actual interest rates that will be paid on the interest
payment dates over the term of the notes.
<Table>
<Caption>
1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ----
January..................... 2.5610% 3.4483% 2.1264% 2.0259% 2.0408%
February.................... 2.6220% 3.4462% 1.8955% 2.1984% 1.7650%
March....................... 2.6846% 3.3868% 1.5517% 2.3769% 1.8795%
April....................... 1.6708% 2.7389% 3.7322% 1.1422% 2.5974% 1.9263%
May......................... 1.6059% 3.2219% 3.5336% 1.1377% 2.9809% 1.6931%
June........................ 1.7263% 3.7576% 2.9206% 1.4756% 3.0201% 1.7372%
July........................ 2.2769% 3.0686% 3.2691% 1.6393% 2.2247%
August...................... 2.0885% 3.1889% 3.6152% 1.1818% 2.0578%
September................... 1.9632% 3.7304% 3.2483% 1.0674% 2.1123%
October..................... 2.1446% 3.6593% 2.7199% 1.4648% 2.1099%
November.................... 2.2644% 3.4111% 2.7199% 1.8028% 2.1583%
December.................... 2.6284% 3.4544% 2.6482% 1.5143% 2.3204%
</Table>
---------------------
S-28
To illustrate the interest rate basis applicable the note, assuming September 3,
2002 were an interest calculation date, based on the historical information on
the Consumer Price Index presented above, the interest rate applicable to the
note until the next interest calculation date would have been 1.0674%,
calculated as follows:
(CPI Level for June 2002 -- CPI Level for June 2001)/CPI Level for June 2001 =
(179.9 -- 178.0)/178.0 = 1.0674%. Accordingly, for a hypothetical investment of
$100,000, the applicable interest payment amount for September 2002 would have
been $1,067.40.
---------------------
We cannot predict the interest rates and the final averaged equity return on
the determination date or the market value of your note, nor can we predict
the relationship between the CPI and S&P 500(R) 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 S&P 500(R)
Index level, the interest rates, and the final averaged equity return
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 above.
S-29
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
expect to enter into hedging transactions involving purchases of futures and
other instruments linked to the indices on the trade date. In addition, from
time to time after we issue the offered notes, we and/or our affiliates expect
to enter into additional hedging transactions and to unwind those we have
entered into, in connection with the offered notes and perhaps in connection
with other index-linked notes we issue, some of which may have returns linked to
the indices 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 indices 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 indices or the index stocks. We expect these steps to
involve sales of instruments linked to the indices on or shortly before the
determination date. These steps also may involve sales and/or purchases of some
or all of the index stocks or listed or over-the-counter options, futures or
other instruments linked to the indices, 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 and fixed income 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-30
THE INDICES
We have derived all information regarding each of the two indices
contained in this prospectus supplement, including their make-up, method of
calculation and changes in its components, from publicly available information
without independent verification. The index sponsor for the S&P 500(R) index
owns the copyright and all rights to its applicable index. The S&P 500(R) index
sponsor has no obligation to continue to publish, and may discontinue
publication of, its applicable index. The consequences of either of the index
sponsors discontinuing or modifying its applicable index are described in the
section entitled "Specific Terms of Your Note -- Discontinuance or Modification
of the S&P 500(R) Index" above. Current information regarding the market value
of the indices is available from index sponsors and from numerous public
information sources. We do not make any representation that the publicly
available information about the indices is accurate or complete. The indices are
determined, comprised and calculated by the index sponsors 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 any of the indices.
THE S&P 500(R) 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 index traded on the New York Stock Exchange, 75 companies or 15.4%
of the index traded on The Nasdaq Stock Market and two companies or 0.2% of the
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-31
COMPUTATION OF THE S&P 500(R) 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
S&P 500(R) 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 17, 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
S-32
note. You should not take the historical levels of the index as an indication of
future performance. We cannot give you any assurance that the future performance
of the index or the index stocks will result in you receiving an amount greater
than the outstanding face amount of your note on the stated maturity date.
Neither we nor any of our affiliates make any representation to you as to the
performance of the index.
The 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 S&P 500(R) INDEX
<Table>
<Caption>
HIGH LOW CLOSE
---- --- -----
2002
Quarter ended March 31.................................... 1,172.51 1,080.17 1147.39
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................................. 938.87 776.76 879.82
2003
Quarter ended March 31.................................... 931.66 800.73 848.18
Quarter ended June 30..................................... 1,011.66 858.48 974.50
Quarter ended September 30................................ 1,039.58 965.46 995.97
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..................................... 1,150.54 1,132.17 1,139.32
Quarter ending September 30 (through August 17, 2004)..... 1,128.94 1,063.23 1,081.71
Closing price on August 17, 2004............................ 1,081.71
</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 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.
S-33
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 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.
THE CONSUMER PRICE INDEX
The Consumer Price Index, for purposes of the notes, is the non-seasonally
adjusted U.S. City Average All Items Consumer Price Index for All Urban
Consumers published monthly by the Bureau of Labor Statistics of the U.S.
Department of Labor and reported on Bloomberg page CPURNSA or any successor
service or successor page. The Bureau of Labor Statistics makes almost all
Consumer Price Index data publicly available. This material may be accessed
electronically by means of the Bureau of Labor Statistics' home page on the
internet at http://www.bls.gov/cpi/. The Consumer Price Index for a particular
month is published during the following month.
According to the publicly available information provided by the Bureau of
Labor Statistics, the Consumer Price Index is a measure of the average change in
consumer prices over time in a fixed market basket of goods and services,
including food, clothing, shelter, fuels, transportation, drugs and charges for
the services of doctors and dentists. User fees (such as water and sewer
service) and sales and excise taxes paid by the consumer are also included.
Income taxes and investment items such as stocks, bonds and life insurance are
not included. The Consumer Price Index includes expenditures by urban wage
earners and clerical workers, professional, managerial and technical workers,
the self-employed, short-term workers, the unemployed, retirees and others not
in the labor force. In calculating the Consumer Price Index, price changes for
the various items are averaged together with weights that represent their
significance in the spending of urban households in the United States.
The contents of the market basket of goods and services and the weights
assigned to the various items are updated periodically to take into account
changes in consumer expenditure patterns. The Consumer Price Index is expressed
in relative terms based on a reference period for which the level is set at 100
(currently the base reference period used by the Bureau of Labor Statistics is
1982-1984). For example, because the Consumer Price Index for the 1982-1984
reference
S-34
period is 100, an increase of 16.5 percent from that period would be shown as
116.5.
The U.S. Department of Treasury also uses the Consumer Price Index in the
interest calculations of inflation-indexed securities issued by the Department.
The reference Consumer Price Index used by the U.S. Department of Treasury for
the first day of any calendar month is the Consumer Price Index for the third
preceding calendar month. Accordingly, the reference Consumer Price Index for
the first day of September is the Consumer Price Index for June, published by
the Bureau of Labor Statistics in July.
HISTORICAL INFORMATION
Since its inception, the Consumer Price Index has experienced significant
fluctuations and therefore the results shown should not be considered as a
representation of the income, yield or capital gain or loss that may be
generated by the Consumer Price Index in the future. The level of the Consumer
Price Index may decrease so that you will not receive any interest payments on
the note. We cannot give you any assurance that the level of the Consumer Price
Index will increase so that you will receive interest payments on the notes.
The following table sets forth the levels of the Consumer Price Index from
January 1998 to June 2004, as reported by the Bureau of Labor Statistics and
reported on Bloomberg page CPURNSA. This historical data is presented for
informational purposes only. Past movements of the Consumer Price Index are not
necessarily indicative of future values.
<Table>
<Caption>
1998 1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ---- ----
January....................... 161.6 164.3 168.8 175.1 177.1 181.7 185.2
February...................... 161.9 164.5 169.8 175.8 177.8 183.1 186.2
March......................... 162.2 165.0 171.2 176.2 178.8 184.2 187.4
April......................... 162.5 166.2 171.3 176.9 179.8 183.8 188.0
May........................... 162.8 166.2 171.5 177.7 179.8 183.5 189.1
June.......................... 163.0 166.2 172.4 178.0 179.9 183.7 189.7
July.......................... 163.2 166.7 172.8 177.5 180.1 183.9
August........................ 163.4 167.1 172.8 177.5 180.7 184.6
September..................... 163.6 167.9 173.7 178.3 181.0 185.2
October....................... 164.0 168.2 174.0 177.7 181.3 185.0
November...................... 164.0 168.3 174.1 177.4 181.3 184.5
December...................... 163.9 168.3 174.0 176.7 180.9 184.3
</Table>
---------------------
S-35
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.
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.
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. 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.
- --------------------------------------------------------------------------------
Your note will be treated as a single debt instrument subject to special
rules governing contingent payment obligations for United States federal income
tax purposes. Under those rules, the amount of interest you are required to take
into account for each accrual period will be determined by constructing a
projected payment schedule for your note and applying rules similar to those for
accruing original issue discount on a hypothetical noncontingent debt instrument
with that projected payment schedule. This method is applied by first
determining the yield at which we would issue a noncontingent fixed rate debt
instrument with terms and conditions similar to your note (the "comparable
yield") and then determining a payment schedule as of the issue date that would
produce the comparable yield. These rules will generally have the effect of
requiring you to include amounts in respect of your note prior to your receipt
of cash attributable to such income.
In general, if the amount of contingent interest you receive on any
payment date is greater than the projected amount of the contingent interest for
that date, you must make a positive adjustment, generally increasing the amount
of interest income on your note. If the amount of contingent interest you
receive on any payment date is less than the projected amount of the contingent
interest for that date, you must make a negative adjustment, generally
decreasing the amount of interest income on that note for that year, or allowing
you to recognize ordinary loss to the extent of your total interest inclusions
on your note. Any negative adjustment that cannot be offset against current or
prior year income may be carried forward to the next year.
You may obtain the comparable yield and projected payment schedule from us
by contacting the Goldman Sachs Corporate
S-36
Treasury Department, Debt Administration Group, at 212-902-1000. You are
required to use the comparable yield and projected payment schedule that we
compute in determining your interest accruals in respect of your note, unless
you timely disclose and justify on your federal income tax return the use of a
different comparable yield and projected payment schedule.
- --------------------------------------------------------------------------------
The comparable yield and projected payment schedule are not provided
to you for any purpose other than the determination of your interest
accruals in respect of your note, and we make no representation regarding
the amount of contingent payments with respect to your note.
- --------------------------------------------------------------------------------
If you purchase your note for an amount that differs from the note's
adjusted issue price at the time of the purchase, you must determine the extent
to which the difference between the price you paid for your note and its
adjusted issue price is attributable to a change in expectations as to the
projected payment schedule, a change in interest rates, or both, and allocate
the difference accordingly. The adjusted issue price of your note will equal
your note's original issue price plus any interest deemed to be accrued on your
note (under the rules governing contingent payment obligations) as of the time
you purchase your note.
If the adjusted issue price of your note is greater than the price you
paid for your note, you must make positive adjustments increasing the amount of
interest that you would otherwise accrue and include in income each year, and
the amount of ordinary income (or decreasing the amount of ordinary loss)
recognized upon maturity by the amounts allocated to each of interest and
projected payment schedule; if the adjusted issue price of your note is less
than the price you paid for your note, you must make negative adjustments,
decreasing the amount of interest that you must include in income each year, and
the amount of ordinary income (or increasing the amount of ordinary loss)
recognized upon maturity by the amounts allocated to each of interest and
projected payment schedule. Adjustments allocated to the interest amount are not
made until the date the daily portion of interest accrues.
Because any Form 1099-OID that you receive will not reflect the effects of
positive or negative adjustments resulting from your purchase of a note at a
price other than the adjusted issue price determined for tax purposes, you are
urged to consult with your tax advisor as to whether and how adjustments should
be made to the amounts reported on any Form 1099-OID.
You will recognize gain or loss upon the sale or maturity of your note in
an amount equal to the difference, if any, between the amount of cash you
receive at such time, less any negative adjustment carry forward determined in
the taxable year of the sale or maturity, and your adjusted basis in your note.
In general, 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), decreased for any projected payments on your
note and increased or decreased by the amount of any positive or negative
adjustment, respectively, that you are required to make if you purchase your
note at a price other than the adjusted issue price determined for tax purposes.
Any gain you recognize upon the sale or maturity of your note will be
ordinary interest income. Any loss you recognize at such time will be ordinary
loss to the extent of interest you included as income in the current or previous
taxable years in respect of your note, and thereafter, capital loss.
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-37
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.
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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.
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S-38
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 $ . For more information about the plan of
distribution and possible market-making activities, see "Plan of Distribution"
in the accompanying prospectus.
S-39
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No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell 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.
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TABLE OF CONTENTS
Prospectus Supplement
<Table>
<Caption>
Page
----
Summary Information........................ S-2
Additional Risk Factors Specific to Your
Note..................................... S-12
Specific Terms of Your Note................ S-19
Hypothetical Payments on Your Note......... S-27
Use of Proceeds and Hedging................ S-30
The Indices................................ S-31
Supplemental Discussion of Federal Income
Tax Consequences......................... S-36
Employee Retirement Income Security Act.... S-38
Supplemental Plan of Distribution.......... S-39
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 Issued Trusts.......................... 66
Description of Capital Securities and
Related Investments...................... 69
Description of Capital Stock of The Goldman
Sachs Group, Inc. ....................... 93
Legal Ownership and Book-Entry Issuance.... 98
Considerations Relating to Securities
Issued in Bearer Form.................... 104
Considerations Relating to Indexed
Securities............................... 109
Considerations Relating to Securities
Denominated or Payable in or Linked to a
Non-U.S. Dollar Currency................. 112
Considerations Relating to Capital
Securities............................... 115
United States Taxation..................... 118
Plan of Distribution....................... 141
Employee Retirement Income Security Act.... 144
Validity of the Securities................. 144
Experts.................................... 144
Cautionary Statement Pursuant to the
Private Securities Litigation Reform Act
of 1995.................................. 145
</Table>
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$
THE GOLDMAN SACHS
GROUP, INC.
Inflation and Equity Linked Notes due 2011
(Linked to the Consumer Price Index and the S&P 500(R) Index)
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(GOLDMAN SACHS LOGO)
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GOLDMAN, SACHS & CO.
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