0000950123-01-506859.txt : 20011009
0000950123-01-506859.hdr.sgml : 20011009
ACCESSION NUMBER: 0000950123-01-506859
CONFORMED SUBMISSION TYPE: 424B3
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20011001
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: GOLDMAN SACHS GROUP INC/
CENTRAL INDEX KEY: 0000886982
STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211]
IRS NUMBER: 133501777
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1126
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-63082
FILM NUMBER: 1749808
BUSINESS ADDRESS:
STREET 1: 85 BROAD ST
CITY: NEW YORK
STATE: NY
ZIP: 10004
BUSINESS PHONE: 2129021000
MAIL ADDRESS:
STREET 1: 85 BROAD ST
CITY: NEW YORK
STATE: NY
ZIP: 10004
424B3
1
y53575e424b3.txt
PRELIMINARY PROSPECTUS
1
Filed pursuant to Rule 424(b)(3)
Registration No. 333-63082
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS
SUPPLEMENT IS NOT COMPLETE AND MAY BE CHANGED.
SUBJECT TO COMPLETION. DATED SEPTEMBER 28, 2001.
PROSPECTUS SUPPLEMENT NO.
TO THE PROSPECTUS DATED JUNE 25, 2001
AND THE PROSPECTUS SUPPLEMENT DATED JUNE 25, 2001
[GOLDMAN SACHS LOGO]
THE GOLDMAN SACHS GROUP, INC.
Medium-Term Notes, Series B
-------------------------
$
CAPERS (Capped Periodic Return Securities) due 2004
(Linked to the S&P 500(TM) Index)
-------------------------
The CAPERS are notes whose return is linked to the performance of the S&P
500(TM)Index, subject to a semi-annual appreciation cap of %. The CAPERS
offer 100% principal protection of your investment in the event the S&P 500(TM)
Index declines. Each note will mature on , 2004. The notes do not
bear interest and no payments will be made on the notes prior to the stated
maturity date.
On the stated maturity date, we will pay a cash amount on each note, equal to
the greater of (i) the face amount of the note or (ii) the face amount of the
note times the product of the index performance for each semi-annual period
(subject to the semi-annual cap). The semi-annual periods will begin on and
of each year, beginning on , 2001, subject to
adjustments for market disruption and non-business days.
The maximum amount that we will pay on the stated maturity date is % of the
face amount of each note, which we will pay if the index level increases by
% or more during each of the six semi-annual periods. However, if the index
level increases by less than % or decreases during any or all of the
semi-annual periods, the amount we will pay on the stated maturity date could be
substantially less, though not less than 100% of the face amount of each note.
Even if the final index level is higher than the initial index level, it is
possible that we will pay only the face amount on the stated maturity date.
For additional details, please refer to "Summary Information -- Key Terms" on
page S-2, "Summary Information -- Q&A" on page S-3 and "Specific Terms of Your
Note" on page S-12.
Investing in the notes involves risks. See "Additional Risk Factors Specific to
Your Note" on page S-7 to read about investment risks relating to the notes.
ORIGINAL ISSUE DATE: , 2001
ORIGINAL ISSUE PRICE: 100% 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.
S&P, Standard & Poor's and the S&P 500(TM) Index are trade marks of
Standard & Poor's Ratings Group and are licensed for use by Goldman, Sachs & Co
and its affiliates. The notes have not been passed on by Standard & Poor's as to
their legality or suitability. The notes are not issued, endorsed, sold or
promoted by Standard & Poor's. STANDARD & POOR'S MAKES NO WARRANTIES AND BEARS
NO LIABILITY WITH RESPECT TO THE NOTES.
GOLDMAN, SACHS & CO.
-------------------------
Prospectus Supplement dated , 2001.
2
SUMMARY INFORMATION
We refer to the CAPERS we are offering by this prospectus supplement as the
"offered notes", the "CAPERS" or the "notes". Each of the offered notes,
including your note, has the terms described below and under "Specific Terms of
Your Note" on page S-12. Please note that in this prospectus supplement,
references to "The Goldman Sachs Group, Inc.", "we", "our" and "us" mean only
The Goldman Sachs Group, Inc. and do not include its consolidated subsidiaries.
Also, references to the "accompanying prospectus" mean the accompanying
Prospectus, dated June 25, 2001, as supplemented by the accompanying Prospectus
Supplement, dated June 25, 2001, of The Goldman Sachs Group, Inc.
KEY TERMS
ISSUER: The Goldman Sachs Group, Inc.
INDEX: S&P 500(TM) Index
FACE AMOUNT: as specified in the note; $ in the aggregate for all the
offered notes
PAYMENT AMOUNT: on the stated maturity date, we will pay the holder of the note
cash equal to the greater of (i) the outstanding face amount of the note or (ii)
the product of the outstanding face amount of the note times the capped index
performance
RESET DATES: each and , beginning on
, 2002, except that each reset date may be extended for up to six
business days; the final reset date will be the determination date
ENDING VALUE: for each reset date, the closing index level of the S&P 500(TM)
Index on the reset date, subject to adjustment as provided below under "Specific
Terms of Your Note -- Discontinuance or Modification of the Index" on page S-14
STARTING VALUE: for each reset date, the closing index level on the preceding
reset date, subject to adjustment as provided in this prospectus supplement; the
starting value for the first reset date is the initial index level
SEMI-ANNUAL RETURN: for each reset date, the result of the ending value divided
by the starting value minus one, expressed as a decimal; the semi-annual return
may be positive or negative
CAPPED SEMI-ANNUAL RETURN: for each reset date, the lesser of (i) the
semi-annual return or (ii) the cap rate
PERIODIC CAPPED PERFORMANCE: for each reset date, one plus the capped
semi-annual return, expressed as a decimal
CAP RATE:
CAPPED INDEX PERFORMANCE: the product of the periodic capped performance for
each reset date
INITIAL INDEX LEVEL:
STATED MATURITY DATE: , 2004 unless extended for up to six business
days
DETERMINATION DATE: the fifth business day prior to , unless
extended for up to five business days
NO INTEREST: the offered notes will not bear interest prior to the stated
maturity date
LISTING: we will apply for listing of the offered notes on the American Stock
Exchange on the original issue date
CALCULATION AGENT: Goldman, Sachs & Co.
BUSINESS DAY: as described on page S-15
S-2
3
Q&A
HOW DO THE NOTES WORK?
The CAPERS offered by this prospectus supplement will have a stated
maturity date 3 years after the original issue date. The return on the notes
will be linked to the performance of the S&P 500(TM) Index, subject to a
semi-annual appreciation cap of %. The notes will offer 100% principal
protection. The notes will bear no interest and no other payments will be made
until maturity.
Any equity upside will be based on the product of six semi-annual returns,
each of which is subject to a semi-annual cap of %.
As discussed in the accompanying prospectus, the notes are indexed debt
securities and are part of a series of debt securities entitled "Medium-Term
Notes, Series B" issued by The Goldman Sachs Group, Inc. The notes will rank
equally with all other unsecured and unsubordinated debt of The Goldman Sachs
Group, Inc. For more details, see "Specific Terms of Your Note" on page S-12.
WHAT WILL I RECEIVE AT THE STATED MATURITY OF THE NOTES?
We have designed the notes for investors who want to protect their entire
investment by receiving at the stated maturity at least 100% of the face amount
of their note, while also having an opportunity to participate in the potential
appreciation of the S&P 500(TM) Index above the initial index level during the
term of the notes, subject to a semi-annual appreciation cap of %.
The payoff on the offered notes is computed by first determining the six
semi-annual returns of the index. Each semi-annual period is bounded by the
corresponding reset dates as shown below.
PERIOD 1 PERIOD 2 PERIOD 3 PERIOD 4 PERIOD 5 PERIOD 6
| | | | | | |
------------------------------------------------------------------------
| | | | | | |
TRADE DATE FIRST SECOND THIRD FOURTH FIFTH LAST RESET
RESET RESET RESET RESET RESET DATE. THIS
DATE DATE DATE DATE DATE IS ALSO THE
DETERMINATION
DATE.
The semi-annual return is calculated by dividing the index level at the
end of the period by the index level at the beginning of that period, then
subtracting one. (The semi-annual return for any period may be negative if the
ending value is lower than the starting value for the period.) If a semi-annual
return (expressed as a percentage) is less than or equal to %, then that
semi-annual return is used for that period. Otherwise, the semi-annual return is
capped at %. Thus, % is used instead of the actual return for any
period during which the semi-annual return exceeds %. We then compute the
product of the six capped semi-annual returns as follows:
capped index performance =
(1+ first capped semi-annual return) X
(1+ second capped semi-annual return) X
(1+ third capped semi-annual return) X
(1+ fourth capped semi-annual return) X
(1+ fifth capped semi-annual return) X
(1+ sixth capped semi-annual return).
We call this computed value the capped index performance. Finally, the
value of the capped index performance (expressed as a percentage) is compared
against 100%. Each offered note pays at maturity the outstanding face amount
times the greater of the value of the capped index performance or 100%. Note
that the capped index performance may be less than 100% if some of the
semi-annual returns are negative.
HYPOTHETICAL EXAMPLES
The maximum possible payoff on each offered note at the stated maturity is
% times the outstanding face amount, which would occur if the cap rate is
% and each semi-annual period has an index return in excess of or equal to
%. It is possible for a note to return only the face amount even if the
final index level is higher than the initial index level. It is also possible
for the capped index performance to be significantly negatively impacted by one
poor performing period. However, in no event will you lose any
S-3
4
part of your initial investment in a note if you buy the note upon issuance and
hold it until the stated maturity date. For more detail about hypothetical rates
of return on your note, please see the following examples and "Hypothetical
Returns on Your Note" on page S-18.
All of the following hypothetical examples are based on a note having a
face amount and an initial public offering price of $1,000, a hypothetical
semi-annual cap of 6% and reset dates of and in
each year, commencing , 2002 and ending on , 2004,
the determination date. The actual cap rate may be higher or lower than the
assumed cap rate. The following examples also assume that the note is purchased
on the original issue date and held until the stated maturity date.
The examples are based on a range of index levels as of each reset date
that are entirely hypothetical; no one can predict what the value of the index
will be on any reset date. In light of the events of September 11, 2001, the
index level may exhibit much greater price volatility than in recent periods.
Consequently, the actual index level, which will serve as the baseline for
determining the index performance during the first semi-annual period, may
differ substantially from the index level on the date of this prospectus
supplement (and may also differ from the level on the day you purchase any
offered notes). Moreover, the actual performance of the index over the life of
the offered notes, as well as the amount payable at maturity, may bear little
relation to the hypothetical examples set forth below.
EXAMPLE I: SEMI-ANNUAL RETURNS EXCEED THE CAP RATE DURING EACH PERIOD (MAXIMUM
POSSIBLE RETURN ON NOTE)
SEMI-ANNUAL
INDEX VALUE RETURN
AT BEGINNING INDEX VALUE AT ((INDEX VALUE
OF PERIOD END OF PERIOD AT END/INDEX
(AS % OF INITIAL (AS % OF INITIAL VALUE AT SEMI-ANNUAL
PERIOD INDEX VALUE) INDEX VALUE) BEGINNING)-1)) RETURN CAPPED?
------ ---------------- ---------------- -------------- --------------
Period 1 100.0% 108.0% 8.0% Yes at 6.0%
Period 2 108.0% 116.0% 7.4% Yes at 6.0%
Period 3 116.0% 125.0% 7.8% Yes at 6.0%
Period 4 125.0% 135.0% 8.0% Yes at 6.0%
Period 5 135.0% 145.0% 7.4% Yes at 6.0%
Period 6 145.0% 155.0% 6.9% Yes at 6.0%
CAPPED INDEX PERFORMANCE 141.85%
PAYMENT AMOUNT AT MATURITY (ON $1,000) $1,418.52
Capped Index Performance = (1 + 0.060) X (1 + 0.060) X (1 + 0.060) X (1 +0.060)
X (1 + 0.060) X (1 + 0.060) = 1.41852 or 141.852%.
Face Amount X Capped Index Performance = $1,000 X 1.41852 = $1,418.52
Payment on the maturity date = $1,418.52, since $1,418.52 is greater than
$1,000.
S-4
5
EXAMPLE II: SEMI-ANNUAL RETURNS ARE MIXED BUT NOTE RETURN IS LESS THAN THE INDEX
RETURN
SEMI-ANNUAL
INDEX VALUE RETURN
AT BEGINNING INDEX VALUE AT ((INDEX VALUE
OF PERIOD END OF PERIOD AT END/INDEX
(AS % OF INITIAL (AS % OF INITIAL VALUE AT SEMI-ANNUAL
PERIOD INDEX VALUE) INDEX VALUE) BEGINNING)-1)) RETURN CAPPED?
------ ---------------- ---------------- -------------- --------------
Period
1..... 100.0% 102.0% 2.0% No, use 2.0%
Period
2..... 102.0% 95.0% -6.9% No, use -6.9%
Period
3..... 95.0% 107.0% 12.6% Yes, at 6.0%
Period
4..... 107.0% 125.0% 16.8% Yes, at 6.0%
Period
5..... 125.0% 135.0% 8.0% Yes, at 6.0%
Period
6..... 135.0% 155.0% 14.8% Yes, at 6.0%
CAPPED INDEX PERFORMANCE 119.94%
PAYMENT AMOUNT AT MATURITY (ON $1,000) $1,199.35
Capped index performance = (1 + 0.020) X (1 - 0.069) X (1 + 0.060) X (1 + 0.060)
X (1 + 0.060) X (1 + 0.060) = 1.19935 or 119.935%.
Face amount X capped index performance = $1,000 X 1.19935 = $1,199.35
Payment on the maturity date = $1,199.35, since $1,199.35 is greater than
$1,000.00.
EXAMPLE III: FINAL INDEX VALUE IS GREATER THAN INITIAL INDEX VALUE YET NOTE ONLY
RETURNS INITIAL PRINCIPAL AT MATURITY
SEMI-ANNUAL
INDEX VALUE RETURN
AT BEGINNING INDEX VALUE AT ((INDEX VALUE
OF PERIOD END OF PERIOD AT END/INDEX
(AS % OF INITIAL (AS % OF INITIAL VALUE AT SEMI-ANNUAL
PERIOD INDEX VALUE) INDEX VALUE) BEGINNING)-1)) RETURN CAPPED?
------ ---------------- ---------------- -------------- --------------
Period 1 100.0% 112.0% 12.0% Yes, at 6.0%
Period 2 112.0% 70.0% -37.5% No, use -37.5%
Period 3 70.0% 100.0% 42.9% Yes, at 6.0%
Period 4 100.0% 105.0% 5.0% No, use 5.0%
Period 5 105.0% 112.0% 6.7% Yes, at 6.0%
Period 6 112.0% 125.0% 11.6% Yes, at 6.0%
CAPPED INDEX PERFORMANCE 82.85%
PAYMENT AMOUNT AT MATURITY (ON $1,000) $1,000.00
Capped index performance = (1 + 0.060) X (1 - 0.375) X (1 + 0.060) X (1 + 0.050)
X (1 + 0.060) X (1 + 0.060) = 0.8285 or 82.85%.
Face amount X capped index performance = $1,000 X 0.8285 = $828.50
Payment on the maturity date = $1,000.00, since $1,000.00 is greater than
$828.50.
-------------------------
S-5
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WHO PUBLISHES THE INDEX AND WHAT DOES IT MEASURE?
The S&P 500(TM) Index is intended to provide an indication of the pattern
of common stock price movement. The calculation of the value of the index is
based on the relative value of the aggregate market value of the common stocks
of 500 companies as of a particular time compared to the aggregate average
market value of the common stocks of 500 similar companies during the base
period of the years 1941 through 1943. As of August 31, 2001, 422 companies or
85.8% of the index traded on the New York Stock Exchange, 76 companies or 14.1%
of the index traded on The Nasdaq Stock Market and 2 companies or 0.1% 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 7,000 equities,
which Standard & Poor's uses as an assumed model for the composition of the
total market.
The index is determined, comprised and calculated by Standard & Poor's
without regard to the offered notes.
For further information, please see "The Index" on page S-24.
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, even though you will not receive any
payments from us until maturity. 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
United States Federal Income Tax Consequences" on page S-28.
S-6
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ADDITIONAL RISK FACTORS SPECIFIC TO YOUR NOTE
An investment in your note is subject to the risks described below, as well
as the risks described under "Considerations Relating to Indexed Securities" in
the accompanying prospectus dated June 25, 2001. Your note is a riskier
investment than ordinary debt securities. Also, your note is not equivalent to
investing directly in the index stocks, i.e., the stocks comprising the index to
which your note is linked. You should carefully consider whether the offered
notes are suited to your particular circumstances.
THE POTENTIAL RETURN ON YOUR NOTE IS LIMITED
Your ability to participate in any rise in the level of the index is
limited. Because of the formula that we will use to determine the payment
amount, the amount you receive on the stated maturity date may result in a lower
rate of return on your note than you would have received had you invested in
another security linked to the index or in the index stocks directly. Moreover,
even if the final index level is higher than the initial index level, it is
possible that we will pay only the face amount on the stated maturity date.
In particular, you should note the following about the formula used to
determine the payment amount:
- Your exposure to the depreciation of the index in any semi-annual period is
not limited and any negative semi-annual returns limit the benefit of any past
or future positive semi-annual returns. This is the case because the capped
index performance is calculated by multiplying the index performance for each
semi-annual period, subject to a cap but not a floor. As a result, the
likelihood that the capped index performance will be less than 100% (and thus
on the stated maturity date you will only receive the face amount of the note)
increases as the number and magnitude of negative semi-annual returns
increase. Because your note is principal protected, however, you will not
receive less than the outstanding face amount of your note on the stated
maturity date.
- Your ability to participate in the appreciation of the index during any semi-
annual period is limited. Because of the cap rate, the capped semi-annual
return will never exceed %. This means that, no matter how much the index
may increase from one reset date to the next (or from the initial index level
to the first reset date), the increase for any such period that will be
reflected in calculating the payment amount on your note will never exceed the
cap rate. Consequently, the cap rate will limit the highest return you can
receive on the stated maturity date.
As a result of the cap rate and the formula used to determine the payment
amount, the maximum amount that we will pay on the stated maturity date is
% of the outstanding face amount of each note, which we will pay if the
index level increases by % or more during each of the six semi-annual
periods. However, if the index level increases by less than % or decreases
during any or all of the semi-annual periods, the amount we will pay on the
stated maturity date could be substantially less, though not less than 100% of
the outstanding face amount of each note.
YOUR NOTE DOES NOT BEAR PERIODIC INTEREST
You will not receive any periodic interest payments on your note. Even if
the amount payable on your note on the stated maturity date exceeds the face
amount of your note, the over-all return you earn on your note may be less than
you would have earned by investing in a debt security that bears interest at a
prevailing market rate. Moreover, under applicable United States tax law as
described under "Supplemental Discussion of Federal Income Tax Consequences",
you will have to pay tax on deemed interest amounts even though your note does
not bear periodic interest.
S-7
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THE RETURN ON YOUR NOTE WILL NOT REFLECT ANY DIVIDENDS PAID ON THE INDEX STOCKS
The index sponsor calculates the level of the index by reference to the
prices of the common stocks included in the index, without taking account of the
value of dividends paid on those stocks. As a result, the return on your note
will not reflect the return you would realize if you actually owned the stocks
included in the index and received the dividends paid on those stocks. You will
not receive any dividends that may be paid on any of the index stocks by the
index stock issuers.
THE MARKET PRICE OF YOUR NOTE MAY BE INFLUENCED BY MANY UNPREDICTABLE FACTORS
The following factors, many of which are beyond our control, will
influence the market value of your note:
- the index level;
- the volatility -- i.e., the frequency and magnitude of changes in the level of
the index;
-- As indicated under "The Index -- Historical Closing Levels of the Index",
the level of the index has been highly volatile at times. It is impossible
to predict whether the index level will rise or fall;
- the dividend rate on the index stocks;
- economic, financial, regulatory and political events that affect stock markets
generally and the market segments of which the index stocks are a part, and
which may affect the level of the index;
- interest and yield rates in the market;
- the time remaining until your note matures; and
- our creditworthiness.
These factors will influence the price you will receive if you sell your
note prior to maturity. If you sell your note prior to maturity, you may receive
less than the outstanding face amount of your note. You cannot predict the
future performance of the index based on its historical performance.
Trading in the common stocks that make up the index, along with all other
U.S. equities, was suspended from the morning of September 11, 2001 until the
U.S. equities markets reopened on September 17, 2001. Although trading has now
resumed, the trading suspension, the events underlying it and related
uncertainties may cause the index level to exhibit much greater price volatility
than in earlier periods, both in the near term and over the term of your note.
Before investing in the offered notes, you should consult publicly available
news sources to determine the index level between the date of this preliminary
prospectus supplement and your purchase of the offered notes. The actual index
level, which will serve as the baseline for determining index performance during
the first semi-annual period, may differ substantially from the index level on
the date of this prospectus supplement (and may also differ from the level on
the trade date). Moreover, the actual performance of the index over the life of
the offered notes, as well as the amount payable at maturity, may bear little
relation to the historical levels of the index or to the hypothetical return
examples set forth elsewhere in this prospectus supplement.
IF THE LEVEL OF THE INDEX CHANGES, THE
MARKET VALUE OF YOUR NOTE MAY NOT
CHANGE IN THE SAME MANNER
Your note may trade quite differently from the performance of the index.
Changes in the level of the index may not result in a comparable change in the
market value of your note. In part, this is because each semi-annual return is
limited up to %. Even if the level of the index on any reset date exceeds
the level on the prior reset date by more than %, the market value of your
note likely will be less than it would have been had your note not been subject
to a cap rate.
TRADING AND OTHER TRANSACTIONS BY
GOLDMAN SACHS IN SECURITIES LINKED
TO THE INDEX STOCKS MAY IMPAIR THE
VALUE OF YOUR NOTE
As we describe under "Use of Proceeds and Hedging" below, we, through
Goldman,
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Sachs & Co. or one or more of our other affiliates, expect to hedge our
obligations under the offered notes by purchasing some or all of the index
stocks, options or futures on the index or index stocks or other instruments
linked to the index or index stocks. We also expect to adjust the hedge by,
among other things, purchasing or selling any of the foregoing, at any time and
from time to time, and to unwind our hedge by selling any of the foregoing,
perhaps on or before the determination date. We may also enter into, adjust and
unwind hedging transactions relating to other index-linked notes whose returns
are linked to the same index. Any of these hedging activities may adversely
affect the index level -- directly or indirectly by affecting the price of the
index stocks -- and therefore the market value of your note and the amount we
will pay on your note at maturity. It is possible that we, through our
affiliates, could receive substantial returns with respect to our hedging
activities while the value of your note may decline. See "Use of Proceeds and
Hedging" for a further discussion of securities transactions in which we or one
or more of our affiliates may engage.
Goldman, Sachs & Co. and our other affiliates may also engage in trading
in one or more of the index stocks or instruments whose returns are linked to
the index or index stocks for their proprietary accounts, for other accounts
under their management or to facilitate transactions, including block
transactions, on behalf of customers. Any of these activities of Goldman, Sachs
& Co. or our other affiliates could adversely affect the index level -- directly
or indirectly by affecting the price of the index stocks -- and, therefore, the
market value of your note and the amount we will pay on your note at maturity.
We may also issue, and Goldman, Sachs & Co. and our other affiliates may also
issue or underwrite, other securities or financial or derivative instruments
with returns linked to changes in the level of the index or one or more of the
index stocks. By introducing competing products into the marketplace in this
manner, we or our affiliates could adversely affect the market value of your
note and the amount we will pay on your note at maturity.
YOU HAVE NO SHAREHOLDER RIGHTS OR
RIGHT TO RECEIVE ANY STOCK
Investing in your note will not make you a holder of any of the index
stocks. Neither you nor any other holder or owner of your note will have any
voting rights, any right to receive dividends or other distributions or any
other rights with respect to the index stocks. Your note will be paid in cash,
and you will have no right to receive delivery of any index stocks.
OUR BUSINESS ACTIVITIES MAY CREATE CONFLICTS
OF INTEREST BETWEEN YOU AND US
As we have noted above, Goldman, Sachs & Co. and our other affiliates
expect to engage in trading activities related to the index and the index stocks
that are not for your account or on your behalf. These trading activities may
present a conflict between your interest in your note and the interests Goldman,
Sachs & Co. and our other affiliates will have in their proprietary accounts, in
facilitating transactions, including block trades, for their customers and in
accounts under their management. These trading activities, if they influence the
level of the index, could be adverse to your interests as a beneficial owner of
your note.
Goldman, Sachs & Co. and our other affiliates may, at present or in the
future, engage in business with the issuers of the index stocks, including
making loans to or equity investments in those companies or providing advisory
services to those companies. These services could include merger and acquisition
advisory services. These activities may present a conflict between the
obligations of Goldman, Sachs & Co. or another affiliate of Goldman Sachs and
your interests as a beneficial owner of a note. Moreover, one or more of our
affiliates have published and in the future expect to publish research reports
with respect to some or all of the issuers of the index stocks and with respect
to the index itself. Any of these activities by any of our affiliates may affect
the level of the index and, therefore, the
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market value of your note and the amount we will pay on your note at maturity.
AS CALCULATION AGENT, GOLDMAN, SACHS & CO. WILL HAVE THE AUTHORITY TO MAKE
DETERMINATIONS THAT COULD AFFECT THE MARKET VALUE OF YOUR NOTE, WHEN YOUR NOTE
MATURES AND THE AMOUNT YOU RECEIVE AT MATURITY
As calculation agent for your note, Goldman, Sachs & Co. will have
discretion in making various determinations that affect your note, including
determining each starting value and ending value and the final index value on
the determination date, which we will use to calculate how much cash we must pay
on the stated maturity date, and determining whether to postpone the stated
maturity date because of a market disruption event. See "Specific Terms of Your
Note" below. The exercise of this discretion by Goldman, Sachs & Co. could
adversely affect the value of your note and may present Goldman, Sachs & Co.
with a conflict of interest of the kind described under "-- Our Business
Activities May Create Conflicts of Interest Between You and Us" above.
THE POLICIES OF THE INDEX SPONSOR AND CHANGES THAT AFFECT THE INDEX OR THE INDEX
STOCKS COULD AFFECT THE AMOUNT PAYABLE ON YOUR NOTE AND ITS MARKET VALUE
The policies of the index sponsor concerning the calculation of the index
level, additions, deletions or substitutions of index stocks and the manner in
which changes affecting the index stocks or their issuers, such as stock
dividends, reorganizations or mergers, are reflected in the index 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 prior to 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 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 any particular reset date (including the determination date) -- and
thus the periodic capped performance for the reset date and, ultimately, 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 each reset date
(including the determination date) and the amount payable on your note more
fully under "Specific Terms of Your Note -- Discontinuance or Modification of
the Index" and "-- Role of Calculation Agent".
THERE IS NO AFFILIATION BETWEEN THE INDEX STOCK ISSUERS AND US, AND WE ARE NOT
RESPONSIBLE FOR ANY DISCLOSURE
BY THE INDEX STOCK ISSUERS
Goldman Sachs is not affiliated with the issuers of the index stocks or
the index sponsor. As we have told you above, however, we or our affiliates may
currently or from time to time in the future engage in business with the index
stock issuers. Nevertheless, neither we nor any of our affiliates assumes any
responsibility for the adequacy or accuracy of any publicly available
information about the index stock issuers. You, as an investor in your note,
should make your own investigation into the index and the index stock issuers.
See "The Index" below for additional information about the index.
Neither the index sponsor nor the index stock issuers are involved in this
offering of your note in any way and none of them have any obligation of any
sort with respect to your note. Thus, neither the index sponsor nor the index
stock issuers have any obligation to take your interests into consideration for
any reason, including in taking any corporate actions that might affect the
value of your note.
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YOUR NOTE MAY NOT HAVE
AN ACTIVE TRADING MARKET
Although we plan to have your note listed on the American Stock Exchange
on or after the original issue date, there may be little or no secondary market
for your note. Even if a secondary market for your note develops, it may not
provide significant liquidity and we expect that transaction costs in any
secondary market would be high. As a result, the difference between bid and
asked prices for your note in any secondary market could be substantial.
WE CAN POSTPONE THE STATED MATURITY DATE IF A MARKET DISRUPTION EVENT OCCURS
If the calculation agent determines that, on the determination date, a
market disruption event has occurred or is continuing, the determination date
will be postponed until the first business day on which no market disruption
event occurs or is continuing. As a result, the stated maturity date for your
note will also be postponed, although not by more than six business days. Thus,
you may not receive the cash payment that we are obligated to deliver on the
stated maturity date until several days after the originally scheduled due date.
Moreover, if the closing level of the index is not available on the
determination date because of a continuing market disruption event or for any
other reason, the calculation agent will nevertheless determine the final index
level based on its assessment, made in its sole discretion, of the level of the
index at that time.
CERTAIN CONSIDERATIONS FOR INSURANCE COMPANIES AND EMPLOYEE BENEFIT PLANS
Any insurance company or fiduciary of a pension plan or other employee
benefit plan that is subject to the prohibited transaction rules of the Employee
Retirement Income Security Act of 1974, as amended, which we call "ERISA", or
the Internal Revenue Code of 1986, as amended, including an IRA or a Keogh plan
(or a governmental plan to which similar prohibitions apply), and that is
considering purchasing the offered notes with the assets of the insurance
company or the assets of such a plan, should consult with its counsel regarding
whether the purchase or holding of the offered notes could become a "prohibited
transaction" under ERISA, the Internal Revenue Code or any substantially similar
prohibition in light of the representations a purchaser or holder in any of the
above categories is deemed to make by purchasing and holding the offered notes.
This is discussed in more detail under "Employee Retirement Income Security Act"
below.
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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 indirect
holders 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 indirect holders 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. 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, the following
terms will apply to your note:
NO INTEREST: we will pay no interest on your note.
SPECIFIED CURRENCY:
- U.S. Dollars
FORM OF NOTE:
- global form only: yes, at DTC
- non-global form available: no
DENOMINATIONS: each note registered in the name of a holder must have a
face amount of $1,000 or any multiple of $1,000.
DEFEASANCE APPLIES AS FOLLOWS:
- full defeasance: no
- covenant defeasance: no
OTHER TERMS:
- the default amount will be payable on any acceleration of the maturity of your
note as described under "-- Special Calculation Provisions" below
- a business day for your note will not be the same as a business day for our
other Series B medium-term notes, as described under "-- Special Calculation
Provisions" below
Please note that the information about the original issue date, original
issue price and net proceeds to The Goldman Sachs Group, Inc. on the front cover
page relates only to the initial sale of the notes. If you have purchased your
note in a market-making transaction after the initial sale, information about
the price and date of sale to you will be provided in a separate confirmation of
sale.
We describe the terms of your note in more detail below.
INDEX, INDEX SPONSOR AND INDEX STOCKS
In this prospectus supplement, when we refer to the index, we mean the
index specified on the cover page, or any successor index, as it may be
modified, replaced or adjusted from time to time as described under
"-- Discontinuance or Modification of the Index" below. When we refer to the
index sponsor as of any time, we mean the entity, including any successor
sponsor, that determines and publishes the index as then in effect. When we
refer to the index stocks as of any time, we mean the stocks that comprise the
index as then in effect, after giving effect to any additions, deletions or
substitutions.
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PAYMENT OF PRINCIPAL ON STATED MATURITY DATE
On the stated maturity date, we will pay as principal, to the holder of
your note, cash in an amount equal to the greater of:
- the face amount of your note outstanding on that date or
- the product of the outstanding face amount of your note times the capped index
performance.
The CAPPED INDEX PERFORMANCE will equal the product of the periodic capped
performance for each of the six reset dates. The PERIODIC CAPPED PERFORMANCEfor
any reset date will equal one plus the capped semi-annual return, expressed as a
decimal. We describe the capped semi-annual return for each reset date on the
"Key Terms" page of this prospectus supplement. We describe the reset dates
below.
Because of the cap rate, the highest periodic capped performance for any
reset date will be 100% plus the cap rate; consequently, the capped index
performance and the amount payable on your note on the stated maturity date will
be limited, even if the index level on the determination date exceeds the
initial index level times the capped index performance. Because your note is
principal protected, we will not pay less than the outstanding face amount of
your note on the stated maturity date, even if the index level on the
determination date is lower than the initial index level.
The calculation agent will determine the starting value and the ending
value for each reset date (including the determination date) by reference to the
closing levels of the index on the relevant days. The closing level of the index
on any particular day will be the closing level on that day as calculated and
published by the index sponsor. However, the calculation agent will have
discretion to adjust the closing level on any particular day or to determine it
in a different manner as described under "-- Discontinuance or Modification of
the Index" below.
RESET DATES
The reset dates will be each and , beginning
with , 2002, except that (i) any reset date that would otherwise
fall on a day that is not a business day will instead fall on the next following
business day and (ii) the last reset date will be the determination date. The
determination date is described under "-- Determination Date" below. In
addition, if the calculation agent determines that a market disruption event
occurs or is continuing on any day that would otherwise be a reset date, then,
with the exception of the last reset date (which will be determined as described
under "-- Determination Date" below), the reset 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, provided that a reset date will
never be later than the fifth business day after or, as the case
may be (unless the relevant specified day is not a business day, in which case
not later than the sixth business day after that date).
STATED MATURITY DATE
The stated maturity date will be unless that day is not a
business day, in which case the stated maturity date will be the next following
business day. If the fifth business day before this applicable day is not the
determination date described below, however, then the stated maturity date will
be the fifth business day following the determination date, provided that the
stated maturity date will never be later than the fifth business day after
or, if is not a business day, later than the sixth
business day after . The calculation agent may postpone the determination
date -- and therefore the stated maturity date -- if a market disruption event
occurs or is continuing on a day that would otherwise be the determination date.
We describe market disruption events under "--Special Calculation Provisions"
below.
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DETERMINATION DATE
The determination date will be the fifth business day prior to
unless the calculation agent determines that a market disruption
event occurs or is continuing on that fifth prior business day. In that event,
the determination date will be the first following business day on which the
calculation agent determines that a market disruption event does not occur and
is not continuing. In no event, however, will the determination date be later
than or, if is not a business day, later than the
first business day after .
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 a reset date or the determination date, then
the reset date or determination date, as applicable, will be postponed to the
next business day on which a market disruption event does not occur and is not
continuing. In no event, however, will a reset date or the determination date be
postponed by more than five business days. If a reset date or the determination
date is postponed to the last possible day but a market disruption event occurs
or is continuing on that day, that day will nevertheless be the reset date or
determination date, as applicable. If the calculation agent determines that
closing index level that must be used to determine the payment amount is not
available on the relevant reset or determination date, either because of a
market disruption event or for any other reason, the calculation agent will
nevertheless determine the final index level based on its assessment, made in
its sole discretion, of the level of the index on the relevant day.
DISCONTINUANCE OR MODIFICATION OF THE INDEX
If the index sponsor discontinues publication of the index and the index
sponsor or anyone else publishes a substitute index that the calculation agent
determines is comparable to the index, then the calculation agent will determine
the amount payable on the stated maturity date by reference to the substitute
index. We refer to any substitute index approved by the calculation agent as a
successor index.
If the calculation agent determines that the publication of the index is
discontinued and there is no successor index, or that the level of the index is
not available on any reset date (including the determination date) because of a
market disruption event or for any other reason, the calculation agent will
determine the starting value and/or the ending value for the relevant reset
date, and thus the capped index performance and the amount payable on the stated
maturity date, by a computation methodology that the calculation agent
determines will as closely as reasonably possible replicate the index.
If the calculation agent determines that the index, the stocks comprising
the index or the method of calculating the index is changed at any time in any
respect -- including any addition, deletion or substitution and any reweighting
or rebalancing of index stocks and whether the change is made by the index
sponsor under its existing policies or following a modification of those
policies, is due to the publication of a successor index, is due to events
affecting one or more of the index stocks or their issuers or is due to any
other reason -- then the calculation agent will be permitted (but not required)
to make such adjustments in the index or the method of its calculation as it
believes are appropriate to ensure that the index level used to determine the
starting value and/or ending value for any reset date (including the
determination date), and thus the capped index performance and the amount
payable on the stated maturity date, is equitable.
Any adjustments made to the closing level of the index on any reset date
(including the determination date) may differ from those made to the closing
level of the index on any other reset date, and these adjustments may be made
with respect to one or more reset dates but not with respect to all reset dates.
The calculation agent is not obligated to make any such adjustments.
All determinations and adjustments to be made by the index sponsor or the
calculation agent with respect to the index may be made
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by the index sponsor or the calculation agent, as the case may be, in its sole
discretion.
DEFAULT AMOUNT ON ACCELERATION
If an event of default occurs and the maturity of your note is
accelerated, we will pay the default amount in respect of the principal of your
note at the maturity. We describe the default amount under "-- Special
Calculation Provisions" below.
For the purpose of determining whether the holders of our Series B
medium-term notes, which include the offered notes, are entitled to take any
action under the indenture, we will treat the outstanding face amount of each
offered note as the outstanding principal amount of that note. Although the
terms of the offered notes differ from those of the other Series B medium-term
notes, holders of specified percentages in principal amount of all Series B
medium-term notes, together in some cases with other series of our debt
securities, will be able to take action affecting all the Series B medium-term
notes, including the offered notes. This action may involve changing some of the
terms that apply to the Series B medium-term notes, accelerating the maturity of
the Series B medium-term notes after a default or waiving some of our
obligations under the indenture. We discuss these matters in the accompanying
prospectus under "Description of Debt Securities We May Offer -- Default,
Remedies and Waiver of Default" and "-- Modification of the Indentures and
Waiver of Covenants".
MANNER OF PAYMENT
Any payment on your note at maturity will be made to an account designated
by the holder of your note and approved by us, or at the office of the trustee
in New York City, but only when your note is surrendered to the trustee at that
office. We also may make any payment in accordance with the applicable
procedures of the depositary.
MODIFIED BUSINESS DAY
As described in the accompanying prospectus, any payment on your note that
would otherwise be due on a day that is not a business day may instead be paid
on the next day that is a business day, with the same effect as if paid on the
original due date. For your note, however, the term business day has a different
meaning than it does for other Series B medium-term notes. We discuss this term
under "-- Special Calculation Provisions" below.
ROLE OF CALCULATION AGENT
The calculation agent in its sole discretion will make all determinations
regarding the index, the reset dates, the starting value, ending value,
semi-annual return, capped semi-annual return and periodic capped performance
for each reset date, market disruption events, business days, the default amount
and the cash to be paid on your note. Absent manifest error, all determinations
of the calculation agent will be final and binding on you and us, without any
liability on the part of the calculation agent.
Please note that Goldman Sachs & Co., our affiliate, is the calculation
agent as of the original issue date of your note. We may change the calculation
agent after the original issue date without notice.
SPECIAL CALCULATION PROVISIONS
BUSINESS DAY
When we refer to a business day with respect to your note, we mean a day
that is a business day of the kind described in the accompanying prospectus and
that is also a day on which the New York Stock Exchange, the Nasdaq National
Market System and the American Stock Exchange are all open for trading and on
which the index sponsor is open for business and the index is calculated and
published by the index sponsor.
DEFAULT AMOUNT
The default amount for your note on any day will be an amount, in the
specified currency for the principal of your note, equal to the cost of having a
qualified financial institution, of the kind and selected as described below,
expressly assume all our payment and other obligations with respect to your note
as of that day and as if no default
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or acceleration had occurred, or to undertake other obligations providing
substantially equivalent economic value to you with respect to your note. That
cost will equal:
- the lowest amount that a qualified financial institution would charge to
effect this assumption or undertaking, plus
- the reasonable expenses, including reasonable attorneys' fees, incurred by the
holder of your note in preparing any documentation necessary for this
assumption or undertaking.
During the default quotation period for your note, which we describe
below, the holder and/or we may request a qualified financial institution to
provide a quotation of the amount it would charge to effect this assumption or
undertaking. If either party obtains a quotation, it must notify the other party
in writing of the quotation. The amount referred to in the first bullet point
above will equal the lowest -- or, if there is only one, the only -- quotation
obtained, and as to which notice is so given, during the default quotation
period. With respect to any quotation, however, the party not obtaining the
quotation may object, on reasonable and significant grounds, to the assumption
or undertaking by the qualified financial institution providing the quotation
and notify the other party in writing of those grounds within two business days
after the last day of the default quotation period, in which case that quotation
will be disregarded in determining the default amount.
DEFAULT QUOTATION PERIOD
The default quotation period is the period beginning on the day the
default amount first becomes due and ending on the third business day after that
day, unless:
- no quotation of the kind referred to above is obtained or
- every quotation of that kind obtained is objected to within five business days
after the due day as described above.
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 rated either:
- A-1 or higher by Standard & Poor's Ratings Group or any successor, or any
other comparable rating then used by that rating agency, or
- P-1 or higher by Moody's Investors Service, Inc. or any successor, or any
other comparable rating then used by that rating agency.
MARKET DISRUPTION EVENT
Any of the following will be a market disruption event:
- a suspension, absence or material limitation of trading in index stocks
constituting 20% or more, by weight, of the index on their respective primary
markets, in each case for more than two hours of trading or during the
one-half hour before the close of trading in that market, as determined by the
calculation agent in its sole discretion, or
- a suspension, absence or material limitation of trading in option or futures
contracts relating to the index or to index stocks constituting 20% or more,
by weight, of the index, if available, in the respective primary markets for
those contracts, in each case
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for more than two hours of trading or during the one-half hour before the
close of trading in that market, as determined by the calculation agent in its
sole discretion, or
- index stocks constituting 20% or more, by weight, of the index, or option or
futures contracts relating to the index or to index stocks constituting 20% or
more, by weight, of the index, if available, do not trade on what were the
respective primary markets for those index stocks or contracts, as determined
by the calculation agent in its sole discretion,
and, in any of these events, the calculation agent determines in its sole
discretion that the event materially interferes with the ability of The Goldman
Sachs Group, Inc. or any of its affiliates to unwind all or a material portion
of a hedge with respect to the offered notes that we or our affiliates have
effected or may effect as described under "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 a previously announced change in the regular business
hours of the relevant market, and
- a decision to permanently discontinue trading in the option or futures
contracts relating to the index or to any index stock.
For this purpose, an "absence of trading" in the primary securities market
on which an index stock, or on which option or futures contracts relating to the
index or an index stock, are traded will not include any time when that market
is itself closed for trading under ordinary circumstances. In contrast, a
suspension or limitation of trading in an index stock or in option or futures
contracts relating to the index or an index stock, if available, in the primary
market for that stock or those contracts, by reason of:
- a price change exceeding limits set by that market, or
- an imbalance of orders relating to that stock or those contracts, or
- a disparity in bid and ask quotes relating to that stock or those contracts,
will constitute a suspension or material limitation of trading in that stock or
those contracts in that primary market.
As is the case throughout this prospectus supplement, references to the
index in this description of market disruption events includes the index and any
successor index as it may be modified, replaced or adjusted from time to time.
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HYPOTHETICAL RETURNS ON YOUR NOTE
The tables below set forth the amount in cash that would be payable for
each $1,000 face amount of your note on the stated maturity date if the
semi-annual returns for each period had the hypothetical values set forth in
each of the tables. Each semi-annual period is bounded by the corresponding
reset date as shown below.
PERIOD 1 PERIOD 2 PERIOD 3 PERIOD 4 PERIOD 5 PERIOD 6
| | | | | | |
-----------------------------------------------------------------------
| | | | | | |
TRADE DATE FIRST SECOND THIRD FOURTH FIFTH LAST RESET
RESET RESET RESET RESET RESET DATE. THIS
DATE DATE DATE DATE DATE IS ALSO THE
DETERMINATION
DATE.
The following tables are provided for purposes of illustration only. They
should not be taken as an indication or prediction of future investment results
and are intended merely to illustrate the impact that various hypothetical index
levels on the reset dates, and trends in changes in the index level, could have
on the payment amount, assuming all other variables remained constant
The tables below assume that there is no change in or affecting any of the
index stocks or the method by which the index sponsor calculates the index
level, that there is no change in the relative weighting of any index stock, and
that no market disruption event occurs.
The information in the tables reflects hypothetical rates of return on the
offered notes assuming that they are purchased on the original issue date and
held to the stated maturity date. If you sell your note prior to the stated
maturity date, your return will depend upon the market value of your note at the
time of sale, which may be affected by a number of factors that are not
reflected in the tables below. For a discussion of some of these factors, see
"Additional Risk Factors Specific to Your Note" above.
ASSUMPTIONS
Face amount $1,000
Original issue price, expressed
as a percentage of the face
amount 100%
Cap rate 0.06
Maturity 3 years
Reset frequency semi-annual
No change in or affecting any of the
index stocks or the method by which the
index sponsor calculates the index level
No change in the relative weighting of
any index stock
No market disruption event occurs
The assumed initial index level is based on the closing level of the index
on the date of this prospectus supplement. The actual initial index level, which
will serve as the baseline for determining the index performance during the
first semi-annual period, will not be determined until the trade date and is
likely to differ from the assumed initial index level, particularly in light of
the events of September 11, 2001, which may result in greater volatility in the
level of the index. The actual initial index level also may differ from the
closing level of the index on the trade date.
We have assumed that the cap rate will be the rate shown in the box above.
If the actual cap rate, as determined on the trade date, were to differ from the
assumed cap rate, the hypothetical periodic capped performances and the total
payments at maturity shown in the tables below could differ substantially from
those based on the actual cap rate. The actual cap rate may be higher or lower
than the assumed cap rate.
The index has been highly volatile in the past and its performance cannot
be predicted for any future period. The recent suspension of trading in the U.S.
equities markets, the events underlying it and related uncertainties may cause
the index level to exhibit much greater price volatility than in earlier
periods,
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both in the near term and over the term of your note. Before investing in the
offered notes, you should consult publicly available news sources to determine
the index level between the date of this preliminary prospectus supplement and
your purchase of the offered notes. The actual index level for the offered notes
may differ substantially from current levels, and the actual performance of the
index over the life of the notes, as well as the amount payable at maturity, may
bear little relation to the hypothetical return examples set forth below or to
the historical levels of the index set forth elsewhere in this prospectus
supplement. For information about the level of the index during recent periods,
see "The Index -- Historical Information" below.
Any rate of return you may earn on an investment in the notes may be lower
than that which you could earn on a comparable investment in the index stocks.
Among other things, the return on the notes will not reflect any dividends that
may be paid on the index stocks. Also, the hypothetical returns shown below do
not take into account the effects of applicable taxes. Because of the U.S. tax
treatment applicable to your note, tax liabilities could affect the after-tax
rate of return on your note to a comparatively greater extent than the after-tax
return on the index stocks.
In each of the tables below, the hypothetical semi-annual return is
calculated by dividing the index value at the end of the period by the index
value at the beginning of the period, then subtracting one. (The semi-annual
return for any period may be negative if the ending value is lower then the
starting value for that period). If a semi-annual return (expressed as a
percentage) is less than or equal to 6%, then that semi-annual return is used
for that period. Otherwise, the semi-annual return is capped at 6%. That is, 6%
is used instead of the actual return for any year during which the semi-annual
return exceeds 6%. We then compute the product of the six capped semi-annual
returns as follows:
capped index performance =
(1 + first capped semi-annual return) X
(1 + second capped semi-annual return) X
(1 + third capped semi-annual return) X
(1 + fourth capped semi-annual return) X
(1 + fifth capped semi-annual return) X
(1 + sixth capped semi-annual return).
Finally, the value of the capped index performance (expressed as a
percentage) is compared against 100%. Each offered note pays at maturity the
face amount times the greater of the value of the capped index performance or
100%. Note that the capped index performance may be less than 100% if some of
the semi-annual returns are negative.
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EXAMPLE I: SEMI-ANNUAL RETURNS EXCEED THE CAP RATE DURING EACH PERIOD (MAXIMUM
POSSIBLE RETURN ON NOTE)
INDEX VALUE SEMI-ANNUAL
AT BEGINNING INDEX VALUE AT RETURN ((INDEX
OF PERIOD END OF PERIOD VALUE AT END/ SEMI-ANNUAL
(AS % OF INITIAL (AS % OF INITIAL INDEX VALUE AT RETURN
PERIOD INDEX VALUE) INDEX VALUE) BEGINNING)-1)) CAPPED?
-------- ---------------- ---------------- -------------- -----------
Period 1 100.0% 108.0% 8.0% Yes at 6.0%
Period 2 108.0% 116.0% 7.4% Yes at 6.0%
Period 3 116.0% 125.0% 7.8% Yes at 6.0%
Period 4 125.0% 135.0% 8.0% Yes at 6.0%
Period 5 135.0% 145.0% 7.4% Yes at 6.0%
Period 6 145.0% 155.0% 6.9% Yes at 6.0%
CAPPED INDEX PERFORMANCE 141.85%
PAYMENT AMOUNT AT MATURITY (ON $1,000) $1,418.52
Capped Index Performance = (1 + 0.060) X (1 + 0.060) X (1 + 0.060) X (1 + 0.060)
X
(1 + 0.060) X (1 + 0.060) = 1.41852 or 141.852%.
Face Amount X Capped Index Performance = $1,000 X 1.41852 = $1,418.52
Payment on the maturity date = $1,418.52, since $1,418.52 is greater than
$1,000.
EXAMPLE II: SEMI-ANNUAL RETURNS ARE MIXED BUT NOTE RETURN IS LESS THAN THE INDEX
RETURN
INDEX VALUE SEMI-ANNUAL
AT BEGINNING INDEX VALUE AT RETURN ((INDEX
OF PERIOD END OF PERIOD VALUE AT END/ SEMI-ANNUAL
(AS % OF INITIAL (AS % OF INITIAL INDEX VALUE AT RETURN
PERIOD INDEX VALUE) INDEX VALUE) BEGINNING)-1)) CAPPED?
-------- ---------------- ---------------- -------------- -------------
Period 1 100.0% 102.0% 2.0% No, use 2.0%
Period 2 102.0% 95.0% -6.9% No, use -6.9%
Period 3 95.0% 107.0% 12.6% Yes, at 6.0%
Period 4 107.0% 125.0% 16.8% Yes, at 6.0%
Period 5 125.0% 135.0% 8.0% Yes, at 6.0%
Period 6 135.0% 155.0% 14.8% Yes, at 6.0%
CAPPED INDEX PERFORMANCE 119.94%
PAYMENT AMOUNT AT MATURITY (ON $1,000) $1,199.35
Capped index performance = (1 + 0.020) X (1 - 0.069) X (1 + 0.060) X (1 + 0.060)
X
(1 + 0.060) X (1 + 0.060) = 1.19935 or 119.935%.
Face amount X capped index performance = $1,000 X 1.19935 = $1,199.35
Payment on the maturity date = $1,199.35, since $1,199.35 is greater than
$1,000.00.
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EXAMPLE III: FINAL INDEX VALUE IS GREATER THAN INITIAL INDEX VALUE YET NOTE ONLY
RETURNS INITIAL PRINCIPAL AT MATURITY
INDEX VALUE SEMI-ANNUAL
AT BEGINNING INDEX VALUE AT RETURN ((INDEX
OF PERIOD END OF PERIOD VALUE AT END/ SEMI-ANNUAL
(AS % OF INITIAL (AS % OF INITIAL INDEX VALUE AT RETURN
PERIOD INDEX VALUE) INDEX VALUE) BEGINNING)-1)) CAPPED?
-------- ---------------- ---------------- -------------- --------------
Period 1 100.0% 112.0% 12.0% Yes, at 6.0%
Period 2 112.0% 70.0% -37.5% No, use -37.5%
Period 3 70.0% 100.0% 42.9% Yes, at 6.0%
Period 4 100.0% 105.0% 5.0% No, use 5.0%
Period 5 105.0% 112.0% 6.7% Yes, at 6.0%
Period 6 112.0% 125.0% 11.6% Yes, at 6.0%
CAPPED INDEX PERFORMANCE 82.85%
PAYMENT AMOUNT AT MATURITY (ON $1,000) $1,000.00
Capped index performance = (1 + 0.060) X (1 - 0.375) X (1 + 0.060) X (1 + 0.050)
X
(1 + 0.060) X (1 + 0.060) = 0.8285 or 82.85%.
Face amount X capped index performance = $1,000 X 0.8285 = $828.50
Payment on the maturity date = $1,000.00, since $1,000.00 is greater than
$828.50.
EXAMPLE IV: SEMI-ANNUAL RETURNS ARE POSITIVE BUT LESS THAN THE CAP RATE FOR EACH
PERIOD (NOTE RETURN EQUALS THE PRICE RETURN ON THE INDEX)
HYPOTHETICAL SEMI-ANNUAL
INDEX VALUE HYPOTHETICAL RETURN
AT BEGINNING INDEX VALUE AT ((INDEX VALUE
OF PERIOD END OF PERIOD AT END/INDEX SEMI-ANNUAL
(AS % OF INITIAL (AS % OF INITIAL VALUE AT RETURN
PERIOD INDEX VALUE) INDEX VALUE) BEGINNING)-1) CAPPED?
-------- ---------------- ---------------- -------------- -------------
Period 1 100.0% 105.0% 5.0% No, use 5.0%
Period 2 105.0% 111.0% 5.7% No, use 5.7%
Period 3 111.0% 117.0% 5.4% No, use 5.4%
Period 4 117.0% 123.0% 5.1% No, use 5.1%
Period 5 123.0% 130.0% 5.7% No, use 5.7%
Period 6 130.0% 137.0% 5.4% No, use 5.4%
CAPPED INDEX PERFORMANCE 137.00%
PAYMENT AMOUNT AT MATURITY (ON $1,000) $1,370.00
Capped index performance = (1 + 0.050) X (1 + 0.057) X (1 + 0.054) X (1 + 0.051)
X (1 + 0.057) X (1 + 0.054) = 1.3700 or 137.00%.
Face amount X capped index performance = $1,000 X 1.3700 = $1,370.00
Payment on the maturity date = $1,370.00, since $1,370.00 is greater than
$1,000.00.
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EXAMPLE V: SEMI-ANNUAL RETURNS ARE NEGATIVE (RECEIVE ORIGINAL FACE AMOUNT)
HYPOTHETICAL SEMI-ANNUAL
INDEX VALUE HYPOTHETICAL RETURN
AT BEGINNING INDEX VALUE AT ((INDEX VALUE
OF PERIOD END OF PERIOD AT END/INDEX SEMI-ANNUAL
(AS % OF INITIAL (AS % OF INITIAL VALUE AT RETURN
PERIOD INDEX VALUE) INDEX VALUE) BEGINNING)-1) CAPPED?
-------- ---------------- ---------------- -------------- -----------
Period 1 100.0% 95.0% -5.0% No, use -5.0%
Period 2 95.0% 91.0% -4.2% No, use -4.2%
Period 3 91.0% 86.0% -5.5% No, use -5.5%
Period 4 86.0% 82.0% -4.7% No, use -4.7%
Period 5 82.0% 77.0% -6.1% No, use -6.1%
Period 6 77.0% 70.0% -9.1% No, use -9.1%
CAPPED INDEX PERFORMANCE 70.00%
PAYMENT AMOUNT AT MATURITY (ON $1,000) $1,000.00
Capped index performance = (1 - 0.050) X (1 - 0.042) X (1 - 0.055) X (1 - 0.047)
X (1 - 0.061) X (1 - 0.091) = 0.7000 or 70.00%.
Face amount X capped index performance = $1,000 X 0.7000 = $700.00
Payment on the maturity date = $1,000, since $1,000 is greater than $700.00.
------------------------
We cannot predict the starting value or ending value for any period, the final
index level on the determination date or the market value of your note, nor can
we predict the relationship between the index level and the market value of your
note at any time prior to the stated maturity date. The actual amount that a
holder of the offered notes will receive at stated maturity and the total and
pretax rates of return on the offered notes will depend entirely on the starting
value and ending value for each reset date and the actual final index level,
each as determined by the calculation agent as described above, as well as the
actual cap rate. In particular, the index level could be lower or higher than
the levels reflected in the table and the actual cap rate could be higher or
lower than the assumed cap rate. Also, 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 tables above.
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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 also expect to 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 listed or
over-the-counter options, futures or other instruments linked to the index or
some or all of the index stocks, and perhaps involving purchases of some or all
of the index stocks, prior to and/or 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
notes we issue, some of which may have returns linked to the index or the index
stocks. Consequently, with regard to your note, from time to time, we and/or our
affiliates:
- expect to acquire and dispose of positions in listed or over-the-counter
options, futures or other instruments linked to the index or some or all of
the index stocks,
- may take or dispose of positions in the securities of the index stock issuers
themselves,
- may take or dispose of positions in listed or over-the-counter options or
other instruments based on indices designed to track the performance of the
New York Stock Exchange or other components of the U.S. equity market and/or
- may take short positions in the index stocks or other securities of the kind
described above -- i.e., we and/or our affiliates may sell securities of the
kind that we do not own or that we borrow for delivery to purchaser.
We and/or our affiliates may acquire a long or short position in
securities similar to the offered notes 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 a hedge
position relating to your note and perhaps hedge positions relating to other
notes with returns linked to the index or the index stocks. Those steps, which
could occur on or before the determination date for your note, are likely to
involve sales of listed or over-the-counter options, futures or other
instruments linked to the index or perhaps to some or all of the index stocks.
They may also involve sales and/or purchases of some or all of the index stocks
as well as listed or over-the-counter options, futures or other instruments
linked to the index, some or all of the index stocks or indices designed to
track the performance of the New York Stock Exchange or other components of the
U.S. equity market.
The hedging activity discussed above may adversely affect the market
value of your note from time to time and the amount we will pay on your
note at maturity. See "Additional Risk Factors Specific to Your
Note -- Trading and Other Transactions by Goldman Sachs in Securities
Linked to the Index Stocks May Impair the Value of Your Note" and "-- Our
Business Activities May Create Conflicts of Interest Between You and Us"
for a discussion of these adverse effects.
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THE INDEX
We have derived all information regarding the index contained in this
prospectus supplement, including its make-up, method of calculation and changes
in its components, from publicly available information. That information
reflects the policies of, and is subject to change by, Standard and Poor's
Ratings Group, which is the index sponsor and is commonly referred to as
Standard & Poor's. Standard and Poor's owns the copyright and all other rights
to the index. Standard & Poor's has no obligation to continue to publish, and
may discontinue publication of, the index. Standard & Poor's does not assume any
responsibility for the accuracy or completeness of such information. The
consequences of Standard & Poor's discontinuing the index are described in the
section entitled "Specific Terms of Your Note -- Discontinuance of Modification
of the Index" above.
Standard & Poor's publishes the S&P 500(TM) 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 August 31, 2001, 422 companies or
85.8% of the S&P 500(TM) Index traded on the New York Stock Exchange; 76
companies or 14.1% of the S&P 500(TM) Index traded on The Nasdaq Stock Market;
and 2 companies or 0.1% of the S&P 500(TM) Index traded on the American Stock
Exchange. As of August 31, 2001, the aggregate market value of the 500 companies
included in the S&P 500 Index represented approximately 80% 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 price of that company's common stock is
generally responsive to changes in the affairs of the respective industry and
the market value 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 (86), consumer staples (35), energy (26), financials (71), health
care (42), industrials (70), information technology (78), materials (40),
telecommunication services (14) and utilities (39). 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(TM) Index does not reflect the payment of dividends on the
stocks included in the S&P 500(TM) Index. Because of this, and due to the
semi-annual appreciation cap, 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.
COMPUTATION OF THE INDEX
Standard & Poor's currently computes the S&P 500(TM) 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);
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(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 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:
New Market Value
Old Base Value X ---------------- = New Base Value
Old Market Value
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(TM) Index.
HISTORICAL CLOSING LEVELS OF THE INDEX
The first table below sets forth the closing levels of the index on the
last business day of each year from 1996 through 1998. The second table below
sets forth the high, the low and the last closing levels of the index for each
of the four calendar quarters in 1999 and 2000, and for the first three calendar
quarters of 2001, through September 28, 2001. We obtained the closing levels
listed in the tables below from Bloomberg Financial Services, without
independent verification.
Since its inception, the level of the index has experienced significant
fluctuations. Any historical upward or downward trend in the closing level of
the index during any period shown below is not an indication that the index is
more or less likely to increase or decrease at any time during the term of your
note. You should not take the historical levels of the index as an indication of
future performance. We cannot give you any assurance in that the future
performance of the index or the index stock will result in you receiving an
amount greater than the outstanding face amount of your note on the stated
maturity date.
Trading in the common stocks that make up the index, along with all other
U.S. equities, was suspended from the morning of
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September 11, 2001 until the U.S. equities markets reopened on September 17,
2001. Although trading has now resumed, the trading suspension, the events
underlying it and related uncertainties may cause the index level to exhibit
much greater price volatility than in earlier periods, both in the near term and
over the term of your note. 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
YEAR CLOSING LEVEL
---- -------------
1996........................ 760.7400
1997........................ 970.4300
1998........................ 1,229.2300
QUARTERLY HIGH, LOW AND CLOSING LEVELS OF THE INDEX
HIGH LOW CLOSE
---- --- -----
1999
Quarter ended March 31............................... 1,316.5500 1,212.1900 1,286.3700
Quarter ended June 30................................ 1,372.7100 1,281.4100 1,372.7100
Quarter ended September 30........................... 1,418.7800 1,268.3700 1,282.7100
Quarter ended December 31............................ 1,469.2500 1,247.4100 1,469.2500
2000
Quarter ended March 31............................... 1,527.4600 1,333.3600 1,498.5800
Quarter ended June 30................................ 1,516.3500 1,356.5600 1,454.6000
Quarter ended September 30........................... 1,520.7700 1,419.8900 1,436.5100
Quarter ending December 31........................... 1,436.2800 1,264.7400 1,320.2800
2001
Quarter ended March 31,.............................. 1,373.7300 1,117.5800 1,160.3300
Quarter ended June 30................................ 1,312.8300 1,103.2500 1,224.4200
Quarter ended September 30, 2000 (through September
28, 2001)......................................... 1,236.7200 965.8000 1,040.9400
Closing Level on September 28, 2001.................. 1,040.9400
-------------------------
LICENSE AGREEMENT
Standard and 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. 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 servicemarks and trade names of Standard & Poor's and of
the use of the index which is determined, composed or 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
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of the offered notes into consideration in determining, composing or calculating
the index. Standard and 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 and 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 UNINTERRUPTED
CALCULATION OF THE INDEX OR ANY DATA INCLUDED 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 WILL
STANDARD & POOR'S HAVE ANY LIABILITY FOR ANY LOST PROFITS OR SPECIAL,
INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES, 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.
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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, 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.
You may obtain the comparable yield and projected payment schedule from us
by contacting the Goldman Sachs Corporate 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.
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--------------------------------------------------------------------------------
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. If the notes are listed on the American Stock
Exchange, you may (but are not required to) allocate the difference pro rata to
interest accruals over the remaining term of the debt instrument to the extent
that your yield on the note, determined after taking into account amounts
allocated to interest, is not less than the applicable U.S. federal rate for the
note. The applicable U.S. federal rate will be the U.S. federal short-term rate,
if your note is expected to mature within three years of the date you purchase
your note, or the U.S. federal mid-term rate, if your note is expected to mature
more than three years from the date you purchase your note. These rates are
determined monthly by the U.S. Secretary of the Treasury and are intended to
approximate the average yield on short- and mid-term U.S. government
obligations, respectively. 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 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) 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
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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.
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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 a "Plan", 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 or under another available exemption. 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 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 by
reason of such person's acquisition, disposition or holding of the offered
notes, or any exercise related thereto, and no advice provided by The Goldman
Sachs Group, Inc. or any of its affiliates has formed a primary basis for any
investment decision by or on behalf of such purchaser or holder in connection
with the offered notes and the transactions contemplated with respect to the
offered notes.
If you are an insurance company or the fiduciary of a pension plan or an
employee benefit plan, and propose to invest in the offered notes, you should
consult your legal counsel.
S-31
32
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. Offered notes sold by Goldman, Sachs & Co.
to the public will initially be offered at the original issue price. Any offered
notes sold by Goldman, Sachs & Co. to securities dealers may be sold at a
discount from the original issue price of up to % of the original issue
price. Any such securities dealers may resell any offered notes purchased from
Goldman, Sachs & Co. to certain other brokers or dealers at a discount from the
original issue price of up to % of the original issue price. If all of the
offered notes are not sold at the original issue price, Goldman, Sachs & Co. may
change the offering price and the other selling terms.
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. For more information about
the plan of distribution and possible market-making activities, see "Plan of
Distribution" in the accompanying prospectus.
NOTICE TO INVESTORS IN SINGAPORE
Notes may not be offered or sold, nor may any document or other material
in connection with the notes be issued, circulated or distributed, either
directly or indirectly, to persons in Singapore other than (i) under
circumstances in which the offer or sale does not constitute an offer or sale of
the notes to the public in Singapore or (ii) to persons whose ordinary business
it is to buy or sell shares or debentures, whether as principal or agent.
S-32
33
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NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST
NOT RELY ON ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IT
DESCRIBES, BUT ONLY UNDER CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL
TO DO SO. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CURRENT ONLY AS OF ITS
DATE.
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
Summary Information....................... S-2
Additional Risk Factors Specific to Your
Note.................................... S-7
Specific Terms of Your Note............... S-12
Hypothetical Returns on Your Note......... S-18
Use of Proceeds and Hedging............... S-23
The Index................................. S-24
Supplemental Discussion of Federal Income
Tax Consequences........................ S-28
Employee Retirement Income Security Act... S-31
Supplemental Plan of Distribution......... S-32
PROSPECTUS SUPPLEMENT DATED JUNE 25, 2001
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
Description of Debt Securities We May
Offer...................................
Description of Warrants We May Offer...... 31
Description of Purchase Contracts We May
Offer................................... 49
Description of Units We May Offer......... 54
Description of Preferred Stock We May
Offer................................... 60
Description of Capital Stock.............. 67
Legal Ownership and Book-Entry Issuance... 73
Considerations Relating to Securities
Issued in Bearer Form................... 79
Considerations Relating to Indexed
Securities.............................. 83
Considerations Relating to Securities
Denominated or Payable in or Linked to a
Non-U.S. Dollar Currency................ 86
United States Taxation.................... 89
Plan of Distribution...................... 109
Employee Retirement Income Security Act... 111
Validity of the Securities................ 112
Experts................................... 112
Cautionary Statement Pursuant to the
Private Securities Litigation Reform Act
of 1995................................. 113
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$
THE GOLDMAN SACHS
GROUP, INC.
CAPERS (CAPPED PERIODIC RETURN SECURITIES) DUE 2004
(LINKED TO THE S&P 500(TM) INDEX)
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[GOLDMAN SACHS LOGO]
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GOLDMAN, SACHS & CO.
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