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THE INFORMATION IN THIS PRELIMINARY
PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
Filed pursuant to Rule 424(b)(3)
Registration Statement No. 333-75321
Subject to Completion. Dated November 8, 1999.
Prospectus Supplement No. to the Prospectus dated May 18, 1999.
$
THE GOLDMAN SACHS GROUP, INC.
Medium-Term Notes, Series B
[GOLDMAN SACHS LOGO] -------------------------
Callable Index-Linked Notes due 2003
(Linked to the GSTI(TM) Internet Index)
-------------------------
Each note being offered has the terms described beginning on page S-11,
including the following:
SUMMARY OF TERMS
ISSUER: The Goldman Sachs Group, Inc.
UNDERLYING INDEX: the GSTI(TM) Internet Index, also referred to as the "GIN
Index", as published and calculated by the Chicago Board Options Exchange,
Incorporated.
FACE AMOUNT: as specified in the note; $ in the aggregate for all the
offered notes
ORIGINAL ISSUE PRICE:
- 100% of the face amount for investors purchasing less than $5,000,000
aggregate face amount of the offered notes
- 99.50% of the face amount for investors purchasing a minimum of $5,000,000
aggregate face amount of the offered notes
TRADE DATE: , 1999
ORIGINAL ISSUE DATE (SETTLEMENT DATE): , 1999 [Trade date + 5
business days]
STATED MATURITY DATE: , 2003 unless extended for up to six business
days [Settlement date + 4 years]
INTEREST RATE (COUPON): 0%; the note will not bear interest prior to maturity
PRINCIPAL AMOUNT PAYABLE AT STATED MATURITY DATE: unless Goldman Sachs exercises
the call right, on the stated maturity date Goldman Sachs will pay the Holder of
the note cash equal to 90% of the outstanding face amount of the note plus the
additional amount, if any. The additional amount will be payable only if the
final GIN Index level exceeds the reference GIN Index level and will be
calculated as follows:
outstanding face amount
x
(final GIN Index level - reference GIN Index level)
-----------------------------------------------------
reference GIN Index level
ISSUER CALL: Goldman Sachs may redeem the offered notes in whole, but not in
part, at the times and prices, expressed as a percentage of the face amount, set
forth below:
- on the one business day following the anniversary of the original issue
date in each of the following years:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---- ----------------
<S> <C>
2001 160%
2002 190%
</TABLE>
REFERENCE GIN INDEX LEVEL:
FINAL GIN INDEX LEVEL: the closing level of the GIN Index on the determination
date, subject to adjustment
LISTING: application has been made to list the offered notes on the Chicago
Board Options Exchange on or after the original issue date under the symbol ""
NET PROCEEDS TO THE GOLDMAN SACHS GROUP, INC.: % of the face amount if the
original issue price is 100%; % of the face amount if the original issue
price is 99.50%
CALCULATION AGENT: Goldman, Sachs & Co.
See "Additional Risk Factors Specific to Your Note" beginning on page S-2 to
read about investment risks relating to the note being purchased.
-------------------------
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. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------------
Goldman Sachs may use this prospectus supplement in the initial sale of the
offered notes. In addition, Goldman, Sachs & Co. or any other affiliate of
Goldman Sachs may use this prospectus supplement in a market-making transaction
in an offered note after its initial sale. UNLESS GOLDMAN SACHS OR ITS AGENT
INFORMS THE PURCHASER OTHERWISE IN THE CONFIRMATION OF SALE, THIS PROSPECTUS
SUPPLEMENT IS BEING USED IN A MARKET-MAKING TRANSACTION.
GOLDMAN, SACHS & CO.
-------------------------
Prospectus Supplement dated , 1999.
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ADDITIONAL RISK FACTORS SPECIFIC TO YOUR NOTE
An investment in your note is subject to risks described in the attached
prospectus under "Risk Factors", including those relating to indexed notes, and
to the risks described below. Your note is a riskier investment than ordinary
debt securities. Also, your note is not equivalent to investing directly in the
GIN Index stocks -- i.e., the stocks comprising the GIN Index to which your note
is linked. You should carefully consider whether the offered notes are suited to
your particular circumstances.
YOU MAY LOSE SOME OF YOUR PRINCIPAL
If the final GIN Index level does not exceed the reference GIN Index level
by at least 10%, you will receive less than the outstanding face amount of your
note on the stated maturity date. This will be the case even if the final GIN
Index level exceeds the GIN Index level on the date of this prospectus
supplement or if the level of the GIN Index at any time -- no matter how long --
during the life of the note exceeds the reference GIN Index level specified on
the front cover of this prospectus supplement. However, in all cases, the
payment on the stated maturity date will not be less than 90% of the outstanding
face amount of your note.
YOUR NOTE DOES NOT BEAR PERIODIC INTEREST
You will not receive any periodic interest payments on your note. Even if
the final GIN Index level exceeds the reference GIN Index level by at least 10%,
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 further below, you
will have to pay tax on deemed interest amounts even though your note does not
bear periodic interest.
THE MARKET VALUE OF YOUR NOTE MAY BE INFLUENCED BY MANY FACTORS THAT ARE
UNPREDICTABLE AND INTERRELATED IN
COMPLEX WAYS
When we refer to the market value of your note, we mean the value that you
could receive for your note if you chose to sell it in the open market before
the stated maturity date. The market value of your note will be affected by many
factors that are beyond our control and are unpredictable. Moreover, these
factors interrelate in complex ways, and the effect of one factor on the market
value of your note may offset or enhance the effect of another factor. For
example, an increase in U.S. interest rates, which could have a negative effect
on the market value of your note, may offset any positive effect that an
increase in the GIN Index level attributable to favorable economic developments
could have. The following paragraphs describe the expected impact on the market
value of your note given a change in a specific factor, assuming all other
conditions remain constant. In addition, see "-- Market Value of Your Note May
be Influenced by Factors Specifically Related To Internet Stocks" below.
The GIN Index Level Will Affect the Market Value of Your Note
We expect that the market value of your note at any particular time will
depend substantially on the amount, if any, by which the level of the GIN Index
at that time has risen above or has fallen below the reference GIN Index level.
Even if you sell your note at a time when the GIN Index level exceeds the
reference GIN Index level, you may receive substantially less than the amount
that would be payable on the stated maturity date based on a final GIN Index
level equal to that current level. If you sell your note at a time when the
level of the GIN Index is below, or not sufficiently above, the reference GIN
Index level, you may receive less than the face amount of your note. Fluctuating
U.S. dividend rates may affect the level of the GIN Index and, indirectly, the
market value of your note. Political, economic and other developments that
affect the stocks underlying the GIN Index may also affect the
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level of the GIN Index and, indirectly, the
market value of your note.
As indicated under "The GIN Index -- Historical Closing Levels of the GIN
Index", the level of the GIN Index has been highly volatile at times in the
past. It is impossible to predict whether the GIN Index will rise or fall.
Changes in Interest Rates are Likely to Affect the Market Value of Your Note
Because we will pay, at a minimum, 90% of the outstanding face amount of
your note on the stated maturity date, we expect that the market value of your
note, like that of a traditional debt security, will be affected by changes in
interest rates, although these changes may affect your note and a traditional
debt security in different degrees. In general, if U.S. interest rates increase,
we expect that the market value of your note will decrease and, conversely, if
U.S. interest rates decrease, we expect that the market value of your note will
increase.
Changes in the Volatility of the GIN Index are Likely to Affect the Market Value
of Your Note
The volatility of the GIN Index refers to the size and frequency of the
changes in the GIN Index level. In general, if the volatility of the GIN Index
increases, we expect that the market value of your note will decrease and,
conversely, if the volatility of the GIN Index decreases, we expect that the
market value of your note will increase.
The Time Remaining to Maturity Is Likely to Affect the Market Value of Your Note
Prior to the stated maturity date, the market value of your note may be
higher than one would expect if that value were based solely on the level of the
GIN Index and the level of interest rates. This difference would reflect a "time
premium" due to expectations concerning the level of the GIN Index and interest
rates during the time remaining to the stated maturity date. However, as the
time remaining to the stated maturity date decreases, we expect that this time
premium will decrease, lowering the market value of your note.
Changes in Our Credit Ratings May Affect the Market Value of Your Note
Our credit ratings are an assessment of our ability to pay our
obligations, including those on the offered notes. Consequently, actual or
anticipated changes in our credit ratings may affect the market value of your
note. However, because your return on your note is dependent upon factors, such
as the level of the GIN Index and interest rates, in addition to our ability to
pay our obligation on your note, an improvement in our credit ratings will not
reduce the other investment risks related to your note.
IF THE LEVEL OF THE GIN INDEX CHANGES, THE MARKET VALUE OF YOUR NOTE MAY NOT
CHANGE IN THE SAME MANNER
The market value of your note may not have a one-to-one relationship with
the level of the GIN Index. Changes in the level of the GIN Index may not result
in a comparable change in the market value of your note. We discuss some of the
reasons for this disparity under "-- The Market Value of Your Note May Be
Influenced by Many Factors That Are Unpredictable and Interrelated in Complex
Ways" above.
YOUR NOTE MAY NOT HAVE
AN ACTIVE TRADING MARKET
Although we have applied to have your note listed on the Chicago Board
Options 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.
YOUR RETURN ON YOUR NOTE WILL NOT REFLECT THE RETURN ON THE GIN INDEX STOCKS
The GIN Index calculator calculates the level of the GIN Index by
reference to the prices of the common stocks included in the
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GIN Index without taking account of the value of any 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 GIN Index and
received any dividends paid on those stocks. We understand, based on publicly
available information, that none of the issuers of the common stocks currently
included in the GIN Index has declared any dividends on its common stock through
the date of this prospectus supplement.
Even if no dividends are paid on the stocks included in the GIN Index, the
return on your note may be less than the return you would realize if you
actually owned those stocks. This is because the final GIN Index level must
exceed the reference GIN Index level by at least 10% before you will receive the
outstanding face amount of your note on the stated maturity date. See "-- You
May Lose Some of Your Principal" above.
YOU HAVE NO SHAREHOLDER RIGHTS
Investing in your note will not make you a holder of any of the GIN 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 GIN Index stocks. On any redemption date or on
the stated maturity date, your note will be paid in cash, and you will have no
right to receive delivery of any GIN Index stocks.
WE CAN REDEEM YOUR NOTE AT OUR OPTION
At various times after the second anniversary of the original issue date,
we will be entitled to redeem your note at our option as further described under
"Specific Terms of Your Note -- Our Call Right" below. Because the redemption
price will be determined by reference to a pre-established schedule, rather than
with regard to the level of the GIN Index when the redemption occurs, the amount
we will pay if we redeem your note may be substantially less than the principal
amount we would pay on the stated maturity date based on a final GIN Index level
equal to the level of the GIN Index at the time of redemption. The redemption
price will not take into account any increase in the level of the GIN Index
above the reference GIN Index level that may have occurred prior to redemption
or that may occur after redemption and prior to the stated maturity date. We
would expect to exercise our call right if the GIN Index has increased to a
level at which the expected market value of your note, if it were not subject to
redemption, would be greater than the redemption price that we would have to pay
on the relevant redemption date. Even if we do not exercise our option to redeem
your note, our ability to do so may adversely affect the market value of your
note.
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. See "Specific Terms of Your Note -- Stated
Maturity Date". As a result, the stated maturity date for your note will also be
postponed, although not by more than five business days. Thus, you may not
receive the payment that we are obligated to make on the stated maturity date
until after the originally scheduled due date.
If the determination date is postponed to the latest possible day and the
closing level is not available on that day because of a market disruption event
or for any other reason, the calculation agent will nevertheless determine the
closing level based on its assessment, made in its sole discretion, of the
market values of the GIN Index stocks at that time.
AS GIN INDEX SPONSOR AND CALCULATION AGENT, GOLDMAN, SACHS & CO. WILL HAVE THE
AUTHORITY TO MAKE DETERMINATIONS THAT COULD MATERIALLY AFFECT YOUR NOTE IN
VARIOUS WAYS AND CREATE CONFLICTS OF INTEREST
As further described under "The GIN Index" below, the GIN Index is a
sub-index of
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the GSTI(TM) (1) Composite Index and was developed, and is owned, by our
affiliate, Goldman, Sachs & Co. We refer to Goldman, Sachs & Co. in that
capacity as the "GIN Index sponsor". Goldman, Sachs & Co. is also the
underwriter of, and market-maker for, the offered notes. The GIN Index has been
licensed for certain purposes to us and the CBOE. Goldman, Sachs & Co. is
responsible for advising the CBOE as the CBOE composes, calculates and maintains
the GIN Index. Goldman, Sachs & Co. has considerable influence over the
composition, calculation and maintenance of the GIN Index. For example, the
GSTI(TM) Committee, which we further describe under "The GIN Index" below, of
Goldman, Sachs & Co. selects the GIN Index stocks to be included, added or
deleted from the GIN Index, subject to the fulfillment of the criteria for
inclusion, addition or deletion of common stocks in the GSTI(TM) Composite
Index. Also, in some circumstances, Goldman, Sachs & Co. can modify these
eligibility criteria. Certain judgments that Goldman, Sachs & Co., as GIN Index
sponsor, could make in connection with the composition, calculation and
maintenance of the GIN Index could affect the value of the GIN Index and,
consequently, the value of your note. See "The GIN Index -- Computation of the
GIN Index" for additional details on the role of Goldman, Sachs & Co., as the
GIN Index sponsor, with respect to the GIN Index.
Also, as calculation agent for your note, Goldman, Sachs & Co. will have
discretion in making various determinations that affect your note. As described
in "Specific Terms of Your Note -- Discontinuance or Modification of the GIN
Index", these may include making adjustments to the GIN Index and determining
the final GIN Index level, which we will use to calculate the amount we must pay
on the stated maturity date. These may also include determining whether to
postpone the stated maturity date because of a market disruption event.
The role played by Goldman, Sachs & Co., as GIN Index sponsor and
calculation agent, and the exercise by it of the kinds of discretion described
above could adversely affect the value of your note and may present Goldman,
Sachs & Co. with a conflict of interest of the kind described below under "--
Our Business Activities May Create Conflicts of Interest Between You and Us".
TRADING AND OTHER TRANSACTIONS BY
GOLDMAN SACHS IN SECURITIES LINKED
TO THE GIN INDEX STOCKS MAY IMPAIR
THE MARKET VALUE OF YOUR NOTE
As we describe under "Use of Proceeds and Hedging" below, we, through
Goldman, Sachs & Co. or one or more of our other affiliates, will hedge our
obligations under the offered notes by purchasing some or all of the GIN Index
stocks, options or futures on the GIN Index or GIN Index stocks or other
instruments linked to the GIN Index or GIN Index stocks and may adjust the hedge
by, among other things, purchasing or selling any of the foregoing at any time
and from time to time. Any of these hedging activities may adversely affect the
GIN Index level -- directly or indirectly by affecting the price of the GIN
Index stocks -- and, therefore, the value of your note. 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 GIN Index stocks or instruments linked to the GIN Index or
GIN 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 GIN Index level -- directly or
indirectly by
- ---------------
1 GSTI(TM) is a trademark of Goldman, Sachs & Co. and used with permission.
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affecting the price of the GIN Index stocks -- and, therefore, the value of your
note. 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 GIN Index or one
or more of the GIN Index stocks. By introducing competing products into the
marketplace in this manner, we or our affiliates could adversely affect the
value of your note.
The indenture governing your note does not contain any restriction on our
ability or the ability of any of our affiliates to purchase or sell all or any
portion of the GIN Index stocks or instruments linked to those stocks.
THE MARKET VALUE OF YOUR NOTE MAY BE INFLUENCED BY FACTORS SPECIFICALLY RELATED
TO INTERNET STOCKS
General economic conditions and earnings results of the companies whose
common stocks comprise the GIN Index and real or anticipated changes in those
conditions or results may affect the market value of your note. All of the GIN
Index stocks are in the Internet-related sector of the technology industry.
There are a number of different views regarding the valuation of stocks in the
Internet sector and the future performance of these stocks. Some of these views
suggest that these stocks are currently overvalued. The following paragraphs
describe a number of the risks related to the Internet sector.
Limited Operating History
Internet companies in general have relatively short operating histories.
They are subject to the risks, expenses and difficulties frequently encountered
by early-stage companies in new and rapidly evolving markets, such as evolving
and unpredictable business models, intense competition, management of growth and
rapid changes in customer demands and industry standards. The failure of an
Internet company to address these challenges could have a material adverse
effect on its business, results of operations, financial condition and
prospects.
Potential Fluctuations in Future Results
Due to the limited operating history of Internet companies and the
unpredictability of the industry, Internet companies generally have neither
internal nor industry-based historical financial data for any significant period
of time upon which to project revenues or base planned operating expenses. The
results of operations of a particular Internet company may fluctuate
significantly in the future due to a variety of factors, many of which relate to
the Internet industry as a whole and are outside the control of any individual
Internet company, such as the rate of growth, usage and acceptance of the
Internet as information media, the rate of acceptance of the Internet as an
advertising medium and a channel of commerce and specific economic conditions in
the Internet markets.
Volatility of Internet Stocks
The market prices of stocks of Internet companies have historically been
volatile for a variety of reasons, including the factors discussed above. In
addition, the trading volumes of some Internet stocks have been limited due to a
relatively small number of freely tradeable shares compared to other companies,
which may result in greater volatility. Although over time more shares of these
companies should become freely tradeable, there is no assurance that their
owners will sell those shares. If an owner or owners were to sell a significant
number of shares, those sales could depress the market price of that stock.
Intense Competition
The market for the Internet products and services is highly competitive,
and we expect this competition to continue to intensify. Increased competition
could result in price reductions, reduced margins or loss of market share. We
can give no assurance that a particular Internet company will be able to compete
successfully against its competitors or that the increased competition will not
have a material adverse effect on its business, results of operations, financial
condition and prospects.
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Risk of System Failure
The ability of Internet companies to provide timely and continuous online
products and services and to manage advertising depends on the efficient and
uninterrupted operation of their computer and communications hardware and
software systems. These systems and operations are vulnerable to damage or
interruption from human error, natural disasters, power loss, telecommunication
failures, break-ins, sabotage, computer viruses, intentional acts of vandalism
and similar events. The occurrence of any such event that interrupts or delays
the operations of an Internet company would have a material adverse effect on
the business, results of operations, financial condition and prospects of that
company.
Risks of Year 2000 Non-Compliance
Many currently installed computer systems and software products are coded
to accept only two-digit entries to identify a year in the date code field.
Consequently, on January 1, 2000, many of these systems could fail or
malfunction because they may not be able to distinguish between 20th century
dates and 21st century dates. Accordingly, all Internet companies must upgrade
their computer systems and software products to comply with applicable "Year
2000" requirements. The failure of an Internet company, or any of its viewers,
customers, linked sites, advertisers, suppliers or other companies on which it
relies, to be Year 2000 compliant could materially affect its business, results
of operations, financial condition and prospects. We have not conducted any
investigations as to whether any of the companies in the GIN Index are or will
be Year 2000 compliant.
Dependence on Continued Growth in Use of the Internet
Future growth in the revenues of Internet companies will depend on the
widespread acceptance and use of the Internet as a source of information and
entertainment and as a vehicle for commerce in goods and services. Rapid growth
in the use of the Internet is a recent phenomenon, and we can give no assurance
that such use will continue to develop or that a sufficient base of users will
emerge to support the combined companies' businesses. Moreover, critical issues
concerning the commercial use of the Internet (including security, reliability,
cost, ease of use and access, quality of service and acceptance of advertising)
remain unresolved and may negatively affect growth in the use of the Internet.
Internet usage may be inhibited for a number of reasons, such as inadequate
development of the necessary network infrastructure, failure to develop
necessary technologies in a timely manner, security concerns and government
regulations. In addition, corporations and other networks providing access to
the Internet may restrict access to certain sites or hours of usage, which could
limit access to and reduce traffic on web sites. If the use of the Internet does
not continue to grow or grows at a slower rate than expected, the business,
financial condition, operating results and prospects of Internet companies would
be materially adversely affected.
Unproven Acceptance of Internet Advertising
Standards to measure the effectiveness of web advertising have yet to be
widely developed. If standards do not develop, existing advertisers may not
continue or increase their levels of web advertising. Furthermore, advertisers
that have traditionally relied upon other advertising media may be reluctant to
advertise on the web. The business, results of operations, financial condition
and prospects of Internet companies could be materially adversely affected if
the market for web advertising declines or develops more slowly than expected.
In addition, "filter" software programs that limit or prevent advertising from
being delivered to a web user's computer are available. Widespread adoption of
this software could materially adversely affect the commercial viability of web
advertising, which could materially adversely affect the advertising revenues of
Internet companies.
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Government Regulation and Legal Uncertainties Relating to the Internet
Existing domestic and international laws and regulations specifically
regulate communications and commerce on the web. Furthermore, laws and
regulations that address issues such as user privacy, pricing, online content
regulation, taxation and the characteristics and quality of online products and
services are under consideration by federal, state, local and foreign
governments and agencies. In addition, several telecommunications companies have
petitioned the U.S. Federal Communications Commission to regulate Internet
service providers and online services providers in a manner similar to the
regulation of long distance telephone carriers and to impose access fees on such
companies. This regulation, if imposed, could increase the cost of transmitting
data over the web. Moreover, it may take years to determine the extent to which
existing laws relating to issues such as intellectual property ownership and
infringement, libel, obscenity and personal privacy are applicable to the web.
New laws or regulations relating to the web, or certain application or
interpretation of existing laws, may impede the growth in the use of the web or
otherwise materially adversely affect the business of Internet companies.
Concerns About Web Security
Concern about the transmission of confidential information over the
Internet has been a barrier to electronic commerce and communications over the
web. Any well-publicized compromise of security could deter more people from
using the web or from using it to conduct transactions that involve the
transmission of confidential information, such as signing up for a paid
subscription, executing stock trades or purchasing goods or services. Because
many of the Internet advertisers seek to advertise on the web to encourage
people to use the web to purchase goods or services, the business, results of
operations and financial condition of Internet companies could be materially
adversely affected if the Internet users significantly reduce their use of the
web because of security concerns. In addition, Internet companies may incur
significant costs to protect themselves against the threat of security breaches
or to alleviate problems caused by these breaches.
Management of Growth
Like other early-stage companies, Internet companies in general have
experienced rapid growth in their operations. This rapid growth has placed, and
the anticipated future growth will continue to place, a significant strain on
the managerial, operational and financial resources of Internet companies. To
manage the growth, Internet companies will need to continue to implement and
improve their operational, financial and management information systems and to
hire, train, motivate and manage their employees. The failure of an Internet
company to successfully manage any of these issues would have a material adverse
effect on its business, results of operations, financial condition and
prospects.
Intellectual Property and Proprietary Rights
The success of an Internet company depends significantly upon its
proprietary technology. Internet companies generally rely on a combination of
copyright and trademark laws, trade secrets, confidentiality procedures and
contractual agreements to protect their proprietary rights. The protective steps
taken by a particular Internet company may be inadequate to deter
misappropriation of its proprietary information, which may result in harm to its
brand, devaluation of its proprietary content and decrease in its
competitiveness. Furthermore, the defense of a company's intellectual property
rights could require the expenditure of significant financial and managerial
resources. In addition, an Internet company may become subject to infringement
claims brought by other companies. Any such infringement claim, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources on the part of such Internet company, which could
materially adversely affect its business, results of operations and financial
condition.
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Technological Change and New Products and Services
The market for Internet products and services is characterized by rapid
technological change, changing customer needs, frequent new product
introductions and evolving industry standards. A particular Internet company's
future success will depend on its ability to continually and timely introduce
new products, services and technologies or improve the performance, features and
reliability of its existing products and services in response to both evolving
demands of the marketplace and competitive product offerings. If an Internet
company fails to develop new or improved products, services or technologies in a
timely manner in response to changing market conditions or customer
requirements, its business, results of operations, financial condition and
prospects could be materially adversely affected.
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 GIN Index and the GIN
Index stocks that are not for your account or on your behalf. These trading
activities may present a conflict between your interest in the note and the
interests Goldman, Sachs & Co. and our other affiliates will have in their
proprietary accounts, in facilitating transactions, including block trades, for
their customers and in accounts under their management. These trading
activities, if they influence the price of the GIN Index stocks, 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 GIN 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 GIN Index stocks. Any of these
activities by any of our affiliates may affect the price of the GIN Index stocks
and, therefore, the value of your note.
THE POLICIES OF THE GIN INDEX CALCULATOR
AND CHANGES THAT AFFECT THE GIN INDEX
OR THE GIN INDEX STOCKS COULD AFFECT
THE AMOUNT PAYABLE ON YOUR
NOTE AND ITS MARKET VALUE
As we more fully describe under "The GIN Index" below, the Chicago Board
Options Exchange, or the CBOE, whom we also refer to in this prospectus
supplement as the "GIN Index calculator", in consultation with our affiliate,
Goldman, Sachs & Co., is responsible for calculating and maintaining the GIN
Index. The policies of the GIN Index calculator concerning the calculation of
the GIN Index level, additions, deletions or substitutions of stocks included in
the GSTI(TM) Composite Index or GIN Index and the manner in which changes
affecting the GIN Index stocks or their issuers, such as reorganizations or
mergers, are reflected in the GIN Index level could affect the GIN 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. In applying these policies,
the GIN Index calculator may act by itself or in conjunction with Goldman, Sachs
& Co., as the GIN Index sponsor.
The amount payable on your note and its market value could also be
affected if the GIN Index calculator (whether acting independently or in
conjunction with the GIN Index sponsor) changes these policies, for example by
changing the manner in which it calculates the GIN Index level, or if the GIN
Index calculator discontinues or suspends calculation or publication of the GIN
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 GIN Index level is not
available on the determination date because of a market
S-9
<PAGE> 10
disruption event or for any other reason, the calculation agent -- which
initially will be Goldman, Sachs & Co., our affiliate -- may determine the final
GIN Index level -- and thus the amount payable on the stated maturity date -- in
a manner it considers appropriate, in its sole discretion. We describe the
discretion that the calculation agent will have in determining the final GIN
Index level and the amount payable on your note more fully under "Specific Terms
of Your Note -- Discontinuance or Modification of the GIN Index" and "-- Role of
Calculation Agent". In addition, Goldman, Sachs & Co. may replace CBOE as the
calculator of any of the GSTI(TM) Indexes.
THERE IS NO AFFILIATION BETWEEN THE GIN INDEX STOCK ISSUERS AND US, AND WE ARE
NOT RESPONSIBLE FOR ANY DISCLOSURE BY THE
GIN INDEX STOCK ISSUERS
Goldman Sachs is not affiliated with the issuers of the GIN Index stocks
or the GIN Index calculator. As we have told you above, however, Goldman, Sachs
& Co. is the GIN Index sponsor and we or our affiliates may currently or from
time to time in the future engage in business with the GIN Index stock issuers.
Nevertheless, neither we nor any of our affiliates (including the GIN Index
sponsor) assumes any responsibility for the adequacy or accuracy of any publicly
available information about the GIN Index stock issuers.
None of the GIN Index calculator or the GIN 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, the GIN Index calculator
and the GIN Index stock issuers do not have -- and Goldman, Sachs & Co., as GIN
Index sponsor, does not have -- any obligation to take your interests, or those
of anyone else having an interest in your note, into consideration for any
reason, including in determining, composing or calculating the GIN Index or in
taking any corporate actions that might affect the value of your note, as
applicable.
YOU WILL HAVE TO PAY TAX ON DEEMED INTEREST AMOUNTS, EVEN THOUGH YOUR NOTE DOES
NOT BEAR PERIODIC INTEREST, AND ANY GAIN YOU RECOGNIZE WHEN YOUR NOTE IS SOLD,
REDEEMED OR MATURES WILL BE TAXED AS ORDINARY INCOME
Because we intend to treat your note as a single debt instrument subject
to special rules governing contingent payment obligations for United States
federal income tax purposes, if you are a United States holder, you will be
required to accrue interest on your note even though your note does not bear
periodic interest. We will calculate a comparable yield and projected payment
schedule, which you will be required to use in determining the amount of
interest to be included in income each year unless you timely disclose and
justify on your federal income tax return the use of a different comparable
yield and projected payment schedule. This comparable yield and projected
payment schedule will not be provided to you for any other purpose than the
determination of your interest accruals with respect to your note.
If the amount actually paid at maturity is less than the assumed amount
payable at maturity, you will have recognized taxable income in periods prior to
maturity that exceeds your economic income from holding the note during those
periods (with an offsetting ordinary loss when your note matures to the extent
of the interest previously accrued and capital loss for any loss thereafter).
Moreover, if you otherwise sell or dispose of your note prior to maturity, you
will be required to treat any gain recognized upon the disposition of your note
as ordinary income instead of capital gain. See "Supplemental Discussion of
Federal Income Tax Consequences" for a more detailed description of the United
States federal income tax consequences of purchasing, owning and disposing of
your note.
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<PAGE> 11
SPECIFIC TERMS OF YOUR NOTE
Please note that in this section entitled "Specific Terms of Your Note",
references to "The Goldman Sachs Group, Inc.", "we", "our" and "us" mean only
The Goldman Sachs Group, Inc. and do not include its consolidated subsidiaries,
while references to "Goldman Sachs" mean The Goldman Sachs Group, Inc. together
with its consolidated subsidiaries. Also, references to "Holders" mean those who
own notes registered in their own names, on the books that we or the trustee
maintains 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 attached prospectus, under
"Description of Notes We May Offer -- Legal Ownership of Notes".
We refer to the notes offered in this prospectus supplement, including
your note, as the offered notes. 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. 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 attached prospectus. The terms
described here supplement those described in the attached prospectus and, if the
terms described here are inconsistent with those described there, the terms
described here are controlling.
In addition to those described on the front cover page, the following
terms will apply to your note:
SPECIFIED CURRENCY: U.S. dollars
FORM OF NOTE:
- - global form only: yes, at DTC
- - non-global form available: no
DENOMINATIONS: any note registered in the name of a Holder must have a face
amount of $10,000 or a multiple of $1,000 in excess of $10,000
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 below under "-- Special Calculation Provisions"
- - 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 below under "-- Special
Calculation Provisions"
Please note that the information about the original issue date, applicable
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.
GIN INDEX, GIN INDEX SPONSOR AND GIN INDEX STOCKS
In this prospectus supplement, when we refer to the GIN Index, we mean the
index specified on the front cover, or any successor index, as it may be
modified, replaced or adjusted from time to time as described below under
"-- Discontinuance or Modification of the GIN Index". When we refer to the GIN
Index sponsor as of any time, we mean the entity, including any successor
sponsor, that sponsors and determines (whether by itself or in
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<PAGE> 12
conjunction with the GIN Index calculator) the
GIN Index as then in effect. When we refer to the GIN Index calculator as of any
time, we mean the entity, including any successor, that publishes, determines,
calculates and maintains the GIN Index (whether by itself or in conjunction with
the GIN Index sponsor) as then in effect. When we refer to the GIN Index stocks
as of any time, we mean the stocks that comprise the GIN Index as then in
effect, after giving effect to any additions, deletions or substitutions.
PAYMENT OF PRINCIPAL ON STATED
MATURITY DATE
On the stated maturity date, we will pay as principal, to the Holder of
your note, cash in an amount equal to:
- - 90% of the outstanding face amount of the note on the stated maturity date
plus the additional amount, if any, described below.
- - The additional amount, which will be payable only if the final GIN Index level
exceeds the reference GIN Index level, will be an amount equal to the
outstanding face amount of the note on the stated maturity date multiplied by
a fraction, the numerator of which is the final GIN Index level minus the
reference GIN Index level and the denominator of which is the reference GIN
Index level.
Thus, on the stated maturity date, we will not pay more than 90% of the
outstanding face amount of your note unless the final GIN Index level exceeds
the reference GIN Index level.
The calculation agent will determine the final GIN Index level, which will
be the closing level of the GIN Index on the determination date described below
as calculated and published by the GIN Index calculator. However, the
calculation agent will have discretion to adjust the final GIN Index level or to
determine it in a different manner as described below under "-- Discontinuance
or Modification of the GIN Index".
STATED MATURITY DATE
The stated maturity date will be , 2003, 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 , 2003 or, if , 2003 is not a business day, later than the
sixth business day after , 2003. 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 below under "-- Special
Calculation Provisions".
DETERMINATION DATE
The determination date will be the fifth business day prior to ,
2003 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 , 2003 or, if , 2003 is not a business day, later than the
first business day after , 2003.
OUR CALL RIGHT
We may redeem the offered notes, including your note, in whole but not in
part, on either of the redemption dates set forth below, at our option, for cash
at the following redemption prices, which are expressed as a percentage of the
outstanding face amount redeemed: If redeemed on the first business day
following the anniversary of the original issue date in each of the years
indicated:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---- ----------------
<S> <C>
2001 160%
2002 190%
</TABLE>
If we exercise our call right, we will pay only the applicable redemption
price specified above, regardless of the level of the GIN
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<PAGE> 13
Index when redemption occurs. Generally, we
would expect to exercise our call right if the GIN Index has increased to a
level at which the expected market value of your note, if it were not subject to
redemption, would be greater than the redemption price that we would have to pay
on the relevant redemption date.
If we choose to exercise our call right, we will notify the Holder of your
note and the trustee not less than 15 nor more than 45 calendar days before the
date we select for redemption, in the manner described in the attached
prospectus. The day we select for redemption will be set forth in the notice of
redemption.
If we give a notice of redemption, then we will redeem all the outstanding
offered notes in full. On the redemption date, we will pay the applicable
redemption price in cash in the manner described under "Manner of Payment"
below.
DISCONTINUANCE OR MODIFICATION
OF THE GIN INDEX
If the GIN Index sponsor or the GIN Index calculator discontinues
publication of the GIN Index and the GIN Index sponsor, the GIN Index calculator
or anyone else publishes a substitute index that the calculation agent
determines is comparable to the GIN 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 GIN Index.
If the calculation agent determines that the publication of the GIN Index
is discontinued and there is no successor GIN Index, or that the level of the
GIN Index is not available on the determination date because of a market
disruption event or for any other reason, the calculation agent will determine
the amount payable on the stated maturity date by reference to a group of stocks
and a computation methodology that the calculation agent determines will as
closely as reasonably possible replicate the GIN Index.
If the calculation agent determines that the GIN Index, the stocks
comprising the GIN Index or the method of calculating the GIN Index is changed
at any time in any respect -- including any addition, deletion or substitution
and any reweighting or rebalancing of GIN Index stocks and whether the change is
made by the GIN Index calculator or the GIN Index sponsor under existing
policies or following a modification of those policies, is due to the
publication of a successor GIN Index, is due to events affecting one or more of
the GIN 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 GIN Index or the method of its calculation as it believes are appropriate
to ensure that the final GIN Index level used to determine the amount payable on
the stated maturity date is equitable.
All determinations and adjustments to be made by the calculation agent
with respect to the GIN Index may be made by the calculation agent in its sole
discretion.
See "Additional Risk Factors Specific To Your Note -- As Index Sponsor and
Calculation Agent, Goldman, Sachs & Co. Will Have the Authority to Make
Determinations That Could Materially Affect Your Note in Various Ways and Create
Conflicts of Interest" for a description of how you could be affected as a
result of our affiliation with the GIN Index sponsor and the calculation agent.
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 below under "-- Special
Calculation Provisions".
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 your note. Although the
terms of the offered notes differ from those of the other Series B medium-term
notes, Holders of specified percentages
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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 attached prospectus under "Description of Notes We May Offer -- Default,
Remedies and Waiver of Default" and "-- Modification and Waiver of Covenants".
MANNER OF PAYMENT
Any payment on your note at maturity or on a redemption date 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 the 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 attached 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 GIN Index, market disruption events, business days, the final GIN
Index level, the default amount and the amount payable in respect of your note
on any redemption date or on the stated maturity date. 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. is serving as 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 attached prospectus but that
is not a day on which the New York Stock Exchange, the American Stock Exchange
or NASDAQ National Market System is authorized by law or executive order to
close or on which the GIN Index is not calculated and published by the GIN Index
calculator or the GIN Index sponsor because the GIN Index calculator or the GIN
Index sponsor is not open for business.
DEFAULT AMOUNT
The default amount for your note on any day will be an amount, in the
specified currency for the principal of your note, equal to the cost of having a
qualified financial institution, of the kind and selected as described below,
expressly assume all our payment and other obligations with respect to your note
as of that day and as if no default or acceleration had occurred, or to
undertake other obligations providing substantially equivalent economic value to
you with respect to your note. That cost will equal:
- - the lowest amount that a qualified financial institution would charge to
effect this assumption or undertaking, plus
- - the reasonable expenses, including reasonable attorneys' fees, incurred by the
Holder of your note in preparing any documentation necessary for this
assumption or undertaking.
During the default quotation period for your note, which we describe below, the
Holder and/or we may request a qualified financial institution to provide a
quotation of the
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<PAGE> 15
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 any one or more of
the GIN Index stocks on their primary market, 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 GIN Index or to any one or more of the GIN Index
stocks, if available, in the primary market for those contracts, in each case
for more than two hours of trading or during the one-half hour before the
close of trading in that market, as determined by the calculation agent in its
sole discretion, or
- - any one or more of the GIN Index stocks, or option or futures contracts
relating to the GIN Index or to any one or more of the GIN Index stocks, if
available, do not trade on what was the primary market for those GIN 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 may
effect as described below under "Use of Proceeds and Hedging".
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<PAGE> 16
The following events will not be market disruption events:
- - a limitation on the hours or numbers of days of trading, but only if the
limitation results from an announced change in the regular business hours of
the relevant market, and
- - a decision to permanently discontinue trading in the option or futures
contracts relating to the GIN Index or to any GIN Index stock.
For this purpose, an "absence of trading" in the primary securities market
on which a GIN Index stock, or on which option or futures contracts relating to
the GIN Index or any one or more GIN Index stocks, 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 a GIN Index
stock or in option or futures contracts relating to the GIN Index or any one or
more GIN Index stocks, 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
GIN Index in this description of market disruption events includes the GIN Index
and any successor GIN Index as it may be modified, replaced or adjusted from
time to time.
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<PAGE> 17
HYPOTHETICAL RETURNS ON YOUR NOTE
In the table below, we provide a range of hypothetical final GIN Index
levels for the GIN Index. Based on these hypothetical final GIN Index levels, a
four-year maturity of the offered notes, the assumed reference GIN Index level
and the other assumptions set forth in the box below, we illustrate a range of
(i) hypothetical amounts that will be payable on the stated maturity date per
each $1,000 of outstanding face amount of your note, (ii) hypothetical total
rates of return on your note to the stated maturity date and (iii) hypothetical
pretax annualized rates of return on your note. Based on the same hypothetical
final GIN Index levels, we also compare the hypothetical pretax annualized rates
of return on your note referred to above to hypothetical pretax annualized rates
of return on owning the GIN Index stocks (having the same relative weighting as
they do in the GIN Index) during the four-year period from the trade date to the
stated maturity date. In the paragraphs following the table, we explain how we
have calculated these amounts.
The information in the table reflects hypothetical rates of return on the
offered notes assuming that they are 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 table below. For a discussion of
some of these factors, see "Additional Risk Factors Specific to Your Note -- The
Market Value of Your Note May Be Influenced By Many Factors That Are
Unpredictable and Interrelated in Complex Ways" and "-- The Market Value of Your
Note May Be Influenced by Factors Specifically Related to Internet Stocks".
<TABLE>
<CAPTION>
- -------------------------------------------
ASSUMPTIONS
<S> <C>
Face amount $1,000
Original issue price, expressed
as a percentage of the face
amount 100%
Reference GIN Index level 474.44
No redemption of the offered
notes
No change in, or affecting, any
of the GIN Index stocks or
the method by which the GIN
Index calculator calculates
the GIN Index level
No change in the relative
weighting of any GIN Index
stock
No market disruption event
occurs
No dividends declared on any of
the GIN Index stocks during
the four-year period from the
trade date to the stated
maturity date of the offered
notes
- -------------------------------------------
</TABLE>
We have assumed that the reference GIN Index level will be the level shown
in the box above. However, the actual reference level will not be determined
until on or shortly before the trade date and is likely to differ from the
assumed reference GIN Index level. The actual reference GIN Index level also may
differ from the closing level of the GIN Index on the trade date.
The GIN Index level has been highly volatile in the past and cannot be
predicted for future periods. For information about the level of the GIN Index
during recent periods, see "The GIN Index -- Historical Closing Levels of the
GIN Index" below.
As stated above, the following table assumes we do not exercise our call
right. If we were to redeem your note, the rate of return on your note to the
redemption date would likely be substantially lower than the rate to the stated
maturity date.
As stated above, the following table assumes that no dividends will be
paid on the
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GIN Index stocks. We understand, based on publicly available information, that
none of the issuers of the common stocks currently included in the GIN Index has
declared any dividends on its common stock through the date of this prospectus
supplement. We do not know, however, whether or to what extent the issuers of
the GIN Index stocks will pay dividends in the future. These are matters that
will be determined by the issuers of the GIN Index stocks and not by us.
Consequently, the amount of dividends actually paid on the GIN Index stocks by
their issuers, and, therefore, the rate of return on the GIN Index stocks,
during the four-year period may differ substantially from the information
reflected in the table below.
As the following table indicates, the hypothetical rates of return 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 negatively
affect the rate of return on your note to a comparatively greater extent than
the over-all rate of return on the GIN Index stocks.
The following table is provided for purposes of illustration only. It
should not be taken as an indication or prediction of future investment results
and is intended merely to illustrate the impact that various hypothetical final
GIN Index levels at the end of the indicated period could have on the rate of
return on your note and the over-all rates of return on the GIN Index stocks,
assuming all other variables remained constant.
<TABLE>
<CAPTION>
1 2 3 4 5 6
- ------------ ------------ --------------- ------------ ------------ ------------
HYPOTHETICAL
HYPOTHETICAL AMOUNT
FINAL GIN PAYABLE ON HYPOTHETICAL
INDEX LEVEL STATED MATURITY HYPOTHETICAL PRETAX
AS % OF DATE PER HYPOTHETICAL PRETAX ANNUALIZED
ASSUMED $1,000 PRETAX TOTAL ANNUALIZED RATE OF
HYPOTHETICAL REFERENCE OUTSTANDING RATE OF RATE OF RETURN ON
FINAL GIN GIN INDEX FACE AMOUNT RETURN ON RETURN ON GIN INDEX
INDEX LEVEL LEVEL OF NOTE NOTE NOTE STOCKS
- ------------ ------------ --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
332.11 70% 900.00 -10% -2.62% -8.72%
379.55 80 900.00 -10 -2.62 -5.50
427.00 90 900.00 -10 -2.62 -2.62
450.72 95 900.00 -10 -2.62 -1.28
474.44 100 900.00 -10 -2.62 0.00
545.61 115 1,050.00 5 1.22 3.52
616.77 130 1,200.00 20 4.61 6.67
687.94 145 1,350.00 35 7.65 9.51
759.10 160 1,500.00 50 10.40 12.10
830.27 175 1,650.00 65 12.92 14.49
901.44 190 1,800.00 80 15.25 16.71
972.60 205 1,950.00 95 17.41 18.78
1,043.77 220 2,100.00 110 19.44 20.72
1,114.93 235 2,250.00 125 21.34 22.54
1,186.10 250 2,400.00 140 23.13 24.27
</TABLE>
-------------------------
The hypothetical pretax total rate of return on note to stated maturity
date (fourth column) represents (i) the hypothetical amount payable on stated
maturity date per
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<PAGE> 19
$1,000 of outstanding face amount of note (third column) minus (ii) $1,000, with
the difference expressed as a percentage of $1,000.
The hypothetical pretax annualized rate of return on note (fifth column)
represents the hypothetical pretax total rate of return on note (fourth column)
expressed on an annualized basis for the period from the trade date to the
stated maturity date and is calculated on a semi-annual, bond-equivalent basis.
The hypothetical pretax annualized rate of return on the GIN Index stocks
(sixth column) represents the hypothetical pretax total rate of return on the
GIN Index stocks during the period from the trade date to the stated maturity
date, expressed on an annualized basis for this period and calculated on a
semi-annual, bond-equivalent basis. For this purpose, the hypothetical pretax
total rate of return on the GIN Index stocks is assumed to equal the difference
between the hypothetical final GIN Index level and the reference GIN Index level
expressed as a percentage of the reference GIN Index level (i.e., the percentage
in column two minus 100%).
We cannot predict the actual final GIN Index level or the market value of
your note, nor can we predict the relationship between the GIN 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 reference GIN Index level and the actual
final GIN Index level determined by the calculation agent as described
above. In particular, the final GIN Index level could be lower or higher
than the levels reflected in the table. Moreover, the assumptions we have
made in connection with the illustration set forth above may not reflect
actual events. Consequently, the total return that an investor in the
offered notes would actually achieve, as well as how that return would
compare to the total return that an investor in the GIN Index stocks would
actually achieve, may be very different from the information reflected in
the table above.
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<PAGE> 20
THE GIN INDEX
We have derived all information regarding the GIN Index contained in this
prospectus supplement, including its make-up, method of calculation and changes
in its components, from publicly available information, except information with
respect to the GSTI(TM) Committee described below, which we obtained from
Goldman, Sachs & Co. That information reflects the policies of, and is subject
to change by, Goldman, Sachs & Co., which is the GIN Index sponsor, and CBOE,
which is the GIN Index calculator, as more fully described below. Goldman, Sachs
& Co. owns all rights to the GSTI(TM) Composite Index and the GSTI Sub-Indexes,
including the GIN Index, which are described below. Goldman, Sachs & Co. has no
obligation to continue to sponsor, and may discontinue sponsorship of, the GIN
Index. Similarly, CBOE has no obligation to continue to publish or calculate,
and may discontinue publication or calculation of, the GIN Index. The
consequences of Goldman, Sachs & Co. discontinuing the GIN Index or CBOE
discontinuing publication or calculation of the GIN Index are described above in
the section entitled "Specific Terms of Your Note -- Discontinuance or
Modification of the GIN Index".
GENERAL
The GSTI(TM) Internet Index (or the GIN Index), the index to which your
note is linked, is one of the sub-indexes of the Goldman Sachs Technology
Indexes (GSTI(TM)). The GSTI(TM) is a family of indexes relating to equity
securities and consists of a composite index, which is commonly referred to as
the "GSTI(TM) Composite Index", and six sub-indexes (including the GIN Index),
which are commonly referred to as the "GSTI(TM) Sub-Indexes". The GSTI(TM)
Composite Index and the GSTI(TM) Sub-Indexes are designed as benchmarks for U.S.
traded technology and Internet-related stocks. The GSTI(TM) Composite Index is a
comprehensive index of U.S. traded technology and Internet-related stocks
selected using the objective criteria described below. The GSTI(TM) Sub-Indexes
are a set of more narrowly based equity indexes consisting of eight or more
stocks selected by the GSTI(TM) Committee from the universe of stocks in the
GSTI(TM) Composite Index. The other GSTI(TM) Sub-Indexes are the GSTI(TM)
Hardware Index, GSTI(TM) Semiconductor Index, GSTI(TM) Software Index, GSTI(TM)
Services Index and GSTI(TM) Multimedia Networking Index.
The GSTI(TM) Committee is a committee of two or more individuals
representing the Technology Investment Research Group and the Equity Derivatives
Research Group at Goldman, Sachs & Co.
GSTI(TM) COMPOSITE INDEX DESIGN
The GSTI(TM) Composite Index has been designed to measure the performance
of U.S.-traded, high-capitalization technology and Internet-related stocks. The
GSTI(TM) Composite Index is a modified capitalization-weighted index with the
weight of the largest capitalization stocks limited to 8.5% of the entire
GSTI(TM) Composite Index on each semi-annual rebalancing date (as further
described below), with each remaining stock in the GSTI(TM) Composite Index
being weighted in proportion to its market capitalization.
The GSTI(TM) Composite Index will include all technology and
Internet-related stocks that meet the following objective criteria:
- - the underlying company's stock must trade on the New York Stock Exchange or
the American Stock Exchange or must be traded through the facilities of the
National Association of Securities Dealers Automated Quotation System (NASDAQ)
and be "reported securities" under Rule 11Aa3-1 of the Securities Exchange Act
of 1934. Only outstanding shares of common stock are eligible for inclusion in
the GSTI(TM) Composite Index; securities derivative of or representing common
stock, such as American Depositary Receipts, are not eligible for inclusion.
- - to be eligible for inclusion, the total market capitalization of the
underlying company's stock must be equal to or greater than the capitalization
"cutoff" value. The base period "cutoff" value for the GSTI(TM) Composite
Index was initially set at $600
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<PAGE> 21
million and this value has been adjusted on each semi-annual rebalancing date
(as described below) to reflect the price performance of the GSTI(TM) Composite
Index since the base period and rounded to the nearest $50 million. Once
included, components of the GSTI(TM) Composite Index must have a total market
capitalization which is 50% or more of the "cutoff" value on each rebalancing
date to remain included. The base period is the inception date of the GSTI(TM)
Composite Index, which was April 30, 1996. As of November 3, 1999, the
"cutoff" value of the GSTI(TM) Composite Index was $1.9 billion.
- - constituent company stocks with a public float below 20% of shares issued and
outstanding are not eligible for inclusion in the GSTI(TM) Composite Index.
- - each constituent company stock must have annualized share turnover of 30% or
more, based on its average daily share volume for the six calendar months
prior to inclusion in the GSTI(TM) Composite Index. An exception to this
criteria is made for stocks eligible for inclusion under the "fast addition"
rule described below.
- - the component companies must be from a delineated group of specified Standard
Industrial Classification codes or Russell Industry codes, which are
established industry classification systems, or be classified as technology or
Internet-related using a supplemental sector or industry classification method
developed and maintained by the Investment Research Group at Goldman, Sachs &
Co. The list of technology and Internet-related stocks classified under the
Goldman Sachs Investment Research Sector Classification system are available
to interested parties upon request from the Equity Derivatives Research Group
at Goldman, Sachs & Co.
A complete list of the current constituents of the GSTI(TM) Composite
Index is available from CBOE.
GSTI(TM) SUB-INDEX COMPOSITION
All stocks in the GSTI(TM) Composite Index are eligible for inclusion in
one or more GSTI(TM) Sub-Indexes. The GSTI(TM) Sub-Indexes are a set of more
narrowly based indexes of eight or more stocks selected from the universe of
GSTI(TM) Composite Index stocks by the GSTI(TM) Committee. A company may be
included in more than one GSTI(TM) Sub-Index but some companies may be included
only in the GSTI(TM) Composite Index. Each GSTI(TM) Sub-Index is weighted
according to a modified capitalization-weighting methodology, which does not
allow for the weight of any GSTI(TM) Sub-Index stock to exceed 12.5% of the
weight of the entire applicable GSTI(TM) Sub-Index on each rebalancing date. The
purpose of this weighting scheme is to limit the impact of stocks which would
otherwise dominate the relevant GSTI(TM) Sub-Index's performance but preserve
the most attractive features of a capitalization-weighted index.
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<PAGE> 22
GIN INDEX COMPOSITION
Below is a list of the 18 companies whose common stocks are included in
the GIN Index as of November 3, 1999:
<TABLE>
<CAPTION>
TRADING EXCHANGE ON WHICH
NAME SYMBOL LISTED OR TRADED WEIGHTING (%)
- ---- ------- ----------------- -------------
<S> <C> <C> <C>
Amazon.com, Inc. ......................... AMZN NASDAQ 11.7%
America Online Inc. ...................... AOL NYSE 16.5
At Home Corp. ............................ ATHM NASDAQ 9.0
Check Point Software Technologies......... CHKP NASDAQ 3.1
CMG Information Services Inc. ............ CMGI NASDAQ 7.1
EBAY, Inc. ............................... EBAY NASDAQ 10.0
E*TRADE Group Inc. ....................... EGRP NASDAQ 4.4
Earthlink Network Inc. ................... ELNK NASDAQ 0.9
INFOSEEK Corporation...................... SEEK NASDAQ 1.5
Inktomi Communications.................... INKT NASDAQ 3.4
MindSpring Enterprises.................... MSPG NASDAQ 1.1
Network Associates Inc. .................. NETA NASDAQ 1.9
PSINET Inc. .............................. PSIX NASDAQ 1.9
RealNetworks Inc. ........................ RNWK NASDAQ 5.9
Sterling Commerce Inc. ................... SE NYSE 1.7
Verio Inc. ............................... VRIO NASDAQ 1.7
Verisign Inc. ............................ VRSN NASDAQ 5.7
Yahoo! Inc. .............................. YHOO NASDAQ 12.6
</TABLE>
GSTI(TM) SUB-INDEX CALCULATION
The GSTI(TM) Sub-Indexes (including the GIN Index) are calculated by CBOE
on a real-time basis using last-sale prices and are disseminated every 15
seconds by CBOE during regular CBOE trading hours. If a component stock is not
currently being traded on its primary market, the most recent price at which the
stock traded on that market is used in the calculation. The GSTI(TM) Composite
Index is also calculated by CBOE in a similar manner. Goldman, Sachs & Co. may
replace CBOE as the calculator of any of the GSTI(TM) Indexes.
The GSTI(TM) Sub-Indexes (including the GIN Index) are calculated on a
modified capitalization-weighted method. This method is a hybrid between equal
weighting for all component securities (which may pose liquidity concerns for
smaller capitalization stocks) and normal capitalization-weighting for all
component securities (which may result in two or three stocks dominating an
index's performance). Under the method employed with respect to each of the
GSTI(TM) Sub-Indexes (including the GIN Index), the maximum weight for any stock
in the relevant GSTI(TM) Sub-Index will be "capped" at 12.5% of the weight of
that entire GSTI(TM) Sub-Index on each rebalancing date. The weight of any stock
in the relevant GSTI(TM) Sub-Index may rise above the 12.5% cap between the
semi-annual rebalancing dates due to relative price performance or certain
corporate actions, such as mergers, acquisitions or large share issuances, which
would result in an increase in the market capitalization of the constituent
company.
The modified-capitalization method is implemented as follows: First, each
GSTI(TM) Sub-Index is capitalization-weighted using the shares outstanding and
the closing price in
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<PAGE> 23
the primary market of each stock on the relevant rebalancing date. Second, the
weight of any stock which is above 12.5% of the weight of the relevant GSTI(TM)
Index is reduced to 12.5%. Third, the aggregate excess weight (i.e., the sum of
the pre-capped weights minus the sum of the post-capped weights for all capped
stocks) is redistributed across the remaining uncapped stocks in the relevant
GSTI(TM) Sub-Index while retaining the relative weighting of those remaining
uncapped stocks. Finally, at the time of any future semi-annual rebalancing (as
described below), stocks with GSTI(TM) Sub-Index weights which exceed their cap
in the relevant GSTI(TM) Sub-Index will be restored to an appropriate capped
weight. (The GSTI(TM) Composite Index is calculated in a similar manner except
that the weight of any component stock in the GSTI(TM) Composite Index is capped
at 8.5%).
Each GSTI(TM) Sub-Index component stock is also assigned on each
semi-annual rebalancing date a sub-index share fraction which is used in
calculating the relevant GSTI(TM) Sub-Index divisor on semi-annual rebalancing
dates. Stocks which are not "capped" have a sub-index share fraction value of
unity (1.0). The sub-index share fraction for "capped" stocks is a function of
the component stock's capped weight, the relevant GSTI(TM) Sub-Index's adjusted
market value, and the actual shares of the component stock outstanding and its
closing price in the primary trading market on the rebalancing date.
The GSTI(TM) Composite Index divisor was initially calculated to yield a
benchmark value of 100.00 at the close of trading on the CBOE on April 30, 1996.
The divisor for the GSTI(TM) Composite Index and for each of the GSTI(TM)
Sub-Indexes is adjusted by the index calculator, which is currently CBOE, as
needed to ensure continuity in each of those indexes in the event of certain
changes due to non-market factors affecting the component stocks, such as
additions or deletions of stocks from that index, share changes, or adjustments
to a component stock's price to reflect rights offerings, spinoffs and special
cash dividends. The divisor remains at the new value until a further adjustment
is necessary as the result of another change.
As of November 3, 1999, the GIN Index's divisor was 295.6194.
GSTI(TM) COMPOSITE INDEX MAINTENANCE
The GSTI(TM) Composite Index is maintained by CBOE. Index maintenance
includes rebalancing, monitoring and completing the adjustments for events such
as additions or deletions of component stocks, share changes, stock splits,
stock dividends, and stock price adjustments due to events such as company
restructurings or spinoffs, and adjusting the divisor for such events as needed.
The GSTI(TM) Composite Index is rebalanced by CBOE on a semi-annual basis.
Stocks are added or deleted from the GSTI(TM) Composite Index on the effective
date of the rebalancing based on the inclusion criteria described under
"-- GSTI(TM) Composite Index Design" above. For example, any GSTI(TM) Composite
Index constituent with a capitalization value that has fallen below 50% of the
"cutoff" value on a semi-annual rebalancing date is removed from the GSTI(TM)
Composite Index. In addition, GSTI(TM) Composite Index share changes are made to
reflect the outstanding shares and closing prices of all GSTI(TM) Composite
Index constituents on the rebalancing date. The changes are implemented after
the close of trading on the CBOE on each "effective" date. The effective dates
are the third Friday of January and July of every year. The rebalancing date is
seven (7) business days prior to (and including) the effective date. CBOE
screens stocks for inclusion in the GSTI(TM) Composite Index and determines the
component stocks of the GSTI(TM) Composite Index. Public notice of the new
component stocks list is disseminated by CBOE at least five trading days prior
to the effective date of the rebalancing unless unforeseen circumstances require
a shorter period. That public notice is published by CBOE after regular U.S.
trading hours. Therefore, Goldman, Sachs & Co. does not learn of the new
composition of the GSTI(TM) Composite Index during regular U.S. trading hours.
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<PAGE> 24
Except for stocks that meet the criteria for
"Fast Addition or Deletion" (described immediately below), stocks can only be
added or deleted from the GSTI(TM) Composite Index or any of the GSTI(TM)
Sub-Indexes at the time of the semi-annual rebalancing.
Fast Addition or Deletion of Component Stocks
Stocks may be added or deleted from the GSTI(TM) Composite Index at a time
other than at the semi-annual rebalancings according to the "fast add or delete"
rule. All changes to constituent stocks of the GSTI(TM) Composite Index made in
accordance with this rule are announced by CBOE at least five trading days prior
to the effective date of the fast add or delete unless unforeseen circumstances
require a shorter period.
Any company whose stock starts trading between semi-annual rebalancings is
eligible to be fast added to the GSTI(TM) Composite Index if the following
criteria are met as determined by the GIN Index calculator: all the inclusion
criteria described above under "-- GSTI(TM) Composite Index Design" are met,
except that no minimum turnover ratio is required and the stock must rank in the
top quartile of market capitalization of the GSTI(TM) Composite Index based on
the previous month-end closing prices. Thereafter, the actual decision to fast
add any newly eligible stocks are made at the discretion of the GSTI(TM)
Committee.
If two companies represented in the GSTI(TM) Composite Index merge or if a
company represented in the GSTI(TM) Composite Index merges with a company not
then included in the GSTI(TM) Composite Index, the merged company remains in the
GSTI(TM) Composite Index if it meets all the GSTI(TM) Composite Index inclusion
criteria. If the target company is then in the GSTI(TM) Composite Index, it is
fast deleted after the close of trading on the CBOE on the date the merger is
completed.
If a GSTI(TM) Composite Index constituent company is acquired by a
non-GSTI(TM) Composite Index company, the acquiring company may be added to the
GSTI(TM) Composite Index if it meets the inclusion criteria; otherwise the
target company will be fast deleted. Any such additions or deletions will be
effective after the close on the date the acquisition is completed.
If a company represented in the GSTI(TM) Composite Index spins-off another
company, the parent and the spun-off company (considered individually) will
remain in the GSTI(TM) Composite Index if each of them meets the GSTI(TM)
Composite Index inclusion criteria. If either the parent or the spun-off company
fails to meet the inclusion criteria, it is removed from the GSTI(TM) Composite
Index.
In the event that a company represented in the GSTI(TM) Composite Index
files for bankruptcy, its stock is removed from the GSTI(TM) Composite Index
effective after the close on the date of the filing or after the close of the
next CBOE trading day. In the event that trading in a GSTI(TM) Composite Index
constituent stock is suspended for thirty (30) trading days, CBOE will remove
that company from the GSTI(TM) Composite Index unless an announcement has been
made that the stock will commence trading within the next ten (10) days. Any
such removal will be pre-announced and, for purposes of minimizing impact to the
GSTI(TM) Composite Index, the stock to be removed will be removed at the value
at which it last traded.
GSTI(TM) SUB-INDEX MAINTENANCE
The GSTI(TM) Sub-Indexes (including the GIN Index) are maintained by CBOE,
in consultation with the GSTI(TM) Committee when such consultation is required
by the rules of the GSTI(TM) Composite Index or GSTI(TM) Sub-Indexes. At each
semi-annual rebalancing, CBOE determines changes to the GSTI(TM) Composite Index
according to the criteria discussed under "-- GSTI(TM) Composite Index
Maintenance" above. Based on this determination, CBOE provides to the GSTI(TM)
Committee, after the close of trading on the day after each rebalancing date, a
list of all constituent stock changes to the GSTI(TM) Composite Index. Based on
this list of changes, the GSTI(TM) Committee determines any changes to the
GSTI(TM) Sub-Indexes. The GSTI(TM) Committee also retains discretion to add or
delete stocks from the GSTI(TM) Sub-
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<PAGE> 25
Indexes at the rebalancing or to change a stock's industry classification at any
time. At the discretion of the GSTI(TM) Committee, a stock may also be removed
from a GSTI(TM) Sub-Index due to lack of industry representation in the relevant
GSTI(TM) Sub-Index at any time. The component stocks of any GSTI(TM) Sub-Index
are intended to be representative of the industry sector represented by that
GSTI(TM) Sub-Index. The GSTI(TM) Committee's decision regarding any changes to
any component stocks of any GSTI(TM) Sub-Index is provided to CBOE by Goldman,
Sachs & Co. after regular U.S. trading hours and before trading commences on the
next trading day after CBOE provides the list of GSTI(TM) Composite Index
constituent changes to the GSTI(TM) Committee, as described above. CBOE, in
turn, disseminates the information concerning the components of the GSTI(TM)
Sub-Indexes to the public at least five days prior to the effective date, unless
unforeseen circumstances require a shorter period.
Additionally, at the semi-annual rebalancing of the GSTI(TM) Composite
Index, stocks with GSTI(TM) Sub-Index weights that exceed their cap in the
relevant GSTI Sub-Index will be restored to their appropriate capped weight.
When a stock is "fast added" to the GSTI(TM) Composite Index, the stock
may also be added to one or more GSTI(TM) Sub-Indexes. If added to a GSTI(TM)
Sub-Index, the stock's weight cannot exceed the appropriate cap for that
GSTI(TM) Sub-Index. If a stock is "fast deleted" from the GSTI(TM) Composite
Index, it will be removed from all GSTI(TM) Sub-Indexes at the same time.
In the case of a merger of a GSTI(TM) Sub-Index constituent company, and
if the post-merger company is determined by CBOE to be eligible to remain in the
GSTI(TM) Composite Index, then the GSTI(TM) Committee will decide the GSTI(TM)
Sub-Index classification of the merged company. If neither pre-merger entity was
in the relevant GSTI(TM) Sub-Index and if the weight of the merged company would
exceed the relevant cap for the GSTI(TM) Sub-Index to which it is assigned, the
weight of the company will be capped at the time that the merger is completed.
The GSTI(TM) Sub-Index shares of all other stocks in the effected GSTI(TM)
Sub-Index will remain unchanged.
HISTORICAL CLOSING LEVELS OF THE GIN INDEX
The initial GIN Index value was set at 100 at the close of trading on
April 30, 1996. CBOE first calculated and published the GIN Index in the third
quarter of 1996. The table below sets forth the closing levels of the GIN Index
for the last two calendar quarters in 1996, for the four calendar quarters in
1997 and 1998, for the first three calendar quarters in 1999 and for the fourth
calendar quarter in 1999 through November 3, 1999, all as published by CBOE. We
obtained the closing levels listed in the table below from Bloomberg Financial
Services, without independent verification.
Since its inception, the level of the GIN Index has experienced
significant fluctuations. Any historical upward or downward trend in the closing
level of the GIN Index during any period shown below is not an indication that
the GIN 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 GIN
Index as an indication of future performance. We cannot give you any assurance
that the future performance of the GIN Index or the GIN Index stocks will result
in you receiving an amount greater than the outstanding face amount of your note
on the stated maturity date; indeed, you may receive an amount less than the
outstanding face amount. See "Additional Risk Factors Specific to Your
Note -- You May Lose Some of Your Principal" above.
On September 17, 1999, the GIN Index was amended in several respects.
These amendments included a revision of the rules of the GSTI(TM) Composite
Index and the GSTI(TM) Sub-Indexes to include a supplemental sector and industry
classification system developed and maintained by the Goldman Sachs Investment
Research department and the reduction of the weight cap of the GSTI(TM)
Sub-Indexes components from 25% to 12.5%. As a result of these amendments,
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Amazon.com Inc. and EBAY, Inc. were added to the GIN Index effective after the
close of trading, September 17, 1999, under the provisions of the rules for fast
additions to the GSTI(TM) Composite Index and GSTI(TM) Sub-Indexes. Given these
changes, the following historical levels may be even less of an indication of
future performance of the GIN Index.
QUARTERLY HIGH, LOW OR CLOSING LEVELS OF THE GIN INDEX
<TABLE>
<CAPTION>
HIGH LOW CLOSE
------ ------ ------
<S> <C> <C> <C>
1996
Initial GIN Index Value on April 30, 1996................... 100.00
Quarter ended September 30................................ 109.65 80.97 106.30
Quarter ended December 31................................. 114.23 97.94 99.79
1997
Quarter ended March 31.................................... 114.96 78.73 80.40
Quarter ended June 30..................................... 108.10 75.41 100.88
Quarter ended September 30................................ 127.36 102.84 113.84
Quarter ended December 31................................. 122.03 94.57 108.06
1998
Quarter ended March 31.................................... 130.51 102.94 130.12
Quarter ended June 30..................................... 159.49 126.55 159.49
Quarter ended September 30................................ 184.79 113.53 164.02
Quarter ended December 31................................. 359.29 125.49 338.74
1999
Quarter ended March 31.................................... 553.20 336.53 553.20
Quarter ended June 30..................................... 667.22 372.17 495.55
Quarter ended September 30................................ 523.72 360.16 456.28
Quarter ended December 31 (through November 3,1999)....... 507.73 435.85 474.44
Closing level of the Index on November 3, 1999............ 474.44
</TABLE>
CBOE has entered into a calculation agency agreement with Goldman, Sachs &
Co., pursuant to which it will calculate the GIN Index as described under
"-- GSTI(TM) Sub-Index Calculation" above. The offered notes are not sponsored,
endorsed, sold or promoted by CBOE. CBOE makes no representation or warranty,
express or implied, to any owner 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 in the ability of the GIN Index to track the
performance of any market segment. CBOE has no obligation to take the needs of
Goldman, Sachs & Co. or any owner of the offered notes into consideration in
calculating the GIN Index. CBOE is not responsible for, and has not participated
in the determination of the timing of the sale of the offered notes, prices at
which the offered notes are to be sold initially 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 converted into cash. CBOE has no obligation or
liability in connection with the administration or marketing of the offered
notes.
NONE OF CBOE, THE GOLDMAN SACHS GROUP, INC., GOLDMAN, SACHS & CO. OR ANY
OF OUR OTHER AFFILIATES GUARANTEES THE ACCURACY OR COMPLETENESS OF THE GIN INDEX
OR ANY INCLUDED DATA AND NONE OF THEM SHALL HAVE ANY LIABILITY FOR ANY
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ERRORS, OMISSIONS OR INTERRUPTIONS IN THE GIN INDEX. NONE OF CBOE, THE GOLDMAN
SACHS GROUP, INC., GOLDMAN, SACHS & CO. OR ANY OF OUR OTHER AFFILIATES MAKES ANY
WARRANTY, EXPRESS OR IMPLIED, AND EACH HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE GIN
INDEX OR ANY INCLUDED DATA. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, IN
NO EVENT SHALL CBOE, THE GOLDMAN SACHS GROUP, INC., GOLDMAN, SACHS & CO. OR ANY
OF OUR OTHER AFFILIATES HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT
OR CONSEQUENTIAL DAMAGES, INCLUDING LOST PROFITS, EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY
AGREEMENTS BETWEEN CBOE AND GOLDMAN SACHS.
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<PAGE> 28
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 attached prospectus under "Use of Proceeds".
We or our affiliates may also use those proceeds in transactions intended to
hedge our obligations under the offered notes as described below.
In anticipation of the sale of the offered notes, we and/or our affiliates
expect to enter into hedging transactions involving purchases of some or all of
the GIN Index stocks, options or futures on the GIN Index or GIN Index stocks or
other instruments linked to the GIN Index or GIN Index stocks prior to and on
the trade date. From time to time, we and/or our affiliates may enter into
additional hedging transactions or unwind those we have entered into. In this
regard, we and/or our affiliates may:
- - acquire or dispose of GIN Index stocks or other securities of a GIN Index
stock issuer,
- - take short positions in GIN Index stocks or other securities of a GIN Index
stock issuer -- i.e., we and/or our affiliates may sell securities of the kind
that we do not own or that we borrow for delivery to a purchaser,
- - take or dispose of positions in options or futures on the GIN Index or GIN
Index stocks or other instruments linked to the GIN Index or GIN Index stocks,
and/or
- - 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 GIN
Index or other components of the global equity markets.
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.
We and/or our affiliates may close out our or their hedge on or before the
determination date. That step may involve sales or purchases of one or more of
the GIN Index stocks, options or futures on the GIN Index or GIN Index stocks or
other instruments linked to the GIN Index or GIN Index stocks, or options or
other instruments linked to indices designed to track the performance of the GIN
Index or other components of the global equity markets.
The hedging activity discussed above may adversely affect the market value
of your note from time to time. See "Additional Risk Factors Specific to
Your Note -- Trading and Other Transactions by Goldman Sachs in Securities
Linked to the GIN 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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SUPPLEMENTAL DISCUSSION OF UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES
The following section supplements the discussion of U.S. federal income taxation
in the attached prospectus with respect to United States holders. The following
section is the opinion of Sullivan & Cromwell, counsel to The Goldman Sachs
Group, Inc. Please consult your own tax advisor concerning the U.S. federal
income tax and any other applicable tax consequences of owning your note in your
particular circumstances.
Although the matter is not free from doubt, your note should 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 interest in
respect of your note prior to your receipt of cash attributable to such income.
It is not entirely clear how the rules governing contingent payment
obligations provide for determining the maturity date for debt instruments (such
as your note) that provide for a call right for purposes of computing the
comparable yield and projected payment schedule. It would be reasonable,
however, to compute the comparable yield and projected payment schedule for your
note (and we intend to make the computation in such a manner) based upon an
assumption that your note will remain outstanding until the stated maturity date
and that the projected contingent payment will be made at such time.
The comparable yield and projected payment schedule may be obtained from
us by contacting the Goldman Sachs Treasury Administration Department, Debt
Administration Group, at 212-902-1000. You are required to use the comparable
yield and projected payment schedule determined by us in determining your
interest accruals in respect of your note unless you timely disclose and justify
on your federal income tax return the use of a different comparable yield and
projected payment schedule.
The comparable yield and projected payment schedule is not provided to you
for any purpose other than the determination of your interest accruals in
respect of your note, and we make no representation regarding the amount
of contingent payments with respect to your note.
If you purchase your note for an amount that differs from the note's
adjusted issue price at the time of the purchase, you must determine the extent
to which the difference between the price you paid for your note and its
adjusted issue price is attributable to a change in expectations as to the
projected payment schedule, a change in interest rates, or both, and allocate
the difference accordingly. The adjusted issue price of your note will equal
your note's original issue price plus any interest deemed to be accrued on your
note (under the rules governing contingent payment obligations) as of the time
you purchase your note. The issue price of your note will be the first price at
which a substantial amount of the offered notes is sold to persons other than
bond houses, brokers or similar persons or organizations acting in the capacity
of underwriters, placement agents or wholesalers. Therefore, you may be required
to make the adjustments
S-29
<PAGE> 30
described below even if you purchase your notes in the initial offering. You can
obtain the issue price of the notes by contacting the Goldman Sachs Treasury
Administration Department, Debt Administration Group, at 212-902-1000. If the
notes are listed on the Chicago Board Options Exchange on the date of purchase,
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.
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 redemption or 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 redemption or 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 in the
secondary market, 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, redemption 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 in the secondary market.
Any gain you recognize upon the sale, redemption 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.
S-30
<PAGE> 31
EMPLOYEE RETIREMENT INCOME SECURITY ACT
If you are an insurance company or the fiduciary of a pension plan or an
employee benefit plan proposing to invest in the offered notes, you should refer
to the matters described under "Employee Retirement Income Security Act" in the
attached prospectus.
S-31
<PAGE> 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. Goldman, Sachs & Co. intends to resell the
offered notes at the original issue price applicable to the offered notes to be
resold. 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 attached 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
<PAGE> 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
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Supplement
Additional Risk Factors Specific to Your
Note.................................... S-2
Specific Terms of Your Note............... S-11
Hypothetical Returns on Your Note......... S-17
The GIN Index............................. S-20
Use of Proceeds and Hedging............... S-28
Supplemental Discussion of United States
Federal Income Tax Consequences......... S-29
Employee Retirement Income Security Act... S-31
Supplemental Plan of Distribution......... S-32
Prospectus
Our Business Principles................... 2
Prospectus Summary........................ 3
Risk Factors.............................. 11
Use of Proceeds........................... 28
Pro Forma Consolidated Financial
Information............................. 29
Capitalization............................ 36
Selected Consolidated Financial Data...... 38
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 40
Industry and Economic Outlook............. 65
Business.................................. 68
Management................................ 93
Principal Shareholders.................... 106
Certain Relationships and Related
Transactions............................ 108
Description of Notes We May Offer......... 113
United States Taxation.................... 143
Employee Retirement Income Security Act... 154
Validity of the Notes..................... 154
Experts................................... 154
Available Information..................... 155
GIN Index to Consolidated Financial
Statements.............................. F-1
Plan of Distribution...................... U-1
</TABLE>
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$
THE GOLDMAN SACHS
GROUP, INC.
Callable Index-Linked Notes due 2003
(Linked to the GSTI(TM) Internet Index)
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GOLDMAN SACHS LOGO
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GOLDMAN, SACHS & CO.
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