GORDON & CO.
16,000 Limited Price Put and Call Options
Gordon Limited Price Options are put and call options. Each option
relates to a particular underlying security that is listed on a national
securities exchange or quoted on an automated quotation system of a national
securities association (NASDAQ). Gordon & Co. also issues its options on
securities issued by the United States of America and on standardized stock
options and standardized stock index options that are listed on a national
securities exchange.
The purchaser of a Gordon Option negotiates the price or premium
with Gordon & Co. As a general rule the premium ranges from 11 1/2 to 30% of
the market value of the underlying security when it is listed on a national
securities exchange and from 151/2 to 40% of its market value when the
underlying security is listed on NASDAQ. This general rule does not apply to
Gordon Options issued on stock options or stock index options. Gordon & Co.
and the purchaser negotiate those premiums specially.
Gordon Options do not trade on any recognized market. The purchaser
of a Gordon Option may be able to realize its value only by reselling it to
Gordon & Co.
Gordon Options are speculative securities that involve a high degree
of risk. The purchaser of a Gordon Option must be prepared to sustain a
total loss of the premium he pays. The discussion at page 7 of this prospectus
describes many of the Risk Factors that pertain to Gordon Options.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or passed
upon the adequacy or accuracy of this Prospectus. Any representation to the
contrary is a criminal offense.
<table>
<s> <c> <c> <c>
============================ ================================= ====================== ===============================
Underwriting
Discounts and Proceeds to
Price to Public (1) Commissions Issuer (2)
============================ ================================= ====================== ===============================
Per Option. . . . . . . . $7,000 None $7,000
- ---------------------------- --------------------------------- ---------------------- -------------------------------
- ---------------------------- --------------------------------- ---------------------- -------------------------------
Total. . . . . . . . . . . $112,000,000 None $112,000,000
..
============================ ================================= ====================== ===============================
</table>
(1) Gordon Limited Price Options are not issued for predetermined premiums.
The figures set forth are estimated.
(2) The proceeds to the issuer are estimated. They may be substantially
less because of the repurchase provision of the Options and will vary depending
on the actual premiums received for the Options.
____________________
The Date of this Prospectus is April 13, 2005.
<page>
AVAILABLE INFORMATION
Gordon & Co. has been issued an exemption by the Commission from the
informational requirements of Section 15(d) of the Securities Exchange Act of
1934 (the"1934 Act"), but as a broker-dealer the Company is subject to the
informational requirements of Section 17 of the 1934 Act and in accordance
therewith, files reports and other information with the Securities and
Exchange Commission (the "Commission" or the "SEC"). Such reports and other
information, when filed, will be available for inspection and copying at the
Public Reference Section maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
Commission's Regional Office in Boston, Massachusetts. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates.
On or about July 31 of each year, Gordon & Co. will furnish the holder
of each outstanding Gordon Option with an unaudited balance sheet as of the
previous June 30, including a computation of Gordon & Co.'s net capital. On
or about March 15 of each year, Gordon & Co. will furnish the holder of each
outstanding Gordon Option with financial statements of Gordon & Co. for the
year ended on the previous December 31, audited by independent certified public
accountants.
This Prospectus, which constitutes a part of a Registration Statement
filed by the Company with the Commission under the Securities Act of 1933, as
amended (the "1933 Act"), omits certain of the information contained in the
Registration Statement as permitted by the rules and regulations of the
Commission. Reference is hereby made to the Registration Statement, including
the exhibits thereto, for further information with respect to the Company
and the Options offered hereby. Statements contained herein concerning
provisions of documents are necessarily summaries of such documents and each
statement is qualified in its entirety by reference to the applicable document
filed with the Commission. A copy of the complete registration statement is
available for inspection at the office of Gordon & Co. without charge.
Since the value of a limited price option depends upon the likelihood of
favorable movements in the price of the underlying security of the option in
relation to the exercise and expiration prices of the option during the life
of the option, information concerning past price behavior of the underlying
security may be significant in evaluating an option transaction. This
information is available through various financial publications, in the
financial press and elsewhere. In addition, Gordon & Co. will furnish the
applicable information set forth on page 35 at the request of prospective
option buyers.
GLOSSARY OF TERMS
The following Glossary briefly defines many of the technical terms used
in the Prospectus. More comprehensive explanations of these terms are included
in the body of the Prospectus.
The definitions in this Glossary all pertain to American-style options as
opposed to European-style options. The distinction is important. An
American-style option may be exercised by the holder at any time after it is
purchased and before it expires, but a European-style option may be exercised
only during a specified period - which may be as short as a single business
day - before the option expires. All Gordon Options are American-style options,
but they include an expiration price as well as an expiration date which is not
typical of most American-style options. Most standardized options (i.e.,
options traded on the national securities exchanges) are American-style
options, but some are European-style options, and more European-style options
may be introduced on those exchanges in the future.
Call: The right to require another to sell and deliver a security
(underlying security) upon payment of a stated price (exercise price) at any
time prior to a stated date (expiration date).
Call Option: A contract which creates a right in the holder of the
contract to require the writer or issuer of the contract to sell the underlying
security of the Call Option to the holder of the option for a stated price
during a stated period of time.
Covered Call Option: A Call Option written by a person who owns the
underlying security of the option during the entire period that the option is
outstanding.
Exercise Price: The price at which the holder of the option may sell in a
put option, or purchase in a call option, the underlying security upon exercise.
The exercise price is sometimes called the striking price.
Expiration Date: The date on which the option expires, provided thatit has
not expired previously because of its expiration price provision.
Expiration Price: The price at which the holder of a Gordon Option loses
his right to sell the option or sell or buy the underlying security. If the
underlying security sells on a national securities exchange, or is quoted on an
automated quotation system of a national securities association, at designated
periods of time, at or above this price in a put option, or at or below this
price in a call option, the option expires regardless of the expiration date of
the contract. The expiration prices and periods of time to which they are
applicable are the prices and periods of time agreed upon by the buyer or his
agent in transactions with Gordon & Co. When the automated quotation system of
a national securities association (NASDAQ) indicates a sale price as well as a
bid and ask price for a security, the expiration price of an option shall be
determined by the reported sale price. References to expiration price throughout
this Prospectus shall be construed accordingly.
Limited Price Call Option: A contract which creates a right in the
purchaser of the contract to require Gordon & Co. to a) repurchase the option
on the terms and conditions stated therein, or b) sell to the holder of the
call option contract the underlying security of the option at a stated price
(exercise price) at any time prior to a stated date (expiration date) provided
the underlying security has not sold at or below the applicable expiration
price stated in the contract.
Limited Price Put Option: A contract which creates a right in the
purchaser of the contract to require Gordon & Co. to a) repurchase the option
on the terms and conditions stated therein, or b) purchase from the holder of
the put option contract the underlying securitY of the option at a stated price
(exercise price) at any time prior to a stated date expiration date) provided
the underlying security has not sold at or above the applicable expiration
price stated in the contract.
Long or Long Position: The ownership of or right to receive a security.
Naked Call Option: A Call Option written by a person who does not own the
underlying security of the option during a period of time when the option is
outstanding.
Naked Put Option: A Put Option written by a person who does not have a
short position in the underlying security of the option during a period of
time when the option is outstanding.
Offsetting Put Option: A Put Option written by a person who does have a
short position in the underlying security of the option during the period
that the option is outstanding. The Put Option is offsetting because the
writer's short position in the underlying security offsets or hedges the
writer's risk in the event the PutOption is exercised. The writer can then
close out his short position by delivering the securities which are put to the
writer. But the writer's short position does not offset the theoretically
unlimited risk of loss incurred by the writer if the market price of the
underlying security increases above the exercise price of the Put Option.
Premium: The aggregate price of the option agreed upon between the buyer
or his agents in a transaction with Gordon & Co.
Put: The right to require another to purchase a security (underlying
security) at a stated price (exercise price) at any time prior to a stated date
(expiration date).
Put Option: A contract which creates a right in the holder of the contract
to require the writer or issuer of the contract to purchase the underlying
security of the Put Option from the holder of the option at a stated price
during a stated period of time.
Short or Short Position: The obligation to deliver a security which a
person does not own.
Standardized Option: An option on stock or on a stock index issued by the
Options Clearing Corporation and traded on a national securities exchange.
Underlying Security: The stock, warrants, rights, units, bonds, U.S.
Treasury securities or standardized stock or standardized index options subject
to being sold or purchased upon exercise of an option. Gordon Limited Price
Options written on standardized stock or standardized index options may not be
transferred or exercised. They may only be resold to Gordon & Co. (See
Limitations on Exercise, Transfer, and Repurchase of Options at page 17.)
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
Because it is a summary, it does not contain all of the information that you
should consider before investing. You should read the entire prospectus
carefully, including the "Risk Factors" in the following section.
Gordon & Co.
Gordon & Co. is the only issuer of Gordon Limited Price Put and Call
Options. Gordon & Co. creates, sells and agrees to perform or repurchase
every Gordon Option. Gordon & Co. is a Massachusetts Limited Partnership
whose office is at 63 Pleasant Street, Watertown, Massachusetts 02472; telephone
(617) 924-7997.
Gordon Options are Unique
Gordon Options are different from other put and call options. The primary
difference is that Gordon Options expire not only on a particular date, but also
if the security underlying the option trades at a specified price prior to the
expiration date of the option. When Gordon & Co.issues an option it defines the
expiration prices applicable during the term of the option. Expiration prices
of Gordon put options decrease as the option grows older; expiration prices of
Gordon call options increase as the option grows older.
Cost and Terms of Premiums for Options
The price of an option is called a premium. Gordon & Co. negotiates the
premium and expiration prices with the purchaser of the option when an option
transaction is initiated. A purchaser of an option may modify the exercise
price and expiration prices of an outstanding option by paying an additional
premium.
Exercise and Repurchase of Options
There is no secondary market for Gordon Options. The holder of a Gordon
Option can recover its value either by exercising the option or by reselling
it to Gordon & Co. Gordon & Co. agrees to perform each option or to repurchase
it in accordance with its terms upon request of the holder of the option.
When a Gordon Option expires it has no further value.
An Overview of Options Trading
Option trading is not suitable for many investors. It is a highly
speculative activity which involves a high degree of risk on the part of the
purchaser of any put or call option. It is not unusual for the purchaser of
an option to lose the entire premium he pays for the option because the price of
the underlying security does not fluctuate in the direction the purchaser
anticipated when he purchased the option.
In general, the purchaser of a put option speculates that the price of
the underlying security will fall below the exercise price of the option
during the term of the option. He hopes to be able to "put" or deliver the
security to the writer of the option in exchange for the exercise price of the
option, thereby realizing a profit. If the price of the underlying security
rises, or fails to fall sufficiently below the exercise price during the term
of the option to compensate for the premium paid for the option, the purchaser
of the option will lose all or part of the premium he paid for the option.
In general, the purchaser of a call option speculates that the price of
the underlying security will rise above the exercise price of the option
during the term of the option. He hopes to be able to "call" upon the writer
of the option to sell and deliver the underlying security of the option for
the exercise price of the option, thereby realizing a profit. If the price of
the underlying security falls, or fails to rise sufficiently above the exercise
price during the term of the option to compensate for the premium paid for the
option, the purchaser of the option will lose all or part of the premium he paid
for the option.
It is apparent that the purchaser of an option speculates not only that the
price of the underlying security will move in the anticipated direction, but
also that it will do so within the designated term of the option.
These risks are even grater for the purchaser of a Gordon Limited Price Put
or Call Option. As indicated throughout this Prospectus, Gordon Limited
Price Options contain an Expiration Price as well as an Expiration Date. If
the price of the underlying security of a Limited Price Option rises (in the
case of a Limited Price Put Option) or falls (in the case of a Limited Price
Call Option) to one of a series of pre-negotiated prices stated in the Option,
the Option will expire even though the Expiration Date of the Option has not
yet been reached. The Expiration Price provision compounds the purchaser's
risk because the Option may expire even before its Expiration Date and will not
be renewed by subsequent changes in the price of the underlying security which
may occur prior to the stated Expiration Date.
The rationale for the inclusion of the Expiration Price provision in every
Gordon Limited Price Option is to moderate Gordon & Co.'s risk as the writer of
the option, by releasing Gordon & Co. from its obligations under the option
when the market price of the underlying security rises to or above the
applicable expiration price of a put option, or falls to or below the
applicable expiration price of a call option. For example, if the applicable
expiration price of a call option is $46.25 per share and the exercise price is
$50.00 per share, the option will expire when the underlying security trades
at or below $46.25. Gordon & Co. will then be relieved of its obligation as
writer of the option. But the purchaser of the option will lose his entire
premium.
Gordon Options do contain provisions which permit the purchaser to modify
the exercise and expiration prices of any option which has not expired by
paying an additional premium. If a purchaser desires to keep an option in force
despite adverse movement in the price of the underlying security, he may do so
by paying an additional premium.
<page>
RISK FACTORS
The risks associated with the purchase of Gordon Options are substantial.
Any purchaser of a Gordon Option must be prepared and be able to afford to
lose his entire investment in the option. This section of the
prospectus discusses some of the most significant risks of trading in Gordon
Options. Other risks are described throughout the prospectus.
The examples used throughout this prospectus include the purchaser's
transaction costs. The commission assumed to be paid on the purchase or sale of
the underlying security is a hypothetical figure. It may vary from the actual
commission because commissions are subject to negotiation between a customer
and his broker. Tax considerations also play a significant role in evaluating
an option transaction. The following examples do not take them into account.
1. The purchaser of a Gordon Limited Price Option runs the risk of
losing his entire investment any time after he purchases the Option because of
the expiration price provision in the option.
Every Gordon & Co. limited price put option provides that if the underlying
security of the option sells at or above one of a stated series of decreasing
prices (expiration prices) on a national securities exchange or the ask price
on NASDAQ is at or above such expiration prices during stated periods of
time during the term of the option (before its expiration date), the option
expires and becomes worthless.
Every Gordon & Co. limited price call option provides that if the
underlying security of the option sells at or below one of a stated series of
increasing prices (expiration prices) on a national securities exchange or the
bid price on NASDAQ is at or below such expiration prices during stated periods
of time during the term of the option (before its expiration date), the option
expires and becomes worthless.
Gordon & Co. and the purchaser of a Gordon Limited Price Option agreeon the
applicable expiration prices of the option when the option is issued.
The expiration price provision in Gordon Limited Price Options makes
them a less desirable and more speculative option than a standardized or
exchange-traded option. (See "Prospectus Summary".) No buyer should purchase
a Limited Price Option if he can purchase a standardized option for a comparable
premium.
The likelihood of a Limited Price Option expiring before its expiration
date because of its expiration price provision is greatly increased if the
underlying security of the option is selling near the expiration price, is
a volatile security and especially if it is a low priced security. As a
general rule, in order for the purchase of an option to become a profitable
investment, the price of the underlying security of the option (before it
sells at a price which will cause the option to expire) must fall sufficiently
below the exercise price in a put option, and must rise sufficiently above
the exercise price in a call option, to cover the premium and
transaction costs. Certain limited exceptions to this general rule are
discussed at "Repurchase Agreement in Gordon Options".
The risk of purchasing Gordon Limited Price Options is extremely great
because of their expiration prices, and anyone purchasing such an option
must expect to lose the amount paid for the option. Accordingly, no
investor should commit any amount of money to the purchase of Limited
Price Options unless he is able to withstand the loss of the entire amount so
committed. Because the risks of options transactions generally, and of
transactions in Gordon Options in particular, are so great, the rules of
the National Association of Securities Dealers, Inc. ("NASD") of which
Gordon & Co. is a member, impose special requirements on its members regarding
the approval and suitability of customers for options trading. Gordon
Options will be sold only to customers who have been approved by Gordon & Co.
for options trading and who satisfy the rules of the NASD regarding customer
suitability for options trading. Moreover, only customers who demonstrate to
Gordon & Co. that they are extremely sophisticated investors capable of
understanding and bearing the peculiar financial risks attendant on buying
Gordon Options issued on standardized stock options or standardized index
options will be approved by Gordon & Co. for buying those types of Gordon
Options. See "Method of Buying Gordon Options".
<page>
The risk of purchasing a limited price put option may be illustrated
by comparing Investor A, who for a total deposit of $5,000 plus a $71.50
commission sells short 100 shares of XYZ stock which is listed on a national
securities exchange at $50 per share,* with Investor B who invests $5,100
(the premium) in a 6 month- 10 day limited price put option covering 800 shares
of the same XYZ stock at an exercise price of $50 per share with
expiration prices of
$53.75 during the first monthly term of the option,
$53.00 during the second monthly term of the option,
$52.25 during the third monthly term of the option,
$51.50 during the fourth monthly term of the option,
$50.75 during the fifth monthly term of the option,
$50.00 during the last month-10 day term of the option.
Both A and B anticipate a drop in the market price of XYZ, but should their
expectations not be realized and XYZ rises in market price, A's loss would be
different from B's. If XYZ rose in market price to $53.75 a share within 30
days after A had sold it short, (and assuming XYZ has paid no dividends), A
will have suffered a paper loss of $375 (plus being out-of-pocket the $71.50
commission) and his deposit will be worth $4,625. He will not be required to
realize this loss, and may recover it should XYZ fall in price while he is
still short the 100 shares of XYZ. On the other hand, if XYZ rose in market
price to $53.75 a share any time within 30 days of Investor B's purchase of
the limited price put option ($53.75 being the expiration price during the
first monthly term of his option), and Investor B had not exercised or sold the
option, Investor B will have suffered the loss of his entire $5,100 investment
with no possibility of recovery because his option would have expired.
- ---------
* This example, as well as all other examples in this prospectus, is based upon
hypothetical values which are not necessarily indicative of the values in any
actual transaction.
<page>
Summary of losses of A and B
(A Sells Short; B Purchases Put Option)
A sells short 100 shares of XYZ and deposits.....................$5,000.00
A pays a commission to sell stock short........................ 71.50
Total funds deposited and commission paid........................$5,071.50
Stock rises in price to $53.75 a share
A's paper loss is $3.75 a share x 100 shares....................$ 375.00
Plus commission paid to sell stock short....................... 71.50
A's paper loss plus commission on transaction...................$ 446.50
B buys a put option on 800 shares of XYZ for.....................$5,100.00
Stock rises in price to $53.75 a share (its expiration
price). Option expires and B receives........................ 0.00
B's loss on transaction..........................................$5,100.00
The risk of purchasing a limited price call option may be illustrated by
comparing Investor A, who for a total investment of $5,000 plus a $71.50
commission buys 100 shares of XYZ stock which is listed on a national securities
exchange at $50 per share, with Investor B who invests $5,100 (pays no
commission) in a 6 month- 10 day limited price call option covering 800
shares of the same XYZ stock at an exercise price of $50 per share
with expiration prices of
$46.25 during the first monthly term of the option,
$47.00 during the second monthly term of the option,
$47.75 during the third monthly term of the option,
$48.50 during the fourth monthly term of the option,
$49.25 during the fifth monthly term of the option,
$50.00 during the last month-10 day term of the option.
Both A and B anticipate a rise in the market price of XYZ, but should their
expectations not be realized and XYZ fall in market price, A's loss would be
different from B's. If XYZ fell in market price to $46.25 a share within 30
days after A had purchased it (and assuming XYZ has paid no dividends), A will
have suffered a paper loss of $375 (plus being out-of-pocket the $71.50
commission) and his investment will be worth $4,625. He will not be required
to realize this loss, and may recover it should XYZ rise in price while he
still owns the 100 shares of XYZ. On the other hand, if XYZ fell in market
price to $46.25 a share any time within 30 days of Investor B's purchase of
the limited price call option ($46.25 being the expiration price during
the first monthly term of his option), and Investor B had not exercised or sold
the option, Investor B will have suffered the loss of his entire $5,100
investment with no possibility of recovery because his option would have
expired.
<page>
Summary of losses of A and B
(A Purchases Stock; B Purchases Call Option)
A buys 100 shares of XYZ.........................................$5,000.00
A pays a commission to buy stock............................... 71.50
A's total cost...................................................$5,071.50
Stock falls in price to $46.25 a share
A's paper loss is $3.75 a share x 100 shares....................$ 375.00
Plus commission paid to buy stock.............................. 71.50
A's paper loss plus commission on transaction...................$ 446.50
B buys a call option on 800 shares of XYZ for....................$5,100.00
Stock falls in price to $46.25 a share (its expiration
price). Option expires and B receives...................... 0.00
B's loss on transaction..........................................$5,100.00
These examples also apply to warrants, rights, units, bonds, U.S. Treasury
securities and options if they were the underlying security of the option.
In the above examples if XYZ was not listed on a national securities
exchange but was quoted on NASDAQ and A and B had taken the same investment
positions as they had in the above examples, the same results as set forth
above would have taken place except:
Investor A might not have paid the same commission.
Investor B, in all likelihood, would have paid Gordon & Co. a larger
premium when he purchased the put and call option. Gordon & Co. generally
charges higher premiums for Gordon Options overlying securities
quoted on NASDAQ because the market for such securities is often less
liquid, deep and continuous than the market for securities traded on
other national securities exchanges. B would have lost his entire
investment in the put option if, during the first monthly term of the
option, the quoted ask price for XYZ on NASDAQ was at or above $53.75 a
share. Similarly, B would have lost his entire investment in the call
option if, during the first monthly term of the option, the quoted bid
price for XYZ on NASDAQ was at or below $46.25 a share.
2. The term of a Gordon Option may be shortened by as much as one
month- 10 days under certain circumstances because of a requirement that
the expiration price during the last month of any option and during the last
month- 10 days of a 6 month- 10 day Option or a 12 month- 10 day Option must
equal the exercise price of the Option.
The expiration prices of Gordon Limited Price Options are determined
by agreement of the parties in a transaction with Gordon & Co. However,
Gordon & Co. will issue Limited Price Options only when the buyer agrees that
the expiration price of the option during the last month- 10 day term of a
6 month- 10 day option or of a 12 month- 10 day option will be at the exercise
price of the option; or that during the final month of any other option the
expiration price of the option will be at the exercise price of the option.
This agreement will result in reducing the term of any option by as much as
one month and will result in reducing the term of a 6 month- 10 day option
or a 12 month- 10 day option by as much as one month- 10 days if the market
price of the underlying security of the option is at the exercise price of the
option at the beginning of the last month of an option or at the beginning of
the last month- 10 days of a 6 month- 10 day or a 12 month- 10 day option.
The effect of this agreement may be illustrated by referring to the
"Typical Limited Price Options" at page 40. If the market price of XYZ is $50
a share (the exercise price) at any time after the fifth monthly term of
the Typical Put or Call Option, either option expires.
<page>
3. A Gordon Option written on an underlying option, warrant or right
expires no later than the expiration date of the underlying option, warrant or
right.
When an option, warrant or right underlying a Gordon Option expires, the
option, warrant or right becomes worthless. As a result, the Gordon Limited
Price Option will automatically expire by virtue of its expiration price
provision.
4. Gordon & Co. assumes no obligation to notify the holder of a Gordon
Limited Price Option that the market price of the underlying security is
approaching the expiration price of the Option. Accordingly, the Option may
expire without the prior knowledge of the purchaser or holder of the Option.
Every purchaser of a Gordon Option assumes the risk that the market
price of the underlying security may reach the applicable expiration price of
the Option at any moment without knowledge of or notice to the holder of the
Option. It is the responsibility of the holder of the Option - not of Gordon
& Co. - to keep apprised of the market price of the security underlying a Gordon
Option.
5. Once a Gordon Limited Price Option expires by virtue of its expiration
price provision it becomes worthless. It is not revived by subsequent
fluctuation in the market price of the underlying security prior to
the original expiration date of the Option.
If a Gordon Option expires by virtue of its expiration price provision it
no longer has any value. Even if the market price of the underlying security
of the Option subsequently fluctuates in favor of the holder of the Option
prior to the expiration date of the Option, the Option is not renewed. Once a
Gordon Option expires, it is completely worthless.
6. The holder of a Gordon Limited Price Option may not exercise an
Option or require Gordon & Co. to repurchase an Option while the market for
the underlying security is subject to a trading halt.
The holder of a Gordon Option may not exercise the Option or require
Gordon & Co. to repurchase the Option while trading in the underlying security
has been halted or suspended. Any trading halt or suspension does not extend
any applicable expiration date. If such a halt is in effect on the final
expiration date of the Option, the Option nevertheless expires on its stated
expiration date. If trading in the underlying security resumes prior to the
expiration date of an option at a price above the applicable expiration price of
a Gordon Put Option or below the applicable expiration price of a Gordon Call
Option, the Option will be deemed to have expired as of the date trading in the
underlying security was resumed.
7. No secondary market for Gordon Options currently exists nor is any
such market expected to develop. A purchaser of a Gordon Option may be unable
to realize the value of an option by selling it to anyone other than
Gordon & Co. Gordon Limited Price Options written on standardized options or
on standardized index options may not be transferred or exercised in any event.
They may be resold only to Gordon & Co.
8. The purchaser of a Gordon Option incurs the risk that Gordon & Co. may
be financially unable to fulfill its obligation as issuer and writer of the
Option.
Gordon & Co. has been a writer of Limited Price Options since 1970.
Although it has met all its obligations in the past as a writer of options,
and expects to be able to meet all its obligations in the future as an issuer
and/or writer of options because of its capital, (see "Financial
Statements"), it may find itself without sufficient funds to repurchase
options it issues. (See "The Back-Up System" at page 27.)
<page>
DESCRIPTION OF GORDON OPTIONS
Gordon Limited Price Options are issued by Gordon & Co., a broker-dealer
registered under the Securities Exchange Act of 1934. Every Limited Price
Option issued by Gordon & Co. is registered under the Securities Act of 1933,
and all purchasers of such options are entitled to the protection of that act.
Purchasers of Limited Price Options are entitled to the protection of the
applicable provisions of the Securities Exchange Act of 1934.
The rights and obligations of Gordon & Co. and the holders of its options
are set forth in written contracts issued by Gordon & Co. (See facsimiles of
Limited Price Option contracts at pages 34 and 37.) This description of
Gordon Limited Price Options is a summary thereof as in effect on the date of
this Prospectus.
Terms of Options
Every Limited Price Option indicates on its face whether it is a Limited
Price Put Option or a Limited Price Call Option. It also states the date of
the option contract, its number, its expiration date, the name and amount
of the underlying security, the exercise price of the option, its expiration
prices and the period of time during which each expiration price is applicable.
The basic contractual rights and obligations of Gordon & Co. and the
holders of its options are described in the Prospectus Summary. Generally
speaking, a Limited Price Option is a contract which gives the holder the
right (subject to certain exceptions described at "Limitations on Exercise,
Transfer and Repurchase of Options" at page 17), commencing at the time the
option is issued and expiring on the expiration date of the option or at
such earlier time as the option expires pursuant to its expiration price
provision, to sell to Gordon & Co. the underlying securities for the exercise
price of a put option, or to purchase from Gordon & Co. the underlying
securities upon payment of the exercise price of a call option, or in either
case, to require Gordon & Co. to repurchase the option. (See "Repurchase
Agreement in Gordon Options" at page 23).
Every Limited Price Put Option contract provides that the option will
expire automatically if the underlying security of the option sells on an
exchange where listed, or if the ask price on NASDAQ is at or above one of a
stated series of decreasing prices (expiration prices) during stated periods
of time prior to the expiration date of the option.
Every Limited Price Call Option contract provides that the option
will expire automatically if the underlying security of the option sells on
an exchange where listed, or if the bid price on NASDAQ is at or below one of a
stated series of increasing prices (expiration prices) during stated
periods of time prior to the expiration date of the option.
Parties to the Option Transaction
The writer of every Gordon Limited Price Option is Gordon & Co. It is
possible that Gordon & Co. may not have a short position in the underlying
security when it writes a put option, or own the underlying security when it
writes a call option in which event, it is a writer of a "naked option".
Gordon & Co. is the issuer of every Gordon Option. Gordon & Co. is
always obligated, upon the timely exercise of a put option, to pay the holder
of the option the exercise price of the option against delivery of the
underlying security of the option and, upon the timely exercise of a call
option, to deliver to the holder of the option the underlying security of the
option against payment of the exercise price of the option. Gordon & Co. is
always obligated to repurchase the option in accordance with its terms.
(See "Repurchase Agreement in Gordon Options" at page 23.)
Exercise Price of Options
All Limited Price Options issued by Gordon & Co. have an exercise price
per share, warrant, right, unit, option or per bond equal to or approximating
the market price of the underlying security at the time the option is issued.
No options are issued by Gordon & Co. in which the exercise price is more
than five per cent (5%) above or five per cent (5%) below the market price of
the underlying security when the option is issued.
<page>
Renewal of Options
Gordon Limited Price Options do not provide for renewal.
Expiration Prices of Options
Gordon & Co. offers (subject to negotiation and change) to issue or
write its 6 month-10 day, 9 month, and 12 month-10 day Limited Price Options
with an exercise price at the market, with expiration prices ranging from
16 1/2% to 0% above (in the case of a put option) or below (in the case of a
call option) the exercise price of its options provided that the premiums
received for the options are premiums set forth in a schedule of premiums at
page 30. Expiration prices of Gordon Limited Price Options written on
standardized or index options are specially negotiated.
The expiration prices of a Gordon Limited Price Put Option will be above,
and the expiration prices of a Gordon Limited Price Call Option will be below
the exercise price of the option when the option is issued by that percentage
of such exercise price as is shown on the charts on pages 13 and 14 for the
various periods of time during the term of the option.
If the expiration prices as so computed are not evenly divisible by .125,
they will be decreased in the case of a Limited Price Put Option and increased
in the case of a Limited Price Call Option to the next 12 1/2 cents.
EXPIRATION PRICES OF LIMITED PRICE OPTIONS
(Expressed as a percentage adjustment to the exercise price of the
option. For Limited Price Put Options add the percentage shown to the exercise
price. For Limited Price Call Options subtract the percentage shown from the
exercise price).
<table>
<s> <c> <c>
6 Month-10 Day Options 9 Month Options 12 Month-10 Day Options
___________________ _______________ _____________________
Period Percentage of the Period Percentage of the Period Percentage of the
of Exercise Price of Exercise Price of Exercise Price
Time of the Option Time of the Option Time of the Option
1st month 7 1/2 % 1st month 12 % 1st month 16 1/2 %
2nd month 6 % 2nd month 10 1/2 % 2nd month 15 %
3rd month 4 1/2 % 3rd month 9 % 3rd month 13 1/2 %
4th month 3 % 4th month 7 1/2 % 4th month 12 %
5th month 1 1/2 % 5th month 6 % 5th month 10 1/2 %
6th month- 6th month 4 1/2 % 6th month 9 %
10 days 0 % 7th month 3 % 7th month 7 1/2 %
8th month 1 1/2 % 8th month 6 %
9th month 0 % 9th month 4 1/2 %
10th month 3 %
11th month 1 1/2 %
12th month-
10 days 0 %
</table>
The computation of expiration prices of a Limited Price Put and Call Option
may be illustrated as follows:
A purchases a 6 month-10 day, 9 month or 12 month-10 day Limited Price
Option on 100 shares of XYZ listed on a national securities exchange at $50
per share and pays a premium set forth on pp. 30-31. Gordon & Co. will issue
a Limited Price Put or Call Option with an exercise price at $50 per share
with the following monthly expiration prices:
<page>
Monthly Expiration Prices of Listed Securities Selling for $50 a Share
<table>
<s> <c> <c> <c>
6 Month-10 Day Option 9 Month Option 12 Month-10 Day Option
Term of Put Call Put Call Put Call
the Option Option Option Option Option Option Option
1st month.................. $53.75 $46.25 $56.00 $44.00 $58.25 $41.75
2nd month.................. 53.00 47.00 55.25 44.75 57.50 42.50
3rd month.................. 52.25 47.75 54.50 45.50 56.75 43.25
4th month.................. 51.50 48.50 53.75 46.25 56.00 44.00
5th month.................. 50.75 49.25 53.00 47.00 55.25 44.75
6th month -10 days........ 50.00 50.00 52.25 47.75 54.50 45.50
7th month.................. 51.50 48.50 53.75 46.25
8th month.................. 50.75 49.25 53.00 47.00
9th month.................. 50.00 50.00 52.25 47.75
10th month.................. 51.50 48.50
11th month.................. 50.75 49.25
12th month -10 days........ 50.00 50.00
</table>
These expiration prices apply to stocks, warrants, rights, units,
bonds and U.S. Treasury securities. Expiration prices of Limited Price
options on underlying options are specially negotiated. Expiration prices of
Limited Price Options with expiration dates other than those listed above are
agreed upon with Gordon & Co. when the transaction is negotiated.
Repurchase of Gordon Limited Price Options
Gordon & Co. is obligated by the express terms of every option it issues
to repurchase the option from the holder at any time prior to its expiration
for a price determined as set forth in the option and described in detail at
"Repurchase Agreement in Gordon Options" at page 23. Certain exceptions to
the obligation of Gordon & Co. to repurchase the options it issues are
discussed at "Limitations on Exercise, Transfer and Repurchase of Options"
at page 17.
Modification of Terms of Options
Gordon & Co. is further obligated by the express terms of every option
it issues at the request of the holder of the option at any time prior to the
expiration of the option, to increase the exercise and expiration prices of a
put option, and decrease the exercise and expiration prices of a call
option, as much (as many points) as the holder desires upon receipt of an
appropriate premium. (See "Costs of Options Transactions" at page 29).
Premiums for Options
The premiums for Gordon Limited Price Options, as well as their
commencement dates, expiration dates, exercise prices, expiration prices
and the periods of time to which they are applicable are all determined by
agreement of the parties in transactions with Gordon & Co. and are all
negotiable. The schedule of premiums at page 30 and of expiration prices at
pages 13-14 are representative only and are always subject to negotiation and
change. Some of the factors which bear upon the determination of the
premium for an option are discussed at "Costs of Options Transactions" at page
29. The buyer of Gordon Options always negotiates solely with Gordon & Co.
Some Differences between Gordon & Co. Options and Other Options
Gordon Limited Price Options differ from other options in these major
respects among others:
1. Every Gordon Limited Price Option contains an expiration price
provision which causes the option to expire before its stated expiration
date (its stated term) if the underlying security of the option sells on a
national securities exchange or is quoted on NASDAQ at one of a stated
series of prices set forth in the option during the term of the option.
(See pages 13 and 14).
<page>
2. Gordon Limited Price Options provide the potential availability
of a premium refund (subject to certain exceptions summarized hereunder
in "Limitations on Exercise, Transfer and Repurchase of Options" at
page 17) pursuant to the repurchase agreement provision which obligates
Gordon & Co. to repurchase the option under certain circumstances any
time before it expires. Gordon Options may not be exercised or
submitted for repurchase while trading in the underlying security is
halted. (See "Repurchase Agreement in Gordon Options" at 23).
3. Gordon Limited Price Options are not traded on any exchange. The
holder of a Limited Price Option should expect only to exercise it,
sell it to Gordon & Co. or permit it to expire. There is no secondary
market for Gordon Options and none is expected to develop. Gordon Limited
Price Options do not provide the depth, liquidity and continuity of a
secondary market provided by an option exchange. While it is
theoretically possible for the holder of a Gordon Option to sell it to
a third party, the holder may be unable to locate a purchaser or
obtain a satisfactory price from anyone other than Gordon & Co. As
previously noted, Gordon Options written on standardized stock options or
on standardized index options may not be transferred or exercised in any
event.
4. Options issued by the Options Clearing Corporation are known as
"Standardized Options" and are traded on several national securities
exchanges. Standardized Options contain no expiration price.
5. Gordon Limited Price Options provide that applicable expiration
prices and exercise prices are decreased by the value of cash dividends
on the date the underlying security goes ex-dividend. See
discussion under "Adjustments in Terms" at pages 16-17.
6. Gordon Limited Price Options may not be exercised nor may the
repurchase of an option be required of Gordon & Co. while the market for
the underlying security is subject to a trading halt even on the
expiration date of the option. Standardized options are subject to more
liberal rules. See the discussion under "Limitations on Exercise, Transfer
and Repurchase of Options" at page 17.
7. Each of the options markets has established minimum requirements
that must be met by underlying securities and issuers thereof in connection
with their selection for options trading. Minimum requirements have also
been fixed as maintenance standards for the continued listing of options
previously selected which must be met by both the underlying securities
and the issuers thereof. These requirements are, in part, designed to
assure that underlying securities are widely held and actively traded,
and they relate to such matters as the number of shares or other units of
the underlying security outstanding and held by persons other than
affiliates of the issuer, the number of shareholders, trading volume of the
underlying security, and the market price of the underlying security. In
addition, other standards relate to such matters as compliance by the
issuer of the underlying security with the reporting requirements of
the SEC, the past earnings history of such issuer and the absence of
defaults by such issuer in meeting certain of its obligations. The
options markets' criteria regarding underlying securities and the issuers
thereof are subject to change.
Gordon & Co. does not limit or restrict its Limited Price Put and Call
Options to underlying securities and issuers thereof which meet the minimum
requirements established by the options markets. Gordon Limited Price Options
are written on most of the securities listed on national securities exchanges
and on many securities quoted on NASDAQ. (See "Limitations on Option Purchases"
at page 23).
Other significant differences between Gordon Options and other options
are discussed at "Adjustments in Terms" at pages 16-17; "Limitations on
Exercise, Transfer and Repurchase of Options" at page 17; and "Exercise of
Gordon Options" at page 26.
<page>
Adjustments in Terms
The number of securities underlying Gordon Limited Price Options and the
exercise price (striking price) and expiration prices are subject to adjustment
in the event of dividends, distributions, stock splits, reverse splits,
recapitalizations, reorganizations or similar activity by the issuer of the
underlying security. If the underlying security of an option is a stock, these
adjustments are as follows:
1. (a) The contract striking price and expiration prices shall be reduced
by the value of any cash dividend on the day the stock goes x-dividend. Options
traded on national securities exchanges do not provide for these adjustments
to reflect the declaration or payment of ordinary cash dividends. Options
traded in the over-the-counter market may provide for adjustments similar to
Gordon Options in this respect.
For example, assume that A purchases a 6 month-10 day put option
on 100 shares of XYZ with a contract striking price of $50 per share with
an expiration price of $53.75 during the first monthly term of the
option. Three weeks after A purchases the option, the issuer of the
underlying security declares and pays a $2 cash dividend. Under the
"Adjustment of Terms" set forth above, the exercise price is lowered from
$50 to $48 per share and the expiration price is lowered from $53.75 to
$51.75 per share during the firstmonthly term of the option and by $2
per share during each subsequent monthly term of the option. The
financial disadvantage to A, because of the declaration and payment of
the dividend, is that A can deliver the underlying security of the option
for only $48 instead of $50 per share and can obtain, under the
repurchase agreement of the option, only the excess, if any, between
the adjusted applicable expiration price of $51.75 (instead of $53.75)
per share, and the amount XYZ can be purchased for during the first
monthly term of the option. The repurchase price during subsequent
monthly terms of the option will be similarly reduced by $2 per share.
(See "Repurchase Agreement in Gordon Options" at page 23).
Now assume that A purchases a 6 month-10 day call option on 100
shares of XYZ with a contract striking price of $50 per share with an
expiration price of $46.25 during the first monthly term of the option.
Three weeks after A purchases the option, the issuer of the underlying
security declares and pays a $2 dividend. Under the "Adjustment of Terms"
set forth above, the exercise price is lowered from $50 to $48 per share
and the expiration price is lowered from $46.25 to $44.25 per share during
the first monthly term of the option and by $2 per share during each
subsequent monthly term of the option. The financial advantage to A,
because of the declaration and payment of the dividend, is that A can
call for the underlying security of the option at $48 instead of $50
per share and can obtain, under the repurchase agreement of the option,
the excess, if any, between what XYZ can be sold for and the adjusted
expiration price of $44.25 (instead of $46.25) per share, during the first
monthly term of the option. The repurchase price during subsequent
monthly terms of the option will be similarly increased by $2 per share.
(See "Repurchase Agreement in Gordon Options" at page 23).
(b) Where the underlying security of an option is entitled to rights
and/or warrants the contract striking price and the expiration prices of
the option shall be reduced by the value of same as fixed by the opening sale
thereof on the day the stock sells ex-rights and/or warrants. If the
underlying security is traded in the over-the-counter market and quoted on
NASDAQ the opening sale will be determined by the opening ask price on NASDAQ
in the case of a put option; and by the opening bid price on NASDAQ in the case
of a call option.
2. (a) In the event of stock splits, reverse splits or other similar
actions by the issuer of the stock, warrant or unit, the option shall become
an option for the equivalent in new securities when duly listed for trading,
and the contract striking price and expiration prices shall not be reduced;
(b) Stock dividends or the equivalent due-bills shall be attached to
the stock, warrant or unit when and if the option is exercised, and the contract
striking price and expiration prices shall not be reduced.
<page>
If the underlying security of an option is a bond these adjustments are as
follows:
1. The contract striking price and expiration prices shall be
reduced by the value of any interest on the date interest is paid.
2. Upon exercise or election to require repurchase of the option,
the contract striking price and expiration prices shall be reduced by
the amount of accrued interest from the last interest payment date to the
date of presentation.
3. If the underlying bond is called for redemption by the issuing
corporation, wholly or in part, the option shall expire on the date fixed
for redemption by the issuing corporation and the contract striking
price and expiration prices shall be reduced by the amount of accrued
interest from the last payable date to the date of redemption.
Limitations on Exercise, Transfer and Repurchase of Options
Gordon Limited Price Options may not be exercised or the repurchase of an
option be required of Gordon & Co. while trading in the underlying security has
been halted by governmental authority, by the Exchange where listed or by the
NASD. Such a trading halt shall not extend the date on which an option expires
or the dates on which expiration prices become applicable. If such a trading
halt is in effect on the stated expiration date of an option, the option
nevertheless expires on its stated expiration date. It should be noted that
the rules of national securities exchanges listing options for trading state
that an option is exercisable during the ten (10) days prior to and including
its expiration date even if trading in the underlying security has been halted.
There is authority to the effect that conventional options traded in the
over-the-counter market may similarly be exercised on and prior to their
expiration date under certain circumstances even if trading in the underlying
security has been halted. In this respect, Gordon Options differ from
Standardized Options.
As previously indicated in this Prospectus, Gordon Limited Price Options
written on underlying standardized stock options or on underlying standardized
index options cannot be transferred or exercised. The only method by which the
holder of such a Gordon Option can realize the value, if any, of that Option
is by reselling the Option to Gordon & Co. pursuant to the repurchase provisions
of the Option.
Position Limits
Gordon & Co. has established limitations governing the maximum number of
shares of stock, warrants, rights, units, options or bonds on which Gordon
Limited Price Options will be issued and may be held by a single investor or
group of investors acting in concert (regardless of whether the options are
held in one or more accounts or through one or more brokers) and has
established limits governing the amount of aggregate premium received for
such options. Gordon & Co. will issue options contracts on no more than
100,000 shares of stock, 100,000 warrants, rights or units, $1,000,000 of
bonds or 1,000 options covering the same underlying security and having
the same expiration date up to a maximum of 200,000 shares of stock,
200,000 warrants, rights or units, $2,000,000 of bonds or 2,000 options
covering the same underlying security regardless of the expiration date. In
no event will Gordon & Co. issue options on the same underlying security if the
premium received for such options exceeds $2,000,000.
For purposes of calculating these osition Limits, both for Gordon & Co.,
as writer, and for buyers of Gordon Options, positions in Gordon Options will be
aggregated with positions in standardized options.
<page>
Evidence of Option Contracts
Gordon Limited Price Options are evidenced by option contracts
issued by Gordon & Co. Gordon & Co. maintains daily records of all
options it issues. The ownership of Limited Price Options is evidenced by
possession of the option contracts. (See facsimiles of Limited Price Options
at pages 34 and 37.) Gordon & Co. also furnishes confirmations and statements
to every account for whom it sells and buys options. It is responsible
for inaccuracies or omissions in confirmations and statements of account. The
transfer of Gordon & Co.'s option contracts changes the ownership of the
options.
Underlying Securities
The underlying securities on which Gordon Limited Price Options are
available are securities registered under the Securities Exchange Act of
1934 and are listed on national securities exchanges or quoted on NASDAQ, and,
accordingly, the issuers of the underlying securities are subject to the
reporting and disclosure requirements of the Securities Exchange Act of 1934.
Also, those stocks, warrants, bonds, rights, units or options which are
listed on exchanges are subject to the listing agreement of the exchanges
where listed and have satisfied the listing standards of that exchange. Issuers
of the stocks, warrants, rights, units or bonds which underlie Gordon Options
are all subject to the Securities and Exchange Commission (SEC) reporting
requirements imposed by Sections 13 and 15(d) of the 1934 Act, including, but
not limited to, the filing of periodic reports with the SEC and, in the case of
issuers whose securities are listed on a national securities exchange, with one
or more securities exchanges. Such reports include annual reports on Form
10-K as well as reports on Forms 10-Q and 8-K describing the business of the
issuer and containing financial statements, quarterly financial reports and
current reports of certain significant events. These materials are
maintained for the last three fiscal years in the public files of the SEC and
certain securities exchanges. Gordon & Co. will issue and write options on
securities only if it appears from the SEC public files that the issuer of the
security is in compliance with SEC reporting and other requirements.
Gordon & Co. makes a diligent effort, prior to writing an option, to determine
that the issuer of the underlying security is not delinquent in its filings.
A list of securities on which Gordon & Co. Limited Price Options are available
may be obtained at the offices of Gordon & Co. Gordon & Co. also issues options
on United States Government Securities.
Gordon & Co. generally issues an option on a security only if the
security has a price of $5 or more if a stock, warrant or option or $250 or
more if a bond, as determined by reference to: (1) the closing price on the
principal national securities exchange on which the security is listed on the
last day on which a sale occurred on such exchange, or (2) if the security is
not so listed, the closing best bid on the preceding business day on NASDAQ.
However, Gordon & Co. reserves the right to deviate from this policy at any
time.
Gordon & Co. will issue an option on a security quoted on NASDAQ but
not listed on a national securities exchange only if, at the time the option
is issued, there are two or more dealers (market makers) standing willing
to, and who do in fact, make a market in such security including making regular
published bona fide bids and offers for such security for their own accounts.
Historical price and volume information concerning underlying securities
may be significant in evaluating options transactions. This information is
available through various financial publications, in the financial press and
elsewhere.
Upon request at or prior to any option transaction, Gordon & Co. will
furnish the buyers of its Limited Price Options, simultaneously with the
written confirmation of the transaction (generally on the same day or within
twenty-four hours of the time the transaction is executed), with a disclosure
statement, substantially in the form set forth on pages 38-39, containing the
following information applicable to the underlying security unless the
security underlying the option is a security authorized for trading on the
Listed Options Exchanges, or unless the underlying security is exempt under the
1933 Act:
<page>
(a) The identity of the issuer and the number of shares outstanding at
the end of its last fiscal year;
(b) The exchange where the security is traded or an indication that it
is traded over-the-counter;
(c) The sales/revenues and earnings per share of the issuer for the
past three fiscal years;
(d) The quarterly high and low sales prices (or bid prices) of
the underlying security and the dividends paid or declared quarterly for
the last two fiscal years; and
(e) The volume of trading in the underlying security on the primary
market where the security is traded for the four weeks (ending on Friday)
preceding the date of the transaction and the average volume of
trading in such primary market during those four weeks.
(The remainder this page is intentionally left blank. The Prospectus continues
on Page 20.)
<page>
BUYING GORDON OPTIONS
Purposes and Risks
There are a number of possible uses of Gordon Limited Price Options by
buyers (holders). Each of these uses involves risks in varying degrees, and
not every use is suitable for every investor. Some uses of options and
attendant risks are illustrated below. As before, tax consequences are not
considered in these descriptions but are significant in determining the net gain
or loss in options transactions.
It must be noted that all of the purposes served by Gordon Limited Price
Options are also served by standardized options traded on national securities
exchanges as well as by certain other options which may be available on the
over-the-counter market, ("Over-the-Counter-Options"). Over-the-Counter-Options
and standardized options do not contain the expiration price provision
found in Gordon Limited Price Options. Accordingly, Over-the-Counter-Options
and standardized options give the holder an opportunity to wait-out a favorable
movement in the price of the underlying security over the entire term of the
option, whereas a Gordon Limited Price Option will expire prior to its
expiration date if the underlying security sells at or is quoted at the
applicable expiration price.
For this reason, Gordon Limited Price Options are more speculative
investments and involve a greater degree of risk than standardized options or
most Over-the-Counter-Options. No purchaser should buy a Gordon Limited
Price Option if he can purchase a Standardized Option or an
Over-the-Counter-Option on the same securities for an equivalent premium.
On the other hand, Over-the-Counter-Options are not always readily
available especially on large blocks of securities. Standardized options are
available at the present time only on a selected group of securities.
Gordon Options are generally readily available to sophisticated stock market
investors, speculators and traders in large quantity on all securities listed
on a national securities exchange or quoted on NASDAQ subject to certain
conditions discussed at "Underlying Securities" at page 18, "Position Limits"
at page 17, "Limitations on Option Purchases" at page 23, and "Limitations on
Exercise, Transfer and Repurchase of Options" at page 17.
Limited Price Options have been available from time to time from issuers
other than Gordon & Co. Gordon & Co. is presently aware of the current
availability of limited price options from other issuers, and prospective
buyers of Gordon Options should be advised that limited price options may be
available from issuers other than Gordon & Co. on terms more favorable to the
buyer. For example, not all broker-dealers who have sold limited price
options have used the same formula as Gordon & Co. when computing premium
refunds. Some broker-dealers who have sold limited price options have computed
premium refunds in certain instances on a basis more favorable to the holder
of the option than the basis of computation presently employed by
Gordon & Co. Accordingly, no prospective buyer should purchase a Gordon Option
without investigating the current availability of other limited price options
and should not purchase a Gordon Option if he can purchase a similar option on
more favorable terms for a comparable premium.
1. Using Options for Leverage Potential. Because a limited price put
option premium is considerably less than the cost of selling short the
underlying security, and a limited price call option premium is considerably
less than the cost of purchasing the underlying security, a given amount of
funds may purchase options covering a much larger quantity of securities than
could be sold short or purchased directly. By so leveraging his funds, the
purchaser of options is able to benefit from any decreases in the price of the
underlying security in a put option, and any increases in the price of the
underlying security in a call option, to a considerably greater extent than
had he sold short or purchased the security outright. However, if the
option is not exercised or sold while it has a remaining value, and if the
value of the underlying security has not decreased in a put
option or increased in a call option during the life of the option (before it
expires because of its expiration date or expiration price provision), the
option purchaser will lose his entire investment, whereas had he sold short or
purchased the security directly, he might have had no loss or only a paper loss.
<page>
Further, except when the value of the remaining life of an option may be
realized by selling it, for an option purchase to be profitable, the underlying
security must depreciate in value in a put option and appreciate in value in a
call option by more than the total premium paid in connection with the
purchase and sale (or exercise) of the option. For example, if a limited
price put option covering 100 shares of XYZ stock at an exercise price of
$50 per share is purchased for a premium of $662.50, and if the option has no
value which may be realized on account of its remaining life (i.e. its only
value depends upon the exercise price being above the market price of the
underlying stock), before the option can be exercised or sold at a profit, the
price of the underlying stock must decrease below $43.375 (the $6.625
decrease will cover the premium). Also, for example, if a limited price call
option covering 100 shares of XYZ stock at an exercise price of $50 per share is
purchased for a premium of $662.50, and if the option has no value which
may be realized on account of its remaining life (i.e. its only value depends
upon the exercise price being below the market price of the underlying
stock), before the option can be exercised or sold at a profit, the price of the
underlying stock must increase to $56.625 (the $6.625 increase will cover the
premium). Accordingly, this use of options is extremely speculative, especially
because of the expiration price provision of Gordon Limited Price Options,
and is unsuitable for investors who do not have the financial capacity to
withstand large losses.
2. Using Options as an Alternative to Selling Short or Investing in the
Underlying Security. This use of options assumes an investor who
anticipates a drop or rise in the price of XYZ stock but does not think it
prudent to expose himself to the risk of a severe price rise by selling
XYZ short or to the risk of a severe price decline by buying XYZ outright.
Through the purchase of a put option on 100 shares of XYZ as an alternative
to the short sale or, through the purchase of a call option on 100 shares of
XYZ as an alternative to the outright purchase of 100 shares of the stock, the
investor may put himself in a position to realize the hoped for profit (less
the premium paid for the option) and to limit his losses to the premium
should the stock increase in value in a put option and decline in value in
a call option. This use of options anticipates the investment of the entire
difference between the cost of the option and the short sale price or cost of
the stock in a relatively risk-free manner (such as a savings account or
Treasury bills), the income from which helps offset the cost of the option.
(To the extent that an investor departs from this risk limiting use of options
by failing to invest in a relatively risk-free manner the entire difference
between the cost of the option and the short sale selling price of the stock
in a put option and the cost of the stock in a call option, the option
investment becomes more of a leverage device as described under example 1above,
and the investor becomes subject to the risks specified thereunder).
Although generally considered to be among the more conservative uses of
option buying, the use of options described in this example 2 still involves
significant risks that are not present in an ordinary short sale or stock
purchase. Unlike the stock investor, the option purchaser must not only
predict whether the price of the stock is going to fall or rise, but when it
will fall or rise. If the stock price does not fall below in a put option,
or rise above in a call option, the exercise price during the life of the
option, the option purchaser will lose his entire option investment
(unless he is able to recover a portion f the premium in an option repurchase
transaction), whereas the stock investor will have suffered only a paper loss
until he chooses to buy in the stock he is short or sell the stock he owns.
Thus, an option investor does not have the choice of "waiting out" an
unexpected upturn or downturn in the stock price beyond the expiration
of the option. Obviously, the shorter the term of the option, the greater is
this risk. It should be emphasized that this risk is increased by the expiration
price provision of Gordon Limited Price Options.
Further, the very security which might be considered more conservative from
the standpoint of a direct short sale or purchase could be more risky as an
option investment. For example, a stable security might be considered a safer
investment than a more volatile security because its price is less likely to
rise or fall, but the same stability factor also means that a security with a
stable price is less likely to fall significantly in a put option or rise
significantly in a call option during the relatively short duration of an
option. If the underlying security price does not fall in a put option or
rise in a call option during that period, the option holder stands to lose his
entire investment in the option.
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The above enumeration of certain purposes and risks of buying options
does not purport to be inclusive; there are other uses that may involve greater
or lesser degrees of risk than stated above. Further, because of the
repurchase agreement of Gordon Limited Price Options, the holder of an option
may sell it to Gordon & Co. Such sale transactions permit additional uses
which are discussed at page 23. No investor should undertake any transaction in
options unless he thoroughly understands the mechanics and risks involved and
is financially able to bear the risks.
It must be noted that the operation of the expiration price provision of
Gordon Limited Price Options may cause any such option to expire at any time
after it is purchased by virtue of fluctuation in the market price of the
underlying security. A Gordon Limited Price Option may expire without the
knowledge of the buyer or holder of such option. Gordon & Co. assumes no
obligation to notify the buyer or holder of any Gordon Limited Price Option
that the market price of the underlying security is approaching the expiration
price of the option. Once a Gordon Limited Price Option expires by virtue
of its expiration price provision, it becomes worthless. Subsequent
fluctuation in the market price of the underlying security prior to the
expiration date of the option does not revive the option.
Method of Buying Gordon Options
Gordon Limited Price Options may be purchased by placing an order with
a broker or directly with Gordon & Co. An order should specify the premium
being offered, the underlying security and the quantity thereof, the
expiration date, the exercise price, and the expiration prices and the
periods of time to which they are applicable. The order may be accepted or
rejected by Gordon & Co., or negotiation may occur concerning the premium,
exercise price, expiration prices and other terms of the option. As stated at
pages 13-14, the charts indicating premiums and expiration prices of Gordon
Options included in this prospectus are illustrative only, and are always
subject to negotiation.
Gordon & Co. generally issues only offsetting put options and covered
call options with an exercise price equal to the market price of the
underlying security when the option is issued. Promptly upon receipt of a
customer's order and agreement on the terms of the Gordon Limited Price
Option to be issued Gordon sells (if a put option) or purchases (if a call
option) the underlying security through a securities broker. The price at
which the underlying security is positioned by Gordon & Co. determines the
exercise price of the Gordon Option and directly affects the amount of the
premium for the option. Accordingly, a customer should instruct Gordon &
Co. when he places his order whether Gordon should position the underlying
security by issuing a market order, a limit order or some other form of
contingency order.
In those rare instances when Gordon elects to issue a naked option, Gordon
sells, as promptly as applicable short selling regulations permit, and
simultaneously purchases (if a naked put option) or purchases and simultaneously
sells (if a naked call option) the underlying security. The actual price
which Gordon & Co. receives on the sale of the underlying security of a naked
put option, or the actual price which Gordon & Co. pays for the underlying
security of a naked call option determines the exercise price of the Gordon
Option issued to the customer and directly affects the amount of the premium for
the option.
When Gordon & Co. and the customer agree on the premium and other terms of
the Limited Price Option and the exercise price of the option is established
according to the procedures herein described a trade binding on the parties
results.
The buyer, or his broker, is required to pay the premium to Gordon & Co.
prior to 3:30 P.M. Eastern Time of the fifth business day after the date on
which the trade is accepted by Gordon & Co. On receipt of the premium
Gordon & Co. issues the option contract. An option cannot be exercised or
resold until the premium is paid. If payment is not received within the
required time, the option transaction will be cancelled without prejudice to
Gordon & Co.'s right to recover the amount of the agreed premium. An
option cannot be modified unless the modification premium has been received
by Gordon & Co. prior to the effective date of the modification.
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Gordon & Co. reserves the right to sell Limited Price Options only to
buyers determined by Gordon & Co. to be sophisticated stock market investors,
traders and speculators. These buyers must satisfy Gordon & Co. that they have
complete comprehension of the mechanics and risks involved in trading in
options, especially Limited Price Options, and have the financial resources
to enable them to bear the risk of trading in such options. As previously
stated under "Risk Factors" at page 7, the NASD imposes special disclosure and
suitability rules for customers who engage in options trading. Gordon & Co.
sells Gordon Options only to purchasers who satisfy the options disclosure
and suitability requirements imposed by the NASD. Moreover, Gordon & Co.
will sell Gordon Options written on standardized stock options or on
standardized index options only to extremely sophisticated investors who
demonstrate a clear understanding of and ability to bear the unusual risks
attendant in a derivative instrument written on another derivative instrument
Gordon & Co. determines the suitability of option buyers by requiring
each prospective buyer to submit asigned written application to open an
account with Gordon & Co. The applicant is required to disclose his full name,
age, marital status, number of dependents, home and business addresses and
telephone numbers, name of employer and position held, bank references,
stockbroker reference, taxpayer identification number, date of
birth, annual income, net worth, investment experience and knowledge, and
investment objectives.
An authorized representative of Gordon & Co. analyzes each application and
determines whether the applicant is suitable for option trading before any
transaction is consummated.
Limitations on Option Purchases
Gordon & Co. has established position limits governing the maximum
number of shares of stock, warrants, bonds or options on which Gordon Limited
Price Options may be held by a single investor or group of investors acting in
concert and the amount of the aggregate premiums received for such options.
Gordon & Co. generally refrains from issuing options if the underlying
security of an option has a closing market price or bid price of less than $5
per share or per option or $250 per bond. (See "Position Limits" at page 17.)
REPURCHASE AGREEMENT IN GORDON OPTIONS
General
As mentioned at pages 14 and 15 in this prospectus, the repurchase
agreement in Gordon Limited Price Options permits investors with existing
positions as holders of options, subject to certain exceptions summarized
hereunder in "Limitations on Exercise, Transfer and Repurchase of
Options" at page 17, to liquidate their positions by selling their options to
Gordon & Co.
A holder (bearer) of a Limited Price Option who desires to sell his option
to Gordon & Co. must present the option and notify Gordon & Co. that he elects
to require Gordon & Co. to repurchase the option. This must be done before
the option expires. The holder may give this notice orally or in writing when
he presents the option to Gordon & Co. Upon receipt of the option and
notice, Gordon & Co. will offer to purchase or sell the underlying
security in accordance with the terms of the notice. Upon the purchase or
sale of the underlying security, Gordon & Co. will pay the holder of the option
the repurchase price calculated in accordance with the method set forth under
"Liquidating Sales Transactions" below. If Gordon & Co. cannot purchase or
sell the underlying security of the option because a trading halt on the
underlying security imposed by governmental authority, by the exchange where
the security is listed, or by the NASD, is in effect, Gordon & Co.'s obligation
to repurchase the option ceases under the repurchase agreement of the option,
unless trading in the underlying security resumes before the expiration date
of the option. (See Paragraph 5 in Facsimiles of Limited Price Options at
pages 34 and 37.)
Liquidating Sale Transactions
The repurchase agreement in Gordon Limited Price Options is available to
the holder of options, subject to certain exceptions summarized hereunder in
"Limitations on Exercise,
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Transfer and Repurchase of Options" at page 17, up to the time the options
expire by virtue of their expiration date or expiration price provision. The
repurchase price for a put option is the amount by which the applicable
expiration price of the put option is above the price Gordon & Co. pays to
purchase the underlying security when the holder of the put option requests
its repurchase. The repurchase price for a call option is the amount by which
the applicable expiration price of the call option is below the price
Gordon & Co. receives on the sale of the underlying security when the holder of
the call option requests its repurchase. The repurchase price for a put or
call option is reduced by the amount, if any, by which the commission
paid to purchase or sell the underlying security when the holder of the option
requests its repurchase, exceeds the commission paid to sell short or
purchase the underlying security at the time the option was issued.
In order to require the repurchase by Gordon & Co. of a Limited Price Put
Option, the holder (bearer) must present the option to Gordon & Co. prior to
the earlier of (a) 3:15 P.M. Eastern Time on the expiration date of the
option or (b) such time as a sale shall occur of the underlying security on a
national securities exchange, if listed on an exchange, or if not so listed
at such time as an ask price appears for the underlying security on NASDAQ, at
a price equal to or more than the expiration price specified in the option as
applicable to the period which includes the date of such sale or of such ask
price.
In order to require the repurchase by Gordon & Co. of a Limited Price Call
Option, the holder (bearer) must present the option to Gordon & Co. prior to
the earlier of (a) 3:15 P.M. Eastern Time on the expiration date of the option
or (b) such time as a sale shall occur of the underlying security on a national
securities exchange, if listed on an exchange, or if not so listed at such time
as a bid price appears for the underlying security on NASDAQ, at a price equal
to or less than the expiration price specified in the option as applicable to
the period which includes the date of such sale or of such bid price.
The holder (bearer) of the option cannot exercise or require its
repurchase while trading in the underlying security of the option has been
halted by governmental authority, by the exchange where listed, or by the NASD.
Such a trading halt shall not extend the date on which the option expires or
the dates on which the expiration prices become applicable. If such a trading
halt is in effect on the expiration date of the option, the option nevertheless
expires on its expiration date.
The holders of Gordon Limited Price Options may save stock brokerage
commissions when they resell their options to Gordon & Co. instead of
exercising them, and in certain instances, receive a portion of the premium
they paid for the options by obtaining the spread, if any, between the
expiration price (not the striking price) and the current market price of the
security underlying the options.
For example, a holder might have purchased the typical limited price
put option described at "Typical Limited Price Options" (page 40) for
$662.50 when XYZ stock was selling at $50 per share. Twenty-nine days later,
XYZ stock is selling for $45 (and it had not risen during said period of time
to $53.75). By exercising the repurchase agreement of the option, the holder
would receive, in accordance with the repurchase agreement, $875 (if the
underlying stock is purchased by Gordon & Co. at $45), this sum being the
difference between the first month expiration price of $53.75 (not the
striking price of $50) and the purchase price of the underlying stock at $45.
The profit made by selling the option in this transaction would be $212.50
($875 less the $662.50 premium paid for the option) less the difference, if
any, of any commission Gordon & Co. pays to buy-in XYZ over the commission it
paid to sell XYZ short at the time the option was written.
Again, for example, a holder might have purchased the typical limited
price call option described at "Typical Limited Price Options" (page 40)
for $662.50 when XYZ stock was selling at $50 per share. Twenty-nine days
later, XYZ stock is selling for $55 (and had not fallen during said
period of time to $46.25). By exercising the repurchase agreement of the
option, the holder would receive, in accordance with the repurchase agreement,
$875 (if the underlying stock is sold by Gordon & Co. at $55), this sum being
the difference between the expiration price of $46.25 (not the striking
price of $50) and the sale price of the underlying stock at $55. The profit
made by selling the option in this transaction would be $212.50 ($875 less
$662.50 premium paid for the option) less the difference, if any, of any
commission Gordon & Co. pays to sell XYZ over the commission it paid to purchase
XYZ at the time the option was written.
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When the holder of a limited price option makes a timely request upon
Gordon & Co. to repurchase the option, Gordon & Co. immediately places a market
order for the purchase of the underlying security of a put option (whether
it is an offsetting put option or a naked put option) or for the sale of the
underlying security of a covered call option and utilizes its best efforts
to effect a prompt and expeditious purchase or sale of the underlying
security. The actual purchase price of the securities underlying a put
option or the actual sales price of the securities underlying a covered call
option is used to calculate the repurchase price of the Gordon Option as
explained above. If the option is a naked call option Gordon & Co. immediately
places a market order for the purchase and simultaneous sale of the underlying
security of the naked call option and utilizes its best efforts to effect a
prompt and expeditious purchase and sale of the underlying security. The
actual sale price of the underlying security is used to compute the repurchase
price exactly as if the call option had been a covered call option.
Gordon & Co. may be legally responsible to the holder of the option for
negligence inexecuting the transaction.
Moderation of Buyer's Risks
In appropriate circumstances, the buyers of options may be able to limit
their losses by closing out theirposition in options prior to their expiration,
pursuant to the Repurchase Agreement in Gordon Options. Although the repurchase
agreement may assist buyers of Gordon Limited Price Options in limiting their
losses, there can be no assurance that the repurchase agreement will be
applicable to any particular option because of a lack of a market to buy or
sell the underlying security of the option, a rapid price fluctuation in the
market price of the underlying security, or the possibility that a trading
halt on an underlying security may eliminate the buyer's right to require
Gordon & Co. to repurchase the option. (See "Limitations on Exercise, Transfer
and Repurchase of Options" at page 17.)
The moderation of the buyer's risk in purchasing a limited price put option
may be illustrated as follows:
A purchases the typical limited price put option described at "Typical
Limited Price Options" (page 40) for a premium of $662.50.
Instead of falling in price as A anticipated, the market price of XYZ
fluctuates between $47 and $51 a share, and is selling at $50 a share three
weeks after he purchases the put option. A desires to liquidate his investment
of $662.50 in the put option he owns. A can liquidate his investment with
financial benefit to himself by electing to sell it to Gordon & Co., who is
obligated to buy the option under the repurchase agreement of the option, for
the amount by which the expiration price of $53.75 is above the price at which
Gordon & Co. can purchase 100 shares of XYZ. If Gordon & Co. purchases 100
shares of XYZ at $50 a share, it is obligated to pay A $375 for the put option
(expiration price of $53.75 less $50 purchase price). A could realize no
gain if he exercised his put option and delivered 100 shares of XYZ at $50 a
share when the market price of XYZ is $50 a share (except he would save the
assumed commission of $71.50 if he owned the 100 shares of XYZ) but does recoup
$375 of his investment of $662.50 by selling the option under the repurchase
agreement of the option.
The moderation of the buyer's risk in purchasing a limited price call
option may be illustrated as follows:
A purchases the typical limited price call option described at "Typical
Limited Price Options" (page 40) for a premium of $662.50.
Instead of rising in price as A anticipated, the market price of XYZ
fluctuates between $53 and $49 a share, and is selling at $50 a share three
weeks after he purchases the call option. A desires to liquidate his
investment of $662.50 in the call option he owns. A can liquidate his
investment with financial benefit to himself by electing to sell it to
Gordon & Co., who is obligated to buy the option under the repurchase agreement
of the option, for the amount by which the expiration price of $46.25 is
below the price at which Gordon & Co. can sell 100
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shares of XYZ. If Gordon & Co. sells 100 shares of XYZ at $50 a share, it
is obligated to pay A $375 for the call option ($50 purchase price less
expiration price of $46.25). A could realize no gain if he exercised his call
option and called for 100 shares of XYZ at $50 a share when the market price
of XYZ is $50 a share (except he would save the assumed commission of $71.50
if he wanted to own the 100 shares of XYZ) but does recoup $375 of his
investment of $662.50 by selling the option under the repurchase agreementof the
option.
A's loss on his investment in both of the above examples is moderated by
the amount A received on the sale of his option.
Restatement of buyer's moderation of loss in the above examples
Paid for option............................................$662.50
Realized on sale of option................................ 375.00
Loss on option transaction.................................$287.50
A would have lost his entire investment if he exercised either of the
above options when the market price of the underlying security was $50.
All that has been stated in the examples set forth above would apply to
warrants, rights, units, options and bonds if they were the underlying
security of the option and would apply if XYZ was listed on a national
securities exchange or quoted on NASDAQ.
EXERCISE OF GORDON OPTIONS
General
Except as limited in the following sentence, a Gordon Limited Price
Option may be exercised by the timely submission to Gordon & Co. of the option
with an oral or written notice of exercise, together with the underlying
security of a put option or payment of the exercise price of a call option.
As noted under Exercise of Options at page 5, Gordon Options written on
standardized stock options or on standardized index options can not be
exercised. They can be only resold to Gordon & Co. under the terms of the
Repurchase Agreement contained therein.
In order to exercise a limited price put option, the holder (bearer) must
present the option to Gordon & Co. prior to the earlier of (a) 3:15 P.M.
Eastern Time on the expiration date of the option or (b) such time as a
sale shall occur of the underlying security on a national securities exchange,
if listed on an exchange, or if not so listed, at such time as an ask price
appears for the underlying security on NASDAQ, at a price equal to or more than
the expiration price specified in the option as applicable to the period
which includes the date of such sale or of such ask price.
In order to exercise a limited price call option, the holder (bearer)
must present the option to Gordon & Co. prior to the earlier of (a) 3:15 P.M.
Eastern Time on the expiration date of the option or (b) such time as a sale
shall occur of the underlying security on a national securities exchange,
if listed on an exchange, or if not so listed at such time as a bid price
appears for the underlying security on NASDAQ, at a price equal to or less
than the expiration price specified in the option as applicable to the
period which includes the date of such sale or of such bid price.
The expiration date of every Gordon Option is calculated to fall on a
business day on which the market for the underlying security is open for
trading. If, by some oversight or inadvertence, the expiration date of a
Gordon Option falls on a day other than such a business day, then the
option does not expire until 3:15 P.M. Eastern Time on the next business day
on which the market for the underlying security is open for trading.
In no event may any Gordon Option be exercised after it has expired either
by virtue of its expiration date or expiration price provision. When a Gordon
Option has expired, it has no further value.
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Tender of Exercise Notice
Gordon & Co. assumes no responsibility for the timely or proper tender
to it of the exercise notice and option. If an option is not properly
exercised (or tendered for repurchase by Gordon & Co. pursuant to the
repurchase agreement in the option discussed at page 23) prior to its
expiration, it will become worthless.
Every tender of an exercise notice and option to Gordon & Co. is
irrevocable.
Payment and Delivery
Gordon & Co. will pay the striking price of a put option, and deliver
the underlying security in a call option, within five business days of the
timely submission of an exercise notice, delivery of the option, and delivery
of the underlying security in a put option, and payment of the exercise price in
a call option.
It should be noted that when the holder of a standardized option exercises
the option, unless a firm has a house rule to the contrary, the holder is not
required to pay the exercise price until five business days later when he
should also receive delivery of the underlying security of a call option or
receive the exercise price of a put option.
In this respect, standardized options are different from Gordon Options
which require the holder to pay the exercise price of a call option, or deliver
the underlying security of a put option, at the time the holder exercises
the option, even though Gordon & Co. is not obligated to deliver the
underlying security of the call option or pay the exercise price of a put
option until five business days after the option is exercised.
Upon the payment of the exercise price of a put option, and delivery of
the underlying security in a call option, to the holder or his broker, the
obligation of Gordon & Co. under the option will be completely discharged.
Remedies
If Gordon & Co. does not pay the striking price on the exercise of a put
option, or deliver the underlying security on the exercise of a call option,
on or before the settlement date, the holder may sell the underlying security
in a put option or buy the underlying security in a call option. Gordon & Co.
is obligated to pay the holder of a put option any amount by which the price
obtained for the underlying security was less than the exercise price of
the put option; and to pay the holder of a call option any amount by which the
price paid for the underlying security exceeded the exercise price of the call
option.
The Back-Up System
The mechanics of trading in Gordon Limited Price Options and the
settlement procedures of Gordon & Co. are designed so that for every
outstanding option, Gordon & Co. has undertaken to perform the obligations
of the option in the event of an exercise of the option. As a result, no matter
how many options may be outstanding at any time with respect to a particular
underlying security Gordon & Co. is always obligated to perform each option.
Once an exercise notice is given and delivery of the option is made by
the holder to Gordon & Co., and the underlying security is tendered to
Gordon & Co. in a put option, or payment of the exercise price is tendered to
Gordon & Co. in a call option, Gordon & Co. is contractually obligated to
perform the obligation of the option in accordance with its terms.
Gordon & Co.'s obligation is secured by margin which ordon & Co. segregates,
maintains and holds to secure the performance of the option.
I. Gordon & Co.'s Net Capital. Gordon & Co. issues limited price
options only if it has at least the net capital required by law. Gordon & Co.
will not permit the withdrawal of any funds from any subordinated loan
account or from the account of any partner if the effect of such withdrawal
or payment would be to reduce its net capital below such required amount.
Gordon & Co. will furnish semi-annually to the holder of each
outstanding option a balance sheet which includes a detailed computation of
its net capital. The financial books
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and records of Gordon & Co. will be audited at least once annually by
independent certified public accountants and a report of such audit will be
furnished to each holder of outstanding Gordon Limited Price Options and to
the SEC.
II. Gordon & Co. Margin Deposits. When Gordon & Co. issues an option,
Gordon & Co. segregates as margin, cash or Treasury bills or the underlying
security (or, in certain cases, a security exchangeable for or convertible
into the underlying security) by 9:30 A.M.on the day after the option is issued.
III. Gordon & Co.'s Lien. Gordon & Co. has a lien on all options,
other securities, margins and funds maintained in each customer's account
with Gordon & Co. If any customer does not perform its obligations to
Gordon & Co., the assets in the customer's account with Gordon & Co. may be
sold or converted to cash by Gordon & Co. and the proceeds applied to the
performance of the customer's obligation as a buyer of Gordon Limited Price
Options. The customer is obligated to pay Gordon & Co. any deficiency
between the amount of the customer's obligation to Gordon & Co. and the amount
Gordon & Co. receives from the liquidation of the customer's account.
FEDERAL INCOME TAX CONSIDERATIONS
Federal income tax considerations are important in evaluating option
transactions. Any investor considering the purchase of a Gordon Limited Price
Put or Call Option should consult with his tax advisor as to how taxes may
affect the outcome of a particular contemplated option transaction.
Gordon & Co. has obtained private rulings from the Internal Revenue
Service with respect to material federal income tax consequences to
buyers of Gordon Options. The specific circumstances of a particular
transaction and of any particular taxpayer may impact the resulting tax
consequences so it is not possible to provide information with respect to the
federal income tax treatment of every conceivable option transaction. These
rulings are set forth below and they are based on the assumption that the
options are capital assets of the holder of the option.
1. The cost of a Gordon Limited Price Call Option or a Gordon Limited
Price Put Option is a nondeductible capital expenditure.
2. If a Gordon Limited Price Call Option or a Gordon Limited Price Put
Option is sold prior to exercise, any gain or loss recognized by the holder
constitutes capital gain or loss and is short-term or long-term, depending
on the holding period of the call or the put.
3. If a Gordon Limited Price Call Option or a Gordon Limited Price Put
Option is allowed to expire without exercise, the expiration is treated as a
sale or exchange of such option on the expiration date. The resulting loss is
a capital loss and is short-term or long-term, depending on the holding period
of the option.
4. If a Gordon Limited Price Call Option is exercised, its cost is
added to the basis of the stock purchased.
5. If a Gordon Limited Price Put Option is exercised, its cost reduces
the amount realized on the sale of the underlying stock in determining gain
or loss. Such gain or loss is capital gain or loss and is short-term or
long-term, depending on the holding period of the stock involved.
6. For purposes of section 1233(b) of the Internal Revenue Code (the
"Code"), the acquisition of a Gordon Limited Price Put Option constitutes a
short sale and the exercise, sale or expiration of the put is a closing of the
short sale. If the put is acquired at a time when the underlying stock
has been held for less than the holding period required for long-term capital
gain purposes or if shares of the underlying security are acquired after
acquisition of the Put Option and before its exercise, sale or expiration, any
gain on exercise, sale or expiration of the Put Option is short-term capital
gain, and the holding period of the underlying security begins to run on the
earliest of (1) the date such security is disposed of, (2) the date the Put
Option is exercised, (3) the date the Put Option is sold or (4) the date the
Put Option expires.
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7. If a Gordon Put Option and securities identified to be used in its
exercise are acquired on the same day, the acquisition of the Put Option
does not constitute a short sale for purposes of section 1233(b) of the Code.
If the Put Option is exercised and if the identified securities are
delivered pursuant to the exercise, the premium paid for the Put Option reduces
the amount realized on the sale. If the Put Option is not exercised, the
premium paid for the Put Option is added to the basis of the identified
securities.
These private tax rulings may not preclude the Internal Revenue Service
from making adjustments in the tax return of individual investors with
respect to transactions in Gordon Options depending on the particular facts
applicable to a specific transaction or to a specific taxpayer. Current laws,
regulations, rulings, decisions and policies of the Internal Revenue Service
are subject to change at any time.
State income tax considerations may also be significant. No attempt is
made to explain them here. Nothing herein is to be construed as tax advice with
respect either to federal or state tax considerations.
COSTS OF OPTIONS TRANSACTIONS
The price which a buyer pays to purchase a Gordon Option is known as a
"premium". The amount of the premium for a particular option is determined by
agreement of the parties to the transaction. The premium depends upon such
factors as the market price and the quantity of the underlying security
involved in the transaction, the identity of the issuer of the underlying
security, the volatility of the underlying security, the term of the
option, the difference, if any, between the exercise price and the market
price of the underlying security, the expiration prices and dates to which
they are applicable, the commission cost involved in positioning and
disposing of the underlying security, whether the underlying security is
traded on a national securities exchange or quoted on NASDAQ, and the premium
at which a conventional or standardized option on the same underlying
security is available.
Gordon & Co. offers its 6 month-10 day, 9 month and 12 month-10 day
limited price options for premiums (subject to negotiation and change)
ranging from 11 1/2% to 30% of the market value of the underlying security when
the security is traded on a national securities exchange and for premiums
ranging from 15 1/2% to 40% of the market value of the underlying security
when the security is quoted on NASDAQ. Premiums for Limited Price Options
on underlying options are specially negotiated.
The premiums are paid to Gordon & Co.
Gordon & Co. may purchase or sell the securities underlying an option
through a broker who has referred the option buyer to Gordon & Co. The
referring broker will receive a commission from Gordon & Co. for executing
transactions in the underlying securities. No additional fee or other
form of compensation is paid to the referring broker by Gordon & Co.
Illustrative premiums at which Gordon & Co. offers its limited price
put and call options (subject to negotiation and change) on securities listed
on a national securities exchange, with exercise prices equivalent to the
market price of the underlying security at the time the options are issued,
are $12.50 per 100 shares of stock, 100 warrants, rights or units or 10 bonds
plus the percentages of the market price of the underlying securities set
forth below.
All premiums are adjusted to the next highest 12 1/2 cents if on being
computed the figures following the decimal point are not evenly divisible by
..125.
<page>
PREMIUMS ON LIMITED PRICE PUT AND CALL OPTIONS
(Expressed as a percentage of the market price of the underlying security)
OPTIONS ON 1,000 SHARES OR MORE OF LISTED STOCK,
1,000 WARRANTS, RIGHTS OR UNITS OR 100 BONDS
<table>
<s> <c> <c> <c>
6 Month-10 Day 12 Month-10 Day
Market Price of Options 9 Month Options Options
Underlying Security Premium Premium Premium
5 to 9.875 not available not available 25 1/2 %
10 to 14.875 not available not available 23 %
15 to 24.875 not available 18 % 22 1/2 %
25 to 39.875 12 1/2 % 17 % 21 1/2 %
40 to 74.875 11 1/2 % 16 % 20 1/2 %
75 to 149.875 11 % 15 1/2 % 20 %
150 and up 10 1/2 % 15 % 19 1/2 %
OPTIONS ON 500 TO 900 SHARES OF LISTED STOCK,
500 TO 900 WARRANTS, RIGHTS OR UNITS OR 50 TO 90 BONDS
6 Month-10 Day 12 Month-10 Day
Market Price of Options 9 Month Options Options
Underlying Security Premium Premium Premium
5 to 9.875 not available not available26 %
10 to 14.875 not available not available23 1/2 %
15 to 24.875 not available 18 % 22 1/2 %
25 to 39.875 13 % 17 1/2 % 22 %
40 to 74.875 12 1/2 % 17 % 21 1/2 %
75 to 149.875 11 1/2 % 16 % 20 1/2 %
150 and up 11 % 15 1/2 % 20 %
OPTIONS ON LESS THAN 500 SHARES OF LISTED STOCK,
500 WARRANTS, RIGHTS OR UNITS OR 50 BONDS
6 Month-10 Day 12 Month-10 Day
Market Price of Options 9 Month Options Options
Underlying Security Premium Premium Premium
5 to 9.875 not available not available27 1/2 %
10 to 14.875 not available not available25 %
15 to 24.875 not available 19 1/2 % 24 %
25 to 39.875 14 % 18 1/2 % 23 %
40 to 74.875 13 % 17 1/2 % 22 %
75 to 149.875 12 1/2 % 17 % 21 1/2 %
150 and up 12 % 16 1/2 % 21 %
</table>
Illustrative premiums at which Gordon & Co. offers its limited price
put and call options (subject to negotiation and change) on securities quoted
on NASDAQ are 33 1/3% more than the premiums on securities quoted on a national
securities exchange.
Premiums for Limited Price Options with expiration dates other than those
listed above are agreed upon with Gordon & Co. when the transaction is
negotiated.
Prior to the expiration of any limited price option it has issued,
Gordon & Co. will increase the exercise and expiration prices in a put option,
and decrease the exercise and expiration prices in a call option, as much (as
many points) as the holder desires, upon the receipt from the holder of a
premium of $1.0625 per share of stock or per warrant, right or unit; $10.625
per bond; and $106.25 per underlying option for each point the exercise and
expiration prices of the option are increased or decreased.
<page>
Except for the premiums discussed herein, Gordon & Co. makes no charge
to the buyer or holder of a Gordon Option for the purchase, modification,
exercise or repurchase of the option.
LITIGATION RELATING TO GORDON & CO.
There is no administrative action, criminal or civil litigation pending
or threatened against Gordon & Co. or its general partner which in the opinion
of management or counsel to Gordon & Co. would materially adversely affect
the financial condition of Gordon & Co.
ORGANIZATION AND MANAGEMENT OF GORDON & CO.
Organization
Gordon & Co. is a broker-dealer registered under the Securities Act of
1934 and it is subject to that Act and to the regulatory jurisdiction of the
Securities and Exchange Commission.
Gordon & Co. was organized in 1937 in Massachusetts as a common law
partnership by Louis Gordon, Milton Gordon and Stanley Gordon under the
name of Beacon Finance Company. On May 1, 1961 Beacon Finance Company
registered with the Commonwealth of Massachusetts as a limited partnership.
On December 15, 1971 Beacon Finance Company registered with the Securities and
Exchange Commission as a broker-dealer pursuant to the Securities Exchange
Act of 1934 and has, since its registration, engaged in the business of
writing options on securities. On December 21, 1971, Beacon Finance Company
changed its name to Gordon & Co. Its offices are located at 63 Pleasant Street,
Watertown, Massachusetts 02472; telephone number (617) 924-7997.
Gordon & Co. has written limited price options for many years. The vast
majority of the options have been repurchased by Gordon & Co. with or without
prior modification pursuant to the repurchase agreement in the options.
Those options which were repurchased may or may not have resulted in a
profit to the holder. Options which have expired have always resulted in a
loss to the holder. Gordon & Co. has never failed to fulfill its obligations
as a writer of options including its obligation to repurchase any option as
required by the terms thereof.
Gordon & Co. issues no research reports to its customers other than
information published by national publication services, and makes no
recommendations with respect to the underlying securities to buyers or writers
of its limited price options.
The capitalization of Gordon & Co. consists of funds invested in
Gordon & Co. by its partners. The issuance and/or writing of the limited
price options offered by this prospectus has a direct effect upon the
capitalization of Gordon & Co. (See the Balance Sheet and Statement of
Income of Gordon & Co. included under "Financial Statements" beginning at
page 42.)
Management
The general partner of Gordon & Co. is Kezar Limited Partnership, a
Massachusetts limited partnership organized on January 1, 1987. An audited
consolidated balance sheet of Kezar Limited Partnership is included at page
57 of this Prospectus. The general partner of Kezar Limited Partnership is
The Salke Family Trust. The Salke Family Trust had a net worth in excess of
four million five hundred thousand($4,500,000) dollars as of
December 31, 2004. The trustees of the Salke Family Trust are
Allison D. Salke and Warren G. Miller. Allison D. Salke is the Chief Executive
Officer of Gordon & Co. At December 31, 2004 she had a net worth in excess of
five hundred thousand ($500,000) dollars. Warren G. Miller is general
counsel to Gordon & Co. At December 31, 2004 he had a net worth in excess of
five hundred thousand ($500,000) dollars. Mr. Miller does not have an
active role in the operation of the business of Gordon & Co. and does not
receive any compensation as an employee of Gordon & Co.
<page>
As general partner of Gordon & Co., Kezar Limited Partnership is
obligated by law to satisfy all of the financial obligations of Gordon & Co.
The Chief Executive Officer of Gordon & Co. is Allison D. Salke,
age 39. Ms. Salke has been actively engaged in the securities business of
Gordon & Co. since 1989 and has served as Chief Operating Officer since 1997.
Michael B. Salke, age 66 had been the Chief Executive Officer of Gordon & Co.
since 1986 and had been actively engaged as its general manager and general
partner from 1961 through 1986. Mr. Salke retired as Chief Executive Officer
effective January 1, 2000 but continued to serve as consultant and adviser to
Gordon & Co. through the year 2001. He is currently the principal officer and
stockholder of Bay Colony Consulting, Inc., a Florida corporation that
provides consulting and advisory services to Gordon & Co. Mr. Salke is also
a limited partner of Kezar Limited Partnership, the general partner of
Gordon & Co.
Executive Compensation
As the Chief Executive Officer of Gordon & Co., Allison D. Salke will
receive an annual salary for the year ended December 31, 2005 of $166,000.00
plus expenses and bonuses to be established at year end.
Bay Colony Consulting, Inc. will receive no fee for advice and
consultation for the year ended December 31, 2005. Michael B. Salke, a limited
partner of the general partner of Gordon & Co., is the sole shareholder of Bay
Colony Consulting, Inc.
After each limited partner of Gordon & Co receives a guaranteed return on
his average annual investment in Gordon & Co. the balance of the
partnership's net income is paid to its general partner, Kezar Limited
Partnership in which Michael Salke has a significant financial interest as
limited partner.
Beneficial Ownership of Gordon & Co.
The following table sets forth as of December 31, 2004 certain
information regarding the ownership of and equity interest in Gordon & Co., a
Massachusetts limited partnership, by each person who is the beneficial owner
of more than five percent of the equity of the partnership, by Allison D. Salke,
the Chief Executive Officer of the company and by Joan and Michael B. Salke
who both indirectly own a substantial beneficial interest in the company by
virtue of their position as limited partners of Kezar Limited Partnership,
the general partner of Gordon & Co.
<table>
<s> <c> <c>
Name and Address of Beneficial Owner Nature of Beneficial Ownership Percentage of Partnership Owned
(1)
======================================= ==================================== ====================================
Kezar Limited Partnership, a General Partner 69.55%
Massachusetts Limited Partnership
- --------------------------------------- ------------------------------------ ------------------------------------
- --------------------------------------- ------------------------------------ ------------------------------------
Marital Trust under will of Stanley Limited Partner 11.24%
Gordon (2)
- --------------------------------------- ------------------------------------ ------------------------------------
- --------------------------------------- ------------------------------------ ------------------------------------
Allison D. Salke Chief and Only Executive Officer 1.00%
- --------------------------------------- ------------------------------------ ------------------------------------
- --------------------------------------- ------------------------------------ ------------------------------------
Joan Salke Limited Partner of Kezar Limited (3)
Partnership
- --------------------------------------- ------------------------------------ ------------------------------------
- --------------------------------------- ------------------------------------ ------------------------------------
Michael B. Salke Limited Partner of Kezar Limited (4)
Partnership
======================================= ==================================== ====================================
</table>
(1) The address of each owner is 63 Pleasant Street, Watertown, MA 02472.
(2) Stanley Gordon who died on June 9, 1997 was the father-in-law of
Michael B. Salke and the father of Joan Salke and the grandfather of
Allison D. Salke.
(3) Joan Salke is the wife of Michael B. Salke, the daughter of Stanley
Gordon and the mother of Allison D. Salke. She does not own directly
any beneficial interest in Gordon & Co. She is a limited partner of
Kezar Limited Partnership, general partner of Gordon & Co. As of
December 31, 2003, Mrs. Salke owned a 31% beneficial interest in
Kezar Limited Partnership.
(4) Michael B. Salke does not directly own any beneficial interest in
Gordon & Co. He is a limited partner of Kezar Limited Partnership,
general partner of Gordon & Co. As of December 31, 2003, Mr. Salke
owned a 11.7% beneficial interest in Kezar Limited Partnership.
LEGAL OPINION AND EXPERT REPORTS
Legal matters in connection with options offered hereby, including legal
matters related to federal income taxes under "Federal Income Tax
Considerations" have been passed upon by Warren G. Miller, Esquire, Boston,
Massachusetts, General Counsel to Gordon & Co. Mr. Miller is a trustee of The
Salke Family Trust which is the general partner of Kezar Limited Partnership,
a Massachusetts limited partnership which is the general partner of Gordon & Co.
The financial statements included in this prospectus and the related
supplemental schedules included elsewhere in the second post-effective
amendment to the registration statement of Gordon & Co. as of December 31, 2004
and 2003 and for the three years in the period ended December 31, 2004
included in this prospectus and in the fifth post-effective amendment to
the registration statement have been audited by Parent, McLaughlin & Nangle,
Certified Public Accountants as stated in their reports appearing herein and
elsewhere in the fifth post-effective amendment to Gordon & Co.'s registration
statement, and have been so included in reliance upon such reports given upon
the authority of these experts in accounting and auditing.
<page>
617) 924-7997
GORDON & CO.
Broker-Dealer
63 PLEASANT STREET
SUITE 200
WATERTOWN, MA 02472
LIMITED PRICE PUT OPTION CONTRACT
CONTRACT NO. WATERTOWN, MASS.
Date
For Value Received, the Bearer may deliver to Gordon & Co.
Shares of at $ per share
Bonds of at $ per bond
Warrants of at $ per warrant
Rights of at $ per right
Units of at $ per unit
Options(7) on at $ per option
hereinafter referred to as the Contract Striking Price.
This option can be exercised only prior to the earlier of (A) 3:15 P.M.
Eastern Time on the expiration date described below or
(B) such time as a sale shall occur of the above described security on a
national securities exchange if listed on an exchange, or if
not so listed, at such time as an ask price appears for the above described
security on an automated quotation system of a national
securities association, at a price equal to or more than the expiration
price specified below as applicable to the period which
includes the date of such sale or such ask price.
Expiration Price Expiration Price
Per Share Per Share
Per Bond Per Bond
Per Warrant Per Warrant
Per Right Per Right
Per Unit Period to Which Per Unit Period to Which
Per Option(7) Applicable Per Option(7) Applicable
........ From.......... to.......... ......... From............ to....
........ From.......... to.......... .......... From............ to....
........ From.......... to.......... ......... From............ to....
........ From.......... to.......... ......... From............ to....
........ From.......... to.......... ......... From............ to....
........ From.......... to......... .......... From............ to....
If the security underlying the Option is a standardized (listed) or index
option, this Option can not be exercised. It can only
be resold to Gordon & Co. pursuant to the terms on the reverse side hereof.
The regular expiration date of this option is or the earlier
expiration date of the underlying security if the
underlying security is an Option, warrant or right, but this option will expire
automatically upon the sale of the security if listed
on a national securities exchange, or at such time as an ask price appears
for the security on an automated quotation system of a
national securities association, at or above the applicable expiration
price specified herein. Gordon & Co. does not assume any
responsibility to notify the bearer of the prices at which the security has
been sold, offered for sale or the ask price of the
security.
At any time prior to the expiration of this option, the bearer may
require Gordon & Co. to repurchase this option at the price determined
pursuant to paragraph 4 of the terms and conditions on the reverse side.
This option must be presented to Gordon & Co. before the exact time of
its expiration in order to exercise this option or to require the repurchase
of this option.
This option is subject to the terms and conditions on the reverse side.
Gordon & Co. agrees to carry out all of the obligations of this option in
accordance with the terms and conditions thereof.
GORDON & CO.
By
TERMS AND CONDITIONS
Definitions of Terms. As used in the Option, "Underlying Security" means
the Stock, Bond, Warrant, Right, Unit or Option of the
issuer and class specified on the face hereof; "Contract Striking Price"
(7) means the price specified on the face hereof as the
price at which the Bearer may deliver or call the Underlying Security,
subject to an adjustment pursuant to these Terms and
Conditions; and "Expiration Price" (7) as of a specified date, means the
amount shown on the face hereof as the expiration price
applicable to the period which includes such date, subject to adjustment
pursuant to these Terms and Conditions.
Prior to the expiration of this Option if the Underlying Security is a
Stock (or, where applicable, a Warrant, Unit or Option):
1. (a)-The Contract Striking Price and Expiration Prices hereof shall be
reduced by the value of any cash dividend on the day the Stock goes ex-dividend;
(b)-Where the underlying stock is entitled to rights and/or warrants the
Contract Striking Price and Expiration Prices shall be
reduced by the value of same as fixed by the opening sale thereof on the day the
Stock sells ex-rights and/or warrants.
2. (a)-In the event of stock splits, reverse splits or other similar action
by the issuer of the Stock, Warrant or Unit or by the
issuer of the security underlying an option which is the subject of this
Option, this Option shall become an Option for the
equivalent in new securities when duly listed for trading and the total
Contract Striking Price and Expiration Prices shall not be reduced.
(b)-Stock dividends or the equivalent due-bills shall be attached to the
Stock, Warrant or Unit when and if this Option is
exercised, and the total Contract Striking Price and Expiration Prices shall not
be reduced. Prior to the Expiration of this Option if the Underlying Security
is a Bond:
3. (a)-The Contract Striking Price and Expiration Prices shall be reduced
by the value of any interest on the day interest is paid on the Bond.
(b)-Upon exercise or election to require repurchase of this Option, the
Contract Striking Price and Expiration Prices of the
Underlying Bond shall be reduced by the amount of accrued interest
from the last interest payment date to the date of presentation.
(c)-If the Underlying Bond is called for redemption by the issuing
corporation, wholly or in part, this Option shall expire on
the date fixed for redemption by said corporation and the Contract Striking
Price and Expiration Prices shall be reduced by the amount of accrued interest
from the last payable date to the date of redemption.
4. If prior to the expiration of this Option there are presented to Gordon
& Co. this Option and notice that the Bearer has elected to require the
repurchase of this Option, Gordon & Co. will offer to purchase if a Put Option,
or will offer for sale if a Call Option, at a price which conforms to the
conditions as to price stated in such notice, the Stock, Bonds, Warrants,
Rights Units or Options covered by this Option. Subject to the purchase or
sale on the Exchange where listed, or on the over-the-counter
market if not listed on an Exchange, by Gordon & Co., prior to the
expiration of this Option and in conformity with such
conditions as to price, of such Stock, Bonds, Warrants, Rights, Units or
Options, Gordon & Co. will repurchase this Option at a
price equal to the amount by which the purchase price of such purchase of the
Stock,Bonds, Warrants, Rights, Units or Options is
below in a Put Option, or sales price of such sale of the Stock, Bonds,
Warrants, Rights, Units or Options is above in a Call
Option, (without reduction for transfer taxes) the amount determined by
multiplying the number of shares of Stock, Bonds, Warrants, Rights, Units or
Options covered by this Option by the applicable Expiration Price in effect
at the date of such purchase or sale, less the difference, if any, in a Put
Option, by which the amount of commission paid to purchase the optioned
security exceeds the commission paid to sell short the optioned security
at the time the option was written, and less the difference, if any, in a
Call Option, by which the amount of commission paid to sell the optioned
security exceeds the commission paid to purchase the optioned security
at the time the option was written. Gordon & Co.'s repurchase of this
Option shall be deemed to have been effected on the date of such purchase or
sale of the Underlying Security.
5. Except as provided herein, this Option may not be exercised, or the
repurchase of this Option required, while trading in the Underlying Security
has been halted by governmental authority, the Exchange where listed, or by
the NASD and such a trading halt shall not extend the date on which this Option
expires or the dates on which Expiration Prices become applicable. If such
a trading halt is in effect on the expiration date of this Option, this Option
shall expire.
6. Prior to the expiration of this Option, the Bearer may have the exercise
price and expiration prices of this Option increased in
a Put Option, and decreased in a Call Option, as many points as the Bearer
desires upon paying Gordon & Co. an additional premium. The additional
premium for each point the exercise and expiration prices of the Option are
increased or decreased is
$1.0625 per share of Stock, Warrant, Right or Unit if the Underlying Security
is a Stock, Warrant, Right or Unit; $10.625 per Bond if the Underlying
Security is a Bond; and $106.25 per Underlying Option if the Underlying Security
is an Option.
7. Underlying Options are generally quoted and traded on the exchange
where listed or on the over-the-counter market at prices
representing 1/100th of the price of the Underlying Option which covers 100
shares or units of the security or index subject to the Underlying Option.
Accordingly for purposes of determining the Contract Striking Price and
applicable expiration prices of this Option, the Contract Striking Price and
Expiration Prices of this Option stated on the face hereof must be multiplied by
100.
(617) 924-7997
GORDON & CO.
Broker-Dealer
63 PLEASANT STREET
SUITE 200
WATERTOWN, MA 02472
LIMITED PRICE CALL OPTION CONTRACT
CONTRACT NO. WATERTOWN, MASS.
Date
For Value Received, the Bearer may call on Gordon & Co. for
Shares of at $ per share
Bonds of at $ per bond
Warrants of at $ per warrant
Rights of at $ per right
Units of at $ per unit
Options(7) on at $ per option
hereinafter referred to as the Contract Striking Price.
This option can be exercised only prior to the earlier of (A) 3:15 P.M.
Eastern Time on the expiration date described below or
(B) such time as a sale shall occur of the above described security on a
national securities exchange if listed on an exchange, or if
not so listed, at such time as a bid price appears for the above described
security on an automated quotation system of a national
securities association, at a price equal to or less than the expiration
price specified below as applicable to the period which
includes the date of such sale or such bid price.
Expiration Price Expiration Price
Per Share Per Share
Per Bond Per Bond
Per Warrant Per Warrant
Per Right Per Right
Per Unit Period to Which Per Unit Period to Which
Per Option(7) Applicable Per Option(7) Applicable
........ From.......... to....... ......... From............ to.......
........ From.......... to....... ......... From............ to.......
........ From.......... to....... ......... From............ to.......
........ From.......... to....... ......... From............ to.......
........ From.......... to....... ......... From............ to.......
........ From.......... to....... ......... From............ to.......
If the security underlying the Option is a standardized (listed) or index
option, this Option can not be exercised. It can only
be resold to Gordon & Co. pursuant to the terms on the reverse side hereof.
The regular expiration date of this option is or the earlier
expiration date of the underlying security if the
underlying security is an Option, warrant or right, but this option will expire
automatically upon the sale of the security if listed
on a national securities exchange, or at such time as a bid price appears
for the security on an automated quotation system of a
national securities association, at or below the applicable expiration
price specified herein. Gordon & Co. does not assume any
responsibility to notify the bearer of the prices at which the security has
been sold, offered for sale or the bid price of the
security.
At any time prior to the expiration of this option, the bearer may
require Gordon & Co. to repurchase this option at the price determined
pursuant to paragraph 4 of the terms and conditions on the reverse side.
This option must be presented to Gordon & Co. before the exact time of
its expiration in order to exercise this option or to
require the repurchase of this option.
This option is subject to the terms and conditions on the reverse side.
Gordon & Co. agrees to carry out all of the obligations of this option in
accordance with the terms and conditions thereof.
GORDON & CO.
By
TERMS AND CONDITIONS
Definitions of Terms. As used in the Option, "Underlying Security" means
the Stock, Bond, Warrant, Right, Unit or Option of the
issuer and class specified on the face hereof; "Contract Striking Price"
(7) means the price specified on the face hereof as the
price at which the Bearer may deliver or call the Underlying Security,
subject to an adjustment pursuant to these Terms and
Conditions; and "Expiration Price" (7) as of a specified date, means the
amount shown on the face hereof as the expiration price
applicable to the period which includes such date, subject to adjustment
pursuant to these Terms and Conditions.
Prior to the expiration of this Option if the Underlying Security is a S
tock (or, where applicable, a Warrant, Unit or Option):
1. (a)-The Contract Striking Price and Expiration Prices hereof shall be
reduced by the value of any cash dividend on the day the Stock goes ex-dividend;
(b)-Where the underlying stock is entitled to rights and/or warrants the
Contract Striking Price and Expiration Prices shall be
reduced by the value of same as fixed by the opening sale thereof on the day the
Stock sells ex-rights and/or warrants.
2. (a)-In the event of stock splits, reverse splits or other similar action
by the issuer of the Stock, Warrant or Unit or by the
issuer of the security underlying an option which is the subject of this
Option, this Option shall become an Option for the
equivalent in new securities when duly listed for trading and the total
Contract Striking Price and Expiration Prices shall not be reduced.
(b)-Stock dividends or the equivalent due-bills shall be attached to the
Stock, Warrant or Unit when and if this Option is
exercised, and the total Contract Striking Price and Expiration Prices shall not
be reduced. Prior to the Expiration of this Option if the Underlying Security
is a Bond:
3. (a)-The Contract Striking Price and Expiration Prices shall be reduced
by the value of any interest on the day interest is paid on the Bond.
(b)-Upon exercise or election to require repurchase of this Option, the
Contract Striking Price and Expiration Prices of the
Underlying Bond shall be reduced by the amount of accrued interest
from the last interest payment date to the date of presentation.
(c)-If the Underlying Bond is called for redemption by the issuing
corporation, wholly or in part, this Option shall expire on
the date fixed for redemption by said corporation and the Contract Striking
Price and Expiration Prices shall be reduced by the
amount of accrued interest from the last payable date to the date of redemption.
4. If prior to the expiration of this Option there are presented to Gordon &
Co. this Option and notice that the Bearer has elected
to require the repurchase of this Option, Gordon & Co. will offer to purchase
if a Put Option, or will offer for sale if a Call
Option, at a price which conforms to the conditions as to price stated in such
notice, the Stock, Bonds, Warrants, Rights Units
or Options covered by this Option. Subject to the purchase or sale on the
Exchange where listed, or on the over-the-counter
market if not listed on an Exchange, by Gordon & Co., prior to the
expiration of this Option and in conformity with such
conditions as to price, of such Stock, Bonds, Warrants, Rights, Units or
Options, Gordon & Co. will repurchase this Option at a
price equal to the amount by which the purchase price of such purchase of the
Stock, Bonds, Warrants, Rights, Units or Options is
below in a Put Option, or sales price of such sale of the Stock, Bonds,
Warrants, Rights, Units or Options is above in a Call
Option, (without reduction for transfer taxes) the amount determined by
multiplying the number of shares of Stock, Bonds,
Warrants, Rights, Units or Options covered by this Option by the
applicable Expiration Price in effect at the date of such
purchase or sale, less the difference, if any, in a Put Option, by which the
amount of commission paid to purchase the optioned
security exceeds the commission paid to sell short the optioned security
at the time the option was written, and less the
difference, if any, in a Call Option, by which the amount of commission paid to
sell the optioned security exceeds the commission
paid to purchase the optioned security at the time the option was written.
Gordon & Co.'s repurchase of this Option shall be deemed to have been effected
on the date of such purchase or sale of the Underlying Security.
5. Except as provided herein, this Option may not be exercised, or the
repurchase of this Option required, while trading in the
Underlying Security has been halted by governmental authority, the Exchange
where listed, or by the NASD and such a trading halt
shall not extend the date on which this Option expires or the dates on which
Expiration Prices become applicable. If such a
trading halt is in effect on the expiration date of this Option, this Option
shall expire.
6. Prior to the expiration of this Option, the Bearer may have the exercise
price and expiration prices of this Option increased in
a Put Option, and decreased in a Call Option, as many points as the Bearer
desires upon paying Gordon & Co. an additional
premium. The additional premium for each point the exercise and expiration
prices of the Option are increased or decreased is
$1.0625 per share of Stock, Warrant, Right or Unit if the Underlying Security
is a Stock, Warrant, Right or Unit; $10.625 per
Bond if the Underlying Security is a Bond; and $106.25 per Underlying Option if
the Underlying Security is an Option.
7. Underlying Options are generally quoted and traded on the exchange
where listed or on the over-the-counter market at prices
representing 1/100th of the price of the Underlying Option which covers 100
shares or units of the security or index subject to
the Underlying Option. Accordingly for purposes of determining the Contract
Striking Price and applicable expiration prices of
this Option, the Contract Striking Price and Expiration Prices of this Option
stated on the face hereof must be multiplied by 100.
TYPICAL LIMITED PRICE OPTIONS
The following typical limited price put and call options are referred to in
various examples throughout this prospectus:
1. Typical Put Option
A limited price put option written for a term of 6 months-10 days on
100 shares of XYZ stock listed on a national securities exchange with a market
value of $50 a share, for a premium of $662.50, at an exercise price of $50 per
share, with expiration prices of
$53.75 during the first monthly term of the option,
$53.00 during the second monthly term of the option,
$52.25 during the third monthly term of the option,
$51.50 during the fourth monthly term of the option,
$50.75 during the fifth monthly term of the option,
$50.00 during the last monthly term of the option.
2. Typical Call Option
A limited price call option written for a term of 6 months-10 days on
100 shares of XYZ stock listed on a national securities exchange with a market
price of $50 a share, for a premium of $662.50, at an exercise price of $50 per
share, with expiration prices of
$46.25 during the first monthly term of the option,
$47.00 during the second monthly term of the option,
$47.75 during the third monthly term of the option,
$48.50 during the fourth monthly term of the option,
$49.25 during the fifth monthly term of the option,
$50.00 during the last monthly term of the option.
(617) 924-7997
Gordon & Co.
Broker-Dealer
63 PLEASANT STREET
SUITE 200
WATERTOWN, MA 02472
Date:
The following information pertains to the security underlying the
Gordon Limited Price Option which you purchased from or sold
through Gordon & Co. on the above date. Financial data has been compiled
from the most recent annual report (on Form 10-K) filed by
the issuer with the Securities and Exchange Commission. Data relating to
trading volume of the underlying security has been obtained from financial
publications. Gordon & Co. believes these sources to be reliable but does not
guarantee the accuracy or completeness of the information.
Underlying Security Exchange No. Shs.
Outstanding
Sales/Revenues and Earnings per Share During Past Three Fiscal Years
Yr. Ended -- -- --
- -------------- ------------- -------------- ---------------
Sales/Revenues:
(in thousands)
------------- -------------- ---------------
Earnings per Sh.
------------- -------------- ---------------
Quarterly High/Low Price Range and
Dividends Declared or Paid During Past 2 Fiscal Years
-- --
-------------------- -------------------
Quarters High/Low Dividend High/Low Dividend
1st........................ ___________________ _________________ _________________ ________________
2nd........................ ___________________ _________________ _________________ ________________
3rd........................ ___________________ _________________ _________________ ________________
4th........................ ___________________ _________________ _________________ ________________
Trading Volume During Past Four Weeks
Week Ended Volume (in Hundreds)
______________ ___________________________
______________ ___________________________
______________ ___________________________
______________ ___________________________
Past 4-wk Average Volume:_______________________________________________________
<page>
FINANCIAL STATEMENTS
There are set forth below the certified financial statements of Gordon &
Co. for the last three fiscal years including statements of financial condition
for the last two fiscal years. Also set forth below is a certified consolidated
balance sheet of Kezar Limited Partnership and Subsidiary at December 31, 2004.
It should be noted that Gordon & Co. is the issuer and writer of every
Gordon & Co. Option. The financial statements of Gordon & Co. and of its
general partner, Kezar Limited Partnership, are presented to furnish buyers of
Gordon Limited Price Options with information as to Gordon & Co.'s financial net
worth and its financial ability to honor all options it issues and writes.
<page>
Independent Auditor's Report
PARTNERS
Gordon & Co.
Watertown, Massachusetts
We have audited the accompanying statements of financial condition of
Gordon & Co. (the Partnership) as of December 31, 2004 and 2003, and the
related statements of operations, changes in partners' capital, and cash
flows for each of the three years ended December 31, 2004. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gordon & Co. at
December 31, 2004 and 2003, and the results of its operations and its cash
flows for each of the three years ended December 31,2004, in conformity with
accounting principles generally accepted in the United States of America.
PARENT, McLAUGHLIN & NANGLE
Certified Public Accountants, Inc.
January 11, 2005
<page>
(This page is intentionally left blank)
<page>
Gordon & Co.
STATEMENTS OF FINANCIAL CONDITION
December 31, 2004 and 2003
ASSETS
<table>
<s> <c> <c>
2004 2003
----------------- -----------------
Cash and cash equivalents $ 421,855 $2,160,189
Deposits with clearing organizations 100,000 120,000
Receivables from brokers, dealers and
clearing organizations 68,400 4,186,780
Receivables from customers 23,950 15,928
Notes Receivable from customers, net (Note C) -- --
Securities owned, at market value 4,353,756 1,984,752
Equipment and improvements - net 1,199,974 1,002,972
Other assets 1,373 52,770
----------------- -----------------
$6,169,308 $9,523,391
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
NOte payable - line of credit $ 600,000 $ --
Payables to customers 155,801 4,537,817
Payables to brokers, dealers and
clearing organizations 129,513 --
Securities sold, not yet purchased 141,206 18,427
Accrued expenses and other liabilities 29,263 19,893
----------------- -----------------
1,055,783 4,576,137
Partners' capital 5,113,525 4,947,254
----------------- -----------------
$6,169309 $9,523,391
================= =================
</table>
See notes to financial statements.
<page>
Gordon & Co.
STATEMENTS OF OPERATIONS
For the years ended December 31, 2004, 2003 and 2002
<table>
<s> <c> <c> <c>
2004 2003 2002
---------------- --------------- ---------------
REVENUES:
Net gains (losses) on option transactions
(including unrealized loss of $80,877
in 2004, $275,923 in 2003 and $1,903,666
in 2002) $1,022,182 ($28,956) ($1,359,289)
Interest 11,501 82,897 139,980
Other income 118,510 295,806 199,732
---------------- --------------- ---------------
1,152,193 349,747 (1,019,577)
EXPENSES:
Compensation and benefits 425,531 489,944 657,369
Other operating costs 1,104,913 1,127,413 2,849,444
---------------- --------------- ---------------
1,530,444 1,617,357 3,506,813
---------------- --------------- ---------------
NET EARNINGS (LOSS) ($378,251) ($1,267,610) ($4,526,390)
================ =============== ===============
</table>
See notes to financial statements.
<page>
Gordon & Co.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the years ended December 31, 2004, 2003 and 2002
GENERAL PARTNER
<table>
<s> <c> <c> <c>
2004 2003 2002
----------------- ----------------- -----------------
PARTNERS' CAPITAL, BEGINNING OF PERIOD $3,079,114 $5,626,143 $13,111,736
----------------- ----------------- -----------------
ADD:
Capital contributions 1,793,867 274,865 558,870
Distributive share of net (409,476) (1,280,912) (4,572,011)
----------------- ----------------- -----------------
Total 1,384,391 (1,006,047) (4,013,141)
----------------- ----------------- -----------------
DEDUCT:
Capital withdrawals 906,898 1,540,982 3,472,452
----------------- ----------------- -----------------
PARTNERS' CAPITAL, END OF PERIOD $3,556,607 $3,079,114 $5,626,143
================= ================= =================
LIMITED PARTNERS
2004 2003 2002
----------------- ----------------- -----------------
PARTNERS' CAPITAL, BEGINNING OF PERIOD $1,868,140 $2,050,441 $2,167,939
----------------- ----------------- -----------------
ADD:
Capital contributions 205,369 58,911 196,205
Distributive share of net earnings 31,225 13,302 45,621
----------------- ----------------- -----------------
Total 236,594 72,213 241,826
----------------- ----------------- -----------------
DEDUCT:
Capital withdrawals 547,816 254,514 359,324
----------------- ----------------- -----------------
PARTNERS' CAPITAL, END OF PERIOD $1,556,918 $1,868,140 $2,050,441
================= ================= =================
TOTAL
2004 2003 2002
----------------- ----------------- -----------------
PARTNERS' CAPITAL, BEGINNING OF PERIOD $4,947,254 $7,676,584 $15,279,675
----------------- ----------------- -----------------
ADD:
Capital contributions 1,999,236 333,776 755,075
Distributive share of net earnings (loss) (378,251) (1,267,610) (4,526,390)
----------------- ----------------- -----------------
Total 1,620,985 (933,834) (3,771,315)
----------------- ----------------- -----------------
DEDUCT:
Capital withdrawals 1,454,714 1,795,496 3,831,776
----------------- ----------------- -----------------
PARTNERS' CAPITAL, END OF PERIOD $5,113,525 $4,947,254 $7,676,584
================= ================= =================
</table>
See notes to financial statements.
<page>
Gordon & Co.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2004, 2003 and 2002
<table>
<s> <c> <c> <c>
2004 2003 2002
---------------- --------------- --------------
OPERATING ACTIVITIES:
Net loss ($378,251) ($1,267,610) ($4,526,390)
Add items not requiring the use of cash:
Depreciation 24,651 18,023 7,899
Provision for doubtful accounts - - 1,497,371
Changes in operating assets and liabilities:
Deposits with clearing organizations 20,000 (10,000) -
Receivables from brokers, dealers and
clearing organizations 4,118,380 (4,088,080) 406,100
Receivables from customers (8,022) 15,717 72,345
Securities owned (2,369,004) (757,447) 1,929,635
Accrued interest on notes receivable - (42,110) (7,400)
Other assets 51,397 (446) 7,957
Payables to customers (4,382,016) 4,498,958 (80,459)
Payables to brokers, dealers and
clearing organizations 129,513 (14,112) (208,486)
Securities sold, not yet purchased 122,779 (41,435) 48,438
Accrued expenses and other liabilities 9,370 1,803 (2,230)
---------------- --------------- ---------------
Total (2,661,203) (1,686,739) (855,220)
---------------- --------------- ---------------
INVESTING ACTIVITIES:
Additions to equipment and improvements (221,653) (387,818) (367,413)
---------------- --------------- ---------------
Total (221,653) (387,818) (367,413)
---------------- --------------- ---------------
FINANCING ACTIVITIES:
Proceeds from note payable 600,000 - -
Proceeds from capital contributions 1,999,236 333,776 755,075
Capital withdrawals (1,454,714) (1,795,496) (3,831,776)
---------------- ---------------- --------------
Total 1,144,714 (1,461,720) (3,076,701)
---------------- ---------------- --------------
INCREASE / (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,738,334) (3,536,277) (4,299,334)
---------------- --------------- ---------------
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 2,160,189 5,696,466 9,995,800
---------------- --------------- ---------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR & 421,855 $2,160,189 $5,696,466
================ =============== ===============
</table>
See notes to financial statements
<page>
Gordon & Co. (A Partnership)
NOTES TO FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the business
Gordon & Co. (the "Partnership"), a Massachusetts limited partnership,
is a registered broker-dealer engaged primarily in the writing of limited
price put and call options. Under the terms of such options, expiration
prices are established. If the market price of the underlying security
falls to or below (call options) or rises to or above (put options) the
expiration price, the option expires. Upon issuance of each option,
Gordon & Co. agrees to repurchase the option prior to expiration for
certain specified prices. An option may be exercised, but if it is not
exercised, modified or repurchased, it expires at the end of the term of
the option as determined either by the expiration price or the expiration
date of the option. The expiration price provision limits the
off-balance sheet market risk, should there be an unfavorable change in
the price of the underlying financial instrument. If a put option expires,
Gordon & Co.'s policy is to immediately purchase the underlying security
to cover its short position.
Principal customers are individuals located throughout the United States
who are familiar with the type of risk associated with these investments
and who satisfy the options disclosure and suitability requirements
imposed by the NASD.
Accounting for option income
Option income is recognized over the term of the option, measured by the
difference between the premiums received for writing and/or modifying
the option and the amount of the Partnership's obligation to repurchase
the option. For covered options, the amount of the repurchase
obligation is considered in determining the realizable value of the
underlying securities.
Cash equivalents
For purposes of the statements of cash flows, the Partnership
considers money market mutual funds, commercial paper and all highly
liquid debt instruments with maturity of three months or less when
purchased to be cash equivalents.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Receivables from customers
Receivables from customers are stated at the amount management
expects to collect from outstanding balances. Management provides for
probable uncollectible amounts through a charge to earnings and a credit
to a valuation allowance based on its assessment of the current status
of individual accounts. Balances that are still outstanding after
management has used reasonable collection efforts are written off through
a charge to the valuation allowance and a credit to receivables from
customers.
Securities transactions and valuation of securities
Securities transactions are recorded on a trade date basis. Securities,
most of which are subject to outstanding put or call options, are
recorded at realizable value, taking into account the repurchase
provisions included in the options. Changes in the realizable value of
securities are included in income.
Receivables from brokers, dealers and clearing organizations are
collateralized in part by securities borrowed or sold. Receivables from
customers are partially collateralized by securities owned by customers
which are not reflected in the financial statements.
<page>
Gordon & Co. (A Partnership)
NOTES TO FINANCIAL STATEMENTS
(Continued)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Securities-lending activities
Securities borrowed are generally reported as collateralized financings,
except where letters of credit or other securities are used as collateral.
Securities-borrowed transactions require the Partnership to deposit
cash, letters of credit, or other collateral with the lender. The
Partnership monitors the market value of securities borrowed and loaned
on a daily basis, with additional collateral obtained or refunded
as necessary.
Fair value of financial instruments
The Partnership's financial instruments, except as discussed elsewhere,
are recorded at carrying amounts which approximate fair value.
Equipment
Equipment is reported at cost, less accumulated depreciation.
Depreciation is computed by use of accelerated methods over the
estimated useful lives of the related assets. Maintenance and repairs
are charged to expense as incurred.
Allocation of partnership income
Class B limited partners receive a guaranteed payment equal to 7-1/2%
of their average capital in the limited partnership. The special
limited partners receive the lesser of their allocated share of the
partnership's net income or a guaranteed payment equal to 10% of their
average capital in the limited partnership.
Net income of the Partnership remaining after the guaranteed payments to
the limited partners is allocated to the general partner.
Income taxes
Federal and state income taxes are not payable or provided for by the
Partnership, as individual partners are liable for income taxes on their
distributive share of Partnership taxable income.
B. CASH SEGREGATED UNDER FEDERAL REGULATIONS
Cash of $195,000 and $200,000 at December 31, 2004 and 2003, respectively,
was segregated in special reserve bank accounts for the benefit of
customers under Rule 15c3-3 of the Securities and Exchange Commission.
No additional deposit was necessary to meet the required reserve computed
as of December 31, 2004 and 2003.
C. NOTES RECEIVABLE FROM CUSTOMERS
The Partnership has two notes receivable from customers totaling $1,497,371
for which it established an allowance for the full amount because the
amounts were doubtful of collection. The accrual of interest on these
notes has been discontinued.
<page>
Gordon & Co.
(A Partnership)
NOTES TO FINANCIAL STATEMENTS
(Continued)
D. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are summarized as follows:
<table>
<s> <c> <c>
2004 2003
Automobile $ 49,586 $ 49,586
Furniture and fixtures 46,165 46,165
Office equipment 66,568 65,773
Software 1,181,475 960,617
----------- -------------
1,343,794 1,122,141
Less accumulated depreciation and amortization (143,820) (119,169)
----------- -------------
$1,199,974 $1,002,972
=========== =============
</table>
Included with software at December 31, 2004 and 2003 is $1,117,676 and
$896,817respectively, of customized software costs for the design of new
trading and back office software. This software is not operational and,
thus, is not being amortized.
E. PAYABLES TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS
Payables to brokers, dealers and clearing organizations are collateralized
by securities purchased.
F. SECURITIES OWNED AND SOLD, NOT YET PURCHASED
<table>
<s> <c> <c>
2004 2003
Market value of securities owned $6,344,019 $2,842,223
Less reduction of securities valuation to reflect the
repurchase provisions of options sold (Note A) 1,990,263 857,471
$4,353,756 $1,984,752
Cost of securities owned $9,380,999 $6,412,418
Market value of securities sold,
not yet purchased $ 125,855 $ 15,680
Plus increase in securities valuation
to reflect the repurchase provisions
of options sold (Note A) 15,351 2,747
$ 141,206 18,427
Cost of securities sold,
not yet purchased $ 124,764 15,977
</table>
At December 31, 2004 and 2003, seven ant three securities account for
approximately 57% and 57% of the market value of securities owned,
respectively. At December 31, 2004 and 2003 all outstanding call and put
options were covered.
<page>
Gordon & Co.
(A Partnership)
NOTES TO FINANCIAL STATEMENTS
(Continued)
G. LINE OF CREDIT
The Partnership has available a line of credit, expiring March 15, 2005,
which permits the Partnership to borrow the lesser of $10,000,000 or 70% of
eligible current market value of securities, with interest at the bank's
prime rate. The Partnership had borrowings of $600,000 that were
outstanding as of December 31, 2004. All securities and investment
property of the Partnership are pledged as collateral.
H. EMPLOYEE BENEFITS
During 2002, the Partnership sponsored a 401(k) Plan and Profit Sharing
Plan. The 401(k) Plan entitles all full-time employees to make
voluntary contributions to the Plan. Contributions cannot exceed the
maximum amount under applicable provisions of the Internal Revenue Code.
The Partnership is obligated to contribute 3% of an employee's salary to
the Plan on an annual basis. During 2002, the partnership merged the
Profit Sharing Plan into the 401(k) Plan. Partnership contributions to
these Plans amounted to $9,804, $14,271 and $67,953 in 2004, 2003 and
2002, respectively.
I. CONCENTRATION OF CREDIT RISK
The Partnership maintains its cash balances at several financial
institutions, and invests excess funds in money market mutual funds.
Balances deposited in commercial banks are insured by the Federal Deposit
Insurance Corporation, up to $100,000, while the balances invested in
money market mutual funds are not insured. As of December 31, 2004 and
2003, the uninsured balances aggregated approximately $337,000 and
$2,117,000 respectively.
J. LEASE COMMITMENTS
During 2003, the Partnership entered into a non-cancelable operating
lease with a related party for office space. The lease expires in March,
2008, and contains escalating clauses for operating expenses and real
estate taxes. The following is a schedule, by years, of future
minimum rental payments, without regard to escalation clauses, on this
operating lease as of December 31, 2004.
Year ending December 31:
2005 $ 43,778
2006 44,948
2007 46,117
2008 11,700
---------
Total minimum payments required $ 146,543
==========
Rental expense for the years ended December 31, 2004, 2003, and 2002
amounted to $43,792, $57,406 and $69,239 respectively.
K. NET CAPITAL REQUIREMENTS
The Partnership is subject to the Securities and Exchange Commission
Uniform Net Capital Rule (SEC Rule 15c3-1), which requires the maintenance
of minimum net capital and requires that the ratio of aggregate
indebtedness to net capital both as defined, shall not exceed 15 to 1. At
December 31, 2004, the Partnership had net capital of $3,489,611, which was
$3,239,611 in excess of its required net capital of $250,000. The
Partnership's net capital ratio was 0.053 to 1, at December 31, 2004.
<page>
Gordon & Co.
(A Partnership)
NOTES TO FINANCIAL STATEMENTS
(Continued)
L. RELATED PARTY TRANSACTIONS
The Partnership has entered into an agreement with a computer
consulting company for monthly computer maintenance, and has contracted
with this company to design new trading and back office software. This
company is partly owned by the Partnership's chief executive officer who
is also a limited partner in the Partnership.
Computer maintenance expense and related software design amounted to
$460,859, $551,398 and $606,188for the years ended December 31, 2004,
2003 and 2002, respectively.
During 2002, the Partnership entered into a consulting agreement with a
company owned by a party who is a limited partner in the general partner of
the Partnership. Consulting expense under this agreement amounted to
$210,239,$204,088 and $463,953 for the years ended December 31, 2004, 2003
and 2002, respectively.
During 2003, the Partnership entered into a lease agreement for office
space with an entity in which the general partner and several limited
partners of the Partnership hold interests. Lease payments made under this
agreement totaled $43,792 and $31,590 for the year ended December 31, 2004
and 2003, respectively. (Reference is made to NOte J).
M. OTHER INCOME/EXPENSE
During 2004 and 2003, the Partnership recovered approximately $12,000 and
$150,000 of amounts due from customers which had been previously written
off as uncollectible. This amount is included with other income in the
Statements of Operations.
During 2002, the partnership established a reserve of $1,497,371 for
possible uncollectibility against the outstanding balances of the two
notes receivable. This amount is included with other operating costs in
the Statements of Operations.
<page>
(This page is intentionally left blank)
<page>
Independent Auditor's Report
Partners
Kezar Limited Partnership and Subsidiary
Watertown, Massachusetts
We have audited the accompanying consolidated statement of financial
condition of Kezar Limited Partnership (the Partnership) and Subsidiary as of
December 31, 2004. This financial statement is the responsibility of the
Partnership's management. Our responsibility is to express an opinion on
this financial statement based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated statement of financial condition is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated statement of
financial condition. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated statement of financial condition
presentation. We believe that our audit of the consolidated statement of
financial condition provides a reasonable basis for our opinion.
In our opinion, the consolidated statement of financial condition referred
to above presents fairly, in all material respects, the financial position
of Kezar Limited Partnership and Subsidiary as of December 31, 2004, in
conformity with accounting principles generally accepted in the United States of
America.
PARENT, McLAUGHLIN & NANGLE
Certified Public Accountants, Inc.
January 11, 2005
<page>
(This page is intentionally left blank)
<page>
KEZAR LIMITED PARTNERSHIP AND SUBSIDIARY
Consolidated Statement of Financial Condition
December 31, 2004
ASSETS
Cash and cash equivalents $ 421,855
Deposits with clearing organizations 100,000
Receivables from brokers, dealers and clearing
organizations 68,400
Receivables from customers 23,950
Notes receivable from customers, net (Note C) --
Securities owned, at market value 4,353,756
Equipment, net 1,199,974
Other assets 1,373
$6,169,308
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Note Payable - line of credit $ 600,000
Payables to customers 155,801
Payables to brokers, dealers and clearing
organizations 129,513
Securities sold, not yet purchased 141,206
Accrued expenses and other liabilities 29,263
1,055,783
Minority interest 1,556,918
Partners' capital 3,556,607
$6,169,308
See notes to consolidated financial statement
<page>
KEZAR LIMITED PARTNERSHIP AND SUBSIDIARY
Notes to Consolidated Statement of Financial Condition
December 31, 2004
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The Consolidated financial statement includes the accounts of Kezar
Limited Partnership and its majority-owned subsidiary, Gordon & Co. All
material inter-company transactions and balances have been eliminated in
consolidation.
Description of the business
Kezar Limited Partnership, a Massachusetts limited partnership, was formed
on January 1, 1987. The Partnership's primary function is to act as the
general partner of Gordon & Co., a Massachusetts limited partnership. The
general partner of the Partnership is The Salke Family Trust.
Gordon & Co., a Massachusetts limited partnership, is a registered
broker-dealer engaged primarily in the writing of limited price put and
call options. Under the terms of such options, expiration prices are
established. If the market price of the underlying security falls to or
below (call options) or rises to or above (put options) the expiration
price, the option expires. Upon issuance of each option, Gordon & Co.
agrees to repurchase the option prior to expiration for certain specified
prices. An option may be exercised, but if it is not exercised, modified
or repurchased, it expires at the end of the term of the option as
determined either by the expiration price or the expiration date of the
option. The expiration price provision limits the off-balance sheet
market risk should there be an unfavorable change in the price of the
underlying financial instrument. If a put option expires, Gordon & Co.'s
policy is to immediately purchase the underlying security to cover its
short position.
Principal customers are individuals located throughout the United States
who are familiar with the type of risk associated with these investments
and who satisfy the options disclosure and suitability requirements
imposed by the NASD.
Accounting for option income
Option income is recognized over the term of the option, measured by the
difference between the premiums received for writing and/or modifying the
option and the amount of the Partnership's obligation to repurchase the
option. For covered options, the amount of the repurchase obligation is
considered in determining the realizable value of the underlying
securities.
<page>
KEZAR LIMITED PARTNERSHIP AND SUBSIDIARY
Notes to Consolidated Statement of Financial Condition
December 31, 2004
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Cash equivalents
The Partnership considers money market funds, commercial paper
and all highly liquid debt instruments with maturity of three
months or less when purchased to be cash equivalents.
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Receivables from customers
Receivables from customers are stated at the amount management
expects to collect from outstanding balances. Management provides
for probable uncollectible amounts through a charge to earnings
and a credit to a valuation allowance based on its assessment of
the current status of individual accounts. Balances that are
still outstanding after management has used reasonable collection
efforts are written off through a charge to the valuation
allowance and a credit to receivables from customers.
Securities transactions and valuation of securities
Securities transactions are recorded on a trade date basis.
Securities, most of which are subject to outstanding put or
call options, are recorded at realizable value, taking into
account the repurchase provisions included in the options.
Changes in the realizable value of securities are included in
income.
Receivables from brokers, dealers and clearing
organizations are collateralized in part by securities borrowed or
sold. Receivables from customers are partially collateralized by
securities owned by customers which are not reflected in the
financial statements.
<page>
KEZAR LIMITED PARTNERSHIP AND SUBSIDIARY
Notes to Consolidated Statement of Financial Condition
December 31, 2004
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Securities-lending activities
Securities borrowed are generally reported as collateralized
financings, except where letters of credit or other securities are
used as collateral. Securities-borrowed transactions require the
Partnership to deposit cash, letters of credit, or other
collateral with the lender. The Partnership monitors the market
value of securities borrowed and loaned on a daily basis, with
additional collateral obtained or refunded as necessary.
Fair value of financial instruments
The Partnership's financial instruments, except as discussed
elsewhere, are recorded at carrying amounts which approximate
fair value.
Equipment
Equipment is reported at cost, less accumulated depreciation.
Depreciation is computed by use of accelerated methods over the
estimated useful lives of the related assets. Maintenance and
repairs are charged to expense as incurred.
Allocation of partnership income
The limited partners receive the lesser of their allocated share
of the Partnership's income or a guaranteed payment, as defined,
equal to 7 1/2% and 10% of their average capital in the limited
Partnership.
Net income of the Partnership remaining after the guaranteed
payments to the limited partners is allocated to the general
partner.
Income taxes
Federal and state income taxes are not payable or provided for by
the Partnership, as individual partners are liable for income
taxes on their distributive share of Partnership taxable income.
B. CASH SEGREGATED UNDER FEDERAL REGULATIONS
Cash of $195,000, at December 31, 2004, was segregated in
special reserve bank accounts for the benefit of customers under
Rule 15c3-3 of the Securities and Exchange Commission. No additional
deposit was necessary to meet the required reserve computed as of
December 31, 2004.
C. NOTES RECEIVABLE FROM CUSTOMERS
The Partnership has two notes receivable from customers totaling
$1,497,371 for which it established an allowance for the full amount
because the amounts are doubtful of collection. The accrual of
interest on these notes has been discontinued.
<page>
KEZAR LIMITED PARTNERSHIP AND SUBSIDIARY
Notes to Consolidated Statement of Financial Condition
December 31, 2004
D. EQUIPMENT
Equipment is summarized as follows:
Automobile $ 49,586
Furniture and fixtures 46,165
Office equipment 66,568
Software 1,181,475
-------------
1,343,794
Less accumulated depreciation ( 143,820)
-------------
$ 1,199,974
=============
Included with software at December 31, 2004 is $1,117,676 of customized
software costs for the design of new trading and back office software.
The software is not operational and, thus, is not being amortized.
E. PAYABLES TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS
Payables to brokers, dealers and clearing organizations are collateralized
by securities purchased.
F. SECURITIES OWNED AND SOLD, NOT YET PURCHASED
Market value of securities owned $ 6,344,019
Less reduction of securities valuation to reflect
the repurchase provisions of options sold (Note A) 1,990,263
-----------
$ 4,353,756
===========
Cost of securities owned $ 9,380,999
===========
Market value of securities sold,
not yet purchased $ 125,855
Plus increase in securities valuation
to reflect the purchase provisions
of options sold (Note A) 15,351
-----------
$ 141,206
===========
Cost of securities sold,
not yet purchased $ 124,764
===========
At December 31, 2004, twelve securities accounted for approximately 57% of
the market value of securities owned.
At December 31, 2004 all outstanding call and put options were covered.
<page>
KEZAR LIMITED PARTNERSHIP AND SUBSIDIARY
Notes to Consolidated Statement of Financial Condition
December 31, 2004
G. NOTE PAYABLE - LINE OF CREDIT
The Partnership has available a line of credit, expiring March 15, 2004,
which permits the Partnership to borrow the lesser of $10,000,000 or 70%
of eligible current market value of securities, with interest at the
bank's prime rate. The Partnership had borrowings of $600,000 that were
outstanding as of December 31, 2004. All securities and investment property
of the Partnership are pledged as collateral.
H. EMPLOYEE BENEFITS
The Partnership sponsored a 401(K) Plan which entitles all full-time
employees to make voluntary contributions to the plan. Contributions
cannot exceed the maximum amount under applicable provisions of the
Internal Revenue Code. The Partnership is obligated to contribute 3%
of an employee's salary to the plan on an annual basis. Partnership
contributions to the plan amounted to $9,804 in 2004.
I. CONCENTRATION OF CREDIT RISK
The Partnership maintains its cash balances at several financial
institutions, and invests excess funds in money market mutual funds.
Balances deposited in commercial banks are insured by the Federal Deposit
Insurance Corporation, up to $100,000, while the balances invested in
money market mutual funds are not insured. As of December 31, 2004, the
uninsured balances aggregated approximately $337,000.
J. LEASE COMMITMENTS
During 2003, the Partnership entered into a non-cancelable operating
lease with a related party for office space. The lease expires in March,
2008, and contains escalating clauses for operating expenses and real
estate taxes. The following is a schedule, by years, of future minimum
rental payments, without regard to escalation clauses, on this
operating lease as of December 31, 2004.
Year ending December 31:
2005 $ 43,778
2006 44,948
2007 46,117
2008 11,700
----------
Total minimum payments required $146,543
==========
<page>
KEZAR LIMITED PARTNERSHIP AND SUBSIDIARY
Notes to Consolidated Statement of Financial Condition
December 31, 2004
K. NET CAPITAL REQUIREMENTS
The Partnership is subject to the Securities and Exchange Commission
Uniform Net Capital Rule (SEC Rule 15c3-1), which requires the maintenance
of minimum net capital and requires that the ratio of aggregate
indebtedness to net capital, both as defined, shall not exceed 15 to 1.
At December 31, 2004, the Partnership had net capital of $3,489,611, which
was $3,239,611 in excess of its required net capital of $250,000. The
Partnership's net capital ratio was 0.053 to 1, at December 31, 2004.
L. RELATED PARTY TRANSACTIONS
The Partnership has entered into an agreement with a computer consulting
company for monthly computer maintenance, and has contracted with this
company to design new trading and back office software. This company is
partly owned by the Partnership's chief executive officer who is also a
limited partner in the Partnership.
Computer maintenance expense and related software design amounted to
$460,859 for the year ended December 31, 2004.
The Partnership maintains a consulting agreement with
a company which is owned by a party who is a limited partner of the
Partnership. Consulting expense under this agreement amounted to
$210,339 for the year ended December 31, 2004.
The Partnership is obligated under a lease agreement for office
space with an entity in which the general partner and several limited
partners of the Partnership hold interests. Lease payments under this
agreement were $43,792 for the year ended December 31, 2004. (Reference is
made to Note J).
<page>
KEZAR LIMITED PARTNERSHIP AND SUBSIDIARY
Notes to Consolidated Statement of Financial Condition
December 31, 2004
M. PARTNERS' CAPITAL
Partners' capital changes during the year ended December 31, 2004 are as
follows:
<table>
<s> <c> <c> <c>
General Limited
Partner Partners Total
Balance, December 31, 2003 $1,037,942 $2,041,172 $3,079,114
Capital contributions 1,751,688 42,179 1,793,867
Net loss ( 409,476) -- ( 409,476)
Capital withdrawals (332,408) ( 574,490) ( 906,898)
------------ ------------ ------------
Balance, December 31, 2004 $2,047,746 $1,508,861 $3,556,607
============ ============ ============
</table>
<page>
=================
TABLE OF CONTENTS
<table>
<s> <c>
Available
Information 2
Glossary of Terms................................. 2
Prospectus Summary................................ 5
Risk Factors...................................... 7 GORDON & CO.
Description of Gordon
Options 12
Terms of Options............................... 12
Parties to the Option Transaction.............. 12
Exercise Price of Options...................... 12
Renewal of Options............................. 13 63 Pleasant Street
Expiration Prices of Options................... 13
Repurchase of Gordon Limited Price Options..... 14 Watertown, Massachusetts 02472
Modification of Terms of Options............... 14
Premiums for Options........................... 14
Some Differences between Gordon & Co. Options (617) 924-7997
and Other Options............................ 14
Adjustments in Terms........................... 16
Limitations on Exercise, Transfer and Repurchase
of Options................................... 17
Position Limits................................ 17
Evidence of Option Contracts................... 18
Underlying Securities.......................... 18
Buying Gordon Options............................. 20
Purposes and Risks............................. 20 GORDON & CO.
Method of Buying Gordon Options................ 22
Limitations on Option Purchases................ 23
Repurchase Agreement in Gordon Options............ 23
General........................................ 23 16,000 LIMITED PRICE PUT AND
Liquidating Sale Transactions.................. 23
Moderation of Buyer's Risks.................... 25 CALL OPTIONS
Exercise of Gordon Options........................ 26
General........................................ 26
Tender of Exercise Notice...................... 26
Payment and Delivery........................... 27 ----------
Remedies....................................... 27
The Back-Up System............................. 27 PROSPECTUS
Federal Income Tax Considerations................. 28
____________
Costs of Options Transactions..................... 29
Litigation Relating to Gordon & Co................ 31
Organization and Management of Gordon & Co........ 31
Organization................................... 31
Management..................................... 31
Executive Compensation......................... 32 April 13, 2005
Beneficial Ownership........................... 32
Legal Opinion and Expert Report................... 33
Facsimile of Limited Price Put Option Contract.... 34
Facsimile of Limited Price Call Option Contract... 37
Typical Limited Price Options..................... 40
Financial Statements.............................. 42
--------------------- -------------------------
</table>
No dealer, salesman or other person has been authorized
to give any information or to make any representations, other
than those contained in this Prospectus, and if given or
made, such information or representations must not be relied
upon. This Prospectus does not constitute an offer to sell
or the solicitation of an offer to buy limited price options
in any jurisdiction in which such an offer would be
unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create
any implication that the information contained herein is
correct as of any time subsequent to the date hereof.
All dealers effecting transactions in the registered
securities, whether or not participating in this
distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters.
==========================
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