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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-8B-2
Registration Statement of Unit Investment Trust Pursuant to
Section 8(b) of the Investment Company Act of 1940
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DIAMONDS TRUST(SM), SERIES 1
(AND SUBSEQUENT AND SIMILAR SERIES
OF THE SPDR TRUST)
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i x i Not the issuer of periodic payment plan certificates.
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i i Issuer of periodic payment plan certificates.
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I. ORGANIZATION AND GENERAL INFORMATION
1. (a) Furnish name of the trust and the Internal Revenue Service Employer
Identification Number. (According to security designation otherwise, or
if the trust does not have or does not transact business under any
other designation.)
DIAMONDS TRUST(SM), SERIES 1, I.R.S. Employer's Identification
Number-None
(b) Furnish title of each class or series of securities issued by the
trust.
CERTIFICATE OF BENEFICIAL INTEREST
--evidencing--
an undivided interest
--in--
DIAMONDS TRUST, SERIES 1
2. Furnish name and principal business address and zip code and the Internal
Revenue Service Employer Identification Number of each sponsor of the trust.
PDR Services Corporation
c/o American Stock Exchange, Inc.
86 Trinity Place
New York, New York 10006
I.R.S. Employer's Identification No. 13-3574560
3. Furnish name and principal business address and zip code and the Internal
Revenue Service Employer Identification Number of each custodian or trustee
of the trust indicating for which class or series of securities each
custodian or trustee is acting.
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State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
(For DIAMONDS Trust, Series 1)
I.R.S. Employer's Identification No. 041-867445
State Street Bank and Trust Company is acting as the sole trustee for the
DIAMONDS Trust.
4. Furnish name and principal business address and zip code and the Internal
Revenue Service Employer Identification Number of each principal underwriter
currently distributing securities of the trust.
None
5. Furnish name of state or other sovereign power, the laws of which govern
with respect to the organization of the trust.
State of New York
6. (a) Furnish the dates of execution and termination of any indenture or
agreement currently in effect under the terms of which the trust was
organized and issued or proposes to issue securities. (If individual
indentures or agreements are entered into with security holders, so
state and furnish the date of the first such indenture or agreement.)
Reference is made to the statements in Exhibit D filed herewith
under the captions "The Trust" and "Termination" in the Prospectus
Summary and under the captions "The Trust" and "Administration of
the Trust--Termination.
(b) Furnish the dates of execution and termination of any indenture or
agreement currently in effect pursuant to which the proceeds of
payments on securities issued or to be issued by the trust are held by
the custodian or trustee. (If this indenture or agreement is the same
as set forth in Item 6(a), so state).
Same as set forth in Item 6(a).
7. Furnish in chronological order the following information with respect to
each change of name of the trust since January 1, 1930. If the name has
never been changed, so state.
Not Applicable
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8. State the date on which the fiscal year of the trust ends.
The fiscal year of the trust is the year ending October 31.
Material Litigation
-------------------
9. Furnish a description of any pending legal proceedings, material with
respect to the security holders of the trust by reason of the nature of the
claim or the amount thereof, to which the trust, the sponsor, or the
principal underwriter is a party or of which the assets of the trust are the
subject, including the substance of the claims involved in such proceeding
and the title of the proceeding. Furnish a similar statement with respect
to any pending administrative proceeding commenced by a governmental
authority or any such proceeding or legal proceeding known to be
contemplated by a governmental authority. Include any proceeding which,
although immaterial itself, is representative of, or one of, a group which
in the aggregate is material.
None
II. GENERAL DESCRIPTION OF THE TRUST AND SECURITIES OF THE TRUST
General Information Concerning the Securities of the Trust and the Rights of
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Holders:
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10. Furnish a brief statement with respect to the following matters for each
class or series of securities issued by the trust:
(a) Whether the securities are of the registered or bearer type.
Registered
(b) Whether the securities are of the cumulative or distributive type.
Distributive
(c) The rights of security holders with respect to withdrawal or redemption.
Reference is made to the statements in Exhibit D filed herewith
under the captions "Redemption of DIAMONDS" and "Administration of the
Trust--Rights of Beneficial Owners."
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(d) The rights of security holders with respect to conversion, transfer,
partial redemption, and similar matters.
Reference is made to the statements in Exhibit D filed herewith
under the captions "Redemption" in the Prospectus Summary and
"Administration of the Trust--Register of Ownership and Transfer,"
"Administration of the Trust--Rights of Beneficial Owners" and
"Redemption of DIAMONDS."
(e) If the trust is the issuer of periodic payment plan certificates, the
substance of the provisions of any indenture or agreement with respect
to lapses or default by security holders in making principal payments,
and with respect to reinstatement.
Not Applicable
(f) The substance of the provisions of any indenture or agreement with
respect to voting rights, together with the names of any persons other
than security holders given with the right to exercise voting rights
pertaining to the trust's securities or the underlying securities and
the relationship of such persons to the trust.
Reference is made to the statements in Exhibit D filed herewith
under the caption "Administration of the Trust--Voting."
(g) Whether security holders must be given notice of any change in:
(1) The composition of the assets of the trust.
No
(2) The terms and conditions of the securities issued by the trust.
Yes, under certain circumstances. Reference is made to the
Statements in Exhibit D filed herewith under the caption
"Administration of the Trust--Amendment."
(3) The provisions of any indenture or agreement of the trust.
Yes, under certain circumstances. Reference is made to the
Statement in Exhibit D filed herewith under the caption
"Administration of the Trust--Amendment."
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(4) The identity of the sponsor, trustee or custodian.
Yes
(h) Whether the consent of security holders is required in order for action
to be taken concerning any change in:
(1) The composition of the assets of the trust.
No.
(2) The terms and conditions of the securities issued by the trust.
Reference is made to the statements in Exhibit D filed
herewith under the caption "Administration of the Trust--
Amendment."
(3) The provisions of any indenture or agreement of the trust.
Reference is made to the statements in Exhibit D filed
herewith under the caption "Administration of the Trust--
Amendment."
(4) The identity of the sponsor, trustee or custodian.
Reference is made to the statements in Exhibit D filed herewith
under the captions "Resignation, Renewal and Liability--The
Sponsor" and "Resignation, Removal and Liability--The Trustee."
(i) Any other principal feature of the securities issued by the trust or any
other principal right, privilege or obligation not covered by
subdivisions (a) to (g) or by any other item on this form.
The Trust consists of units of fractional undivided interest in the
Trust representing proportionate interests in the portfolio of
securities held by the Trust, comprised primarily of publicly traded
common stocks of domestic issuers included from time to time in the
Dow Jones Industrial Average (the "DJIA")substantially identical in
composition and weighting to the DJIA (including contracts to
purchase such securities, if any) (collectively referred to herein
as "Securities"), all undistributed income or other amounts received
or accrued thereon and any undistributed cash realized from the
sale, redemption, liquidation or other
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disposition of the Securities deposited in the Trust, or from deposits
of Securities. Such units issued by the Trust ("Creation Units") will
be an aggregation of and will be denominated in DIAMONDS. One
Creation Unit is an aggregation of 50,000 DIAMONDS. The Trust is not
sponsored by or affiliated with Dow Jones & Company, Inc. The Trust
intends to qualify for and elect tax treatment as a Regulated
Investment Company under the Internal Revenue Code of 1986, as
amended. Future series of the Trust may also elect tax treatment as
Regulated Investment Companies.
Information Concerning the Securities Underlying the Trust's Securities:
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11. Describe briefly the kind or type of securities comprising the unit of
specified securities in which security holders have an interest. (If the
unit consists of a single security issued by an investment company name,
such investment company and furnish a description of the type of securities
comprising the portfolio of such investment company.)
Reference is made to answer in Item 10(i).
In addition, the composition of the Securities in the Trust will be
adjusted from time to time to conform to changes in the composition of
the securities comprising the DJIA. Reference is made to the statements
in Exhibit D filed herewith under the captions "The Portfolio," "The
Portfolio--Adjustments to the Portfolio," "The Portfolio--Adjustments to
the Portfolio Deposit" and "The Portfolio--Selection and Acquisition of
Securities" in connection with the procedures for adjusting the
composition of the Securities held by the Trust.
If the trust owns or will own any securities of its regular brokers or
dealers as defined in Rule 10b-1 under the Act, or their parents, identify
those brokers or dealers and state the value of the registrant's holdings of
the securities of each subject issuer as of the close of the registrant's
most recent fiscal year.
Reference is made to the Statements in Exhibit D filed herewith under
the caption "The Portfolio--Adjustments to the Portfolio."
12. If the trust is the issuer of periodic payment plan certificates and if any
underlying securities were issued by another investment company, furnish the
following information for each such company:
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(a) Name of company.
(b) Name and principal business address of sponsor.
(c) Name and principal business address of trustee or custodian.
(d) Name and principal business address of principal underwriter.
(e) The period during which the securities of such company have been the
underlying securities.
Not Applicable
Information Concerning Loads, Fees, Charges and Expenses:
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13. (a) Furnish the following information with respect to each load, fee,
expense or charge to which (1) principal payments, (2) underlying
securities, (3) distributions, (4) cumulated or reinvested distributions
or income, and (5) redeemed or liquidated assets of the trust's
securities are subject:
(A) The nature of such load, fee, expense, or charge.
(B) The amount thereof.
(C) The name of the person to whom such amounts are paid and his
relationship to the trust.
(D) The nature of the services performed by such person in consideration
for such load, fee, expense or charge.
Reference is made to the statements in Exhibit D filed
herewith under the captions "Expenses of the Trust" and
"Redemption of DIAMONDS--Procedure for Redemption of
DIAMONDS."
(b) For each installment payment type of periodic payment plan certificate
of the trust, furnish the following information with respect to sales
load and other deductions from principal payments.
Not Applicable
(c) State the amount of total deductions as a percentage of the net amount
invested for each type of security issued by the trust. State each
different sales charge available as a percentage of the public offering
price and as a percentage of the net amount invested. List any special
purchase plans or methods established by rule or exemptive order that
reflect scheduled variations in, or elimination of, the sales load and
identify each class of individuals or transactions to which such plans
apply.
Reference is made to the statements in Exhibit D filed herewith
under the captions "Expenses of the
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Trust" and "Redemption of DIAMONDS--Procedure for Redemption of
DIAMONDS."
(d) Explain fully the reasons for any difference in the price at which
securities are offered generally to the public, and the price at which
securities are offered for any class of transactions to any class or
group of individuals, including officers, directors, or employees of the
sponsor, trustee, custodian or principal underwriter.
Not Applicable
(e) Furnish a brief description of any loads, fees, expenses or charges not
covered in Item 13(a) which may be paid by security holders in
connection with the trust or its securities. (Assignment, reinstatement,
replacing lost certificates, etc.)
A Transaction Fee or Fees will be charged to all creators of
DIAMONDS in Creation Unit size aggregations and to all redeemers
of DIAMONDS in Creation Unit size aggregations. Reference is made
to the statements in Exhibit D filed herewith under the captions
"The Trust--Creation of Creation Units" and "Redemption of
DIAMONDS--Procedure for Redemption of DIAMONDS".
(f) State whether the sponsor, principal underwriter, custodian or trustee,
or any affiliated person of the foregoing may receive profits or other
benefits not included in answer to Item 13(a) or 13(d) through the sale
or purchase of the trust's securities or interests in such securities,
or underlying securities or interests in underlying securities, and
describe fully the nature and extent of such profits or benefits.
Reference is made to the answer set forth in Item 13(e).
Reference is also made to the statements in Exhibit D filed
herewith under the caption "The Portfolio--Adjustments to the
Portfolio."
(g) State the percentage that the aggregate annual charges and deductions
for maintenance and other expenses of the trust bear to the dividend and
interest income from the trust property during the period covered by the
financial statements filed herewith.
Not Applicable
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Information Concerning the Operations of the Trust:
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14. Describe the procedure with respect to the applications (if any) and the
issuance and authentication of the trust's securities, and state the
substance of the provisions of any indenture or agreement pertaining
thereto.
Reference is made to the statements in Exhibit D filed herewith under
the caption "The Trust--Book-Entry-Only System."
15. Describe the procedure with respect to the receipt of payments from
purchasers of the trust's securities and the handling of the proceeds
thereof, and state the substance of the provisions of any indenture or
agreement pertaining thereto.
Reference is made to the statements in Exhibit D filed herewith under
the caption "The Trust" and "The Trust--Creation of Creation Units."
16. Describe the procedure with respect to the acquisition of underlying
securities and the disposition thereof, and state the substance of the
provisions of any indenture or agreement pertaining thereof.
Reference is made to information provided in answer to Item 11 above and
to the statements in Exhibit D filed herewith under the captions "The
Trust--Creation of Creation Units," "The Portfolio" and "Administration
of the Trust, and "Redemption of DIAMONDS - Procedure for redemption of
DIAMONDS."
17. (a) Describe the procedure with respect to withdrawal or redemption by
security holders.
(b) Furnish the names of any persons who may redeem or repurchase, or are
required to redeem or repurchase, the trust's securities or underlying
securities from security holders, and the substance of the provisions of
any indenture or agreement pertaining thereto.
(c) Indicate whether repurchased or redeemed securities will be canceled or
may be resold.
Reference is made to answer to Item 10(d) above.
18. (a) Describe the procedure with respect to the receipt, custody and
disposition of the income and other distributable funds of the trust and
state the substance
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of the provisions of any indenture or agreement pertaining thereto.
Reference is made to the statements in Exhibit D filed herewith
under the caption "Administration of the Trust--Distribution to
Beneficial Owners."
(b) Describe the procedure, if any, with respect to the reinvestment of
distributions to security holders and state the substance of the
provisions of any indenture or agreement pertaining thereto. Reference
is made to the statements in Exhibit D filed herewith under the caption
"Dividend Reinvestment Service".
Not Applicable
(c) If any reserves or special funds are created out of income or principal,
state with respect to each such reserve or fund the purpose and ultimate
disposition thereof, and describe the manner of handling of same.
Reference is made to the statements in Exhibit D filed herewith
under the caption "Administration of the Trust--Distributions to
Beneficial Owners."
(d) Submit a schedule showing the periodic and special distributions which
have been made to security holders during the three years covered by the
financial statements filed herewith. State for each such distribution
the aggregate amount per share. If distributions from sources other than
current income have been made, identify each such other source and
indicate whether such distribution represents the return of principal
payments to security holders. If payments other than cash were made,
describe the nature thereof, the account charged and the basis of
determining the amount of such charge.
Not Applicable
19. Describe the procedure with respect to the keeping of records and accounts
of the trust, the making of reports and the furnishing of information to
security holders, and the substance of the provisions of any indenture or
agreement pertaining thereto.
Reference is made to the statements in Exhibit D filed herewith under
the captions "DIAMONDS" "Distribution of DIAMONDS," "Expenses of the
Trust," "Administration of the Trust--Records," "Administration of the
Trust--Distributions to Beneficial Owners," "Administration of the
Trust--Statements to Beneficial
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Owners" and "Administration of the Trust--Register of Ownership and
Transfer."
20. State the substance of the provisions of any indenture or agreement
concerning the trust with respect to the following:
(a) Amendments to such indenture or agreement.
Reference is made to the statements in Exhibit D filed herewith
under the caption "Administration of the Trust--Amendment."
(b) The extension or termination of such indenture or agreement.
Reference is made to the statements in Exhibit D filed herewith
under the captions "Administration of the Trust--Amendment" and
"Administration of the Trust --Termination."
(c) The removal or resignation of the trustee or custodian, or the failure
of the trustee or custodian to perform its duties, obligations and
functions.
Reference is made to the statements in Exhibit D filed herewith
under the caption "Resignation, Removal and Liability--The Trustee."
(d) The appointment of a successor trustee or custodian, or the failure or
the trustee or custodian to perform its duties, obligations and
functions.
Reference is made to answer in Item 20(c) above.
(e) The removal or resignation of the sponsor, or the failure of the sponsor
to perform its duties, obligations and functions.
Reference is made to the statements in Exhibit D filed herewith
under the caption "Resignation, Removal and Liability--The Sponsor."
(f) The appointment of a successor sponsor and the procedure if a successor
sponsor is not appointed.
Reference is made to answer in Item 20(c) and Item 20 (e) above.
21. (a) State the substance of the provisions of any indenture or agreement with
respect to loans to security holders.
Not Applicable
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(b) Furnish a brief description of any procedure or arrangement by which
loans are made available to security holders by the sponsor, principal
underwriter, trustee or custodian, or any affiliated person of the
foregoing. The following items should be covered:
(1) The name of each person who makes such agreement or arrangement with
security holder.
(2) The rata of interest payable on such loans.
(3) The period for which loans may be made.
(4) Costs or charges for default in repayment at maturity.
(5) Other material provisions of the agreement or arrangement.
Not Applicable
(c) If such loans are made, furnish the aggregate amount of loans
outstanding at the end of the last fiscal year, the amount of interest
collected during the last fiscal year allocated to the sponsor,
principal underwriter, trustee or custodian or affiliated person of the
foregoing and the aggregate amount of loans in default at the end of the
last fiscal year covered by financial statements filed herewith.
Not Applicable
22. State the substance of the provisions of any indenture or agreement with
respect to limitations on the liabilities of the sponsor, trustee or
custodian, or any other party to such indenture or agreement.
Reference is made to answers in Items 20(c) and 20(e) above.
23. Describe any bonding arrangement for officers, directors, partners or
employees of the sponsor or principal underwriter of the trust, including
the amount of coverage and the type of bond.
The insurance policies carried by the American Stock Exchange, Inc. will
extend to cover the officers and directors of PDR Services Corporation.
As of July 1, 1997, the American Stock Exchange, Inc. has the following
coverage:
1. A financial institution blanket bond in the amount of
$25,000,000/$50,000,000 single loss limit/aggregate written by
National Union Fire Insurance Co., CNA Insurance Companies and
Aetna Casualty and Surety Co.
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and
2. A directors and officers liability policy in the amount of
$40,000,000 written by CNA Insurance Company and National Union Fire
Insurance Co.
24. State the substance of any other material provisions of any indenture or
agreement concerning the trust or its the securities and a description of
any other material functions or duties of the sponsor, trustee or custodian
not stated in Item 10 or Items 14 to 23 inclusive.
Reference is made to answers to Item 10 and Items 14 through 23,
inclusive.
III. ORGANIZATION, PERSONNEL AND AFFILIATED PERSONS OF
SPONSOR
Organization and Operations of Sponsor
--------------------------------------
25. State the form of organization of the sponsor of the trust, the name of the
state or other sovereign power under the laws of which the sponsor was
organized and the date of organization.
The Sponsor is a Delaware corporation which was incorporated on June 5,
1990.
26. (a) Furnish the following information with respect to all fees received by
the sponsor of the trust in connection with the exercise of any
functions or duties concerning securities of the trust during the period
covered by the financial statements filed herewith.
Not Applicable
(b) Furnish the following information with respect to any fee or any
participation in fees received by the sponsor from any underlying
investment company or any affiliated person or investment adviser of
such company:
(1) The nature of such fee or participation.
(2) The name of the person making payment.
(3) The nature of the services rendered in consideration for such fee or
participation.
(4) The aggregate amount received during the last fiscal year covered by
the financial statements filed herewith.
Not Applicable
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27. Describe the general character of the business engaged in by the sponsor
including a statement as to any business other than that of sponsor of the
trust. If the sponsor acts or has acted in any capacity with respect to any
investment company or companies other than the trust, state the name or
names of such company or companies, their relationship, if any, to the
trust, and the nature of the sponsor's activities therewith. If the sponsor
has ceased to act in such named capacity, state the date of an circumstances
surrounding such cessation.
Reference is made to the statements in Exhibit D filed herewith under the
caption "Sponsor."
Officials and Affiliated Persons of Sponsor
-------------------------------------------
28. (a) Furnish as at latest practicable date the following information with
respect to the sponsor of the trust, with respect to each officer,
director, or partner of the sponsor, and with respect to each natural
person directly or indirectly owning, controlling or holding with power
to vote 5% or more of the outstanding voting securities of the sponsor.
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As at July 1, 1997
Name and principal Nature of relationship or affiliation
business address with sponsor of the trust
- ----------------- -------------------------------------
(Directors)
Joseph Stefanelli* Director
Gary Gastineau* Director
Paul Shackford* Director
(Officers principally involved with the trust)
Joseph B. Stefanelli President
Gary L. Gastineau Vice President
James Baker Vice President
Michael T. Bickford Vice President
Diane Fezza Vice President
Richard Mikaliunas Vice President
Geraldine Brindisi Secretary
Paul R. Shackford Treasurer
Sandra L. Long Assistant Secretary
None of the individuals listed above either directly or indirectly owns,
controls or holds with power to vote 5% of more of the outstanding voting
securities of the sponsor. (All of the outstanding shares of common stock are
owned by the American Stock Exchange, Inc. See response to Item 29 herein.)
Ownership of all securities of the sponsor
------------------------------------------
Securities owned Securities owned Securities owned
Title of record which of record which beneficially
of are also owned are not owned which are not
Class beneficially beneficially owned of record
- -------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
of of of
Class Class Class
- -------------------------------------------------------------------
-- -- -- -- -- -- --
- -------------------------------------------------------------------
None____________________
* c/o American Stock Exchange, Inc., 86 Trinity Place, New York,
New York 10006
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Ownership of all securities of the trust
----------------------------------------
None
Other companies of which each of the persons named
above is presently an officer, director or partner
--------------------------------------------------
Name and principal Nature of business Nature of affiliation
business address of such other with such other
of such other company company company
- ----------------------- ------------------ ---------------------
None
(b) Furnish a brief statement of the business experience during the last
five years of each officer, director or partner of the sponsor.
1. Joseph Stefanelli, James Baker, Diane Fezza, Richard Mikaliunas,
Geraldine Brindisi and Sandra Long, holding the above-mentioned offices,
have each been employed by the American Stock Exchange, Inc. for the
past five (5) years.
2. Mr. Gary Gastineau, holding the office listed above, has been employed
by the American Stock Exchange, Inc. since July 1995. Prior thereto, Mr.
Gastineau was employed by S.G. Warburg & Co., Inc. as Senior Vice
President and Head of Global Equity Derivatives from June 1994 through
March 1995 and from January 1992 through May 1994 he was employed by
Swiss Bank as Vice President and Director of Customer Risk Management
Research.
3. Mr. Bickford, holding the office listed above, has been employed by the
American Stock Exchange, Inc. since March 1995. Prior thereto, Mr.
Bickford was employed by Kidder Peabody & Co., Inc. as Vice President
from May 1983 through February 1995.
4. Mr. Shackford, holding the office listed above, has been employed by the
American Stock Exchange, Inc. since October 1996. Prior thereto, Mr.
Shackford was employed by Park Electrochemical Corp as Vice President
and CFO from August 1995 to October 1996 and from January 1990 to August
1995 he was employed by Equitable Bag Co.Inc. as Executive Vice
President and CFO.
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Companies Owning Securities of Sponsor
--------------------------------------
29. Furnish as at latest practicable date the following information with respect
to each company which directly or indirectly owns, controls or holds with
power to vote 5% or more of the outstanding voting securities of the
sponsor.
As at July 1, 1997
Name and principal business address Nature of business
- ----------------------------------- ------------------
American Stock Exchange, Inc. National securities
86 Trinity Place exchange
New York, New York 10006
Ownership of all securities of the sponsor
------------------------------------------
Securities owned Securities owned Securities owned
Title of record which of record which beneficially
of are also owned are not owned which are not
Class beneficially beneficially owned of record
- --------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
of of of
Class Class Class
- --------------------------------------------------------------------------------
Common 100 100% -- -- -- --
Shares
- --------------------------------------------------------------------------------
* The Sponsor authorized 100 shares of common stock with a
par value of .10 per share issued in the name of, and sold
to, the American Stock Exchange, Inc. upon payment of $100.00 for
such shares. The American Stock Exchange, Inc. purchased the
Sponsor's shares on December 22, 1992.
Controlling Persons
-------------------
30. Furnish as at latest practicable date the following information with respect
to any person, other than those covered by Items 28, 29 and 42 who directly
or indirectly controls the sponsor.
None
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Compensation of Officers and Directors of Sponsor, Compensation of Officers
-------------------------------------------------- ------------------------
of Sponsor
----------
31. Furnish the following information with respect to the remuneration for
services paid by the sponsor during the last fiscal year covered by
financial statements filed herewith:
(a) Directly to each of the officers or partners of the sponsor directly
receiving the three highest amounts of remuneration;
(b) Directly to all officers or partners of the sponsor as a group exclusive
of persons whose remuneration is included under Item 31(a), stating
separately the aggregate amount paid by the sponsor itself and the
aggregate amount paid by all the subsidiaries;
(c) Indirectly or through subsidiaries to each of the officers or partners
of the sponsor.
Not Applicable
Compensation of Directors
-------------------------
32. Furnish the following information with respect to the remuneration for
services, exclusive of remuneration reported under Item 31, paid by the
sponsor during the last fiscal year covered by financial statements filed
herewith:
(a) The aggregate direct remuneration to directors.
(b) Indirectly or through subsidiaries to directors.
Not Applicable
Compensation to Employees
-------------------------
33. (a) Furnish the following information with respect to the aggregate amount
of remuneration for services of all employees of the sponsor (exclusive
of persons whose remuneration is reported in Items 31 and 32) who
received remuneration in excess of $10,000 during the last fiscal year
covered by financial statements filed herewith from the sponsor and any
of its subsidiaries.
(b) Furnish the following information with respect to the remuneration for
services paid directly during the last fiscal year covered by financial
statements filed
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herewith to the following classes of persons (exclusive of those persons
covered by Item 33(a)):
(1) sales managers, branch managers, district managers and other persons
supervising the sale of registrant's securities; (2) salesmen, sales
agents, canvassers and other persons making solicitations but not in
supervisory capacity; (3) administrative and clerical employees; and (4)
others (specify). If a person is employed in more than one capacity,
classify according to predominant type of work.
Not Applicable
Compensation to Other Persons
-----------------------------
34. Furnish the following information with respect to the aggregate amount of
compensation for services paid any person (exclusive of persons whose
remuneration is reported in Items 31, 32 and 33), whose aggregate
compensation in connection with services rendered with respect to the trust
in all capacities exceeded $10,000 during the last fiscal year covered by
financial statements filed herewith from the sponsor and any of its
subsidiaries.
Not Applicable
IV. DISTRIBUTION AND REDEMPTION OF SECURITIES
Distribution of Securities
--------------------------
35. Furnish the names of the states in which sales of the trust's securities (A)
are currently being made, (B) are presently proposed to be made, and (C)
have been discontinued, indicating by appropriate letter the status with
respect to each state.
(A) No sales of the Trust's securities are currently being made.
(B) Reference is made to the statements in Exhibit D filed herewith
under the caption "Continuous Offering of DIAMONDS."
(C) None.
36. If sales of the trust's securities have at any time since January 1, 1936
been suspended for more than a month, describe briefly the reasons for such
suspension.
Not Applicable
20
<PAGE>
37. (a) Furnish the following information with respect to each instance where,
subsequent to January 1, 1937, any federal or state governmental
officer, agency, or regulatory body denied authority to distribute
securities of the trust, excluding a denial which was merely a
procedural step prior to any determination by such officer, etc. and
which denial was subsequently rescinded.
(1) Name of officer, agency or body.
(2) Date of denial.
(3) Brief statement of reason given for denial.
Not Applicable
(b) Furnish the following information with regard to each instance
where, subsequent to January 1, 1937, the authority to distribute
securities of the trust has been revoked by any federal or state
governmental officer, agency or regulatory body.
(1) Name of officer, agency or body.
(2) Date of denial.
(3) Brief statement of reason given for revocation.
Not Applicable
38. (a) Furnish a general description of the method of distribution of
securities of the trust.
Reference is made to the statements in Exhibit D filed herewith
under the captions "Underwriting" in the Prospectus Summary, "The
Trust-- Creation of Creation Units", "The Trust-- Procedures for
Creation of Creation Units", "The Trust-- Placement of Creation
Orders using DIAMONDS Clearing Process", "The Trust-- Placement of
Creation Orders Outside the DIAMONDS Clearing Process", "The Trust--
Book-Entry-Only System", "Exchange Listing" and "Continuous Offering
of DIAMONDS".
(b) State the substance of any current selling agreement between each
principal underwriter and the trust or the sponsor, including a
statement as to the inception and termination dates of the agreement,
any renewal and termination provisions and any assignment provisions.
Reference is made to the statements in Exhibit D filed herewith
under the captions "Underwriting" in the Prospectus Summary and
"Continuous Offering of "DIAMONDS" and "The Trust-- Placement of
Creation Orders Using DIAMONDS Clearing Process".
21
<PAGE>
(c) State the substance of any current agreements or arrangements of each
principal underwriter with dealers, agents, salesman, etc., with respect
to commissions and overriding commissions, territories, franchises,
qualifications and revocations. If the trust is the issuer of periodic
payment plan certificates, furnish schedules of commissions and the
bases thereof. In lieu of a statement concerning schedules of
commissions, such schedules of commissions may be filed as Exhibit
A(3)(C).
Reference is made to answer to Item 38(b) above.
Information Concerning Principal Underwriter
--------------------------------------------
39. (a) State the form of organization of each principal underwriter of
securities of the trust, the name of the state or other sovereign power
under the laws of which each underwriter was organized and the date of
organization.
Reference is made to the statements in Exhibit D filed herewith
under the caption "Underwriting" in the Prospectus Summary.
(b) State whether any principal underwriter currently distributing
securities of the trust is a member of the National Association of
Securities Dealers, Inc.
Reference is made to the statements in Exhibit D filed herewith
under the caption "Underwriting" in the Prospectus Summary.
40. (a) Furnish the following information with respect to all fees received by
each principal underwriter of the trust from the sale of securities of
the trust and any other functions in connection therewith exercised by
such underwriter in such capacity or otherwise during the period covered
by the financial statements filed herewith.
Reference is made to answer to Item 39(b) above.
(b) Furnish the following information with respect to any fee or any
participation in fees received by each principal underwriter from any
underlying investment company or any affiliated person or investment
adviser of such company.
(1) The nature of such fee or participation.
(2) The name of the person making payment.
(3) The nature of the services rendered in consideration for such fee or
participation.
22
<PAGE>
(4) The aggregate amount received during the last fiscal year covered by
the financial statements filed herewith.
Not Applicable
41. (a) Describe the general character of the business engaged in by each
principal underwriter, including a statement as to any business other
than the distribution of securities of the trust. If a principal
underwriter acts or has acted in any capacity with respect to any
investment company or companies, other than the trust, state the name or
names of such company or companies, their relationship, if any, to the
trust and the nature of such activities. If a principal underwriter has
ceased to act in such named capacity, state the date of and the
circumstances surrounding such cessation.
Reference is made to the statements in Exhibit D filed herewith
under the caption "Underwriting" in the Prospectus Summary.
(b) Furnish as at latest practicable date the address of each branch office
of each principal underwriter currently selling securities of the trust
and furnish the name and residence address of the person in charge of
such office.
Not Applicable
(c) Furnish the number of individual salesmen of each principal underwriter
through whom any of the securities of the trust were distributed for the
last fiscal year of the trust covered by the financial statements filed
herewith and furnish the aggregate amount of compensation received by
such salesman in such year. (Segregate full-time and part-time
salesmen.)
Not Applicable
42. Furnish, for as at latest practicable date the following information with
respect to each principal underwriter currently distributing securities of
the trust and with respect to each of the officers, directors or partners of
such underwriter.
Not Applicable
43. Furnish, for the last fiscal year covered by the financial statements filed
herewith, the amount of brokerage commissions received by any principal
underwriter who is a member of a national securities exchange and who is
currently distributing the securities of the trust or effecting
23
<PAGE>
transaction for the trust in the portfolio securities of the trust.
Not Applicable
Offering Price or Acquisition Valuation of Securities of the Trust
------------------------------------------------------------------
44. (a) Furnish the following information with respect to the method of
valuation used by the trust for the purpose of determining the offering
price to the public of securities issued by the trust or the valuation
of shares or interests in the underlying securities acquired by the
holder of a periodic payment plan certificate:
(1) The source of quotations used to determine the value of portfolio
securities.
(2) Whether opening, closing, bid, asked or any other price is used.
(3) Whether price is as of the day of sale or as of any other time.
(4) A brief description of the methods used by registrant for
determining other assets and liabilities including accrual for
expenses and taxes (including taxes on unrealized appreciation).
(5) Other items which registrant adds to the net asset value in
computing offering price of its securities.
(6) Whether adjustments are made for fractions:
(i) before adding distributor's compensation (load); and
(ii) after adding distributor's compensation (load).
Reference is made to the information stated in answer to Items
10(i) and 11 above, as well as to the statements in Exhibit D
filed herewith under the caption "Valuation."
(b) Furnish a specimen schedule showing the components of the offering price
of the trust's securities as at the latest practicable date.
Not Applicable
(c) If there is any variation in the offering price of the trust's
securities to any person or classes of persons other than underwriters,
state the nature and amount of such variation and indicate the person or
classes of persons to whom such offering is made.
None
24
<PAGE>
45. Furnish the following information with respect to any suspension of the
redemption rights of the securities issued by the trust during the three
fiscal years covered by the financial statements filed herewith:
(a) By whose action redemption rights were suspended.
(b) The number of days' notice given to security holders prior to
suspension of redemption rights.
(c) Reason for suspension.
(d) Period during which suspension was in effect.
Not Applicable
Redemption Valuation of Securities of the Trust
-----------------------------------------------
46. (a) Furnish the following information with respect to the method of
determining the redemption or withdrawal valuation of securities issued
by the trust:
(1) The source of quotations used to determine the value of portfolio
securities.
(2) Whether opening, closing, bid, asked or any other price is used.
(3) Whether price is as of the day of sale or as of any other time.
(4) A brief description of methods used by registrant for determining
other assets and liabilities including accrual for expenses and
taxes (including taxes on unrealized appreciation). (5) Other items
which registrant deducts from the net asset value in computing
redemption value of its securities.
(6) Whether adjustments are made for fractions.
Reference is made to the information in
Exhibit D filed herewith under the captions
"Valuation" and "Redemption of DIAMONDS."
(b) Furnish a specimen schedule showing the components of the redemption
price to the holders of the trust's securities as at the latest
practicable date.
Not Applicable
Purchase and Sale of Interests in Underlying Securities from and to Security
----------------------------------------------------------------------------
Holders
-------
47. Furnish a statement as to the procedure with respect to the maintenance of a
position in the underlying securities or interests in the underlying
securities, the extent and nature thereof and the person who maintains such
a position.
25
<PAGE>
Include a description of the procedure with respect to the purchase of
underlying securities or interests in the underlying securities from
security holders who exercise redemption or withdrawal rights and the sale
of such underlying securities and interests in the underlying securities to
other security holders. State whether the method of valuation of such
underlying securities or interests in underlying securities differs from
that set forth in Items 44 and 46. If any item of expenditure included in
the determination of the valuation is not or may not actually be incurred or
expended, explain the nature of such item and who may benefit from the
transaction.
Reference is made to information provided in answers to Items 44 and 46
above and to the statements in Exhibit D filed herewith under the
captions "The Trust," "The Portfolio," "Continuous Offering of
DIAMONDS," "Redemption of DIAMONDS" and "Administration of the Trust--
Distributions to Beneficial Owners."
V. INFORMATION CONCERNING THE TRUSTEE OR CUSTODIAN
48. Furnish the following information as to each trustee or custodian of the
trust.
(a) Name and principal business address.
(b) Form of organization.
(c) State or other sovereign power under the laws of which the trustee
or custodian was organized.
(d) Name of governmental supervising or examining authority.
Reference is made to the statements in Exhibit D filed herewith
under the caption "Trustee."
49. State the basis for payment of fees or expenses of the trustee or custodian
for services rendered with respect to the trust and its securities, and the
aggregate amount thereof for the last fiscal year. Indicate the person
paying such fees or expenses. If any fees or expenses are prepaid, state
the unearned amount.
Reference is made to the statements in Exhibit D filed herewith under
the captions "Expenses of the Trust", "The Portfolio-- Adjustments to
the Portfolio" and "Redemption of DIAMONDS." A Transaction Fee or Fees
will be charged to all creators of DIAMONDS in Creation Unit size
aggregations and to all redeemers of DIAMONDS in Creation Unit size
aggregations. Reference is also made to the statements in Exhibit D
filed herewith under the captions
26
<PAGE>
"The Trust-- Creation of Creation Units" and "Redemption of DIAMONDS--
Procedure for Redemption of DIAMONDS".
50. State whether the trustee or custodian or any other person has or may create
a lien on the assets of the trust, and if so, give full particulars,
outlining the substance of the provisions of any indenture or agreement with
respect thereto.
Reference is made to the statements in Exhibit D filed herewith under
the captions "Expenses of the Trust" and "Redemption of DIAMONDS."
VI. INFORMATION CONCERNING INSURANCE OF HOLDERS OF SECURITIES
51. Furnish the following information with respect to insurance of holders of
securities:
(a) Name and address of the insurance company.
(b) The types of policies and whether individual or group policies.
(c) The types of risks insured and excluded.
(d) The coverage of the policies.
(e) The beneficiaries of such policies and the uses to which the
proceeds of policies must be put.
(f) The terms and manner of cancellation and of reinstatement.
(g) The method of determining the amount of premiums to be paid by
holders of securities.
(h) The amount of aggregate premiums paid to the insurance company
during the last fiscal year.
(i) Whether any person other than the insurance company receives any
part of such premiums, the name of each such person and the amounts
involved, and the nature of the services rendered therefor.
(j) The substance of any other material provisions of any indenture or
agreement of the trust relating to insurance.
Not applicable
VII. POLICY OF REGISTRANT
52. (a) Furnish the substance of the provisions of any indenture or agreement
with respect to the conditions upon which and the method of selection by
which particular portfolio securities must or may be eliminated from
assets of the trust or must or may be replaced by other portfolio
securities. If an investment advisor or other person is to be employed
in connection with such selection, elimination, or substitution, state
the name of such
27
<PAGE>
person, the nature of any affiliation to the sponsor, trustee or
custodian, and any principal underwriter, and the amount of remuneration
to be received for such services. If any particular person is not
designated in the indenture or agreement, describe briefly the method of
selection of such person.
Reference is made to answer in Item 16 above.
(b) Furnish the following information with respect to each transaction
involving the elimination of any underlying security during the period
covered by the financial statements filed herewith:
(1) Title of security.
(2) Date of elimination.
(3) Reasons for elimination.
(4) The use of the proceeds from the sale of the eliminated security.
(5) Title of security substituted, if any.
(6) Whether sponsor, principal underwriter, trustee or custodian or any
affiliated person of the foregoing were involved in the transaction.
(7) Compensation or remuneration received by each such person directly
or indirectly as a result of a transaction.
Not Applicable
(c) Describe the policy of the trust with respect to the substitution and
elimination of the underlying securities of the trust with respect to:
(1) The grounds for elimination and substitution.
(2) The type of securities which may be substituted for any underlying
security.
(3) Whether the acquisition of such substituted security or securities
would constitute the concentration of investment in a particular
industry or group of industries or would conform to a policy of
concentration of investment in a particular industry or group of
industries.
(4) Whether such substituted securities may be the securities of another
investment group.
(5) The substance of the provisions of any indenture or agreement which
authorize or restrict the policy of the registrant in this regard.
Reference is made to answer in Item 16 above.
(d) Furnish a description of any policy (exclusive of policies covered by
paragraph (a) and (b) herein) of the
28
<PAGE>
trust which is deemed a matter of fundamental policy and which is elected to
be treated as such.
Not Applicable
Regulated Investment Company
----------------------------
53. (a) State the taxable status of the trust.
Reference is made to the statements in Exhibit D filed herewith
under the caption "Tax Status of the Trust."
(b) State whether the trust qualified for the last taxable year as a
regulated investment company as defined in the Internal Revenue Code of
1986, and state its present intention with respect to such qualification
during the current taxable year.
The Trust was not in existence during the last taxable year, but
intends to qualify as a regulated investment company during the
current taxable year.
VIII. FINANCIAL AND STATISTICAL INFORMATION
54. If the trust is not the issuer of periodic payment plan certificates,
furnish the following information with respect to each class or series of
securities [as at the end of the registrant's past 10 fiscal years]:
Not Applicable
(Items 55, 56, 57 and 58 are not applicable since they relate only to periodic
payment plan certificates.)
59. Financial Statements of the Trust
Not Applicable
Financial Statements of the Sponsor
Not Applicable
29
<PAGE>
EXHIBITS
The following Exhibits are filed herewith:
Exhibit D Preliminary Prospectus dated July 14, 1997
The following Exhibits to be filed by amendment:
Exhibit A(1) Form of Standard Terms and Conditions of Trust between
PDR Services Corporation, as Sponsor and
State Street Bank and Trust Company, as
Trustee.
Exhibit A(5) The form of the Trust's security (included as an exhibit
to Exhibit A(1) listed above).
Exhibit A(1)(a) Form of Indenture between PDR Services Corporation, as
Sponsor and State Street Bank and Trust
Company, as Trustee.
Exhibit A(3) Form of Distribution Agreement among PDR Services
Corporation, Inc., as Sponsor, the
Trust, and PDR Distributors, Inc., as
Distributor.
Exhibit A(6) Certificate of Incorporation and By-laws of PDR
Services Corporation.
Exhibit A(9) Form of Depository Agreement among State Street Bank and
Trust Company, as Trustee, PDR Services
Corporation, Inc., as Sponsor and The
Depository Trust Company with respect to
services rendered to the Trust.
Exhibit A(9)(a) Form of License Agreement between PDR Services
Corporation and Standard and Poor's
Corporation.
Exhibit A(9)(b) Form of Participant Agreement between PDR Distributors,
Inc. and various broker-dealers.
30
<PAGE>
Pursuant to the requirements of the Investment Company Act of 1940, the Sponsor
of the registrant has caused this registration statement to be duly signed on
behalf of the registrant in the City of New York and the State of New York on
the ____ of July, 1997.
Signature: DIAMONDS Trust, Series 1
------------------------
(Name of Registrant)
[SEAL]
By PDR Services Corporation
------------------------
(Name of sponsor, trustee or
custodian)
By
-------------------------
Joseph Stefanelli
President of Sponsor
Attest:
-------------------
(Name)
- ---------------------------
(Title)
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
PRELIMINARY, SUBJECT TO COMPLETION DATED JULY 14, 1997
PROSPECTUS
DIAMONDS SM TRUST, SERIES 1
A UNIT INVESTMENT TRUST
------------
The DIAMONDS Trust (the "Trust") was formed by PDR Services Corporation, a
Delaware corporation (the "Sponsor") and a wholly-owned subsidiary of the
American Stock Exchange, Inc. (the "Exchange"), to provide investors with the
opportunity to purchase units of beneficial interest in the Trust representing
proportionate undivided interests in the portfolio of securities held by the
Trust (the "Securities") consisting of all of the component common stocks of
the Dow Jones Industrial Average (the "DJIA"SM).* While the investment
objective of the Trust is to provide investment results that generally
correspond to the price and yield performance of the DJIA, there is no
assurance that this investment objective can be achieved. Each unit of
fractional undivided interest in the Trust is referred to as a "DIAMONDS Unit".
The value of the Securities and, consequently, the value of DIAMONDS, will
fluctuate. The minimum number of DIAMONDS that may be created or redeemed at
any one time as described below is 50,000, which aggregation is referred to
herein as a "Creation Unit".
DIAMONDS have been accepted for listing on the Exchange subject to official
notice of issuance. Once created, DIAMONDS may be traded in the secondary
market on a per-DIAMONDS Unit basis, and need not be traded in Creation Unit
size aggregations.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------
Prospectus dated , 1997
Investors are advised to read and retain this Prospectus for future reference.
------------
* "Dow Jones Industrial Average"SM, "DJIA"SM, "Dow Jones" SM and "DIAMONDS"SM
are trademarks and service marks of Dow Jones & Company, Inc. ("Dow Jones")
and have been licensed for use for certain purposes by PDR Services
Corporation and the American Stock Exchange, Inc. pursuant to a License
Agreement with Dow Jones. The Trust, based on the DJIA, is not sponsored,
endorsed, sold or promoted by Dow Jones and Dow Jones makes no representation
regarding the advisability of investing in the Trust.
COPYRIGHT(C) 1997 BY PDR SERVICES CORPORATION
<PAGE>
ESSENTIAL INFORMATION AS OF +
Number of DIAMONDS
Fractional Undivided
Interest in Trust
Represented by each DIAMONDS
Unit
Record Date: Monthly, commencing with ++
Dividend Payment Dates:
Monthly, commencing in the month of ++
Trustee's Annual Fee: From 11/100 of one percent to 15/100 of one
percent, based on net asset value of the Trust,
as the same may be reduced by certain amounts,
plus (or minus) the Adjustment Amount.+++
Estimated Ordinary Operating
Expenses of the Trust: 18/100 of one percent (0.18%) (inclusive of
Trustee's annual fee).+++
Net Asset Value per DIAMONDS
Unit (based on the value of
the Securities, other net
assets of the Trust and
number of DIAMONDS
outstanding)
$
Evaluation Time:
Closing time of the regular trading session on
the New York Stock Exchange, Inc. (ordinarily
4:00 p.m. New York time).
Licensor: Dow Jones & Company, Inc.
Mandatory Termination Date: The first to occur of (i) , 2122 or (ii) the date
20 years after the death of the last survivor of
eleven persons named in the Agreement, the oldest
of whom was born in and the youngest of
whom was born in .
Discretionary Termination:
Trust may be terminated if at any time after six
months following and prior to three years
following the Initial Date of Deposit the value
of the securities held by the Trust is less than
$150,000,000 or if at any time after three years
following the Initial Date of Deposit such value
of the securities held by the Trust is less than
$350,000,000, as such amount shall adjusted for
inflation.++++
- --------
+ The day prior to the Initial Date of Deposit. The Trust Agreement became
effective and the Initial Deposit was made on , 1998 (the
"Initial Date of Deposit").
++ See "Administration of the Trust,Distributions to Beneficial Owners".
+++ Until further notice, the Sponsor has undertaken that on each day during
each fiscal year up to and including October 31, 2000, the ordinary
operating expenses of the Trust as calculated by the Trustee will not be
permitted to exceed an amount which is 0.18% of the daily net asset value
of the Trust. After October 31, 2000, such amount may be changed and may
exceed 0.18%. See "Expenses of Trust".
++++ The Trust may also be terminated under other circumstances. See
"Administration of the Trust--Termination".
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus.
OBJECTIVES
The Sponsor formed the Trust to provide investors with the opportunity to
purchase units of beneficial interest in the Trust representing proportionate
undivided interests in the Securities which consist of all of the component
common stocks of the Dow Jones Industrial Average (the "DJIA") in the form of a
security that closely tracks the DJIA and that may be traded as a share of
common stock. The investment objective of the Trust is to provide investment
results that generally correspond to the price and yield performance of the
component common stocks of the DJIA (the component common stocks of the DJIA
are sometimes referred to herein as "Index Securities"). There can be no
assurance that this investment objective will be met fully. For example, it may
not be possible for the Trust to replicate and maintain exactly the composition
of the Index Securities. It is also possible that, from time to time, the Trust
will be unable to purchase all of the Index Securities. In certain
circumstances, the Trust may be required to make distributions in excess of the
yield performance of the Index Securities (see "Tax Status of the Trust"). The
value of the Securities and, consequently, the value of DIAMONDS, is subject to
changes in the value of common stocks generally and to other factors. Further,
the payment of dividends and maintenance of capital are subject to a number of
conditions, including the financial condition of the issuers of the Securities
(see "Special Considerations").
THE TRUST
The Trust is a unit investment trust organized under the laws of the State of
New York. The Trust is governed by a trust agreement (the "Trust Agreement")
between State Street Bank and Trust Company, a bank and trust company organized
under the laws of the Commonwealth of Massachusetts (the "Trustee"), and the
Sponsor dated and executed as of , 199 .
DISTRIBUTOR
The Distributor for DIAMONDS is , a registered broker-dealer, a
member of the National Association of Securities Dealers, Inc., (see
"Underwriting").
PORTFOLIO DEPOSITS
All orders to create DIAMONDS in Creation Unit size aggregations must be
placed with the Distributor (see "Underwriting" and "Procedure for Creation of
Creation Units"). To be eligible to place orders with the Distributor to create
Creation Unit size aggregations of DIAMONDS, an entity or person either must be
(1) a "Participating Party", as hereinafter defined or (2) a Depository Trust
Company Participant (see "Book-Entry Ownership of DIAMONDS"), and in each case
must have executed a Participant Agreement, as hereinafter defined (see "The
Trust--Procedures for Creation of Creation Units" and "The Trust--Placement of
Creation Orders Using DIAMONDS Clearing Process"). As used herein, the term
"Participating Party" means a broker-dealer or other participant in the
DIAMONDS Clearing Process, as hereinafter defined, through the Continuous Net
Settlement ("CNS") System of the National Securities Clearing Corporation
("NSCC"), a clearing agency that is registered with the Securities and Exchange
Commission (the "Commission"). Upon acceptance of an order to create DIAMONDS,
the Distributor will transmit such order to the Trustee and instruct the
Trustee to initiate the book entry movement of the appropriate number of
DIAMONDS to the account of the entity placing the order. Payment for orders to
create DIAMONDS will be made by deposits with the Trustee of a portfolio of
securities that is substantially similar in composition to the Index Securities
(see "The Trust--Creation of DIAMONDS"), together with a cash payment in an
amount which shall be equal to the Dividend Equivalent
3
<PAGE>
Payment (as hereinafter defined), plus or minus, as the case may be, the
Balancing Amount (as hereinafter defined--see "The Portfolio--Adjustments to
the Portfolio Deposit"). The "Dividend Equivalent Payment" enables the Trustee
to make a distribution of dividends on the next Dividend Payment Date (as
hereinafter defined), and is an amount equal, on a per Creation Unit basis, to
the dividends on all the Securities with ex-dividend dates within the
accumulation period, net of expenses and liabilities for such period
(including, without limitation, (x) taxes or other governmental charges against
the Trust not previously deducted, if any, and (y) accrued fees of the Trustee
and other expenses of the Trust (including legal and auditing expenses) and
other expenses not previously deducted (see "Expenses of the Trust")), as if
all of the Securities had been held for the entire accumulation period for such
distribution. For federal income tax purposes, a portion of dividend
distributions may result in a return of capital to Beneficial Owners (as
hereinafter defined) of DIAMONDS (see "Tax Status of the Trust").
The Dividend Equivalent Payment and the Balancing Amount are collectively
referred to herein as the "Cash Component" and the deposit of such a portfolio
of Securities and the Cash Component are collectively referred to herein as a
"Portfolio Deposit". In connection with the creation of DIAMONDS, in the event
that the Trustee determines, in its discretion, that one or more Index
Securities are likely to be unavailable for delivery or available in
insufficient quantity for delivery to the Trust upon the creation of DIAMONDS
in Creation Unit size aggregations, then the Trustee shall have the right in
its discretion to permit the cash equivalent value of such Index Security or
Index Securities to be included in the Portfolio Deposit as a part of the Cash
Component in lieu of the inclusion of such Index Security or Index Securities
in the securities portion of the Portfolio Deposit (see "The Portfolio--
Adjustments to the Portfolio Deposit").
In connection with the creation of DIAMONDS, if a creator is restricted by
regulation or otherwise from investing or engaging in a transaction in one or
more Index Securities, the Trustee shall have the right, in its discretion, to
permit the cash equivalent value of such Index Security or Index Securities to
be included in the Portfolio Deposit based on the market value of such Index
Security or Index Securities as of the Evaluation Time on the date such
creation order is deemed received by the Distributor (see "Placement of
Creation Orders Outside DIAMONDS Clearing Process") as part of the Cash
Component in lieu of the inclusion of such Index Security or Index Securities
in the securities portion of the Portfolio Deposit. In such case such creator
will pay the Trustee the standard Transaction Fee, plus an additional amount
per Creation Unit not to exceed three (3) times the Transaction Fee applicable
for one Creation Unit as described below.
An entity or person placing creation orders with the Distributor must deposit
Portfolio Deposits either (i) through the CNS clearing processes of NSCC, as
such processes have been enhanced to effect creations and redemptions of
Creation Unit size aggregations of DIAMONDS, such processes being referred to
herein as the "DIAMONDS Clearing Process", or (ii) with the Trustee outside the
DIAMONDS Clearing Process (i.e., through the facilities of DTC).
TRANSACTION FEE
A transaction fee is payable to the Trustee in connection with each creation
and each redemption made through the DIAMONDS Clearing Process of Creation Unit
size aggregations of DIAMONDS (the "Transaction Fee"), subject to the changes,
modifications or waivers, if any, described below. Such Transaction Fee is non-
refundable, regardless of the net asset value of the Trust.
Until further notice is given as described below, the Transaction Fee charged
in connection with each creation of Creation Units through the DIAMONDS
Clearing Process (see "Procedures for Creation of Creation Units") is $1,000
per Participating Party per day, regardless of the number of Creation Units
created on such day by such Participating Party. Likewise, until further notice
is given as described below, the Transaction Fee charged in connection with the
redemption of Creation Units through the DIAMONDS Clearing Process is $1,000
per Participating Party per day, regardless of the number of Creation Units
redeemed on such day by
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such Participating Party. This Transaction Fee may subsequently be changed by
the Trustee, upon the advice of the Sponsor in its sole discretion, but will
not in any event exceed 10/100 of one percent (10 basis points) of the value of
a Creation Unit at the time of creation or redemption, as the case may be, (the
"10 Basis Point Limit")*. No modifications to, or reductions, discounts or
waivers of, the Transaction Fee charged in connection with the creation of
Creation Units are scheduled or currently contemplated by the Sponsor.
If Creation Units are created or redeemed outside the DIAMONDS Clearing
Process, an additional amount not to exceed three (3) times the Transaction Fee
applicable for a Creation Unit will be charged to the creator or redeemer.
Under the current schedule, therefore, the total fee charged in connection with
the creation or redemption of Creation Units outside the DIAMONDS Clearing
Process would be $1,000 (the Transaction Fee for the creation or redemption of
a Creation Unit) plus an additional amount not to exceed $3,000 (3 times
$1,000) for a total of $4,000.
From time to time, and for such periods as the Sponsor, in its sole
discretion, may determine, the Transaction Fee (as well as any additional
amounts charged in connection with creations and/or redemptions outside the
DIAMONDS Clearing Process) may be increased, decreased or otherwise modified or
waived in its entirety for certain lot-size creations and/or redemptions of
DIAMONDS, or for creations and/or redemptions made under certain specified
circumstances without the consent of Beneficial Owners, subject to certain
conditions (See "The Trust--Creation of Creation Units" and "Procedures for
Redemption of DIAMONDS"). The Sponsor also reserves the right, from time to
time, to vary the lot-size of the creations and/or redemptions of DIAMONDS
subject to an increase or decrease and/or entitled to such waiver of the
Transaction Fee. Any change so made will not cause the amount of the
Transaction Fee to exceed the 10 Basis Point Limit at the time of a creation,
or redemption, as the case may be. Such changes or variations will be effected
by an amendment to the current Trust prospectus. The amount of the new
Transaction Fee in effect at any given time will be available from the Trustee.
SIZE OF CREATION UNIT AGGREGATIONS OF DIAMONDS
DIAMONDS may be created or redeemed only in Creation Unit size aggregations
of 50,000 DIAMONDS, or in multiples thereof (e.g., 100,000, 150,000, 200,000
DIAMONDS), and in no event will fractional Creation Units be created or
redeemed.** The Sponsor reserves the right to direct the Trustee to declare a
split or reverse split in the number of DIAMONDS outstanding and a
corresponding change in the number of DIAMONDS constituting a Creation Unit in
the event that the per DIAMONDS Unit price in the secondary market changes to
an amount that the Sponsor believes falls outside a desirable retail range. For
example, if a 2-for-1 split were declared, the number of DIAMONDS in a Creation
Unit size aggregation of DIAMONDS would double (e.g., from 50,000 to 100,000
DIAMONDS per Creation Unit).
PORTFOLIO ADJUSTMENTS
To maintain the correlation between the Trust and the DJIA, the Trustee will
make conforming changes to the Trust's portfolio in accordance with the terms
of the Agreement to conform to periodic changes in the Index Securities made by
Dow Jones, (see "The Portfolio--Adjustments to the Portfolio"). The composition
of the securities portion of a Portfolio Deposit is adjusted to conform to
changes in the DJIA resulting from certain capital changes that may affect the
price, and hence the weighting of a component security in the DJIA. Any such
change will result in a corresponding adjustment to the prescribed Portfolio
Deposit effective on the Business Day (a "Business Day" being any day that the
New York Stock Exchange is open for business) on which the change to the DJIA
takes effect. Changes to the DJIA are made after the close of the market (see
"The Portfolio--Adjustments to the Portfolio Deposit").
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* The amount of the Transaction Fee currently in effect will be available from
the Trustee.
** See "Dividend Reinvestment Service," however, for a description of the sole
case in which DIAMONDS may be created by the Trustee in less than a Creation
Unit size aggregation of 50,000 DIAMONDS.
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BOOK ENTRY OWNERSHIP OF DIAMONDS
The Depository Trust Company, New York, New York, a limited purpose trust
company organized under the laws of the State of New York (the "Depository") or
its nominee will be the record or registered owner of all outstanding DIAMONDS.
Beneficial ownership of DIAMONDS will be shown on the records of the Depository
or its participants. Certificates will not be issued for DIAMONDS, whether in
Creation Unit size aggregations or otherwise (see "The Trust--Book-Entry-Only
System").
EXPENSES
The expenses incident to the organization of the Trust and its registration
as an investment company will be capitalized and amortized on a straight line
basis over five years following the Initial Date of Deposit (see "Expenses of
the Trust"). The Trustee's fees are set forth generally in the Summary of
Essential Information and more specifically in "Expenses of the Trust" below.
Other expenses of the Trust are also described more fully in "Expenses of the
Trust".
FEDERAL INCOME TAX CONSIDERATIONS
The Trust intends to adopt a fiscal year ending on October 31 of each year.
The Trust intends to qualify for and elect tax treatment as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code") and to distribute annually its entire investment company
taxable income and net capital gain. Distributions that are taxable as ordinary
income to Beneficial Owners generally are expected to constitute dividend
income for federal income tax purposes and to be eligible for the dividends-
received deduction available to many corporations to the extent of qualifying
dividend income received by the Trust (see "Tax Status of the Trust"). The
Trust's regular monthly distributions will be based on the dividend performance
of the Securities held during such monthly distribution period rather than the
actual taxable income of the Trust. As a result, a portion of the distributions
of the Trust may be treated as a return of capital or a capital gain dividend
for federal income tax purposes or the Trust may be required to make additional
distributions to maintain its status as a regulated investment company or to
avoid imposition of income or excise taxes on undistributed income (see "Tax
Status of the Trust" and "Administration of the Trust--Distributions to
Beneficial Owners").
ERISA CONSIDERATIONS
In considering the advisability of an investment in DIAMONDS, fiduciaries of
pension, profit sharing or other tax-qualified retirement plans (including
Keogh Plans) and welfare plans (collectively, "Plans") subject to the fiduciary
responsibility requirements of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), should consider whether an investment in DIAMONDS
is permitted by the documents and instruments governing the Plan and whether
the investment satisfies the exclusive benefit, prudence and diversification
requirements of ERISA. Individual retirement account ("IRA") investors should
consider that an IRA may make only such investments as are authorized by its
governing instruments.
The fiduciary standards and prohibited transaction rules of ERISA and Section
4975 of the Code will not apply to transactions involving the Trust's assets
while DIAMONDS are held by a Plan or IRA. Unlike many other investment vehicles
offered to Plans and IRAs, the Trust's assets will not be treated as "plan
assets" of the Plans or IRAs which acquire or purchase DIAMONDS. Although ERISA
imposes certain duties on Plan fiduciaries and ERISA and/or Section 4975 of the
Code prohibit certain transactions involving "plan assets" between Plans or
IRAs and their fiduciaries or certain related persons, those rules will not
apply to transactions involving the Trust's assets because DIAMONDS represent
an interest in the Trust, and the Trust is registered as an investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"). ERISA,
the
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Code and U.S. Department of Labor regulations contain unconditional language
exempting the assets of registered investment companies from treatment as "plan
assets" in applying the fiduciary and prohibited transaction provisions of
ERISA and the Code.
RESTRICTIONS ON PURCHASES BY INVESTMENT COMPANIES
The acquisition of DIAMONDS by registered investment companies is subject to
the restrictions set forth in section 12(d)(1) of the 1940 Act.
INVESTMENT MANAGEMENT
The Trust holds the Securities and cash and is not actively "managed" by
traditional methods, which typically involve effecting changes in the
Securities on the basis of judgments made relating to economic, financial and
market considerations. The composition of the Securities are, however, adjusted
to conform to changes in the composition of the Index Securities in the manner
set forth in the Trust Agreement (see "The Portfolio--Adjustments to the
Portfolio").
DISTRIBUTIONS
After the initial three months of the Trust's operations, monthly
distributions based on the amount of dividends payable with respect to
Securities held by the Trust and other income, if any, received by the Trust,
net of fees and expenses, are made via the Depository and its participants to
Beneficial Owners (see "The Trust--Book-Entry-Only System") on each Dividend
Payment Date (see "Administration of the Trust--Distributions to Beneficial
Owners"). Any net capital gains recognized by the Trust in any taxable year
will be distributed at least annually. The Trust may make additional
distributions after the end of the year in order to satisfy certain
distribution requirements imposed by the Code (see "Tax Status of the Trust"
and "Administration of the Trust--Distributions to Beneficial Owners").
Although income distributions are currently planned to be made on a monthly
basis, the Trustee reserves the right to vary the periodicity with which
distributions are made (see "Administration of the Trust--Distributions to
Beneficial Owners"). Those Beneficial Owners interested in reinvesting their
monthly distributions may participate through DTC Participants in the DTC
Dividend Reinvestment Service available through certain brokers. (See "Dividend
Reinvestment Service" for a brief description thereof.)
REDEMPTION
DIAMONDS in Creation Unit size aggregations are ordinarily redeemable in kind
only and are not redeemable for cash except under certain circumstances (see
"Redemption of DIAMONDS"). DIAMONDS can be redeemed only in Creation Unit size
aggregations effected by a Participating Party (with respect to redemptions
through the DIAMONDS Clearing Process) or a DTC Participant (with respect to
redemptions outside the DIAMONDS Clearing Process), in either case which has
executed a Participant Agreement (see "Redemption of DIAMONDS--Procedure for
Redemption of DIAMONDS"). Individual DIAMONDS are not redeemable, but entitle
the owners thereof to certain payments upon termination of the Trust (see
"Administration of the Trust--Termination"). Prior to termination, DIAMONDS
Unit owners may aggregate individual DIAMONDS to Creation Unit size or
multiples thereof (e.g., 50,000, 100,000 DIAMONDS, etc.) and request that the
Trustee redeem the DIAMONDS so aggregated. There can be no assurance, however,
that there always will be sufficient depth and liquidity in the public trading
market to complete all such transactions (see "Special Considerations"). Owners
of DIAMONDS in less than Creation Unit size aggregations may have to pay
brokerage fees and commissions to acquire sufficient DIAMONDS (i.e., 50,000
DIAMONDS) to constitute a Creation Unit. Each redemption will also be
accompanied by a Cash Redemption Payment (as hereinafter defined, see
"Redemption of DIAMONDS--Procedure for Redemption of DIAMONDS") which on any
given Business Day is an amount typically identical to the Cash Component of a
Portfolio Deposit.
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In the event that the Trustee determines in its discretion that an Index
Security is likely to be unavailable for delivery or available in insufficient
quantity for delivery by the Trust upon the redemption of DIAMONDS in Creation
Unit size aggregations, then the Trustee shall have the right in its discretion
to deliver the cash equivalent value of such Index Security or Index
Securities, based on the market value of such Index Security or Index
Securities as of the Evaluation Time on the date such redemption order is
deemed received by the Trustee (see "Procedure for Redemption of DIAMONDS"), as
part of the Cash Redemption Payment in lieu of delivering the Index Security or
Index Securities to the redeemer.
In connection with the redemption of DIAMONDS, if a redeeming investor
requests redemption in cash, rather than in kind, with respect to one or more
Securities, (for example, because a redeemer is restricted by regulation or
otherwise from investing or engaging in a transaction in one or more Index
Securities,) the Trustee shall have the right in its discretion to deliver the
cash equivalent value of such Index Security or Index Securities based on the
market value of such Index Security or Index Securities as of the Evaluation
Time on the date such redemption order is deemed received by the Trustee (see
"Placement of Redemption Orders Outside DIAMONDS Clearing Process") as a part
of the Cash Redemption Payment in lieu of delivering such Index Security or
Index Securities to the redeemer. In all such cases, such investor will pay the
Trustee the standard Transaction Fee, plus an additional amount per Creation
Unit not to exceed three (3) times the Transaction Fee applicable for a
Creation Unit.
The Trustee, in its discretion, upon the request of a redeeming investor, may
redeem Creation Units in whole or in part by providing such redeemer with a
portfolio of Securities differing in exact composition from the Index
Securities but not differing in net asset value of the then-current Portfolio
Deposit. Such a redemption might be made, for example, if it were to be
determined that this would be appropriate in order to maintain the Trust
portfolio's correlation to the price-weighted composition of the DJIA (i.e. an
equal number of shares of each component stock), for instance when a stock
split of one of the Index Securities occurs. See ("The Portfolio" and "The
DJIA").
DIAMONDS Unit owners may also be required to pay Excess Cash Amounts, (as
hereinafter defined) when applicable, in connection with a redemption of
DIAMONDS (see "Redemption of DIAMONDS--Procedure for Redemption of DIAMONDS").
The Transaction Fee will be charged in connection with the redemption of
Creation Unit size aggregations of DIAMONDS. If a request for redemption is
made directly to the Trustee outside the DIAMONDS Clearing Process, an
additional amount not to exceed three (3) times the Transaction Fee applicable
for a Creation Unit will be charged to the redeemer due to the increased
expense associated with delivery outside the DIAMONDS Clearing Process (see
"Prospectus Summary--Transaction Fee").
TERMINATION
The Trust will terminate by its terms on the first to occur of: (i) the date
one hundred twenty-five (125) years from the Initial Date of Deposit (i.e.,
, 2122) or (ii) the date twenty (20) years after the death of the
last survivor of eleven persons named in the Agreement, the oldest of whom was
born in and the youngest of whom was born in (the "Mandatory
Termination Date"). The Trust may also be terminated earlier upon the agreement
of the Beneficial Owners of 66 2/3% of the then outstanding DIAMONDS or in the
event that DIAMONDS are de-listed from the Exchange (see "Exchange Listing").
The Sponsor will also have the discretionary right to direct the Trustee to
terminate the Trust if at anytime after six months following and prior to three
years following the Initial Date of Deposit the net asset value of the Trust
falls below $150,000,000 and if after three years following the Initial Date of
Deposit the net asset value of the Trust is less than $350,000,000, as such
dollar amount shall be adjusted for inflation in accordance with the National
Consumer Price Index for All Urban Consumers (the "CPI-U")* as published by the
United States Department
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* The CPI-U, as published by the United States Department of Labor, measures
the inflation rate of specified commodities deemed representative of the
purchases of all urban consumers.
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of Labor, such adjustment to take effect at the end of the fourth year
following the Initial Date of Deposit and at the end of each year thereafter
and to be made so as to reflect the percentage increase in consumer prices as
set forth in the CPI-U for the twelve month period ending in the month
preceding the month in which such adjustment is made. The Trustee shall also
have the right to terminate the Trust in the event that (a) the Sponsor resigns
or becomes incapable of discharging its duties and a successor is not
appointed; (b) the Depository is unable or unwilling to continue to perform its
functions as set forth under the Trust Agreement and a comparable replacement
is unavailable; (c) NSCC no longer provides clearance services with respect to
DIAMONDS, or if the Trustee is no longer a member of NSCC; (d) Dow Jones ceases
publishing the DJIA; or (e) the License Agreement (as hereinafter defined) is
terminated. The License Agreement currently is scheduled to terminate five
years from the commencement date of trading of DIAMONDS, subject to a five-year
renewal period following such date.
The Trust shall terminate if the Trustee resigns or becomes incapable of
discharging its duties and a successor is not appointed (see "Administration of
the Trust--Termination").
UNDERWRITING
(the "Distributor") acts as underwriter of DIAMONDS on an agency
basis. All orders to create DIAMONDS in Creation Unit size aggregations must be
placed with the Distributor, and it is the responsibility of the Distributor to
transmit such orders to the Trustee. The Distributor will furnish to those
placing such orders confirmation that the orders have been accepted, but the
Distributor shall reject any order which is not submitted in proper form. Upon
acceptance of an order to create DIAMONDS, the Distributor instructs the
Trustee to initiate the book-entry movement of the appropriate number of
DIAMONDS to the account of the entity placing the order. The Distributor is
also responsible for delivering a prospectus to those persons creating
DIAMONDS. The Distributor also maintains records of both the orders placed with
it for the creation of DIAMONDS and the confirmations of acceptance issued by
it. In addition, the Distributor maintains a record of the instructions given
to implement delivery of DIAMONDS in response to orders placed with it. The
Distributor may also provide certain other administrative services, such as
those related to state securities law compliance. The Distributor is a
corporation organized in under the laws of the State of and is
located at . The Distributor is a registered broker-dealer, a
member of the National Association of Securities Dealers, Inc. The Sponsor pays
the Distributor for its services a flat annual fee. The Sponsor will not seek
reimbursement for such payment from the Trust without obtaining prior exemptive
relief from the Commission.
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SPECIAL CONSIDERATIONS AND RISK FACTORS
GENERAL
Investment in the Trust should be made with an understanding that the value
of the Securities may fluctuate in accordance with changes in the financial
condition of the issuers of the Securities, the value of common stocks
generally and other factors. The identity of the Index Securities and the
Securities also changes from time to time (see "The Portfolio--Adjustments to
the Portfolio" and "The Portfolio--Selection and Acquisition of Securities").
There can be no assurance that the issuers of the Securities will pay
dividends on outstanding shares of common stock. Distributions on the
Securities will generally depend upon the declaration of dividends by the
issuers of the Securities; the declaration of such dividends generally depends
upon various factors, including the financial condition of the issuers and
general economic conditions. As discussed above, the Trust, unlike a managed
investment company, is not actively "managed" by traditional methods, and
therefore the adverse financial condition of an issuer will not result in the
elimination of its securities from the Securities held by the Trust unless the
Securities of such issuer are removed from the DJIA (see "The Portfolio--
Adjustments to the Portfolio").
An investment in the Trust should also be made with an understanding of the
risks inherent in an investment in equity securities, including the risk that
the financial condition of the issuers of the Securities may become impaired
or that the general condition of the stock market may deteriorate (either of
which may cause a decrease in the value of the Securities and thus in the
value of DIAMONDS). Common stocks are susceptible to general stock market
fluctuations and to volatile increases and decreases in value as market
confidence in and perceptions of their issuers change. These investor
perceptions are based on various and unpredictable factors including
expectations regarding government, economic, monetary and fiscal policies,
inflation and interest rates, economic expansion or contraction, and global or
regional political, economic and banking crises. As discussed above, the Trust
is not actively "managed" and therefore common stocks held by the Trust will
not be disposed of as a result of or in anticipation of normal fluctuations in
the market.
Holders of common stocks of any given issuer incur more risk than holders of
preferred stocks and debt obligations of such issuer because common
stockholders, as owners of such issuer, have generally inferior rights to
receive payments from such issuer in comparison with the rights of creditors
of, or holders of debt obligations or preferred stocks issued by, such issuer.
Further, unlike debt securities which typically have a stated principal amount
payable at maturity (whose value, however, will be subject to market
fluctuations prior thereto), or preferred stocks which typically have a
liquidation preference and which may have stated optional or mandatory
redemption provisions, common stocks have neither a fixed principal amount nor
a maturity. Common stock values are subject to market fluctuations as long as
the common stock remains outstanding. The value of the Securities thus may be
expected to fluctuate over the entire life of the Trust to values higher or
lower than those prevailing on the Initial Date of Deposit (see "Market
Risks").
Although currently all of the Securities are listed on a national securities
exchange, in the future the principal trading market for some Securities may
be in the over-the-counter market. The existence of a liquid trading market
for certain Securities may depend on whether dealers will make a market in
such Securities. There can be no assurance that a market will be made for any
of the Securities, that any market for the Securities will be maintained or
that any such market will be or remain liquid. The price at which the
Securities may be sold and the value of the Trust will be adversely affected
if trading markets for the Securities are limited or absent.
An investment in the Trust should also be made with an understanding that
the Trust will not be able to replicate exactly the performance of the DJIA
because the total return generated by the Securities will be reduced by
transaction costs incurred in adjusting the actual balance of the Portfolio
Securities and other Trust expenses, whereas such transaction costs and
expenses are not included in the calculation of the DJIA. It is also possible
that for a short period of time, the Trust may not fully replicate the
performance of the DJIA due to the temporary unavailability of certain Index
Securities in the secondary market or due to other extraordinary
circumstances. Such events are unlikely to continue for an extended period of
time, because the Trustee is required to correct
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such imbalances by means of adjusting the composition of Portfolio Securities
(see "The Portfolio--Adjustments to the Portfolio"). It is also possible that
the composition of the Trust may not exactly replicate the composition of the
DJIA if the Trust has to adjust its Portfolio holdings in order to continue to
qualify as a "regulated investment company" under the Code (See "Tax Status of
the Trust").
Neither the Depository nor Beneficial Owners of DIAMONDS are entitled either
to dispose of any of the Securities in the Trust, as such, or to vote the
Securities. As the beneficial owner of the Securities, the Trustee has the
right to vote all of the voting Securities (see "Administration of the Trust--
Voting").
Except as otherwise specifically noted, the time frames for delivery of
Securities, cash, or DIAMONDS in connection with creation and redemption
activity within the DIAMONDS Clearing Process as set forth herein are based on
NSCC's current "regular way" settlement period of three (3) days during which
NSCC is open for business (each such day an "NSCC Business Day"). NSCC may, in
the future, reduce such "regular way" settlement period, in which case it is
anticipated that there would be a corresponding reduction in settlement
periods applicable to DIAMONDS Unit creations and redemptions. Investors
should note that NSCC Business Days do not always coincide with the days
during which the Trustee is open for business.
NET ASSET VALUE AND MARKET PRICES
The Trust's assets consist primarily of the Securities. Therefore, the net
asset value of DIAMONDS in Creation Unit size aggregations and,
proportionately, the net asset value per DIAMONDS Unit, changes as
fluctuations occur in the market value of Securities. Investors should also be
aware that the aggregate public trading market price of 50,000 DIAMONDS may be
different from the net asset value of a Creation Unit aggregation of DIAMONDS
(i.e., 50,000 DIAMONDS may trade at a premium over or at a discount to the net
asset value of a Creation Unit) and similarly the public trading market price
per DIAMONDS Unit may be different from the net asset value of a Creation Unit
on a per DIAMONDS Unit basis (see "Special Considerations and Risk Factors--
Market Risks"). This price difference may be due, in large part, to the fact
that supply and demand forces at work in the secondary trading market for
DIAMONDS will be closely related to, but not identical to, the same forces
influencing the prices of the DJIA component stocks trading individually or in
the aggregate at any point in time. The expenses of the Trust are reflected in
the net asset value of DIAMONDS in Creation Unit size aggregations and the
expenses of the Trust are accrued daily (see "Expenses of the Trust").
TRADING CONSIDERATIONS
Prior to the date of this Prospectus, there has been no market for DIAMONDS
trading individually or in Creation Unit size aggregations and, consequently,
there can be no assurance that active trading markets will develop, nor is
there an accurate basis for predicting the price levels at which DIAMONDS may
trade.
The Sponsor does not maintain a secondary market in DIAMONDS. DIAMONDS have
been accepted for listing on the Exchange subject to official notice of
issuance. The market symbol for DIAMONDS will be DIA. Trading in DIAMONDS on
the Exchange may be halted due to market conditions or, in light of Exchange
rules and procedures, for reasons that, in the view of the Exchange, make
trading in DIAMONDS inadvisable. In addition, trading in DIAMONDS on the
Exchange is subject to trading halts caused by extraordinary market volatility
pursuant to Exchange "circuit breaker" rules that require trading in
securities on the Exchange to be halted for a specified time period based on a
specified market decline. There can be no assurance that the requirements of
the Exchange necessary to maintain the listing of DIAMONDS will continue to be
met or will remain unchanged. The Trust will be terminated in the event
DIAMONDS are delisted from the Exchange. (For a description of the conditions
to listing of DIAMONDS and the circumstances under which the Exchange would
consider the suspension of trading in or the delisting of DIAMONDS, see
"Exchange Listing.") Further, the Trust may be terminated, among other
reasons, in the event that the net asset value of the Trust falls below a
specified level (see "Administration of the Trust--Termination").
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MARKET RISKS
DIAMONDS are subject to the risks of an investment in a portfolio of large-
capitalization common stocks, including the risk that the general level of
stock prices may decline, thereby adversely affecting the value of such
investment. DIAMONDS are also subject to risks other than those associated
with an investment in such a portfolio of common stocks in that the selection
of the stocks included in the Trust's portfolio, the expenses associated with
the Trust or other factors distinguishing an ownership interest in a trust
from the direct ownership of a portfolio of securities may affect trading in
DIAMONDS as compared with trading in a portfolio of large-capitalization
common stocks. DIAMONDS are further subject to the risk that extraordinary
events may cause any of the parties providing services to the Trust, such as
the Trustee, the Sponsor, the Distributor, the Depository or NSCC, to be
closed or otherwise unable to perform such party's obligations as set forth
herein and in the agreements between and among such parties. According to the
terms of the Trust Agreement, if any of the above named entities fails or is
otherwise unable to perform adequately its duties, a successor entity may be
named or appointed to assume all duties and obligations of its predecessor.
If, however, no suitable successor is available or willing to undertake all
such duties and obligations, under the Trust Agreement the Trust will then be
terminated (see "Administration of the Trust--Termination").
The Trustee will ordinarily deliver a portfolio of Securities for each
Creation Unit size aggregation of DIAMONDS delivered for redemption, identical
in composition to the securities portion of a Portfolio Deposit as in effect
on the date a request for redemption is deemed received by the Trustee (see
"Redemption of DIAMONDS"). If a redemption is processed through the DIAMONDS
Clearing Process, to the extent that the Securities to be delivered on
settlement date are not delivered, they will be covered by NSCC's guarantee of
the completion of such delivery. Any Securities not received on settlement
date will be marked to the market until delivery is completed. The Trust, to
the extent it has not already done so, remains obligated to deliver such
Securities to NSCC, and the market risk of any increase in the value of such
Securities until delivery is made by the Trust to NSCC could adversely affect
the net asset value of the Trust. Investors should note that the Securities to
be delivered to a redeemer submitting a redemption request outside of the
DIAMONDS Clearing Process that are not delivered to such redeemer are not
covered by NSCC's guarantee of completion of such delivery.
Investors should also note that the size of the Trust in terms of total
assets held may change substantially over time and from time to time as
DIAMONDS in Creation Unit size aggregations are created and redeemed. Such
fluctuations in Trust size should not adversely impact the net asset value at
any time, because the amount of the Cash Component or the Cash Redemption
Payment upon creations or redemptions, respectively, of DIAMONDS in Creation
Unit size aggregations is determined each day to equate the value of the
Portfolio Deposit to the net asset value of the Trust, on a per Creation Unit
basis, at the close of business on the day such request is deemed received by
the Trustee (see "The Portfolio--Adjustments to the Portfolio Deposit").
Investors in the Trust should also be aware that there are tax consequences
associated with the ownership of DIAMONDS resulting from the distribution of
Trust dividends and sales of DIAMONDS as well as the sales of underlying
Securities held by the Trust in connection with redemptions or changes in the
DJIA under certain circumstances (see "Tax Status of the Trust--Tax
Consequences to Beneficial Owners").
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DIAMONDS TRUST, SERIES 1
REPORT OF INDEPENDENT ACCOUNTANTS
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DIAMONDS TRUST, SERIES 1
SCHEDULE OF INVESTMENTS
, 1998
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THE TRUST
The Trust is a unit investment trust created under the laws of the State of
New York pursuant to the Trust Agreement.* The Securities held by the Trust
consist of a portfolio of common stocks or, in the case of securities not yet
delivered in connection with purchases made by the Trust or Portfolio
Deposits, confirmations of contracts to purchase such securities
(collectively, the "Portfolio").
CREATION OF CREATION UNITS
On the Initial Date of Deposit, Portfolio Deposits will be deposited with
the Trustee through the clearing processes of NSCC, following placement with
the Distributor of orders to create DIAMONDS. The Distributor shall reject any
order that is not submitted in proper form. To permit the Trustee to insure
that the process of settlement is working satisfactorily, there shall be no
further Portfolio Deposits accepted by the Trustee for a period of three (3)
Business Days following the Initial Date of Deposit, and the Sponsor and the
Trustee shall jointly announce the day thereafter on which further Portfolio
Deposits will be accepted, and Exchange trading of DIAMONDS shall not commence
until such date. On or after such date, Portfolio Deposits may be deposited
with the Trustee through the clearing processes of NSCC, following placement
with the Distributor of orders to create DIAMONDS. The Distributor shall
reject any order that is not submitted in proper form. Investors may deposit
Portfolio Deposits through the DIAMONDS Clearing Process or directly with the
Trustee outside the DIAMONDS Clearing Process. The Transaction Fee will be
charged at the time of creation of a Creation Unit size aggregation of
DIAMONDS. An additional amount not to exceed three (3) times the Transaction
Fee applicable for a Creation Unit will be charged to a creator creating
outside the DIAMONDS Clearing Process (i.e. depositing Portfolio Deposits
directly with the Trustee through DTC,) in part due to the increased expense
associated with settlement outside the DIAMONDS Clearing Process. See
"Prospectus Summary--Transaction Fee" for a detailed description of the amount
of the Transaction Fee and the additional amounts and reductions, limitations
and waivers applicable thereto, if any. The shares of the common stock of the
Index Securities in a Portfolio Deposit on the day prior to the Initial Date
of Deposit had an aggregate market value of $ (see "Schedule of
Investments"). There will be a Cash Component included in the Portfolio
Deposit on the Initial Date of Deposit in order to make the value of each
DIAMONDS Unit equal to 1/100th of the value of the DJIA.
The Trustee, at the direction of the Sponsor in its sole discretion, from
time to time and for such periods as may be determined by the Sponsor in its
sole discretion, may increase** or reduce the amount and/or waive the
imposition altogether of the Transaction Fee (and/or the additional amounts
charged in connection with creations and/or redemptions outside the DIAMONDS
Clearing Process) for certain lot-size creations and/or redemptions of
DIAMONDS, whether applied solely to creations and/or redemptions of DIAMONDS
made through the DIAMONDS Clearing Process (see "Procedures for Creation of
Creation Units"), solely to creations and/or redemptions made outside the
DIAMONDS Clearing Process, or to both methods of creation and/or redemption.
The Sponsor also reserves the right, from time to time, to vary the lot-size
of the creations and/or redemptions of DIAMONDS subject to such an increase
and/or entitled to such a reduction or waiver of the Transaction Fee and the
additional amounts charged in connection with creations and/or redemptions
outside the DIAMONDS Clearing Process. The existence of such increase,
reduction or waiver of the Transaction Fee (as well as any additional amounts,
if applicable) and the lot-size of Creation Units affected shall be disclosed
in the current DIAMONDS Unit Prospectus (see "Prospectus Summary--Transaction
Fee"). As of the date hereof, the Sponsor does not contemplate the reduction,
variation by lot-size or waiver of Transaction Fees in connection with the
creation or redemption of DIAMONDS or of the additional amounts charged in
connection with the creation or redemption of DIAMONDS outside the DIAMONDS
Clearing Process beyond that which is discussed herein under the caption
"Prospectus Summary--Transaction Fee".
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* Reference is hereby made to said Trust Agreement, and any statements
contained herein are qualified in their entirety by the provisions of said
Trust Agreement.
** Such increase is subject to the 10 Basis Point Limit discussed above under
"Prospectus Summary--Transaction Fee".
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The DJIA is a price-weighted stock index; that is, the component stocks of
the DJIA are represented in exactly equal share amounts and therefore are
accorded relative importance in the DJIA based on their prices. See "The
Portfolio" and "The DJIA". The shares of common stock of the securities
portion of a Portfolio Deposit on any date of deposit will reflect the
composition of the component stocks of the DJIA on such day. The portfolio of
Index Securities that is the basis for a Portfolio Deposit varies as changes
are made in the composition of the Index Securities (see "The Portfolio--
Adjustments to the Portfolio Deposit"). The Trustee will make available to
NSCC* prior to the commencement of trading on each Business Day a list of the
names and required number of shares of each of the Index Securities in the
current Portfolio Deposit as well as the amount of the Dividend Equivalent
Payment for the previous Business Day. Under certain extraordinary
circumstances which may make it impossible for the Trustee to provide such
information to NSCC on a given Business Day, NSCC shall use the information
regarding the identity of the Index Securities of the Portfolio Deposit on the
previous Business Day. The identity of each of the Index Securities required
for a Portfolio Deposit, as in effect on the Initial Date of Deposit, is set
forth in the above Schedule of Investments. The Sponsor intends to make
available (a) on each Business Day, the Dividend Equivalent Payment effective
through and including the previous Business Day, per outstanding DIAMOND, and
(b) every 15 seconds throughout the day at the Exchange a number representing,
on a per DIAMONDS Unit basis, the sum of the Dividend Equivalent Payment
effective through and including the previous Business Day, plus the current
value of the securities portion of a Portfolio Deposit as in effect on such
day (which value will occasionally include a cash in lieu amount to compensate
for the omission of a particular Index Security from such Portfolio Deposit--
see "The Portfolio--Adjustments to the Portfolio Deposit"). Such information
is calculated based upon the best information available to the Sponsor and may
be calculated by other persons designated to do so by the Sponsor. The
inability of the Sponsor to provide such information will not in itself result
in a halt in the trading of DIAMONDS on the Exchange. Investors interested in
creating DIAMONDS or purchasing DIAMONDS in the secondary market should not
rely solely on such information in making investment decisions but should also
consider other market information and relevant economic and other factors
(including, without limitation, information regarding the DJIA, the Index
Securities and financial instruments based on the DJIA).
Upon receipt of a Portfolio Deposit or Deposits, following placement with
the Distributor of an order to create DIAMONDS, the Trustee will deliver
DIAMONDS in Creation Unit size aggregations to the Depository. In turn, the
DIAMONDS Unit position will be removed from the Trustee's account at the
Depository and will be allocated to the account of the DTC Participant acting
on behalf of the depositor creating Creation Unit(s) (see "The Trust--
Procedures for Creation of Creation Units" and "The Trust--Book-Entry-Only
System"). Each DIAMONDS Unit represents a fractional undivided interest in the
Trust in an amount equal to one (1) divided by the total number of DIAMONDS
outstanding. The Trustee may reject a request to create Creation Units made by
any depositor or group of depositors if such depositor(s), upon the acceptance
by the Trustee of such request and the issuance to such depositor(s) of
DIAMONDS, would own eighty percent (80%) or more of the outstanding DIAMONDS
(see "Tax Status of the Trust"). The Trustee also may reject any Portfolio
Deposit or any component thereof under certain other circumstances (see "The
Trust--Procedures for Creation of Creation Units").
Additional DIAMONDS in Creation Unit size aggregations will be created upon
receipt of the appropriate Portfolio Deposits from creators. As additional
DIAMONDS in Creation Unit size aggregations are created, the aggregate value
of the Portfolio will be increased and the fractional undivided interest in
the Trust represented by each DIAMONDS Unit will be decreased. As discussed
above, under certain circumstances (1) a portion of the securities portion of
a Portfolio Deposit may consist of contracts to purchase certain Index
Securities or (2) a portion of the Cash Component may consist of cash in an
amount to enable the Trustee to purchase such Index Securities. In the event
there is a failure to deliver the Index Securities which are the subject of
such contracts to purchase, the Trustee will be instructed pursuant to the
Agreement to acquire such Index Securities in an expeditious manner. To the
extent the price of any such Index Security increases or decreases between the
time of creation and the time any such Index Security is purchased and
delivered, DIAMONDS will represent fewer
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* As of December 31, 1996, the AMEX Clearing Corp., a wholly-owned subsidiary
of the American Stock Exchange, Inc., owned 33% of the issued and
outstanding shares of common stock of NSCC.
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or more shares of such Index Security and more or fewer of the other Index
Securities in the Trust. Hence, price fluctuations during the period from the
time the cash is received by the Trustee to the time the requisite Index
Securities are purchased and delivered will affect the value of all DIAMONDS.
The identity and appropriate number of shares of the Index Securities
required for a Portfolio Deposit are determined in the manner described
herein. Due to changes in the composition of the Index Securities, the
composition of the Securities and the prescribed Portfolio Deposit will also
change from time to time (see "The Portfolio--Adjustments to the Portfolio"
and "The Portfolio--Adjustments to the Portfolio Deposit"). The identity and
appropriate number of shares of the Index Securities to be delivered as part
of a Portfolio Deposit are determined daily and reflect the composition of the
DJIA and, together with the Cash Component, have a value equal to the net
asset value of the Trust on a per Creation Unit basis at the close of business
on the day of request for creation. The composition of the Portfolio is also
adjusted from time to time to conform to the changes to the DJIA as described
herein and as set forth in the Trust Agreement. As the appropriate number of
shares and identities of the Index Securities change, substantially identical
changes to the composition of the required Portfolio Deposit are made
contemporaneously. Corresponding adjustments to the composition of the
Portfolio, however, will be made as nearly contemporaneously as possible with
adjustments to the required Portfolio Deposit, but in all cases will be made
in accordance with the specifications set forth herein and in the Trust
Agreement (see "The Portfolio--Adjustments to the Portfolio"). Although the
composition of the securities portion of a Portfolio Deposit changes from time
to time, the interests of Beneficial Owners will not be adversely affected
because the composition of such securities and the aggregate value thereof,
together with the Cash Component, will be calculated based upon the
proportionate net asset value of the Trust (see "The Portfolio--Adjustments to
the Portfolio").
PROCEDURES FOR CREATION OF CREATION UNITS
To be eligible to place orders with the Distributor to create DIAMONDS in
Creation Unit size aggregations, an entity or person must be (1) a
Participating Party, with respect to creations through the DIAMONDS Clearing
Process or (2) a DTC Participant with respect to creations/redemptions outside
the DIAMONDS Clearing Process. All DIAMONDS, however created, will be entered
on the records of the Depository in the name of Cede & Co. for the account of
a DTC Participant (see "The Trust--Book Entry Only System").
All orders to create DIAMONDS must be placed in multiples of 50,000 DIAMONDS
(Creation Unit size). All orders to create DIAMONDS, whether through the
DIAMONDS Clearing Process or outside the DIAMONDS Clearing Process, must be
received by the Distributor by no later than the closing time of the regular
trading session on the New York Stock Exchange, Inc. ("Closing Time")
(ordinarily 4:00 p.m. New York time) in each case on the date such order is
placed in order for creation of DIAMONDS to be effected based on the net asset
value of the Trust as determined on such date. The date on which a creation
order (or order to redeem as discussed below) is placed is herein referred to
as the "Transmittal Date". Orders must be transmitted by telephone or other
transmission method acceptable to the Distributor and Trustee, pursuant to
procedures set forth in the Participant Agreement, as described below (see
"Placement of Creation Orders Using DIAMONDS Clearing Process" and "Placement
of Creation Orders Outside DIAMONDS Clearing Process").
Orders to create Creation Unit sized aggregations of DIAMONDS shall be
placed with a Participating Party or DTC Participant, as applicable, in the
form required by such Participating Party or DTC Participant. Investors should
be aware that their particular broker may not have executed a Participant
Agreement, and that, therefore, orders to create Creation Unit sized
aggregations of DIAMONDS may have to be placed by the investor's broker
through a Participating Party or a DTC Participant who has executed a
Participant Agreement. At any given time there may be only a limited number of
broker-dealers that have executed a Participant Agreement. Those placing
orders to create DIAMONDS through the DIAMONDS Clearing Process should afford
sufficient time to permit proper submission of the order to the Distributor
prior to the Closing Time on the Transmittal Date.
Orders for creation that are effected outside the DIAMONDS Clearing Process
are likely to require transmittal by the DTC Participant earlier on the
Transmittal Date than orders effected using the DIAMONDS
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Clearing Process. Those persons placing orders outside the DIAMONDS Clearing
Process should ascertain the deadlines applicable to DTC and the Federal
Reserve Bank wire system by contacting the operations department of the broker
or depository institution effectuating such transfer of securities and Cash
Component. The DTC Participant notified of an order to create DIAMONDS outside
the DIAMONDS Clearing Process shall be required to effect a transfer of (1)
the requisite Index Securities through DTC by 11:00 a.m. on the next Business
Day immediately following the Transmittal Date in such a way as to replicate
the Portfolio Deposit established on the Transmittal Date by the Trustee in
calculating the net asset value of the Trust and (2) the Cash Component
through the Federal Reserve Bank wire system so as to be received by the
Trustee by 2:00 p.m. on the next Business Day immediately following the
Transmittal Date. If the Trustee does not receive both the Index Securities by
11:00 a.m. and the Cash Component by 2:00 p.m. on the Business Day immediately
following the Transmittal Date, such order shall be canceled. Upon written
notice to the Distributor, such canceled order may be resubmitted the
following Business Day using a Portfolio Deposit as newly constituted to
reflect the current net asset value of the Trust.
All questions as to the number of shares of each of the Index Securities,
the amount of the Cash Component and the validity, form, eligibility
(including time of receipt) and acceptance for deposit of any Index Securities
to be delivered shall be determined by the Trustee, whose determination shall
be final and binding. The Trustee reserves the absolute right to reject a
creation order transmitted to it by the Distributor in respect of any
Portfolio Deposit or any component thereof if (a) the depositor or group of
depositors, upon obtaining the DIAMONDS ordered, would own 80% or more of the
current outstanding DIAMONDS (see "Tax Status of the Trust"), (b) the
Portfolio Deposit is not in proper form; (c) acceptance of the Portfolio
Deposit would have certain adverse tax consequences (see "Tax Status of the
Trust"); (d) the acceptance of the Portfolio Deposit would, in the opinion of
counsel, be unlawful; (e) the acceptance of the Portfolio Deposit would
otherwise, in the discretion of the Trustee, have an adverse effect on the
Trust or the rights of Beneficial Owners; or (f) in the event that
circumstances outside the control of the Trustee make it for all practical
purposes impossible to process creations of DIAMONDS. The Trustee and the
Sponsor are under no duty to give notification of any defects or
irregularities in the delivery of Portfolio Deposits or any component thereof
nor shall either of them incur any liability for the failure to give any such
notification.
A list of the Participating Parties or DTC Participants that have executed a
Participant Agreement (as hereinafter defined) is available at the office of
the Trustee at 1776 Heritage Drive, North Quincy, Massachusetts 02171 and the
office of the Distributor at during normal business hours.
PLACEMENT OF CREATION ORDERS USING DIAMONDS CLEARING PROCESS
Portfolio Deposits created through the DIAMONDS Clearing Process must be
delivered through a Participating Party (see "Prospectus Summary--Portfolio
Deposits") that has executed a Participant Agreement with the Distributor and
with the Trustee (as the same may be from time to time amended in accordance
with its terms, the "Participant Agreement"). The Participant Agreement
authorizes the Trustee to transmit to NSCC on behalf of the Participating
Party such trade instructions as are necessary to effect the Participating
Party's creation order. Pursuant to such trade instructions from the Trustee
to NSCC, the Participating Party agrees to transfer the requisite Index
Securities (or contracts to purchase such Index Securities that are expected
to be delivered in a "regular way" manner by the third (3rd) NSCC Business
Day) and the Cash Component to the Trustee, together with such additional
information as may be required by the Trustee. An order to create DIAMONDS
through the DIAMONDS Clearing Process is deemed received by the Distributor on
the Transmittal Date if (i) such order is received by the Distributor not
later than the Closing Time on such Transmittal Date and (ii) all other
procedures set forth in the Participant Agreement are properly followed.
PLACEMENT OF CREATION ORDERS OUTSIDE DIAMONDS CLEARING PROCESS
Portfolio Deposits created outside the DIAMONDS Clearing Process must be
delivered through a DTC Participant that has executed a Participant Agreement
with the Distributor and with the Trustee. A DTC Participant who wishes to
place an order creating DIAMONDS to be effected outside the DIAMONDS Clearing
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Process need not be a Participating Party, but such orders must state that the
DTC Participant is not using the DIAMONDS Clearing Process and that the
creation of DIAMONDS will instead be effected through a transfer of securities
and cash. The Portfolio Deposit transfer must be ordered by the DTC
Participant in a timely fashion so as to ensure the delivery of the requisite
number of Index Securities through DTC to the account of the Trustee by no
later than 11:00 a.m. of the next Business Day immediately following the
Transmittal Date. All questions as to the number of Index Securities to be
delivered, and the validity, form and eligibility (including time of receipt)
for the deposit of any tendered securities, will be determined by the Trustee,
whose determination shall be final and binding. The cash equal to the Cash
Component must be transferred directly to the Trustee through the Federal
Reserve wire system in a timely manner so as to be received by the Trustee no
later than 2:00 p.m. on the next Business Day immediately following the
Transmittal Date. An order to create DIAMONDS outside the DIAMONDS Clearing
Process is deemed received by the Distributor on the Transmittal Date if (i)
such order is received by the Distributor not later than the Closing Time on
such Transmittal Date and (ii) all other procedures set forth in the
Participant Agreement are properly followed. However, if the Trustee does not
receive both the requisite Index Securities and the Cash Component in a timely
fashion on the next Business Day immediately following the Transmittal Date,
such order will be canceled. Upon written notice to the Distributor, such
canceled order may be resubmitted the following Business Day using a Portfolio
Deposit as newly constituted to reflect the current net asset value of the
Trust. The delivery of DIAMONDS so created will occur no later than the third
(3rd) Business Day following the day on which the creation order is deemed
received by the Distributor. Under the current schedule, the total fee charged
in connection with the creation of one Creation Unit outside the DIAMONDS
Clearing Process would be $4,000 (see "Prospectus Summary--Transaction Fee").
BOOK-ENTRY-ONLY SYSTEM
The Depository acts as securities depository for DIAMONDS. DIAMONDS are
represented by a single global security (the "Global Security"), which is
registered in the name of Cede & Co., as nominee for the Depository and
deposited with, or on behalf of, the Depository. Certificates will not be
issued for DIAMONDS.
The Depository has advised the Sponsor and the Trustee as follows: The
Depository is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. The Depository was created to
hold securities of its participants (the "DTC Participants") and to facilitate
the clearance and settlement of securities transactions among the DTC
Participants in such securities through electronic book-entry changes in
accounts of the DTC Participants, thereby eliminating the need for physical
movement of securities certificates. DTC Participants include securities
brokers and dealers, banks, trust companies, clearing corporations, and
certain other organizations, some of whom (and/or their representatives) own
the Depository.* Access to the Depository system is also available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a DTC Participant, either directly or
indirectly (the "Indirect Participants"). The Depository agrees with and
represents to its participants that it will administer its book-entry system
in accordance with its rules and by-laws and requirements of law.
Upon the settlement date of any creation, transfer or redemption of
DIAMONDS, the Depository will credit or debit, on its book-entry registration
and transfer system, the number of DIAMONDS so created, transferred or
redeemed to the accounts of the appropriate DTC Participants. The accounts to
be credited and charged shall be designated by the Trustee to NSCC, in the
case of a creation or redemption through the DIAMONDS Clearing Process, or by
the Trustee and the DTC Participant, in the case of a creation or redemption
transacted outside of
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* As of December 31, 1996, the Exchange owns 4.61149% of the issued and
outstanding shares of common stock of the Depository and an affiliate of the
Exchange, AMEX Clearing Corp., owns 0.00185% of the issued and outstanding
shares of common stock of the Depository. Also as of such date, the Trustee
owns 4.35685% of the issued and outstanding shares of the common stock of
the Depository.
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the DIAMONDS Clearing Process (see "The Trust--Procedures for Creation of
Creation Units" and "Redemption of DIAMONDS"). Beneficial ownership of
DIAMONDS is limited to DTC Participants, Indirect Participants and persons
holding interests through DTC Participants and Indirect Participants.
Ownership of beneficial interests in DIAMONDS (owners of such beneficial
interests are referred to herein as "Beneficial Owners") will be shown on, and
the transfer of ownership will be effected only through, records maintained by
the Depository (with respect to DTC Participants) and on the records of DTC
Participants (with respect to Indirect Participants and Beneficial Owners that
are not DTC Participants). Beneficial Owners are expected to receive from or
through the DTC Participant a written confirmation relating to their purchase
of DIAMONDS. The laws of some jurisdictions may require that certain
purchasers of securities take physical delivery of such securities in
definitive form. Such laws may impair the ability of certain investors to
acquire beneficial interests in DIAMONDS.
So long as Cede & Co., as nominee of the Depository, is the registered owner
of DIAMONDS, references herein to the registered or record owners of DIAMONDS
shall mean Cede & Co. and shall not mean the Beneficial Owners of DIAMONDS.
Beneficial Owners of DIAMONDS will not be entitled to have DIAMONDS registered
in their names, will not receive or be entitled to receive physical delivery
of certificates in definitive form and will not be considered the record or
registered holder thereof under the Trust Agreement. Accordingly, each
Beneficial Owner must rely on the procedures of the Depository, the DTC
Participant and any indirect Participant through which such Beneficial Owner
holds its interests, to exercise any rights of a holder of DIAMONDS under the
Trust Agreement. The Trustee and the Sponsor understand that under existing
industry practice, in the event the Trustee requests any action of DIAMONDS
Unit holders, or a Beneficial Owner desires to take any action that the
Depository, as the record owner of all outstanding DIAMONDS, is entitled to
take, the Depository would authorize the DTC Participants to take such action
and that the DTC Participants would authorize the indirect Participants and
Beneficial Owners acting through such DTC Participants to take such action or
would otherwise act upon the instructions of Beneficial Owners owning through
them.
As described above, the Trustee recognizes the Depository or its nominee as
the owner of all DIAMONDS for all purposes except as expressly set forth in
the Trust Agreement. Conveyance of all notices, statements and other
communications to Beneficial Owners is effected as follows. Pursuant to the
agreement between the Trustee and the Depository (as the same may be from time
to time amended in accordance with its terms, the "Depository Agreement"), the
Depository is required to make available to the Trustee upon request and for a
fee to be charged to the Trust a listing of the DIAMONDS Unit holdings of each
DTC Participant. The Trustee shall inquire of each such DTC Participant as to
the number of Beneficial Owners holding DIAMONDS, directly or indirectly,
through such DTC Participant. The Trustee shall provide each such DTC
Participant with copies of such notice, statement or other communication, in
such form, number and at such place as such DTC Participant may reasonably
request, in order that such notice, statement or communication may be
transmitted by such DTC Participant, directly or indirectly, to such
Beneficial Owners. In addition, the Trust shall pay to each such DTC
Participant a fair and reasonable amount as reimbursement for the expenses
attendant to such transmittal, all subject to applicable statutory and
regulatory requirements.
DIAMONDS Unit distributions shall be made to the Depository or its nominee,
Cede & Co., as the registered owner of all DIAMONDS. The Trustee and the
Sponsor expect that the Depository or its nominee, upon receipt of any payment
of distributions in respect of DIAMONDS, shall credit immediately DTC
Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in DIAMONDS as shown on the records of the
Depository or its nominee. The Trustee and the Sponsor also expect that
payments by DTC Participants to indirect Participants and Beneficial Owners of
DIAMONDS held through such DTC Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in a "street name,"
and will be the responsibility of such DTC Participants. Neither the Trustee
nor the Sponsor has or will have any responsibility or liability for any
aspects of the records relating to or notices to Beneficial Owners, or
payments made on account of beneficial ownership interests in DIAMONDS, or for
maintaining, supervising or reviewing
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any records relating to such beneficial ownership interests or for any other
aspect of the relationship between the Depository and the DTC Participants or
the relationship between such DTC Participants and the indirect Participants
and Beneficial Owners owning through such DTC Participants.
Beneficial Owners may elect to have their distributions reinvested in
additional DIAMONDS (see "Dividend Reinvestment Service").
The Depository may determine to discontinue providing its service with
respect to DIAMONDS at any time by giving notice to the Trustee and the
Sponsor and discharging its responsibilities with respect thereto under
applicable law. Under such circumstances, the Trustee and the Sponsor shall
take action either to find a replacement for the Depository to perform its
functions at a comparable cost or, if such a replacement is unavailable, to
terminate the Trust (see "Termination of the Trust").
THE PORTFOLIO
Because the objective of the Trust is to provide investment results that
correspond substantially to the price and yield performance of the DJIA, the
Portfolio will at any time consist of as many of the Index Securities as is
practicable and under most circumstances, all of the Index Securities. It is
anticipated that cash or cash items (other than dividends held for
distribution) normally would not be a substantial part of the Trust's net
assets. Although the Trust may at any time fail to own certain of the Index
Securities, the Trust will be substantially invested in Index Securities and
the Sponsor believes that such investment should result in a close correlation
between the investment performance of the DJIA and that derived from ownership
of DIAMONDS.
ADJUSTMENTS TO THE PORTFOLIO
The DJIA is a price-weighted index of 30 component common stocks, the
components of which are determined by the editors of The Wall Street Journal,
without any consultation with the companies, the respective stock exchange or
any official agency.
Because the investment objective of the Trust is to provide investment
results that generally correspond to the price and yield performance of the
DJIA, capital changes such as stock splits and composition changes to the DJIA
create the need for the Trust to make corresponding Portfolio adjustments as
described below.
The Trustee will adjust the composition of the Portfolio from time to time
to conform to changes in the composition of the Index Securities. Pursuant to
the provisions of the Agreement, the Trustee will make conforming changes to
the Trust's portfolio in order to correlate the Securities with the Index
Securities comprising the DJIA. While other DJIA changes may lead to
adjustments in the Trust's portfolio, the most common changes are likely to
occur as a result of changes in the Index Securities included in the DJIA and
as a result of stock splits. The Agreement sets forth the method of
adjustments which may occur thereunder as a result of corporate actions to the
DJIA, such as stock splits or changes in the identity of the component stocks.
For example, in the event of an Index Security change (in which the common
stock of one issuer held in the DJIA is replaced by the common stock of
another), the Trustee may sell all shares of such Security being removed from
the DJIA. If the share price of the removed Index Security was higher than the
price of its replacement Index Security, the Trustee will calculate how to
allocate the proceeds of the sale of the removed Index Security between
purchase of the replacement Index Security and purchases of additional shares
of other Securities currently held in the Portfolio so that the number of
shares of each Security in the Portfolio after the transactions would be as
nearly equal as practicable. If the share price of the removed Index Security
was lower than the price of the replacement Index Security, the Trustee will
calculate the number of shares of each of the other Securities currently held
in the Portfolio that must be sold in order to purchase enough shares of the
replacement Index Security so that the number of shares of each Security in
the Portfolio after the transactions would be as nearly equal as practicable.
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In the event of a stock split, the price weighting of the stock which is
split will drop. The Trustee can make the corresponding Portfolio Adjustment
by selling the additional shares of the Security received from the stock
split. The Trustee would use the proceeds to buy an equal number of shares of
each Security held in the Portfolio--including the Security which had just
experienced a stock split. In practice, of course, not all the shares received
in the split would be sold: enough of those shares would be retained to make
an increase in the number of split shares equal to the increase in the number
of shares in each of the other Securities held in the Portfolio purchased with
the proceeds of the sale of the remaining shares resulting from such split.
As a result of the purchase and sale of Securities in accordance with these
requirements, or the creation of Creation Units, the Trust may hold some
amount of residual cash (other than cash held temporarily due to timing
differences between the sale and purchase of Securities or cash delivered in
lieu of Index Securities or undistributed income or undistributed capital
gains), which amount shall not exceed for more than two (2) consecutive
Business Days 5/10th of 1 percent of the aggregate value of the Securities.
All adjustments to the Portfolio held by the Trustee shall be made by the
Trustee pursuant to the foregoing specifications and as set forth in the Trust
Agreement and shall be non-discretionary. All portfolio adjustments will be
made as described herein unless such adjustments would cause the Trust to lose
its status as a "regulated investment company" under Subchapter M of the
Internal Revenue Code. Additionally, the Trustee is required to adjust the
composition of the Portfolio at any time if it is necessary to insure the
continued qualification of the Trust as a regulated investment company (see
"Tax Status of the Trust"). The adjustments provided herein are intended to
conform the composition of the Portfolio, to the extent practicable, to the
composition of the Index Securities. Such adjustments are based upon the DJIA
as it is currently determined by Dow Jones. To the extent that the method of
determining the DJIA is changed by Dow Jones in a manner that would affect the
adjustments provided for herein, the Trustee and the Sponsor shall have the
right to amend the Trust Agreement, without the consent of the Depository or
Beneficial Owners, to conform the adjustments provided herein and in the Trust
Agreement to such changes so that the objective of tracking the DJIA is
maintained.
In making the adjustments described herein, the Trustee shall rely on Dow
Jones for information as to the composition of the Index Securities. If the
Trustee becomes incapable of obtaining or processing such information or NSCC
is unable to receive such information from the Trustee on any Business Day,
then the Trustee shall use the composition and weightings of the Index
Securities for the most recently effective Portfolio Deposit for the purposes
of all adjustments and determinations described herein (including, without
limitation, determination of the securities portion of the Portfolio Deposit)
until the earlier of (a) such time as current information with respect to the
Index Securities is available or (b) three (3) consecutive Business Days have
elapsed. If such current information is not available and three (3)
consecutive Business Days have elapsed, the composition and weightings of the
Securities (as opposed to the Index Securities) shall be used for the purposes
of all adjustments and determinations herein (including, without limitation,
determination of the securities portion of the Portfolio Deposit) until
current information with respect to the Index Securities is available.
At such time as the Trustee gives written notice of the termination of the
Trust (see "Administration of the Trust--Termination"), from and after the
date of such notice the Trustee shall use the composition and weightings of
the Securities as of such notice date for the purpose and determination of all
redemptions or other required uses of the basket.
From time to time Dow Jones may make adjustments to the composition of the
DJIA as a result of a merger or acquisition involving one or more of the Index
Securities. In such cases, the Trust, as shareholder of securities of an
issuer that is the object of such merger or acquisition activity, may receive
various offers from would-be acquirors of the issuer. The Trustee is not
permitted to accept any such offers until such time as it has been determined
that the securities of the issuer will be removed from the DJIA. Since
securities of an issuer may be removed from the DJIA only after the
consummation of a merger or acquisition of such issuer, in selling the
securities of such issuer the Trust may receive, to the extent that market
prices do not provide a more attractive alternative, whatever consideration is
being offered to the shareholders of such issuer that have not tendered their
shares prior to such time. Any cash received in such transactions will be
reinvested in Index Securities in
22
<PAGE>
proportion to the new composition of the Index Securities in the DJIA. Any
securities received as a part of the consideration that are not Index
Securities will be sold as soon as practicable and the cash proceeds of such
sale will be reinvested in proportion to the new composition of the Index
Securities in the DJIA.
Purchases and sales of Securities resulting from the adjustments described
above will be made in the share amounts dictated by the foregoing
specifications, whether round lot or odd lot. Certain Index Securities,
however, may at times not be available in the quantities that the foregoing
calculations require. For this and other reasons, precise duplication of the
proportionate relationship between the Portfolio and the Index Securities may
sometimes not be possible but nevertheless will continue to be the objective
in connection with all acquisitions and dispositions of Securities.
The Trust is a unit investment trust registered under the 1940 Act, and is
not a managed fund. Traditional methods of investment management for a managed
fund typically involve frequent changes to a portfolio of securities on the
basis of economic, financial and market analyses. The Portfolio held by the
Trust, however, is not managed. Instead, the only purchases and sales that are
made with respect to the Portfolio will be those necessary to create, to the
extent feasible, a portfolio that is designed to replicate the DJIA to the
extent practicable, taking into consideration the adjustments referred to
above. Since no attempt is made to "manage" the Trust in the traditional
sense, the adverse financial condition of an issuer will not be the basis for
the sale of its securities from the Portfolio unless the issuer is removed
from the DJIA.
The Trust will be liquidated on the fixed Mandatory Termination Date unless
terminated earlier under certain circumstances (see "Administration of the
Trust--Termination"). In addition, Beneficial Owners of DIAMONDS in Creation
Unit size aggregations have the right to redeem in kind (see "Redemption of
DIAMONDS").
ADJUSTMENTS TO THE PORTFOLIO DEPOSIT
On each Business Day following the Initial Date of Deposit (each such day an
"Adjustment Day"), the number of shares and/or identity of each of the Index
Securities in a Portfolio Deposit is adjusted in accordance with the following
procedure. At the close of the market on each Adjustment Day, the Trustee
calculates the net asset value of the Trust (see "Valuation"). The net asset
value is divided by the number of outstanding DIAMONDS in Creation Unit size
aggregations, resulting in a net asset value per Creation Unit (the "NAV
Amount"). The Trustee then calculates the number of shares of each of the
component stocks of the DJIA in a Portfolio Deposit for the following Business
Day ("Request Day"), such that (1) the market value at the close of the market
on Adjustment Day of the securities to be included in the Portfolio Deposit on
Request Day, together with the Cash Component or Cash Redemption Payment
(defined below), as the case may be, effective for requests to create or
redeem on Adjustment Day, equals the NAV Amount and (2) the securities in a
Portfolio Deposit correspond to the securities in the DJIA after the close of
trading on Request Day. For each security, the number resulting from such
calculation is rounded down to the nearest whole share. The securities so
calculated constitute the securities portion of the Portfolio Deposit
effective on Request Day and thereafter until the next subsequent Adjustment
Day, as well as the Securities to be delivered by the Trustee in the event of
request for redemption of DIAMONDS in Creation Unit size aggregations on
Request Day and thereafter until the following Adjustment Day (see "Redemption
of DIAMONDS"). In addition to the foregoing adjustments, in the event that
there shall occur a stock split, stock dividend or reverse split with respect
to any Index Security that results in an adjustment to the DJIA divisor, the
Portfolio Deposit shall be adjusted to take account of such stock split, stock
dividend or reverse split.
On Request Day and on each day that a request for the creation or redemption
of DIAMONDS in Creation Unit size aggregations is deemed received, the Trustee
calculates the market value of the securities portion of the Portfolio Deposit
as in effect on Request Day as of the close of the market and adds to that
amount the Dividend Equivalent Payment effective for requests to create or
redeem on Request Day (such market value and Dividend Equivalent Payment are
collectively referred to herein as the "Portfolio Deposit Amount"). The
Trustee then calculates the NAV Amount, based on the close of the market on
Request Day. The difference between the NAV Amount so calculated and the
Portfolio Deposit Amount is the "Balancing Amount". The
23
<PAGE>
Balancing Amount serves the function of compensating for any differences
between the value of the Portfolio Deposit Amount and the NAV Amount at the
close of trading on Request Day due to, for example, a difference in the
percentage of the Creation Unit and the percentage of the Trust's assets held
in cash or a change in the composition of the Index.
As previously discussed, the Dividend Equivalent Payment and the Balancing
Amount in effect at the close of business on Request Date are collectively
referred to as the Cash Component or the Cash Redemption Payment (see
"Prospectus Summary--Portfolio Deposits" and "Prospectus Summary--
Redemption"). If the Balancing Amount is a positive number (i.e., if the NAV
Amount exceeds the Portfolio Deposit Amount) then, with respect to the
creation of DIAMONDS, the Balancing Amount shall increase the Cash Component
of the then effective Portfolio Deposit transferred to the Trustee by a
creator, and with respect to redemptions of DIAMONDS in Creation Unit size
aggregations, the Balancing Amount shall be added to the cash transferred to a
redeemer by the Trustee. If the Balancing Amount is a negative number (i.e.,
if the NAV Amount is less than the Portfolio Deposit Amount) then, with
respect to the creation of DIAMONDS such amount shall decrease the Cash
Component of the then effective Portfolio Deposit to be transferred to the
Trustee by the creator or, if such cash portion is less than the Balancing
Amount, the difference shall be paid by the Trustee to the creator, and with
respect to redemptions of DIAMONDS in Creation Unit size aggregations, the
Balancing Amount shall be deducted from the cash transferred to the redeemer
or, if such cash is less than the Balancing Amount, the difference shall be
paid by the redeemer to the Trustee.
In the event that the Trustee has included the cash equivalent value of one
or more Index Securities in the Portfolio Deposit because the Trustee has
determined that such Index Securities are likely to be unavailable or
available in insufficient quantity for delivery, the Portfolio Deposit so
constituted shall dictate the Index Securities to be delivered in connection
with the creation of DIAMONDS in Creation Unit size aggregations and upon the
redemption of DIAMONDS in Creation Unit size aggregations for all purposes
hereunder until such time as the securities portion of the Portfolio Deposit
is subsequently adjusted.
In connection with the creation or redemption of DIAMONDS, if an investor is
restricted by regulation or otherwise from investing or engaging in a
transaction in one or more Index Securities, the Trustee, in its discretion,
shall have the right to include the cash equivalent value of such Index
Securities in the Portfolio Deposit as part of the Cash Component (or the Cash
Redemption Payment, as the case may be) in lieu of the inclusion of such Index
Securities in the securities portion of the Portfolio Deposit for the
particular affected investor. The amount of such cash equivalent payment may
require the Trustee to purchase the appropriate number of shares of the Index
Security that such investor was unable to purchase. In any such case such
investor shall pay the Trustee the standard Transaction Fee, plus an
additional amount not to exceed three (3) times the Transaction Fee applicable
for a Creation Unit.
The Trustee, in its discretion, upon the request of the redeeming investor,
may redeem Creation Units in whole or in part by providing such redeemer with
a portfolio of Securities differing in exact composition from the Index
Securities but not differing in net asset value from the then-current
Portfolio Deposit. Such a redemption might be made, for example, if it were to
be determined that this composition would be appropriate in order to maintain
the Trust Portfolio correlation to the price-weighted composition of the DJIA
(i.e. an equal number of shares of each component stock), for instance when a
stock split in one of the DJIA Index Securities occurs.
SELECTION AND ACQUISITION OF SECURITIES
In prescribing the method described above for selecting the Index Securities
that constitute the prescribed Portfolio Deposit from time to time, the
Sponsor intends to duplicate, to the extent practicable, the component
securities of the DJIA as of the relevant date.
Because certain of the Securities from time to time may be sold or may
otherwise be changed under certain circumstances as described herein, no
assurance can be given that the Trust will retain for any length of time its
24
<PAGE>
size and composition (see "The Portfolio--Adjustments to the Portfolio").
Also, the deposit of additional Portfolio Deposits and the redemption of
DIAMONDS in Creation Unit size aggregations will affect the size and
composition of the Trust.
Neither the Sponsor nor the Trustee shall be liable in any way for any
default, failure or defect in any of the Securities.
THE DJIA
The Sponsor selected the DJIA as the basis for the selection of the
securities held by the Trust because it is well known to investors and
contains some of the most well known, liquid and highly capitalized companies
in the U.S. Many of the stocks in the DJIA are household names.
The DJIA was first published in 1896. Initially comprised of 12 companies,
the DJIA has evolved into the most recognizable stock indicator in the world,
and the only index composed of companies that have sustained earnings
performance over a significant period of time. In its second century, the DJIA
is the oldest continuous barometer of the U.S. stock market, and the most
widely quoted indicator of U.S. stock market activity.
The 30 stocks now comprising the DJIA are all leaders in their respective
industries, and their stocks are widely held by individuals and institutional
investors. These stocks represent approximately one-fifth of the $1 trillion-
plus market value of all US stocks and approximately one-fourth of the value
of stocks listed on the New York Stock Exchange.
The Sponsor has been granted a license to use the DJIA as a basis for
determining the composition of the Trust and to use certain trademarks of Dow
Jones in connection with the Trust (see "License Agreement"). Dow Jones is not
responsible for and shall not participate in the creation or sale of DIAMONDS
or in the determination of the timing of, prices at, or quantities and
proportions in which purchases or sales of Index Securities or Securities
shall be made. The information in this Prospectus concerning Dow Jones and the
DJIA has been obtained from sources that the Sponsor believes to be reliable,
but the Sponsor takes no responsibility for the accuracy of such information.
The following table shows the actual performance of the DJIA for the years
1896 through 1996. Stock prices fluctuated widely during this period and were
higher at the end than at the beginning. The results shown should not be
considered as a representation of the income yield or capital gain or loss
that may be generated by the DJIA in the future, nor should the results be
considered as a representation of the performance of the Trust.
<TABLE>
<CAPTION>
YEAR DJIA POINT YEAR % %
ENDED CLOSE CHANGE CHANGE DIVS YIELD
- ----- -------- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
1997....................................
1996.................................... 6,448.27 1,331.20 26.00% 131.14 2.03%
1995.................................... 5,117.12 1,282.70 33.50 116.56 2.28
1994.................................... 3,834.44 80.3 2.10 105.66 2.76
1993.................................... 3,754.09 453 13.70 99.66 2.65
1992.................................... 3,301.11 132.3 4.20 100.72 3.05
1991.................................... 3,168.83 535.2 20.30 95.18 3.00
1990.................................... 2,633.66 - 119.5 - 4.30 103.7 3.94
1989.................................... 2,753.20 584.6 27.00 103 3.74
1988.................................... 2,168.57 229.7 11.80 79.53 3.67
1987.................................... 1,938.83 42.9 2.30 71.2 3.67
1986.................................... 1,895.95 349.3 22.60 67.04 3.54
1985.................................... 1,546.67 335.1 27.70 62.03 4.01
1984.................................... 1,211.57 - 47.1 - 3.70 60.63 5.00
1983.................................... 1,258.64 212.1 20.30 56.33 4.48
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
YEAR DJIA POINT YEAR % %
ENDED CLOSE CHANGE CHANGE DIVS YIELD
- ----- -------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
1982..................................... 1,046.54 171.5 19.60% 54.14 5.17%
1981..................................... 875 - 89 - 9.20 56.22 6.43
1980..................................... 963.99 125.3 14.90 54.36 5.64
1979..................................... 838.74 33.7 4.20 50.98 6.08
1978..................................... 805.01 - 26.2 - 3.10 48.52 6.03
1977..................................... 831.17 - 173.5 - 17.30 45.84 5.52
1976..................................... 1,004.65 152.2 17.90 41.4 4.12
1975..................................... 852.41 236.2 38.30 37.46 4.39
1974..................................... 616.24 - 234.6 - 27.60 37.72 6.12
1973..................................... 850.86 - 169.2 - 16.60 35.33 4.15
1972..................................... 1,020.02 129.8 14.60 32.27 3.16
1971..................................... 890.2 51.3 6.10 30.86 3.47
1970..................................... 838.92 38.6 4.80 31.53 3.76
1969..................................... 800.36 - 143.4 - 15.20 33.9 4.24
1968..................................... 943.75 38.6 4.30 31.34 3.32
1967..................................... 905.11 119.4 15.20 30.19 3.34
1966..................................... 785.69 - 183.6 - 18.90 31.89 4.06
1965..................................... 969.26 95.1 10.90 28.61 2.95
1964..................................... 874.13 111.2 14.60 31.24 3.57
1963..................................... 762.95 110.9 17.00 23.41 3.07
1962..................................... 652.1 - 79 - 10.80 23.3 3.57
1961..................................... 731.14 115.3 18.70 22.71 3.11
1960..................................... 615.89 - 63.5 - 9.30 21.36 3.47
1959..................................... 679.36 95.7 16.40 20.74 3.05
1958..................................... 583.65 148 34.00 20 3.43
1957..................................... 435.69 - 63.8 - 12.80 21.61 4.96
1956..................................... 499.47 11.1 2.30 22.99 4.60
1955..................................... 488.4 84 20.80 21.58 4.42
1954..................................... 404.39 123.5 44.00 17.47 4.32
1953..................................... 280.9 - 11 - 3.80 16.11 5.74
1952..................................... 291.9 22.7 8.40 15.43 5.29
1951..................................... 269.23 33.8 14.40 16.34 6.07
1950..................................... 235.41 35.3 17.60 16.13 6.85
1949..................................... 200.13 22.8 12.90 12.79 6.39
1948..................................... 177.3 - 3.9 - 2.10 11.5 6.49
1947..................................... 181.16 4 2.20 9.21 5.08
1946..................................... 177.2 - 15.7 - 8.10 7.5 4.23
1945..................................... 192.91 40.6 26.60 6.69 3.47
1944..................................... 152.32 16.4 12.10 6.57 4.31
1943..................................... 135.89 16.5 13.80 6.3 4.64
1942..................................... 119.4 8.4 7.60 6.4 5.36
1941..................................... 110.96 - 20.2 - 15.40 7.59 6.84
1940..................................... 131.13 - 19.1 - 12.70 7.06 5.38
1939..................................... 150.24 - 4.5 - 2.90 6.11 4.07
1938..................................... 154.76 33.9 28.10 4.98 3.22
1937..................................... 120.85 - 59.1 - 32.80 8.78 7.27
1936..................................... 179.9 35.8 24.80 7.05 3.92
1935..................................... 144.13 40.1 38.50 4.55 3.16
1934..................................... 104.04 4.1 4.10 3.66 3.52
1933..................................... 99.9 40 66.70 3.4 3.40
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
YEAR DJIA POINT YEAR % %
ENDED CLOSE CHANGE CHANGE DIVS YIELD
- ----- ------ ------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
1932........................................ 59.93 - 18 - 23.10% 4.62 7.71%
1931........................................ 77.9 - 86.7 - 52.70 8.4 10.78
1930........................................ 164.58 - 83.9 - 33.80 11.13 6.76
1929........................................ 248.48 - 51.5 - 17.20 12.75 5.13
1928........................................ 300 97.6 48.20 NA NA
1927........................................ 202.4 45.2 28.80 NA NA
1926........................................ 157.2 0.5 0.30 NA NA
1925........................................ 156.66 36.2 30.00 NA NA
1924........................................ 120.51 25 26.20 NA NA
1923........................................ 95.52 - 3.2 - 3.30 NA NA
1922........................................ 98.73 17.6 21.70 NA NA
1921........................................ 81.1 9.1 12.70 NA NA
1920........................................ 71.95 - 35.3 - 32.90 NA NA
1919........................................ 107.23 25 30.50 NA NA
1918........................................ 82.2 7.8 10.50 NA NA
1917........................................ 74.38 - 20.6 - 21.70 NA NA
1916........................................ 95 - 4.2 - 4.20 NA NA
1915........................................ 99.15 44.6 81.70 NA NA
1914........................................ 54.58 - 24.2 - 30.70 NA NA
1913........................................ 78.78 - 9.1 - 10.30 NA NA
1912........................................ 87.87 6.2 7.60 NA NA
1911........................................ 81.68 0.3 0.40 NA NA
1910........................................ 81.36 - 17.7 - 17.90 NA NA
1909........................................ 99.05 12.9 15.00 NA NA
1908........................................ 86.15 27.4 46.60 NA NA
1907........................................ 58.75 - 35.6 - 37.70 NA NA
1906........................................ 94.35 - 1.9 - 1.90 NA NA
1905........................................ 96.2 26.6 38.20 NA NA
1904........................................ 69.61 20.5 41.70 NA NA
1903........................................ 49.11 - 15.2 - 23.60 NA NA
1902........................................ 64.29 - 0.3 - 0.40 NA NA
1901........................................ 64.56 - 6.1 - 8.70 NA NA
1900........................................ 70.71 4.6 7.00 NA NA
1899........................................ 66.08 5.6 9.20 NA NA
1898........................................ 60.52 11.1 22.50 NA NA
1897........................................ 49.41 9 22.20 NA NA
1896........................................ 40.45 NA NA NA NA
</TABLE>
- --------
* Source: Dow Jones. Year-end index values shown do not reflect reinvestment
of dividends nor costs, such as brokerage charges and transaction costs.
** Source: Dow Jones. Yields are obtained by dividing the sum of the then most
recent four quarters' cash dividends per share of each of the component
stocks in the DJIA by the sum of the prices at year end of the component
stocks in the DJIA.
The DJIA is a price-weighted stock index, meaning that the component stocks
of the DJIA are accorded relative importance based on their prices. The DJIA
is called an "average" because originally it was calculated by adding up the
component stock prices and then dividing by the number of stocks. The method
remains the same today, but the divisor (the number that is divided into the
total of the stock prices) has been increased to eight significant digits to
minimize distortions due to rounding and has been adjusted over time to insure
continuity of the DJIA after component stock changes and corporate actions, as
discussed below.
27
<PAGE>
The DJIA divisor is adjusted due to corporate actions that change the price
of any of its component shares. The most frequent reason for such an
adjustment is a stock split. For example, suppose a company in the DJIA issues
one new share for each share outstanding. After this two-for-one "split," each
share of stock is worth half what it was immediately before, other things
being equal. But without an adjustment in the divisor, this split would
produce a distortion in the DJIA. An adjustment must be made to compensate so
that the "average" will remain unchanged. At Dow Jones, this adjustment is
handled by changing the divisor.* The formula used to calculate divisor
adjustments is:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Adjusted Sum Unadjusted Sum
New Divisor = Current Divisor x of Prices / of Prices
</TABLE>
Changes in the composition of the DJIA are made entirely by the editors of
The Wall Street Journal without consultation with the companies, the
respective stock exchange, or any official agency. Additions or deletions of
components may be made to achieve better representation of the broad market
and of American industry.
In selecting components for the DJIA, the following criteria are used: 1)
the company is not a utility or in the transportation business; 2) the company
has a premier reputation in its field; 3) the company has a history of
successful growth; and 4) there is wide interest among individual and
institutional investors. Whenever one component is changed, the others are
reviewed. For the sake of historical continuity, composition changes are made
rarely.
Although all 30 components are currently listed on the New York Stock
Exchange, listing on the New York Stock Exchange is not a criterion for
selection. Dow Jones & Co. announced the following changes in the components
of the DJIA, effective with trading Monday, March 17, 1997.
Companies removed were:
.Woolworth Corp., which had been in the DJIA since 1924.
.Westinghouse Electric, which had been in the DJIA since 1928.
.Texaco Inc., which had been in the DJIA since 1925.
.Bethlehem Steel, which had been in the DJIA since 1928.
Companies added were:
.Hewlett-Packard
.Johnson & Johnson
.Traveler's Group Inc.
.Wal-Mart Stores Inc.
LICENSE AGREEMENT
Under the terms of a license agreement with Dow Jones (the "License
Agreement"), the Sponsor and the Exchange have been granted a license to use
the DJIA as a basis for determining the composition of the Trust and to use
certain trade names, trademarks and service marks of Dow Jones in connection
with the Trust. The License Agreement may be amended by the parties thereto
without the consent of any of the Beneficial Owners of DIAMONDS. Currently,
the License Agreement is scheduled to expire five years from the commencement
date of trading of DIAMONDS, in accordance with its terms and is subject to a
five year renewal period following such date. The parties thereto may extend
the term of the License Agreement beyond such date without the consent of any
of the Beneficial Owners of DIAMONDS.
- --------
* Currently, the divisor is recalculated after the close of business on the
day prior to the occurrence of the split.
28
<PAGE>
None of the Trust, the Trustee, the Distributor, the Depository or any
Beneficial Owner of DIAMONDS is entitled to any rights whatsoever under the
foregoing licensing arrangements or to use the trademarks and service marks
"Dow Jones", "DIAMONDS", "DJIA" or to use the DJIA except as specifically
described herein or as may be specified in the Trust Agreement.
The Trust is not sponsored, endorsed, sold or promoted by Dow Jones. Dow
Jones makes no representation or warranty, express or implied, to the
Beneficial Owners of DIAMONDS or any member of the public regarding the
advisability of investing in securities generally or in the Trust
particularly. Dow Jones' only relationship to the Sponsor, the Exchange and
the Trust is the licensing of certain trademarks, trade names and service
marks of Dow Jones and of the DJIA which is determined, composed and
calculated by Dow Jones without regard to the Sponsor, the Exchange, the Trust
or the Beneficial Owners of DIAMONDS. Dow Jones has no obligation to take the
needs of the Sponsor, the Exchange, the Trust or the Beneficial Owners of
DIAMONDS into consideration in determining, comprising or calculating the
DJIA. Dow Jones is not responsible for and has not participated in the
determination of the timing of, prices at or quantities of the DIAMONDS to be
issued or in the determination or calculation of the equation by which the
DIAMONDS are to be redeemed. Dow Jones has no obligation or liability in
connection with the administration, marketing or trading of DIAMONDS.
DOW JONES DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE
DJIA OR ANY DATA INCLUDED THEREIN AND DOW JONES SHALL HAVE NO LIABILITY FOR
ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. DOW JONES MAKES NO WARRANTY,
EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE SPONSOR, THE EXCHANGE,
THE TRUST, BENEFICIAL OWNERS OF DIAMONDS OR ANY OTHER PERSON OR ENTITY FROM
THE USE OF THE DJIA OR ANY DATA INCLUDED THEREIN. DOW JONES MAKES NO EXPRESS
OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, WITH RESPECT TO
THE DJIA OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING,
IN NO EVENT SHALL DOW JONES HAVE ANY LIABILITY FOR ANY LOST PROFITS OR
INDIRECT, PUNITIVE SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. THERE ARE NO THIRD PARTY
BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN DOW JONES, THE SPONSOR
AND THE EXCHANGE.
EXCHANGE LISTING
As described above, DIAMONDS have been accepted for listing on the Exchange,
subject to official notice of issuance. Transactions involving DIAMONDS in the
public trading market are subject to customary brokerage charges and
commissions.
The Sponsor's aim in designing DIAMONDS was to provide investors with a
security whose initial market value would approximate one-hundredth ( 1/100th)
the value of the DJIA. Thus, for example, if the DJIA were at 7500, investors
might expect a DIAMONDS Unit to trade at approximately $75. Note, however,
that the market price of a DIAMONDS Unit should also reflect its share of the
dividends accumulated on the Securities (see "Administration of the
Trust,Distributions to Beneficial Owners") and may also be affected by supply
and demand, market volatility, sentiment and other factors.
There can be no assurance that DIAMONDS will always be listed on the
Exchange. The Exchange will consider the suspension of trading in or removal
from listing of DIAMONDS:
(a) if the Trust has more than 60 days remaining until termination and
there are fewer than 50 record and/or beneficial holders of DIAMONDS for 30
or more consecutive trading days;
(b) if the DJIA is no longer calculated or available; or
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<PAGE>
(c) if such other event shall occur or condition exists which, in the
opinion of the Exchange, makes further dealings on the Exchange
inadvisable.
The Trust is not required to pay a listing fee to the Exchange.
The Trust will be terminated in the event that DIAMONDS are delisted (see
"Administration of the Trust--Termination").
TAX STATUS OF THE TRUST
The Trust intends to qualify for and elect tax treatment as a "regulated
investment company" under Subchapter M of the Code. The Trust intends to adopt
a year ending on October 31 of each year. To qualify as a regulated investment
company, the Trust must, among other things, (a) derive in each taxable year
at least 90% of its gross income from dividends, interest, gains from the sale
or other disposition of stock, securities or foreign currencies, or certain
other sources, (b) derive in each taxable year less than 30% of its gross
income from the sale or other disposition of stock, securities, certain
foreign positions, and certain other assets held for less than three months,
(c) meet certain diversification tests, and (d) distribute in each year at
least 90% of its investment company taxable income. If the Trust qualifies as
a regulated investment company, subject to certain conditions and
requirements, the Trust will not be subject to federal income tax to the
extent its income is distributed in a timely manner. Any undistributed income
may be subject to tax, including a four percent (4%) excise tax imposed by
section 4982 of the Code on certain undistributed income of a regulated
investment company that does not distribute to shareholders in a timely manner
at least ninety-eight percent (98%) of its taxable income (including capital
gains).
TAX CONSEQUENCES TO BENEFICIAL OWNERS
Dividends paid by the Trust from its investment company taxable income
(which includes dividends, interest and the excess of net short-term capital
gains over net long-term capital losses) will be taxable to Beneficial Owners
as ordinary income. A dividend paid in January will be considered for federal
income tax purposes to have been paid by the Trust and received by Beneficial
Owners on the preceding December 31 if the dividend was declared in the
preceding October, November or December to Beneficial Owners of record shown
on the records of the Depository and the DTC Participants (see "The Trust--
Book Entry Only System") on a date in one of those months.
Distributions paid by the Trust from the excess of net long-term capital
gains over net short-term capital losses ("net capital gain") are taxable as
long-term capital gain, regardless of the length of time an investor has owned
DIAMONDS. Any loss on the sale or exchange of a share held for six months or
less may be treated as a long-term capital loss to the extent of any capital
gain dividends received by the Beneficial Owner. For corporate investors,
dividends from net investment income (but not return of capital distributions
or capital gain dividends) generally will qualify for the corporate dividends-
received deduction to the extent of qualifying dividend income received by the
Trust, subject to the limitations contained in the Code. Investors should note
that the regular monthly dividends paid by the Trust will not be based on the
Trust's investment company taxable income and net capital gain, but rather
will be based on the dividends paid with respect to the Securities. As a
result, a portion of the distributions of the Trust may be treated as a return
of capital or a capital gain dividend for federal income tax purposes or the
Trust may make additional distributions in excess of the yield performance of
the Securities in order to distribute all of its investment company taxable
income and net capital gain.
Distributions in excess of the Trust's current or accumulated earnings and
profits (as specially computed) generally will be treated as a return of
capital for federal income tax purposes and will reduce a Beneficial Owner's
tax basis in DIAMONDS. Return of capital distributions may result, for
example, if a portion of the dividends declared represents cash amounts
deposited in connection with Portfolio Deposits rather than dividends actually
received by the Trust. Under certain circumstances, a significant portion of
the Trust's regular monthly
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dividends could be treated as return of capital distributions. Such
circumstances may be more likely to occur in periods during which the number
of outstanding DIAMONDS fluctuates significantly, as may occur during the
initial years of the Trust. Beneficial Owners will receive annually
notification from the Trustee through the DTC Participants as to the tax
status of the Trust's distributions (see "The Trust--Book-Entry-Only System").
A distribution paid shortly after a purchase or creation of DIAMONDS may be
taxable even though in effect it may represent a return of capital.
Distributions reinvested in additional DIAMONDS through the means of the
Service (see "Dividend Reinvestment Service") will nevertheless be taxable
dividends to Beneficial Owners acquiring such additional DIAMONDS to the same
extent as if such dividends had been received in cash.
The sale of DIAMONDS by a Beneficial Owner is a taxable event, and may
result in a gain or loss, which generally should be a capital gain or loss for
Beneficial Owners that are not dealers in securities.
Under the Code, an in-kind redemption of DIAMONDS will not result in the
recognition of taxable gain or loss by the Trust but generally will constitute
a taxable event for the redeeming shareholder. Upon redemption, a Beneficial
Owner generally will recognize gain or loss measured by the difference on the
date of redemption between the aggregate value of the cash and securities
received and its tax basis in the DIAMONDS redeemed. Securities received upon
redemption (which will be comprised of the securities portion of the Portfolio
Deposit in effect on the date of redemption) generally will have an initial
tax basis equal to their respective market values on the date of redemption.
The Internal Revenue Service ("IRS") may assert that any resulting loss may
not be deducted by a Beneficial Owner on the basis that there has been no
material change in such Beneficial Owner's economic position or that the
transaction has no significant economic or business utility apart from the
anticipated tax consequences. Beneficial Owners of DIAMONDS in Creation Unit
size aggregations should consult their own tax advisors as to the consequences
to them of the redemption of DIAMONDS.
Dividend distributions, capital gains distributions, and capital gains from
sales or redemptions may also be subject to state, local and foreign taxes.
Deposit of a Portfolio Deposit with the Trustee in exchange for DIAMONDS in
Creation Unit size aggregations will not result in the recognition of taxable
gain or loss by the Trust but generally will constitute a taxable event to the
depositor under the Code, and a depositor generally will recognize gain or
loss with respect to each security deposited equal to the difference between
the amount realized in respect of the security and the depositor's tax basis
therein. The amount realized with respect to a security deposited should be
determined by allocating the value on the date of deposit of the DIAMONDS
received (less any cash paid to the Trust, or plus any cash received from the
Trust, in connection with the deposit) among the securities deposited on the
basis of their respective fair market values at that time. The IRS may assert
that any resulting losses may not be deducted by a depositor on the basis that
there has been no material change in the depositor's economic position or that
the transaction has no significant economic or business utility or purpose
apart from the anticipated tax consequences. Depositors should consult their
own tax advisors as to the tax consequences to them of a deposit to the Trust.
After the initial deposit of Portfolio Deposits with the Trustee, the
Trustee has the right to reject the order to create Creation Units transmitted
to it by the Distributor if the depositor or group of depositors, upon
obtaining the DIAMONDS ordered, would own eighty percent (80%) or more of the
outstanding DIAMONDS, and if pursuant to section 351 of the Code such a
circumstance would result in the Trust having a basis in the securities
deposited different from the market value of such securities on the date of
deposit. The Trustee has the right to require information regarding DIAMONDS
Unit ownership pursuant to the Participant Agreement and from the Depository
and to rely thereon to the extent necessary to make the foregoing
determination as a condition to the acceptance of a Portfolio Deposit.
Ordinary income dividends received via the Depository by Beneficial Owners
who are non-resident aliens will be subject to a thirty percent (30%) United
States withholding tax unless a reduced rate of withholding or a
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withholding exemption is provided under applicable tax treaties. Non-resident
shareholders are urged to consult their own tax advisors concerning the
applicability of United States withholding tax.
Backup withholding at a rate of 31% will apply to dividends, capital gain
distributions, redemptions and sales of DIAMONDS unless (a) the Beneficial
Owner is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact, or (b) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. The amount of any backup withholding from a payment to a
Beneficial Owner will be allowed as a credit against the holder's U.S. federal
income tax liability and may entitle such holder to a refund from the U.S.
Internal Revenue Service, provided that the required information is furnished
to the U.S. Internal Revenue Service.
The tax discussion set forth above is included for general information only.
Prospective investors should consult their own tax advisors concerning the
federal, state, local and foreign tax consequences to them of an investment in
the Trust, including the effect of possible legislative changes.
CONTINUOUS OFFERING OF DIAMONDS
DIAMONDS in Creation Unit size aggregations will be offered continuously to
the public by the Trust through the Distributor and will be delivered upon the
deposit of a Portfolio Deposit (see "The Trust--Procedure for Creation of
Creation Units"). A list of the identity and number of shares of each of the
Index Securities in the current Portfolio Deposit and the amount of the
Dividend Equivalent Payment effective through and including the previous
Business Day is made available by the Trustee to NSCC on each Business Day.
Under certain extraordinary circumstances which may make it impossible for the
Trustee to provide such information to NSCC on a given Business Day, NSCC
shall use the composition and weighting of the Index Securities for the most
recently effective Portfolio Deposit. The minimum number of DIAMONDS that may
be created as described herein is 50,000 or one Creation Unit. Persons making
Portfolio Deposits and creating Creation Unit aggregations of DIAMONDS will
receive no fees, commissions or other form of compensation or inducement of
any kind from the Sponsor or the Distributor, nor will any such person have
any obligation or responsibility to the Sponsor or Distributor to effect any
sale or resale of DIAMONDS.
Because new DIAMONDS can be created and issued on an ongoing basis, at any
point during the life of the Trust a "distribution", as such term is used in
the Securities Act of 1933, may be occurring. Broker-dealers and other persons
are cautioned that some activities on their part may, depending on the
circumstances, result in their being deemed participants in a distribution in
a manner which could render them statutory underwriters and subject them to
the prospectus-delivery and liability provisions of the Securities Act. For
example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Units after placing a creation order with the
Distributor, breaks them down into the constituent DIAMONDS and sells the
DIAMONDS directly to its customers; or if it chooses to couple the creation of
a supply of new DIAMONDS with an active selling effort involving solicitation
of secondary market demand for DIAMONDS. A determination of whether one is an
underwriter must take into account all the facts and circumstances pertaining
to the activities of the broker-dealer or its client in the particular case,
and the examples mentioned above should not be considered a complete
description of all the activities that could lead to categorization as an
underwriter.
Dealers who are not "underwriters" but are participating in a distribution
(as contrasted to ordinary secondary trading transactions), and thus dealing
with DIAMONDS that are part of an "unsold allotment" within the meaning of
Section 4(3)(C) of the Securities Act, would be unable to take advantage of
the prospectus-delivery exemption provided by Section 4(3) of the Securities
Act. Firms that do incur a prospectus delivery obligation with respect to
DIAMONDS are reminded that under Securities Act rule 153, a prospectus-
delivery obligation under Section 5(b)(2) of the Act owed to an Exchange
member in connection with a sale on the Exchange is satisfied by the fact that
DIAMONDS prospectuses will be available at the Exchange upon request. Of
course, the prospectus-delivery mechanism provided in rule 153 is only
available with respect to transactions on an exchange.
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The Sponsor intends to qualify DIAMONDS in states selected by the Sponsor
and through broker-dealers who are members of the National Association of
Securities Dealers, Inc. Investors intending to create or redeem Creation Unit
size aggregations of DIAMONDS in transactions not involving a broker-dealer
registered in such investor's state of domicile or residence should consult
counsel regarding applicable broker-dealer or securities regulatory
requirements under such state securities laws prior to such creation or
redemption.
EXPENSES OF THE TRUST
The following charges are or may be accrued and paid by the Trust: (a) the
Trustee's fee as discussed more fully below, (b) fees payable to transfer
agents for the provision of transfer agency services; (c) fees of the Trustee
for extraordinary services performed under the Trust Agreement; (d) various
governmental charges; (e) any taxes, fees and charges payable by the Trustee
with respect to DIAMONDS (whether in Creation Unit size aggregations or
otherwise); (f) expenses and costs of any action taken by the Trustee or the
Sponsor to protect the Trust and the rights and interests of Beneficial Owners
of DIAMONDS (whether in Creation Unit size aggregations or otherwise); (g)
indemnification of the Trustee or the Sponsor for any losses, liabilities or
expenses incurred by it in the administration of the Trust without gross
negligence, bad faith, wilful misconduct or wilful malfeasance on its part or
reckless disregard of its obligations and duties; (h) expenses incurred in
contacting Beneficial Owners of DIAMONDS during the life of the Trust and upon
termination of the Trust; and (i) other out-of-pocket expenses of the Trust
incurred pursuant to actions permitted or required under the Trust Agreement.
In addition to those discussed above, the following expenses are or may be
charged to the Trust: (a) reimbursement to the Sponsor of amounts paid by it
to Dow Jones in respect of annual licensing fees pursuant to the License
Agreement (see "License Agreement"), (b) federal and state annual registration
fees for the issuance of DIAMONDS, and (c) expenses of the Sponsor relating to
the printing and distribution of marketing materials describing DIAMONDS and
the Trust (including, but not limited to, associated legal, consulting,
advertising, and marketing costs and other out-of-pocket expenses such as
printing). In addition, initial fees and expenses totaling approximately
$ , in connection with the organization of the Trust, will be
capitalized and will be amortized over five years from the start of the
Trust's operations on a straight-line basis and charged to the Trust.
The Sponsor reserves the right to charge the Trust a special sponsor fee
from time to time in reimbursement for certain services it may provide to the
Trust which would otherwise be provided by the Trustee in an amount not to
exceed the actual cost of providing such services. The Sponsor or the Trustee
from time to time may voluntarily assume some expenses or reimburse the Trust
so that total expenses of the Trust are reduced, although neither the Sponsor
nor the Trustee is obligated to do so and either one or both parties may
discontinue such voluntary assumption of expenses or reimbursement at any time
without notice.
Until further notice, the Sponsor has undertaken that on each day during
each fiscal year up to and including October 31, 2000, the ordinary operating
expenses of the Trust as calculated by the Trustee will not be permitted to
exceed an amount which is 18/100 of 1% (0.18%) per annum of the daily net
asset value of the Trust after taking into account any expense offset credits.
To the extent during such period the ordinary operating expenses of the Trust
do exceed such 0.18% amount, the Sponsor will reimburse the Trust for or
assume such excess ordinary operating expenses. The Sponsor retains the
ability to be repaid by the Trust for expenses so reimbursed or assumed to the
extent that subsequently during the year expenses fall below the 0.18% per
annum level on any given day. For purposes of this undertaking by the Sponsor,
ordinary operating expenses of the Trust shall not include taxes, brokerage
commissions and, of course, such extraordinary non-recurring expenses as may
arise, including without limitation the cost of any litigation to which the
Trust or Trustee may be a party. The Sponsor may choose to reimburse or assume
certain Trust expenses in later periods in order to keep Trust expenses at a
level it believes to be attractive to investors, but is not obligated to do
so. In any event, it is possible that, on any day and during any period over
the life of the Trust, total fees and expenses of the Trust may exceed 0.18%
per annum.
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If the income received by the Trust in the form of dividends and other
distributions on the Securities is insufficient to cover Trust expenses, the
Trustee may make advances to the Trust to cover such expenses; otherwise the
Trustee may sell Securities in an amount sufficient to pay such expenses. The
Trustee may reimburse itself in the amount of any such advance, together with
interest thereon at a percentage rate equal to the then current overnight
federal funds rate, by deducting such amounts from (1) dividend payments or
other income of the Trust when such payments or other income is received, (2)
the amounts earned or benefits derived by the Trustee on cash held by the
Trustee for the benefit of the Trust, and (3) the sale of Securities.
Notwithstanding the foregoing, in the event that any advance remains
outstanding for more than forty-five (45) Business Days, the Trustee may sell
Securities to reimburse itself for the amount of such advance and any accrued
interest thereon. Such advances will be secured by a lien on the assets of the
Trust in favor of the Trustee. The expenses of the Trust are reflected in the
net asset value of the Trust (see "Valuation").
For services performed under the Trust Agreement, the Trustee is paid by the
Trust a fee at an annual rate of 11/100 of 1% to 15/100 of 1% of the net asset
value of the Trust, as shown below, such percentage amount to vary depending
on the net asset value of the Trust, plus or minus the Adjustment Amount (as
hereinafter defined). Such compensation is computed on each Business Day on
the basis of the net asset value of the Trust on such day, and the amount
thereof is accrued daily and paid monthly. Notwithstanding the fee schedule
set forth in the table below, in the fourth year of the Trust's operation and
in subsequent years, the Trustee shall be paid a minimum fee of $400,000 per
annum as adjusted by the CPI-U to take effect at the beginning of the fourth
year and each year thereafter. To the extent that the amount of the Trustee's
compensation, prior to any adjustment in respect of the Adjustment Amount, is
less than specified amounts, the Sponsor has agreed to pay the amount of any
such shortfall. The Trustee, in its discretion, may also waive all or a
portion of such fee.
TRUSTEE FEE SCALE
<TABLE>
<CAPTION>
NET ASSET VALUE FEE AS A PERCENTAGE OF NET
OF THE TRUST ASSET VALUE OF THE TRUST
--------------- --------------------------
<S> <C>
$0-$499,999,999......... 15/100 of 1% per annum plus or minus the Adjustment Amount*
$500,000,000-
$999,999,999........... 13/100 of 1% per annum plus or minus the Adjustment Amount**
$1,000,000,000 and
above.................. 11/100 of 1% per annum plus or minus the Adjustment Amount**
</TABLE>
- --------
* During the first two years of operation of the Trust, the Trustee's fee
shall be reduced to 12/100 of 1% per annum plus or minus the Adjustment
Amount for any day on which the net asset value of the Trust is below
$350,000,000.
** The fee indicated applies to that portion of the net asset value of the
Trust which falls in the size category indicated.
The Adjustment Amount shall be calculated at the end of each quarter and
applied against the Trustee's fee for the following quarter. The "Adjustment
Amount" is an amount which is intended, depending upon the circumstances,
either to (1) reduce the Trustee's fee by the amount that the Transaction Fees
paid on creation and redemption exceeds the costs of those activities, and by
the amount of excess earnings on cash held for the benefit of the Trust or (2)
increase the Trustee's fee by the amount that the Transaction Fee (plus
additional amounts paid in connection with creations or redemptions outside
the DIAMONDS Clearing Process), if any, paid on creations or redemptions,
falls short of the actual costs of these activities. If in any quarter the
Adjustment Amount exceeds the fee payable to the Trustee as set forth above,
the Trustee shall use such excess amount to reduce other Trust expenses,
subject to certain federal tax limitations. To the extent that the amount of
such excess exceeds the Trust's expenses for such quarter, any remaining
excess shall be retained by the Trustee as part of its compensation. If in any
quarter the costs of processing creations and redemptions exceed the amounts
charged as a Transaction Fee (plus the additional amounts paid in connection
with creations or redemptions outside the DIAMONDS Clearing Process) net of
the excess earnings, if any, on cash held for the benefit of the Trust, the
Trustee will augment the Trustee's fee by the resulting Adjustment Amount.
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<PAGE>
REDEMPTION OF DIAMONDS
DIAMONDS in Creation Unit size aggregations are ordinarily redeemable in
kind only and are not redeemable for cash except under certain circumstances.
DIAMONDS in Creation Unit size aggregations may be redeemed by submitting a
request for redemption, the requisite number of DIAMONDS and the Excess Cash
Amount (as defined below), if applicable, to the Trustee in the manner
specified below. Beneficial Owners of DIAMONDS may sell DIAMONDS in the
secondary market, but must accumulate enough DIAMONDS to constitute a Creation
Unit (i.e., 50,000 DIAMONDS) in order to redeem through the Trust. DIAMONDS
can be redeemed only when Creation Unit size aggregations are owned by a
Beneficial Owner and held in the account of a single Participating Party (with
respect to redemptions through the DIAMONDS Clearing Process) or a single DTC
Participant (with respect to redemptions outside the DIAMONDS Clearing
Process). DIAMONDS will remain outstanding until redeemed or until the
termination of the Trust.
PROCEDURE FOR REDEMPTION OF DIAMONDS
Requests for redemptions of Creation Units may be made on any Business Day
through the DIAMONDS Clearing Process to the Trustee at its Quincy office or
at such other office as may be designated by the Trustee. Requests for
redemptions of Creation Units may also be made directly to the Trustee outside
the DIAMONDS Clearing Process. Requests for redemption shall not be made to
the Distributor. In the case of redemptions made through the DIAMONDS Clearing
Process, the Transaction Fee will be deducted from the amount delivered to the
redeemer. In case of redemptions tendered directly to the Trustee outside the
DIAMONDS Clearing Process, a total fee will be charged equal to the
Transaction Fee plus an additional amount not to exceed three (3) times the
Transaction Fee applicable for a Creation Unit, (due in part to the increased
expense associated with delivery outside the DIAMONDS Clearing Process) and
such amount will be deducted from the amount delivered to the redeemer (see
"Prospectus Summary--Transaction Fee"). In all cases, both the tender of
DIAMONDS for redemption and distributions to the redeemer in respect of
DIAMONDS redeemed will be effected through the Depository and the relevant DTC
Participant(s) to the Beneficial Owner thereof as recorded on the book entry
system of the Depository or the relevant DTC Participant, as the case may be
(see "The Trust--Book-Entry-Only System").
The Trustee will transfer to the redeeming Beneficial Owner via the
Depository and the relevant DTC Participant(s) a portfolio of Securities for
each Creation Unit size aggregation of DIAMONDS delivered, typically identical
in weighting and composition to the securities portion of a Portfolio Deposit
as in effect (1) on the date a request for redemption is deemed received by
the Trustee as described below, in the case of redemptions made either through
the DIAMONDS Clearing Process or outside the DIAMONDS Clearing Process or (2)
on the date that notice of the termination of the Trust is given, in the case
of the termination of the Trust (see "Administration of the Trust--
Termination" and "The Portfolio--Adjustments to the Portfolio"). The Trustee
will also transfer via the relevant DTC Participant(s) to the redeeming
Beneficial Owner in cash the "Cash Redemption Payment", which on any given
Business Day is typically an amount identical to the amount of the Cash
Component and is equal to a proportional amount of the following: dividends on
all the Securities for the period through the date of redemption, net of
expenses and liabilities for such period including, without limitation, (x)
taxes or other governmental charges against the Trust not previously deducted
if any, and (y) accrued fees of the Trustee and other expenses of the Trust
(including legal and auditing expenses) and other expenses not previously
deducted (see "Expenses of the Trust"), as if all the Securities had been held
for the entire accumulation period for such distribution, plus or minus the
Balancing Amount. To the extent that any amounts payable to the Trust by the
redeeming Beneficial Owner exceed the amount of the Cash Redemption Payment
("Excess Cash Amounts"), such Beneficial Owner shall be required to deliver
payment thereof to the Trustee. In the case of redemptions made through the
DIAMONDS Clearing Process, the Trustee will effect a transfer of the Cash
Redemption Payment and Securities to the redeeming Beneficial Owner by the
third (3rd) NSCC Business Day following the date on which request for
redemption is deemed received. In the case of redemptions made outside the
DIAMONDS Clearing Process, the Trustee will transfer the Cash Redemption
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Payment and the securities to the redeeming Beneficial Owner by the third
(3rd) Business Day following the date on which the request for redemption is
deemed received. The Trustee will cancel all DIAMONDS delivered upon
redemption.
In the event that the Trustee determines in its discretion that an Index
Security is likely to be unavailable or available in insufficient quantity for
delivery by the Trust upon the redemption of DIAMONDS in Creation Unit size
aggregations, the Trustee shall have the right in its discretion to deliver
the cash equivalent value of such Index Security or Index Securities, based on
the market value of such Index Security or Index Securities as of the
Evaluation Time on the date such redemption is deemed received by the Trustee
(see "Placement of Redemption Orders Using DIAMONDS Clearing Process") as a
part of the Cash Redemption Payment in lieu of delivering such Index Security
or Index Securities to the redeemer. In connection with the redemption of
DIAMONDS, if a redeeming investor requests redemption in cash, rather than in
kind, with respect to one or more Securities (for example, because such a
redeemer is restricted by regulation or otherwise from investing or engaging
in a transaction in one or more Index Securities), the Trustee shall have the
right in its discretion to deliver the cash equivalent value of such Index
Security or Index Securities based on the market value of such Index Security
or Index Securities as of the Evaluation Time on the date such redemption
order is deemed received by the Trustee (see "Placement of Redemption Orders
Outside DIAMONDS Clearing Process") as a part of the Cash Redemption Payment
in lieu of delivering such Index Security or Index Securities to the redeemer.
In such case, such investor will pay the Trustee the standard Transaction Fee,
plus an additional amount not to exceed three (3) times the Transaction Fee
applicable for a Creation Unit (see "Prospectus Summary--Transaction Fee").
The Trustee, in its discretion, upon the request of a redeeming investor,
may redeem Creation Units in whole or in part by providing such redeemer with
a portfolio of Securities differing in exact composition from the Index
Securities but not differing in net asset value from the then-current
Portfolio Deposit. Such a redemption might be made, for example, if it were to
be determined that this composition would be appropriate in order to maintain
the Trust Portfolio correlation to the price-weighted composition of the DJIA
(i.e. an equal number of shares of each component stock), for instance when a
stock split of one of the Index Securities occurs. See ("The Portfolio" and
"The DJIA").
The Trustee may sell Securities to obtain sufficient cash proceeds to
deliver to the redeeming Beneficial Owner. To the extent cash proceeds are
received by the Trustee in excess of the amount required to be provided to the
redeeming Beneficial Owner, such cash amounts shall be held by the Trustee and
shall be applied in accordance with the guidelines set forth under the caption
"The Portfolio--Adjustments to the Portfolio").
If the income received by the Trust in the form of dividends and other
distributions on the Securities is insufficient to allow distribution of the
Cash Redemption Payment, the Trustee may advance out of its own funds any
amounts necessary in respect of redemptions of DIAMONDS; otherwise, the
Trustee may sell Securities in an amount sufficient to effect such
redemptions. The Trustee may reimburse itself in the amount of such advance,
together with interest thereon at a percentage rate equal to the then current
overnight federal funds rate, by deducting such amounts from (1) dividend
payments or other income of the Trust when such payments or other income is
received, (2) the amounts earned or benefits derived by the Trustee on cash
held by the Trustee for the benefit of the Trust, and (3) the sale of
Securities. Notwithstanding the foregoing, in the event that any advance
remains outstanding for more than forty-five (45) Business Days, the Trustee
shall sell Securities to reimburse itself for such advance and any accrued
interest thereon. Such advances will be secured by a lien on the assets of the
Trust in favor of the Trustee.
The Trustee may, in its discretion, and will when so directed by the
Sponsor, suspend the right of redemption, or postpone the date of payment of
the net asset value (1) for any period during which the New York Stock
Exchange is closed; (2) for any period during which an emergency exists as a
result of which disposal or evaluation of the Securities is not reasonably
practicable; or (3) for such other period as the Commission may by order
permit for the protection of Beneficial Owners. Neither the Sponsor nor the
Trustee is liable to any person or in any way for any loss or damages which
may result from any such suspension or postponement.
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<PAGE>
To be eligible to place orders with the Trustee to redeem DIAMONDS in
Creation Unit size aggregations, an entity or person must be (1) a
Participating Party with respect to redemptions through the DIAMONDS Clearing
Process, or (2) a DTC Participant with respect to redemptions outside the
DIAMONDS Clearing Process.
All orders to redeem DIAMONDS must be placed in multiples of 50,000 DIAMONDS
(Creation Unit size). Orders must be transmitted to the Trustee by telephone
or other transmission method acceptable to the Trustee so as to be received by
the Trustee not later than the Closing Time on the Transmittal Date, pursuant
to procedures set forth in the Participant Agreement. Severe economic or
market changes or disruptions, or telephone or other communication failure,
may impede the ability to reach the Distributor, the Trustee, a Participating
Party, or a DTC Participant.
Orders to redeem Creation Unit size aggregations of DIAMONDS shall be placed
with a Participating Party or DTC Participant, as applicable, in the form
required by such Participating Party or DTC Participant. Investors should be
aware that their particular broker may not have executed a Participant
Agreement, and that, therefore, orders to redeem Creation Unit size
aggregations of DIAMONDS may have to be placed by the investor's broker
through a Participating Party or a DTC Participant who has executed a
Participant Agreement. At any given time there may be only a limited number of
broker-dealers that have executed a Participant Agreement. Those placing
orders to redeem DIAMONDS should afford sufficient time to permit (1) proper
submission of the order by a Participating Party or DTC Participant to the
Trustee and (2) the receipt of the DIAMONDS to be redeemed and the Excess Cash
Amounts, if any, by the Trustee in a timely manner, as described below. Orders
for redemption that are effected outside the DIAMONDS Clearing Process are
likely to require transmittal by the DTC Participant earlier on the
Transmittal Date than orders effected using the DIAMONDS Clearing Process.
Those persons placing orders outside the DIAMONDS Clearing Process should
ascertain the deadlines applicable to DTC and the Federal Reserve Bank wire
system by contacting the operations department of the broker or depository
institution effectuating such transfer of DIAMONDS and Cash Redemption
Payment. These deadlines will vary by institution. The Participant notified of
an order to redeem outside the DIAMONDS Clearing Process will be required to
transfer DIAMONDS through DTC and the Excess Cash amounts, if any, through the
Federal Reserve Bank wire system in a timely manner (see "Placement of
Redemption Orders Outside the DIAMONDS Clearing Process").
PLACEMENT OF REDEMPTION ORDERS USING DIAMONDS CLEARING PROCESS
Orders to redeem DIAMONDS in Creation Unit size aggregations through the
DIAMONDS Clearing Process must be delivered through a Participating Party (see
"Portfolio Deposit") that has executed the Participant Agreement with the
Distributor and with the Trustee (as the same may be from time to time amended
in accordance with its terms). An order to redeem DIAMONDS using the DIAMONDS
Clearing Process is deemed received on the Transmittal Date if (i) such order
is received by the Trustee not later than the Closing Time on such Transmittal
Date and (ii) all other procedures set forth in the Participant Agreement are
properly followed; such order will be effected based on the net asset value of
the Trust as determined as of the Evaluation Time on the Transmittal Date. An
order to redeem DIAMONDS using the DIAMONDS Clearing Process made in proper
form but received by the Trustee after the Closing Time will be deemed
received on the next Business Day immediately following the Transmittal Date.
The Participant Agreement authorizes the Trustee to transmit to NSCC on behalf
of the Participating Party such trade instructions as are necessary to effect
the Participating Party's redemption order. Pursuant to such trade
instructions from the Trustee to NSCC, the Trustee will transfer the requisite
Securities (or contracts to purchase such Securities which are expected to be
delivered in a "regular way" manner) by the third (3rd) NSCC Business Day
following the date on which such request for redemption is deemed received,
and the Cash Redemption Payment. The calculation of the value of the
Securities and the Cash Redemption Payment to be delivered by the Trustee to
the redeeming Beneficial Owner will be made according to the procedures set
forth under "Valuation," computed as of the Evaluation Time on the Business
Day on which a redemption order is deemed received by the Trustee.
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PLACEMENT OF REDEMPTION ORDERS OUTSIDE DIAMONDS CLEARING PROCESS
Orders to redeem DIAMONDS outside the DIAMONDS Clearing Process must be
delivered through a DTC Participant that has executed the Participant
Agreement with the Distributor and with the Trustee. A DTC Participant who
wishes to place an order for redemption of DIAMONDS to be effected outside the
DIAMONDS Clearing Process need not be a Participating Party, but such orders
must state that the DTC Participant is not using the DIAMONDS Clearing Process
and that redemption of DIAMONDS will instead be effected through transfer of
DIAMONDS directly through DTC. An order to redeem DIAMONDS outside the
DIAMONDS Clearing Process is deemed received by the Trustee on the Transmittal
Date if (i) such order is received by the Trustee not later than the Closing
Time on such Transmittal Date, (ii) such order is preceded or accompanied by
the requisite number of DIAMONDS specified in such order, which delivery must
be made through DTC to the Trustee no later than 11:00 a.m. on such
Transmittal Date (the "DTC Cut-Off Time") and (iii) all other procedures set
forth in the Participant Agreement are properly followed. The Excess Cash
Amounts owed by the Beneficial Owner, if any, must be delivered no later than
2:00 p.m. on the Business Day immediately following the Transmittal Date.
After the Trustee has deemed an order for redemption outside the DIAMONDS
Clearing Process received, the Trustee will initiate procedures to transfer
the requisite Securities (or contracts to purchase such Securities which are
expected to be delivered within three Business Days) and the Cash Redemption
Payment to the redeeming Beneficial Owner by the third Business Day following
the Transmittal Date on which such redemption order is deemed received by the
Trustee.
The calculation of the value of the Securities and the Cash Redemption
Payment to be delivered to the redeeming Beneficial Owner will be made by the
Trustee according to the procedures set forth under "Valuation," computed as
of the Evaluation Time on the Business Day on which a redemption order is
deemed received by the Trustee. Therefore, if a redemption order in proper
form is submitted to the Trustee by a DTC Participant not later than the
Closing Time on the Transmittal Date, and the requisite DIAMONDS are delivered
to the Trustee prior to the DTC Cut-Off Time on such Transmittal Date, then
the value of the Securities and the Cash Redemption Payment to be delivered to
the Beneficial Owner will be determined by the Trustee as of the Evaluation
Time on such Transmittal Date. If, however, a redemption order is submitted to
the Trustee by a DTC Participant not later than the Closing Time on a
Transmittal Date but either (1) the requisite DIAMONDS are NOT delivered by
the DTC Cut-Off Time on such Transmittal Date or (2) the redemption order is
not submitted in proper form, then the redemption order will NOT be deemed
received as of such Transmittal Date. In such case, the value of the
Securities and the Cash Redemption Payment to be delivered to the Beneficial
Owner will be computed as of the Evaluation Time on the Business Day that such
order is deemed received by the Trustee, i.e., the Business Day on which the
DIAMONDS are delivered through DTC to the Trustee by the DTC Cut-Off Time on
such Business Day pursuant to a properly submitted redemption order.
VALUATION
The net asset value of the Trust is computed as of the Evaluation Time shown
under "Essential Information" on each Business Day. The net asset value of the
Trust on a per DIAMONDS Unit basis is determined by subtracting all
liabilities (including accrued expenses and dividends payable) from the total
value of the Trust's investments and other assets and dividing the result by
the total number of outstanding DIAMONDS.
The aggregate value of the Securities shall be determined by the Trustee in
good faith in the following manner: If the Securities are listed on one or
more national securities exchanges, such evaluation shall generally be based
on the closing sale price on that day (unless the Trustee deems such price
inappropriate as a basis for evaluation) on the exchange which is deemed to be
the principal market therefor (the New York or American Stock Exchange if the
securities are listed thereon) or, if there is no such appropriate closing
sale price on such exchange, at the closing bid price (unless the Trustee
deems such price inappropriate as a basis for evaluation). If the Securities
are not so listed or, if so listed and the principal market therefor is other
than on such exchange
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or there is no such closing bid price available, such evaluation shall
generally be made by the Trustee in good faith based on the closing price on
the over-the-counter market (unless the Trustee deems such price inappropriate
as a basis for evaluation) or if there is no such appropriate closing price,
(a) on current bid prices, (b) if bid prices are not available, on the basis
of current bid prices for comparable securities, (c) by the Trustee's
appraising the value of the securities in good faith on the bid side of the
market, or (d) by any combination thereof.
ADMINISTRATION OF THE TRUST
RECORDS
The Trustee maintains records of the transactions of the Trust, including a
current list of the identity and number of shares of each of the Securities in
the Portfolio. Records of the creation of DIAMONDS in Creation Unit size
aggregations are also maintained by the Distributor. Record of ownership of
DIAMONDS is maintained by the Depository and by DTC Participants as described
above (see "The Trust--Book-Entry-Only System").
A complete copy of the Trust Agreement is maintained by the Trustee. A copy
of the Trust Agreement is available to Beneficial Owners at the corporate
trust office of the Trustee at 225 Franklin Street, Boston, Massachusetts
02110 during normal business hours.
VOTING
The Trustee has the right to vote all of the voting stocks in the Trust. The
Trustee votes the voting stocks of each issuer in the same proportionate
relationship as all other shares of each such issuer are voted to the extent
permissible and, if not permitted, abstains from voting.
DISTRIBUTIONS TO BENEFICIAL OWNERS
The regular monthly ex-dividend date for DIAMONDS is the third (3rd) Friday
in each calendar month of each fiscal year, commencing April , 1998, unless
such day is not a Business Day, in which case the ex-dividend date is the
immediately preceding Business Day (the "Ex-Dividend Date"). Beneficial Owners
as reflected on the records of the Depository and the DTC Participants on the
second Business Day following the Ex-Dividend Date (the "Record Date") are
entitled to receive an amount representing dividends accumulated on the
Securities through the monthly dividend period which ends on the Business Day
preceding such Ex-Dividend Date (including Securities with ex-dividend dates
falling within such monthly dividend period), net of fees and expenses,
accrued daily for such period. For the purposes of all dividend distributions,
dividends per DIAMONDS Unit are calculated at least to the nearest 1/100th of
$0.01. The payment of dividends is made on the Monday preceding the third
(3rd) Friday of the next calendar month or the next subsequent Business Day if
such Monday is not a Business Day (the "Dividend Payment Date"). Dividend
payments will be made through the Depository and the DTC Participants to
Beneficial Owners then of record with funds received from the Trustee.
DIAMONDS are registered in book entry only, which records are kept by the
Depository (see "The Trust--Book-Entry-Only System").
Dividends payable to the Trust in respect of the Securities are credited by
the Trustee to a non-interest bearing account as of the date on which the
Trust receives such dividends. Other moneys received by the Trustee in respect
of the Securities, including but not limited to the Cash Component, the Cash
Redemption Payment, all moneys realized by the Trustee from the sale of
options, warrants or other similar rights received or distributed in respect
of the Securities as dividends or distributions and capital gains resulting
from the sale of Securities are also credited by the Trustee to a non-interest
bearing account. All funds collected or received are held by the Trustee
without interest until distributed or otherwise utilized in accordance with
the provisions of the Trust Agreement. To the extent the amounts credited to
such accounts generate interest income or an equivalent benefit to the
Trustee, such interest income or benefit is used to reduce the Trustee's
annual fee (see "Expenses of the Trust").
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The Trust intends to qualify as a regulated investment company for federal
income tax purposes. A regulated investment company is not subject to federal
income tax on its net investment income and capital gains that it distributes
to shareholders, so long as it meets certain overall distribution and
diversification requirements and other conditions under Subchapter M of the
Code. The Trust intends to satisfy these overall distribution and
diversification requirements and to otherwise satisfy any required conditions.
The Trustee intends to make additional distributions to the minimum extent
necessary (i) to distribute the entire annual investment company taxable
income of the Trust, plus any net capital gains (from sales of securities in
connection with adjustments to the Portfolio or to generate cash for such
distributions), and (ii) to avoid imposition of the excise tax imposed by
section 4982 of the Code (see "Tax Status of the Trust"). The additional
distributions, if needed, would consist of (a) any amount by which estimated
Trust investment company taxable income and net capital gains for a fiscal
year exceeds the amount of Trust taxable income previously distributed with
respect to such year or, if greater, the minimum amount required to avoid
imposition of such excise tax, and (b) a distribution after the actual annual
investment company taxable income and net capital gains of the Trust have been
computed of the amount, if any, by which such actual income exceeds the
distributions already made. The net asset value of the Trust will be reduced
by the amount of such additional distributions. The magnitude of the
additional distributions, if any, will depend upon a number of factors,
including the level of redemption activity experienced by the Trust. Because
substantially all proceeds from the sale of Securities in connection with
adjustments to the Portfolio will have been used to purchase shares of Index
Securities, the Trust may have no cash or insufficient cash with which to pay
any such additional distributions. In that case, the Trustee typically will
have to sell an approximately equal number of shares of each of the Securities
sufficient to produce the cash required to make such additional distributions.
(see "The Portfolio--Adjustments to the Portfolio").
The Trustee further reserves the right to declare special dividends if, in
its reasonable discretion, such action is necessary or advisable to preserve
the status of the Trust as a regulated investment company or to avoid
imposition of income or excise taxes on undistributed income.
The Trustee further reserves the right to vary the frequency with which
periodic dividend distributions are made (e.g., from monthly to quarterly) if
it is determined by the Sponsor and the Trustee, in their discretion, that
such a variance would be advisable to facilitate compliance with the rules and
regulations applicable to regulated investment companies or would otherwise be
advantageous to the Trust. In addition, the Trustee reserves the right to
change the regular ex-dividend date for DIAMONDS to another date within the
month or quarter if it is determined by the Sponsor and the Trustee, in their
discretion, that such a change would be advantageous to the Trust. Notice of
any such variance or change (which notice shall include changes to the Record
Date, the Ex-Dividend Date, the Dividend Payment Date, and the accumulation
period resulting from such variance) shall be provided to Beneficial Owners
via the Depository and the DTC Participants (see "The Trust--Book-Entry-Only
System").
The Trustee may, in its discretion, advance out of its own funds any amounts
necessary to permit distributions via the Depository to Beneficial Owners. The
Trustee may reimburse itself in the amount of such advance, together with
interest thereon at a percentage rate equal to then current overnight federal
funds rate, by deducting such amounts from (1) dividend payments or other
income of the Trust when such payments or other income is received, (2) the
amounts earned or benefits derived by the Trustee on cash held by the Trustee
for the benefit of the Trust, and (3) the sale of Securities. Notwithstanding
the foregoing, in the event that any advance remains outstanding for more than
forty-five (45) Business Days, the Trustee shall sell Securities to reimburse
itself for such advance and any accrued interest thereon. Such advances will
be secured by a lien on the assets of the Trust in favor of the Trustee.
In addition, as soon as practicable after notice of termination of the
Trust, the Trustee will distribute via the Depository and the DTC Participants
to each Beneficial Owner redeeming DIAMONDS in Creation Unit size aggregations
prior to the termination date specified in such notice a portion of the
Securities and cash as described above (see "Redemption of DIAMONDS" and
"Administration of the Trust--Termination").
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Otherwise, the Trustee will distribute to each Beneficial Owner (whether in
Creation Unit size aggregations or otherwise), as soon as practical after
termination of the Trust, such Beneficial Owner's pro rata share of the net
asset value of the Trust (see "Administration of the Trust--Termination").
All distributions are made by the Trustee through the Depository and the DTC
Participants to Beneficial Owners as recorded on the book entry system of the
Depository and the DTC Participants (see "The Trust--Book-Entry-Only System").
The settlement date for the creation of DIAMONDS in Creation Unit size
aggregations or the purchase of DIAMONDS in the secondary market must occur on
or prior to the Record Date in order for such creator or purchaser to receive
a distribution on the next Dividend Payment Date. If the settlement date for
such creation or a secondary market purchase occurs after the Record Date, the
distribution will be made to the prior security holder or Beneficial Owner as
of such Record Date.
Any Beneficial Owner interested in acquiring additional DIAMONDS with
proceeds received from distributions described above may elect dividend
reinvestment through DTC Participants by means of the DTC Dividend
Reinvestment Service, described herein (see "Dividend Reinvestment Service"),
if such service is available through such Beneficial Owner's broker.
TRUST SUPERVISION
The Trust's Portfolio Securities are not managed and therefore the adverse
financial condition of an issuer of securities in the Trust does not, in
itself, require the sale of Securities from the Portfolio. The Trustee shall,
on a non-discretionary basis, make changes to the Portfolio as described above
(see "The Portfolio--Adjustments to the Portfolio").
The Trustee will direct its securities transactions only to brokers or
dealers, which may include affiliates of the Trustee, from whom it expects to
obtain the most favorable prices or execution of orders.
STATEMENTS TO BENEFICIAL OWNERS
With each distribution, the Trustee will furnish for distribution to
Beneficial Owners (see "The Trust--Book-Entry-Only System") a statement
setting forth the amount being distributed expressed as a dollar amount per
DIAMONDS Unit.
Promptly after the end of each calendar year, the Trustee will furnish to
the DTC Participants for distribution to each person who was a Beneficial
Owner of DIAMONDS at the end of such calendar year, an annual report of the
Trust containing financial statements audited by independent accountants of
nationally recognized standing and such other information as may be required
by applicable laws, rules and regulations.
REGISTER OF OWNERSHIP AND TRANSFER
The Trustee maintains a record of the creation and redemption of DIAMONDS in
Creation Unit size aggregations as well as creations of DIAMONDS in connection
with the Dividend Reinvestment Service. The Depository maintains a record on
its book entry system of the DTC Participant ownership of DIAMONDS and the
number of DIAMONDS owned (see "The Trust--Book-Entry-Only System").
Certificates are not issued for DIAMONDS, whether in Creation Unit size
denominations or otherwise. Beneficial Owners have the rights accorded to
holders of "book-entry" securities under applicable law. Beneficial Owners may
transfer DIAMONDS through the Depository by instructing the DTC Participant
holding the DIAMONDS for such Beneficial Owner in accordance with standard
securities industry procedures.
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RIGHTS OF BENEFICIAL OWNERS
DIAMONDS in Creation Unit size aggregations (i.e., 50,000 DIAMONDS) may be
tendered to the Trustee for redemption (see "Redemption of DIAMONDS").
Beneficial Owners may sell DIAMONDS in the secondary market, but must
accumulate enough DIAMONDS (i.e., 50,000 DIAMONDS) to constitute a full
Creation Unit in order to redeem through the Trust. The death or incapacity of
any Beneficial Owner will not operate to terminate the Trust nor entitle such
Beneficial Owner's legal representatives or heirs to claim an accounting or to
take any action or proceeding in any court for a partition or winding up of
the Trust.
Beneficial Owners shall not have the right to vote concerning the Trust,
except as described below with respect to termination and as otherwise
expressly set forth in the Trust Agreement, or in any manner control the
operation and management of the Trust, nor shall any Beneficial Owner be
liable to any other person by reason of any action taken by the Sponsor or the
Trustee.
AMENDMENT
The Trust Agreement may be amended from time to time by the Trustee and the
Sponsor without the consent of any Beneficial Owners (a) to cure any ambiguity
or to correct or supplement any provision thereof which may be defective or
inconsistent or to make such other provisions in regard to matters or
questions arising thereunder as will not adversely affect the interests of
Beneficial Owners; (b) to change any provision thereof as may be required by
the Commission; (c) to add or change any provision as may be necessary or
advisable for the continuing qualification of the Trust as a "regulated
investment company" under the Code; (d) to add or change any provision thereof
as may be necessary or advisable in the event that NSCC or the Depository is
unable or unwilling to continue to perform its functions as set forth therein;
and (e) to add or change any provision thereof to conform the adjustments to
the Portfolio and the Portfolio Deposit to changes, if any, made by Dow Jones
in its method of determining the DJIA. The Trust Agreement may also be amended
from time to time by the Sponsor and the Trustee with the consent of the
Beneficial Owners of 51% of the outstanding DIAMONDS to add provisions to or
change or eliminate any of the provisions of the Trust Agreement or to modify
the rights of Beneficial Owners; provided, however, that the Trust Agreement
may not be amended without the consent of the Beneficial Owners of all
outstanding DIAMONDS if such amendment would (1) permit, except in accordance
with the terms and conditions of the Trust Agreement, the acquisition of any
securities other than those acquired in accordance with the terms and
conditions of the Trust Agreement; (2) reduce the interest of any Beneficial
Owner in the Trust; or (3) reduce the percentage of Beneficial Owners required
to consent to any such amendment.
Promptly after the execution of any such amendment, the Trustee shall
receive from the Depository, pursuant to the terms of the Depository
Agreement, a list of all DTC Participants holding DIAMONDS. The Trustee shall
inquire of each such DTC Participant as to the number of Beneficial Owners for
whom such DTC Participant holds DIAMONDS, and provide each such DTC
Participant with sufficient copies of a written notice of the substance of
such amendment for transmittal by each such DTC Participant to such Beneficial
Owners (see "The Trust--Book-Entry-Only System").
TERMINATION
The Trust Agreement provides that the Sponsor has the discretionary right to
direct the Trustee to terminate the Trust if at any time after six months
following and prior to three years following the Initial Date of Deposit the
net asset value of the Trust falls below $150,000,000 or if at any time after
three years following the Initial Date of Deposit the net asset value of the
Trust is less than $350,000,000, as such dollar amount shall be adjusted for
inflation in accordance with the CPI-U, such adjustment to take effect at the
end of the fourth year following the Initial Date of Deposit and at the end of
each year thereafter and to be made so as to reflect the percentage increase
in consumer prices as set forth in the CPI-U for the twelve month period
ending in the last month of the preceding fiscal year.
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The Trust Agreement also provides that the Trustee shall, at the direction
of the Sponsor, terminate the Trust if within 90 days from the Initial Date of
Deposit the net asset value is less than $100,000. The Trust will also
terminate in the event that DIAMONDS are delisted from the Exchange. The
Exchange will consider the suspension of trading in or the delisting of
DIAMONDS as discussed above (see "Exchange Listing").
The Trust may also be terminated (a) by the agreement of the Beneficial
Owners of 66 2/3% of outstanding DIAMONDS; (b) if the Depository is unable or
unwilling to continue to perform its functions as set forth under the Trust
Agreement and a comparable replacement is unavailable; (c) if NSCC no longer
provides clearance services with respect to DIAMONDS, or if the Trustee is no
longer a participant in NSCC; (d) if Dow Jones ceases publishing the DJIA; and
(e) if the License Agreement is terminated. Currently, the License Agreement
is scheduled to expire five years from the commencement date of trading of
DIAMONDS in accordance with its terms and is subject to a five year renewal
period following such date. The Trust will also terminate by its terms on the
Mandatory Termination Date.
If either the Sponsor or the Trustee shall resign or be removed and a
successor is not appointed, the Trust will terminate (see "Resignation,
Removal and Liability--The Trustee" and "Resignation, Removal and Liability--
The Sponsor"). The dissolution of the Sponsor or its ceasing to exist as a
legal entity for any cause whatsoever, however, will not cause the termination
of the Trust Agreement or the Trust unless the Trustee deems termination to be
in the best interests of Beneficial Owners.
Prior written notice of the termination of the Trust will be given at least
twenty (20) days prior to termination of the Trust to all Beneficial Owners in
the manner described above (see "The Trust--Book-Entry-Only System"). The
notice will set forth the date on which the Trust will be terminated (the
"Termination Date"), the period during which the assets of the Trust will be
liquidated, the date on which Beneficial Owners of DIAMONDS (whether in
Creation Unit size aggregations or otherwise) will receive in cash the net
asset value of the DIAMONDS held and the date determined by the Trustee upon
which the books of the Trust shall be closed. Such notice shall further state
that, as of the date thereof and thereafter, neither requests to create
additional Creation Units nor Portfolio Deposits will be accepted, that no
additional DIAMONDS will be created for the purpose of reinvesting dividend
distributions, and that, as of the date thereof and thereafter, the portfolio
of Securities delivered upon redemption shall be identical in composition to
the Securities held in the Trust as of such date rather than the securities
portion of the Portfolio Deposit as in effect on the date request for
redemption is deemed received. Beneficial Owners of DIAMONDS in Creation Unit
size aggregations may, in advance of the Termination Date, redeem in kind
directly from the Trust (see "Redemption of DIAMONDS").
Within a reasonable period of time after the Termination Date the Trustee
shall, subject to any applicable provisions of law, use its best efforts to
sell all of the Securities not already distributed to redeeming Beneficial
Owners of Creation Units. The Trustee shall not be liable for or responsible
in any way for depreciation or loss incurred by reason of any such sale or
sales. The Trustee may suspend such sales upon the occurrence of unusual or
unforeseen circumstances, including but not limited to a suspension in trading
of a Security, the closing or restriction of trading on a stock exchange, the
outbreak of hostilities or the collapse of the economy. Upon receipt of
proceeds from the sale of the last Security, the Trustee shall deduct
therefrom its fees and all other expenses (see "Expenses of the Trust"). The
remaining amount shall be transmitted to the Depository for distribution via
the DTC Participants, together with a final statement setting forth the
computation of the gross amount distributed. DIAMONDS not redeemed prior to
termination of the Trust will be redeemed in cash at net asset value based on
the proceeds of the sale of the Securities. Such redemptions in cash at net
asset value shall be available to all Beneficial Owners, with no minimum
aggregation of DIAMONDS required (see "Administration of the Trust--
Distributions to DIAMONDS Unit Beneficial Owners").
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RESIGNATION, REMOVAL AND LIABILITY
THE TRUSTEE
Under the Trust Agreement, the Trustee may resign and be discharged of the
Trust created by the Trust Agreement by executing a notice of resignation in
writing and filing such notice with the Sponsor and mailing a copy of the
notice of resignation to all DTC Participants that are reflected on the
records of the Depository as owning DIAMONDS for distribution to Beneficial
Owners as provided above (see "The Trust--Book-Entry-Only System") not less
than sixty (60) days before the date such resignation is to take effect. Such
resignation will become effective upon the appointment of and the acceptance
of the Trust by a successor Trustee or, if no successor is appointed within
sixty (60) days after the date such notice of resignation is given, the Trust
shall terminate (see "Administration of the Trust--Termination"). The Sponsor,
upon receiving notice of such resignation, is obligated to use its best
efforts to appoint a successor Trustee promptly.
In case the Trustee becomes incapable of acting as such or is adjudged a
bankrupt or is taken over by any public authority, the Sponsor may discharge
the Trustee and appoint a successor Trustee as provided in the Trust
Agreement. Notice of such discharge and appointment shall be mailed via the
DTC Participants to Beneficial Owners by the Sponsor.
Upon a successor Trustee's execution of a written acceptance of an
appointment as Trustee for the Trust, such successor Trustee will become
vested with all the rights, powers, duties and obligations of the original
Trustee.
A successor Trustee is required to be a trust company, corporation or
national banking association organized and doing business under the laws of
the United States or any state thereof; to be authorized under such laws to
exercise corporate trust powers; and to have at all times an aggregate
capital, surplus and undivided profit of not less than $50,000,000.
Beneficial Owners of 51% of the then outstanding DIAMONDS may at any time
remove the Trustee by written instrument(s) delivered to the Trustee and the
Sponsor. The Sponsor shall thereupon use its best efforts to appoint a
successor Trustee in the manner specified above and in the Trust Agreement.
The Trust Agreement provides that the Trustee is not liable for any action
taken in reasonable reliance on properly executed documents or for the
disposition of monies or Securities or for the evaluations required to be made
thereunder, except by reason of its own gross negligence, bad faith, wilful
malfeasance, wilful misconduct, or reckless disregard of its duties and
obligations nor is the Trustee liable or responsible in any way for
depreciation or loss incurred by reason of the sale by the Trustee of any
Securities in the Trust. In the event of the failure of the Sponsor to act,
the Trustee may act and is not liable for any such action taken by it in good
faith. The Trustee is not personally liable for any taxes or other
governmental charges imposed upon or in respect of the Securities or upon the
interest thereon or upon it as Trustee or upon or in respect of the Trust
which the Trustee may be required to pay under any present or future law of
the United States of America or of any other taxing authority having
jurisdiction. In addition, the Trust Agreement contains other customary
provisions limiting the liability of the Trustee. The Trustee and its
directors, subsidiaries, shareholders, officers, employees, and affiliates
under common control with the Trustee (each a "Trustee Indemnified Party")
will be indemnified from the assets of the Trust and held harmless against any
loss, liability or expense incurred without gross negligence, bad faith,
wilful misconduct, wilful malfeasance on the part of such Trustee Indemnified
Party or reckless disregard of its duties and obligations, arising out of, or
in connection with its acceptance or administration of the Trust, including
the costs and expenses (including counsel fees) of defending against any claim
or liability.
THE SPONSOR
If at any time the Sponsor shall fail to undertake or perform or become
incapable of undertaking or performing any of the duties which by the terms of
the Trust Agreement are required of it to be undertaken or performed, or shall
resign, or shall become bankrupt or its affairs shall be taken over by public
authorities, the
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Trustee may appoint a successor Sponsor as shall be satisfactory to the
Trustee, agree to act as Sponsor itself, or may terminate the Trust Agreement
and liquidate the Trust (see "Termination"). Notice of the resignation or
removal of the Sponsor and the appointment of a successor shall be mailed by
the Trustee to the Depository and the DTC Participants for distribution to
Beneficial Owners (see "The Trust--Book-Entry-Only System"). Upon a successor
Sponsor's execution of a written acceptance of such appointment as Sponsor of
the Trust, such successor Sponsor shall become vested with all of the rights,
powers, duties and obligations of the original Sponsor. Any successor Sponsor
may be compensated at rates deemed by the Trustee to be reasonable.
The Sponsor may resign by executing and delivering to the Trustee an
instrument of resignation. Such resignation shall become effective upon the
appointment of a successor Sponsor and the acceptance of such appointment by
the successor Sponsor, unless the Trustee either agrees to act as Sponsor or
terminates the Trust Agreement and liquidates the Trust, which the Trustee
shall do if no successor Sponsor is appointed (see "Termination").
The dissolution of the Sponsor or its ceasing to exist as a legal entity for
any cause whatsoever will not cause the termination of the Trust Agreement or
the Trust unless the Trustee deems termination to be in the best interests of
the Beneficial Owners of DIAMONDS.
The Trust Agreement provides that the Sponsor is not liable to the Trustee,
the Trust or to the Beneficial Owners of DIAMONDS for taking any action or for
refraining from taking any action made in good faith or for errors in
judgment, but is liable only for its own gross negligence, bad faith, wilful
misconduct or wilful malfeasance in the performance of its duties or its
reckless disregard of its obligations and duties under the Trust Agreement.
The Sponsor is not liable or responsible in any way for depreciation or loss
incurred by the Trust by reason of the sale of any Securities of the Trust.
The Trust Agreement further provides that the Sponsor and its directors,
subsidiaries, shareholders, officers, employees, and affiliates under common
control with the Sponsor (each a "Sponsor Indemnified Party") shall be
indemnified from the assets of the Trust and held harmless against any loss,
liability or expense incurred without gross negligence, bad faith, wilful
misconduct or wilful malfeasance on the part of any Sponsor Indemnified Party
in the performance of its duties or reckless disregard of its obligations and
duties under the Trust Agreement, including the payment of the costs and
expenses of defending against any claim or liability.
SPONSOR
The Sponsor of the Trust is PDR Services Corporation, a Delaware corporation
incorporated on June 15, 1990 with offices c/o the Exchange, 86 Trinity Place,
New York, New York 10006. The Sponsor's Internal Revenue Service Employer
Identification Number is 13-3574560. The Exchange owns all of the Sponsor's
outstanding shares of common stock. The Exchange is a "control person" of the
Sponsor as such term is defined in the Securities Act of 1933.
The Sponsor, at its own expense, may from time to time provide additional
promotional incentives to brokers who sell DIAMONDS to the public. In certain
instances, these incentives may be provided only to those brokers who meet
certain threshold requirements for participation in a given incentive program,
such as selling a significant number of DIAMONDS within a specified time
period.
TRUSTEE
The Trustee is State Street Bank and Trust Company, a bank and trust company
organized under the laws of the Commonwealth of Massachusetts with its
principal place of business at 225 Franklin Street, Boston, Massachusetts
02110. The Trustee's Internal Revenue Service Employer Identification Number
is 04-1867445. The Trustee is subject to supervision and examination by the
Massachusetts Division of Banks and the Federal Reserve Bank of Boston.
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<PAGE>
DEPOSITORY
The Depository Trust Company, New York, New York, a limited purpose trust
company and member of the Federal Reserve System, acts as Depository for
DIAMONDS. The Depository receives customary fees for its services.
LEGAL OPINION
The legality of the DIAMONDS offered hereby has been passed upon by Carter,
Ledyard & Milburn, New York, New York, as counsel for the Sponsor.
INDEPENDENT ACCOUNTANTS
The financial statements as of included in this Prospectus have
been so included in reliance upon the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
DAILY DIAMONDS UNIT TRADING INFORMATION
The Sponsor will make available daily a list of the names and the required
number of shares of each of the Securities in the current Portfolio Deposit.
The Sponsor also intends to make available (a) on a daily basis, the Dividend
Equivalent Payment effective through and including the previous Business Day,
per outstanding DIAMONDS UNIT, and (b) every 15 seconds throughout the trading
day at the Exchange a number representing, on a per DIAMONDS Unit basis, the
sum of the Dividend Equivalent Payment effective through and including the
previous Business Day, plus the current value of the securities portion of a
Portfolio Deposit as in effect on such day (which value may include a cash in
lieu amount to compensate for the omission of a particular Index Security from
such Portfolio Deposit). Intra-day information will be available with respect
to trades and quotes and underlying trading values will be published every 15
seconds throughout the trading day. Information with respect to net asset
value, net accumulated dividend, final dividend amount to be paid, shares
outstanding, estimated cash amount and total cash amount per Creation Unit
will be available daily prior to the opening of trading on the Exchange.
INFORMATION AND COMPARISONS RELATING TO TRUST, SECONDARY MARKET TRADING, NET
ASSET SIZE, PERFORMANCE AND TAX TREATMENT
Information regarding various aspects of the Trust, including the net asset
size thereof, as well as the secondary market trading, the performance and the
tax treatment of DIAMONDS, may be included from time to time in
advertisements, sales literature and other communications as well as in
reports to current or prospective Beneficial Owners.
Information may be provided to prospective investors to help such investors
assess their specific investment goals and to aid in their understanding of
various financial strategies. Such information may present current economic
and political trends and conditions and may describe general principles of
investing such as asset allocation, diversification and risk tolerance, as
well as specific investment techniques such as indexing and hedging. In
addition, information may be presented to prospective or current Beneficial
Owners regarding the purchase of DIAMONDS in the secondary market, such as
margin requirements, types of orders that may be entered, and information
concerning short sales. Similarly, market data symbols, trading fractions,
other trading information and the CUSIP number relating to DIAMONDS may be
included in such information. Comparisons
46
<PAGE>
with other investment vehicles, such as mutual funds, may be made with respect
to the application of such requirements; costs of fund management and
administration; cost and advantages of intraday trading; and rules applicable
to short sales.
Information regarding the Trust's net asset size may be stated in
communications to prospective or current Beneficial Owners for one or more
time periods, including annual, year-to-date or daily periods. Such
information may also be expressed in terms of the total number of DIAMONDS
outstanding as of one or more time periods. Factors integral to the size of
the Trust's net assets, such as creation volume and activity, may also be
discussed, and may be specified from time to time or with respect to various
periods of time. Comparisons of such information during various periods may
also be made, and may be expressed by means of percentages.
Information may be provided to investors regarding the ability to engage in
short sales of DIAMONDS, including reference to any applicable exemption from
the "tick test" provision of the SEC short sale rule (Rule 10a-1 under the
Securities Exchange Act of 1934), to permit short sales on "minus" or "zero-
minus" ticks. Selling short refers to the sale of securities which the seller
does not own, but which the seller arranges to borrow prior to effecting the
sale. Institutional investors may be advised that lending their DIAMONDS Unit
shares to short sellers may generate stock loan credits which may supplement
the return they can earn from an investment in DIAMONDS. These stock loan
credits may provide a useful source of additional income for certain
institutional investors who can arrange to lend DIAMONDS. Potential short
sellers may be advised that a short rebate (functionally equivalent to partial
use of proceeds of the short sale) may reduce their cost of selling short.
Information may be provided to investors regarding capital gains
distributions by the Trust, including historical information relating to such
distributions. Comparisons between the Trust and other investment vehicles
such as mutual funds may be made regarding such capital gains distributions,
as well as relative tax efficiencies between the Trust and such other
investment vehicles (e.g. realization of capital gains or losses to the Trust
and to such other investment vehicles in connection with redemption of their
respective securities). (See "Tax Status of the Trust" for discussion of tax
consequences to Beneficial Owners of DIAMONDS in connection with the sale or
redemption of DIAMONDS.) Based on projected differences between DIAMONDS and
conventional mutual funds with regard to capital gains distributions,
projections may be made regarding comparative capital gains distributions and
tax rates for taxable investors holding DIAMONDS over a long period of time.
Comparisons may also be provided regarding the probable tax impact resulting
from rebalancing of the Trust portfolio (see "The Portfolio--Adjustments to
the Portfolio") and adjustments to the portfolio of an actively managed
investment vehicle.
Specifically, information may be provided to prospective or current
investors comparing and contrasting the tax efficiencies of conventional
mutual funds with DIAMONDS. Both conventional mutual funds and the DIAMONDS
Trust may be required to recognize capital gains incurred as a result of
adjustments to the composition of the DJIA and therefore to their respective
portfolios. From a tax perspective, however, a significant difference between
a conventional mutual fund and the DIAMONDS Trust is the process by which
their shares are redeemed. In cases where a conventional mutual fund
experiences redemptions in excess of subscriptions ("net redemptions") and has
insufficient cash available to fund such net redemptions, such fund may have
to sell stocks held in its portfolio to raise and pay cash to redeeming
shareholders. A mutual fund will generally experience a taxable gain or loss
when it sells such portfolio stocks in order to pay cash to redeeming fund
shareholders. In contrast, the redemption mechanism for DIAMONDS does not
ordinarily involve selling the portfolio stocks held by the DIAMONDS Trust in
the event of a redemption. Instead, the DIAMONDS Trust usually delivers the
actual portfolio of stocks in an "in-kind" exchange to any person redeeming
DIAMONDS Unit in Creation Unit size aggregations (i.e., 50,000 DIAMONDS per
Creation Unit). While this "in-kind" exchange is a taxable transaction to the
redeeming entity (usually a broker/dealer) making the exchange, it generally
does not constitute a taxable transaction at the DIAMONDS Trust level and,
consequently, there is no realization of taxable gain or loss by the DIAMONDS
Trust with respect to such "in-kind" exchanges. In a period of market
appreciation of the DJIA and, consequently, appreciation of DIAMONDS Unit ,
this "in-kind" redemption mechanism has the effect of eliminating the
recognition and distribution of those net unrealized gains
47
<PAGE>
at the DIAMONDS Trust level. Investors should note that although the same
result would occur for conventional mutual funds utilizing an "in-kind"
redemption mechanism, the opportunities to redeem fund shares by delivering
portfolio stocks "in-kind" are limited in most mutual funds.
Investors may be informed that, while no unequivocal statement can be made
as to the net tax impact on a conventional mutual fund resulting from the
purchases and sales of its portfolio stocks over a period of time,
conventional funds that have accumulated substantial unrealized capital gains,
if they experience net redemptions and do not have sufficient available cash,
may be required to make taxable capital gains distributions that are generated
by changes in such fund's portfolio. In contrast, the "in-kind" redemption
mechanism of DIAMONDS may make them more tax efficient investments under most
circumstances than comparable conventional mutual fund shares. As discussed
above, the "in-kind" redemption feature of the DIAMONDS Trust tends to lower
the amount of annual net capital gains distributions to DIAMONDS Unit holders
as compared to their conventional mutual fund counterparts. Since shareholders
are generally required to pay income tax on capital gains distributions, the
smaller the amount of such distributions, the less taxes that are payable
currently. To the extent that the DIAMONDS Trust is not required to recognize
capital gains, the DIAMONDS Unit holder is able, in effect, to defer tax on
such gains until he sells or otherwise disposes of his shares, or the DIAMONDS
Trust terminates. If such holder retains his shares until his death, under
current law the tax basis of such shares would be adjusted to their then fair
market value.
Information regarding the secondary market trading activity of DIAMONDS also
may be presented over one or more stated time periods, such as for daily,
monthly, quarterly or annual periods. DIAMONDS Unit secondary market trading
volume information may be compared with similar information relating to other
issues trading on the Exchange during the same reporting period. Average daily
secondary market trading volume of DIAMONDS may also be reported from time to
time. Comparisons of such information during various periods may also be made,
and may be expressed by means of percentages.
Information may also be provided in communications to prospective investors
or current Beneficial Owners comparing and contrasting the relative advantages
of investing in DIAMONDS as compared to other investment vehicles, such as
mutual funds, both on an individual and a group basis (e.g., stock index
mutual funds). Such information may include comparisons of costs and expense
ratios, expressed either in dollars or basis points, stock lending activities,
permitted investments and hedging activities (e.g., engaging in options or
futures transactions), and portfolio turnover data and analyses. In addition,
such information may quote, reprint or include portions of financial,
scholarly or business publications or periodicals, including model allocation
schedules or portfolios, as the foregoing relate to the comparison of DIAMONDS
to other investment vehicles, current economic, financial and political
conditions, investment philosophy or techniques, or the desirability of owning
DIAMONDS.
In addition, information on the performance of DIAMONDS on the basis of
changes in price per DIAMONDS Unit with or without reinvesting all dividends
and/or any distributions of capital in additional DIAMONDS may be included
from time to time in such information. Total return measures the percentage
growth in the total dollar value of an investment in DIAMONDS (reflecting
dividends and capital appreciation but without provision for any income taxes
payable). Average annualized performance will be stated for various periods.
Total return figures may also be stated for a period from the Initial Date of
Deposit, a date at least twelve months prior to the end of the reporting
period or for annual periods for the life of the Trust. Information on the
DJIA contained in this Prospectus, as updated from time to time, may also be
included from time to time in such material. The performance of the Trust, of
the DJIA (provided information is also given reflecting the performance of the
Trust in comparison to that DJIA) or both may also be compared to the
performance of money managers as reported in market surveys such as SEI Fund
Evaluation Survey (a leading data base of tax-exempt funds) or mutual funds
such as those reported by Lipper Analytical Services Inc., Money Magazine Fund
Watch, Wiesenberger Investment Companies Service, Morningstar Incorporated and
Value Line Investment Survey each of which measures performance following
their own specific and well-defined calculation measures, or of the New York
Stock Exchange Composite Index, the American Stock Exchange Index (indices of
stocks
48
<PAGE>
traded on the New York and American Stock Exchanges, respectively), S&P 500
Index ( a broad-based index of 500 publicly traded common stocks) or similar
measurement standards during the same period of time. In addition to all other
sources of comparative information, comparative performance figures published
by other funds or money managers may be included from time to time.
Information may also be included regarding the aggregate amount of assets
committed to index investing generally by various types of investors, such as
pension funds and other institutional investors, which currently exceeds $300
billion.
Information on the relative price performance of DIAMONDS in relation to
other securities and/or indices may be represented in the form of
"correlation". Correlation is a standard measure of the degree of linear
association between two price series, and ranges from minus one hundred
percent (-100%) (i.e. perfect negative linear association) to positive one
hundred percent (100%) (i.e., perfect linear association).
One important difference between DIAMONDS and conventional mutual fund
shares is that the DIAMONDS are available for purchase or sale on an intraday
basis on the American Stock Exchange. An investor who buys shares in a
conventional mutual fund will usually buy or sell shares at a price at or
related to the closing net asset value per share, as determined by the fund.
In contrast, DIAMONDS are not offered for purchase or redeemed for cash at a
fixed relationship to closing NAV.
Information relating to the relative price performance of DIAMONDS may be
compared against a wide variety of investment categories and asset classes,
including common stocks, small capitalization stocks, long and intermediate
term corporate and government bonds, Treasury bills, the rate of inflation in
the United States (based on the Consumer Price Index ("CPI") and combinations
of various capital markets. Historical returns of these and other capital
markets in the United States may be provided by independent statistical
studies and sources, such as those provided by Ibbotson Associates of Chicago,
Illinois. The performance of these capital markets is based on the returns of
different indices. Information may be presented using the performance of these
and other capital markets to demonstrate general investment strategies. So,
for example, performance of DIAMONDS may be compared to the performance of
selected asset classes such as short-term U.S. Treasury bills, long-term U.S.
Treasury bonds, long-term corporate bonds, mid-capitalization stocks, foreign
stocks and small capitalization stocks and may also be measured against the
rate of inflation as set forth in well-known indices (such as the CPI).
Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. Performance of DIAMONDS may also
be compared to that of other indices or compilations that may be developed and
made available to the investing public in the future. Of course, such
comparisons will only reflect past performance of DIAMONDS and the investment
categories, indices or compilations chosen and no guarantees can be made of
future results regarding the performance of either DIAMONDS or the asset
classes chosen for such comparisons.
DIVIDEND REINVESTMENT SERVICE
The Trust has made the DTC book-entry Dividend Reinvestment Service (the
"Service") available for use by Beneficial Owners through DTC Participants for
reinvestment of their cash proceeds. Note that some DTC Participants may not
elect to utilize the Service; therefore, after the Service is made available
for DIAMONDS, an interested DIAMONDS Unit investor may wish to contact such
investor's broker to ascertain the availability of the Service through such
broker. Interested Beneficial Owners should also note that each broker may
require investors to adhere to specific procedures and timetables in order to
participate in the Service and such investors should ascertain from their
broker such necessary details. DIAMONDS acquired pursuant to the Service will
be held by the Beneficial Owners in the same manner, and subject to the same
terms and conditions, as for original ownership of DIAMONDS.
Distributions reinvested in additional DIAMONDS through the Service will
nevertheless be taxable dividends to Beneficial Owners to the same extent as
if received in cash.
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The Trustee will utilize the cash proceeds of dividends received from all
Beneficial Owners participating in reinvestment through the Service to obtain
Index Securities necessary to create the requisite number of DIAMONDS at the
close of business on each DIAMONDS Unit distribution date. Any cash balance
remaining after the requisite number of DIAMONDS has been created will be
distributed, on a pro rata basis, to all Beneficial Owners who participated in
the Service. Note that brokerage commissions, if any, incurred in obtaining
the Index Securities necessary to create additional DIAMONDS with the cash
from the distributions will be an expense of the Trust.*
ADDITIONAL INFORMATION
This Prospectus does not include all of the information with respect to the
Trust set forth in its registration statement and the exhibits thereto filed
with the Commission, under the Securities Act of 1933, and the 1940 Act, to
which reference is hereby made. Copies of such documents may be inspected
without charge at the Commission's offices at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of all or any part thereof may be obtained
from such office after payment of the fees prescribed by the Commission. Such
information is also available at the offices of the Sponsor at 86 Trinity
Place, New York, New York.
- --------
* It is difficult to estimate the annual dollar amount of brokerage
commissions that might be incurred in connection with the Dividend
Reinvestment Service during any calendar year. The Trustee estimates that
during calendar year 1998, the approximate amount of annual brokerage
commissions incurred in implementing the Service might be in the range of
to per DIAMONDS Unit. There can be no guarantee that either the size
of the Trust or the number of outstanding DIAMONDS will remain constant, or
that dividend payments, the cost of brokerage commissions incurred to
purchase Index Securities or Beneficial Owner participation will remain the
same from year to year.
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GLOSSARY OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"Adjustment Amount"........................................................
"Adjustment Day"...........................................................
"Balancing Amount".........................................................
"Beneficial Owners"........................................................
"Business Day".............................................................
"Cash Component"...........................................................
"Cash Redemption Payment"..................................................
"Closing Time".............................................................
"Code".....................................................................
"Commission"...............................................................
"Creation Unit"............................................................
"Depository Agreement".....................................................
"Depository"...............................................................
"Distributor"..............................................................
"Dividend Equivalent Payment"..............................................
"Dividend Payment Date"....................................................
"DTC Cut-Off Time".........................................................
"DTC Participants".........................................................
"Evaluation Time"..........................................................
"Ex-Dividend Date".........................................................
"Excess Cash Amounts"......................................................
"Exchange".................................................................
"Global Security"..........................................................
"Index Securities".........................................................
"Indirect Participants"....................................................
"Initial Date Deposit".....................................................
"License Agreement"........................................................
"Mandatory Termination Date"...............................................
"Misweighting Amount"......................................................
"Misweighting".............................................................
"NAV Amount"...............................................................
"NSCC Business Day"........................................................
"NSCC".....................................................................
"Participant Agreement"....................................................
"Participating Party"......................................................
"Portfolio Deposit Amount".................................................
"Portfolio Deposit"........................................................
"Portfolio"................................................................
"Record Date"..............................................................
"Request Day"..............................................................
"DJIA".....................................................................
"Securities"...............................................................
"Service"..................................................................
"DIAMONDS Clearing Process"................................................
"DIAMONDS UNIT"............................................................
"Sponsor"..................................................................
"Dow Jones"................................................................
"Termination Date".........................................................
"Transaction Fee"..........................................................
"Transmittal Date".........................................................
"Trust Agreement"..........................................................
"Trust"....................................................................
"Trustee"..................................................................
"Weighting Analysis".......................................................
</TABLE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND ANY
INFORMATION OR REPRESENTATIONS NOT STATED IN IT, OR IN THE REGISTRATION
STATEMENT AND EXHIBITS OF WHICH IT IS A PART, MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE TRUST, THE SPONSOR OR THE TRUSTEE. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY
OFFER TO BUY, ANY SECURITY OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES, OR AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY,
SECURITIES IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION IN IT IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. HOWEVER,
IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED TO BE
DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
THE TRUST IS REGISTERED AS A UNIT INVESTMENT TRUST UNDER THE INVESTMENT
COMPANY ACT OF 1940. REGISTRATION DOES NOT IMPLY THAT THE TRUST OR DIAMONDS
HAVE BEEN GUARANTEED, SPONSORED, RECOMMENDED OR APPROVED BY THE UNITED STATES
OR ANY STATE OR ANY AGENCY OR OFFICER THEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ESSENTIAL INFORMATION.....................................................
PROSPECTUS SUMMARY........................................................
SPECIAL CONSIDERATIONS AND RISK FACTORS...................................
REPORT OF INDEPENDENT ACCOUNTANTS.........................................
STATEMENT OF ASSETS AND LIABILITIES.......................................
SCHEDULE OF INVESTMENTS...................................................
THE TRUST.................................................................
THE PORTFOLIO.............................................................
THE DJIA..................................................................
LICENSE AGREEMENT.........................................................
EXCHANGE LISTING..........................................................
TAX STATUS OF THE TRUST...................................................
CONTINUOUS OFFERING OF DIAMONDS...........................................
EXPENSES OF THE TRUST.....................................................
REDEMPTION OF DIAMONDS....................................................
VALUATION.................................................................
ADMINISTRATION OF THE TRUST...............................................
RESIGNATION, REMOVAL AND LIABILITY........................................
SPONSOR...................................................................
TRUSTEE...................................................................
DEPOSITORY................................................................
LEGAL OPINION.............................................................
INDEPENDENT ACCOUNTANTS...................................................
INFORMATION AND COMPARISONS RELATING TO TRUST, SECONDARY MARKET TRADING,
NET ASSET SIZE, PERFORMANCE AND TAX TREATMENT............................
DIVIDEND REINVESTMENT SERVICE.............................................
ADDITIONAL INFORMATION....................................................
GLOSSARY OF DEFINED TERMS.................................................
</TABLE>
DIAMONDSSM TRUST SERIES 1
----------------
PROSPECTUS
----------------
SPONSOR
PDR SERVICES CORPORATION
----------------
, 1997
