THE DOW(R) INDUSTRIALS ("DIAMONDS(R)")
DIAMONDS TRUST, SERIES 1
A UNIT INVESTMENT TRUST
ANNUAL REPORT
OCTOBER 31, 2007
"Dow Jones Industrial Average(SM)", "DJIA(R)", "Dow Jones(R)", "The Dow(R)", and
"DIAMONDS(R)" are trademarks and service marks of Dow Jones & Company, Inc.
("Dow Jones") and have been licensed for use for certain purposes by State
Street Global Markets, LLC pursuant to a License Agreement with Dow Jones. The
DIAMONDS Trust, Series 1 (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.
DIAMONDS TRUST, SERIES 1
TRUST OVERVIEW
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OBJECTIVE:
To provide investment results that, before expenses, generally correspond to the
price and yield performance of the Dow Jones Industrial Average.
STRATEGY:
The Trust's holdings are comprised of the 30 stocks in the Dow Jones Industrial
Average, which is designed to capture the price performance of 30 U.S. blue-chip
stocks that are generally considered leaders within their respective industries.
PERFORMANCE OVERVIEW:
The Trust ended its fiscal year on October 31, 2007 with a 12-month return of
17.72% on net asset value as compared to the Dow Jones Industrial Average return
of 17.94%.
In the early part of the fiscal year, U.S. stock returns were helped by strong
growth in corporate profits and accommodating economic conditions. In the latter
part of the year, cracks began showing in the economic environment. U.S.
residential real estate values fell throughout the year, and this led to lower
consumer confidence, fears of a recession caused by falling consumer spending,
and a liquidity crunch in some fixed income markets. Despite these issues, the
Dow Jones Industrial Average gained nearly 18% during the year, continuing its
recent bull run.
Leading performers in the Dow Jones Industrial Average were McDonald's Corp.,
Alcoa, Inc. and Honeywell International, Inc. McDonald's Corp. results from
overseas were very strong, due in part to the weak U.S. Dollar. Alcoa's, Inc.
earnings were aided by strong commodity prices. Honeywell International, Inc.
posted strong increases in sales and earnings. Citigroup, Inc. was the weakest
stock in the Dow Jones Industrial Average during the year. The company was hit
hard by issues in the sub-prime mortgage securities market.
The performance information presented does not reflect the deduction of taxes
that a unitholder would pay on Trust distributions or the redemption of Trust
units. Performance data quoted represents past performance and past performance
does not guarantee future results. An investment return and principal value of
an investment will fluctuate so that an investor's units, when redeemed, may be
worth more or less than their original cost. Current performance may be lower or
higher than performance quoted.
1
DIAMONDS TRUST, SERIES 1
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2007
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COMMON STOCKS SHARES VALUE
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3M Co. ................................................. 5,446,152 $ 470,329,687
Alcoa, Inc. ............................................ 5,446,152 215,613,158
Altria Group, Inc. ..................................... 5,446,152 397,187,865
American Express Co. ................................... 5,446,152 331,942,964
American International Group, Inc. ..................... 5,446,152 343,761,114
AT&T, Inc. ............................................. 5,446,152 227,594,692
Boeing Co. ............................................. 5,446,152 536,936,126
Caterpillar, Inc. ...................................... 5,446,152 406,337,401
Citigroup, Inc. ........................................ 5,446,152 228,193,769
Coca-Cola Co. .......................................... 5,446,152 336,354,347
Du Pont (E.I.) de Nemours & Co. ........................ 5,446,152 269,638,986
Exxon Mobil Corp. ...................................... 5,446,152 500,991,522
General Electric Co. ................................... 5,446,152 224,163,616
General Motors Corp. ................................... 5,446,152 213,434,697
Hewlett-Packard Co. .................................... 5,446,152 281,457,135
Home Depot, Inc. ....................................... 5,446,152 171,608,250
Honeywell International, Inc. .......................... 5,446,152 329,002,042
Intel Corp. ............................................ 5,446,152 146,501,489
International Business Machines Corp. .................. 5,446,152 632,407,170
Johnson & Johnson....................................... 5,446,152 354,925,726
JPMorgan Chase & Co. ................................... 5,446,152 255,969,144
McDonald's Corp. ....................................... 5,446,152 325,135,274
Merck & Co., Inc. ...................................... 5,446,152 317,292,815
Microsoft Corp. ........................................ 5,446,152 200,472,855
Pfizer, Inc. ........................................... 5,446,152 134,029,801
Procter & Gamble Co. ................................... 5,446,152 378,616,487
United Technologies Corp. .............................. 5,446,152 417,120,782
Verizon Communications, Inc. ........................... 5,446,152 250,904,223
Wal-Mart Stores, Inc. .................................. 5,446,152 246,220,532
Walt Disney Co. ........................................ 5,446,152 188,600,244
--------------
Total Common Stocks -- (Cost $9,780,925,978)............ $9,332,743,913
==============
See accompanying notes to financial statements.
2
DIAMONDS TRUST, SERIES 1
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2007
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ASSETS
Investments in securities, at value.......................... $9,332,743,913
Cash......................................................... 12,471,541
Receivable for DIAMONDS issued in-kind....................... 42,195
Dividends receivable......................................... 10,397,747
--------------
Total Assets................................................... 9,355,655,396
--------------
LIABILITIES
Income distribution payable.................................. 10,509,644
Accrued Trustee expense...................................... 303,036
Accrued expenses and other liabilities....................... 4,951,926
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Total Liabilities.............................................. 15,764,606
--------------
NET ASSETS..................................................... $9,339,890,790
==============
NET ASSETS REPRESENTED BY:
Paid in surplus.............................................. 10,068,602,839
Undistributed net investment income.......................... 17,835,012
Accumulated net realized loss on investments................. (298,364,996)
Net unrealized depreciation on investments................... (448,182,065)
--------------
NET ASSETS..................................................... $9,339,890,790
==============
NET ASSET VALUE PER DIAMOND.................................... $139.17
=======
UNITS OF FRACTIONAL UNDIVIDED INTEREST
("DIAMONDS") OUTSTANDING, UNLIMITED UNITS AUTHORIZED, $0.00
PAR VALUE................................................. 67,109,070
--------------
COST OF INVESTMENTS............................................ $9,780,925,978
==============
See accompanying notes to financial statements.
3
DIAMONDS TRUST, SERIES 1
STATEMENTS OF OPERATIONS
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FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
OCTOBER 31, 2007 OCTOBER 31, 2006 OCTOBER 31, 2005
------------------ ------------------ ------------------
INVESTMENT INCOME
Dividend income................... $ 172,683,551 $ 154,659,959 $ 177,120,908
-------------- -------------- -------------
EXPENSES
Trustee expense................... 4,232,050 4,562,765 4,928,790
Marketing expense................. 4,437,144 3,903,738 4,307,114
DJIA license fee.................. 2,555,000 2,555,000 2,655,783
Legal and audit services.......... 174,890 100,378 149,889
SEC registration fee.............. -- -- 324,223
Printing and postage expense...... 119,920 275,241 403,199
Other expenses.................... 98,163 109,678 120,310
-------------- -------------- -------------
Total expenses......................... 11,617,167 11,506,800 12,889,308
Trustee earnings credits.......... (965,742) (418,803) (280,392)
-------------- -------------- -------------
Net expenses after Trustee earnings
credits.............................. 10,651,425 11,087,997 12,608,916
-------------- -------------- -------------
NET INVESTMENT INCOME.................. 162,032,126 143,571,962 164,511,992
-------------- -------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on investment
transactions.................... 854,766,927 413,807,291 651,853,900
Net change in unrealized
appreciation (depreciation)..... 139,514,977 517,345,427 (297,315,375)
-------------- -------------- -------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS.......................... 994,281,904 931,152,718 354,538,525
-------------- -------------- -------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS...................... $1,156,314,030 $1,074,724,680 $ 519,050,517
============== ============== =============
See accompanying notes to financial statements.
4
DIAMONDS TRUST, SERIES 1
STATEMENTS OF CHANGES IN NET ASSETS
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FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
OCTOBER 31, 2007 OCTOBER 31, 2006 OCTOBER 31, 2005
------------------ ------------------ ------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS:
Net investment income............. $ 162,032,126 $ 143,571,962 $ 164,511,992
Net realized gain on investment
transactions.................... 854,766,927 413,807,291 651,853,900
Net change in unrealized
appreciation (depreciation)..... 139,514,977 517,345,427 (297,315,375)
-------------- --------------- ---------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS...................... 1,156,314,030 1,074,724,680 519,050,517
-------------- --------------- ---------------
NET EQUALIZATION CREDITS AND CHARGES... (13,594,558) (1,800,594) (2,410,446)
-------------- --------------- ---------------
DISTRIBUTIONS TO UNITHOLDERS FROM NET
INVESTMENT INCOME.................... (147,731,248) (141,435,357) (168,178,022)
-------------- --------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS
FROM ISSUANCE AND REDEMPTION OF
DIAMONDS............................. 1,785,284,683 (1,781,857,294) (1,129,366,247)
-------------- --------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS
DURING PERIOD........................ 2,780,272,907 (850,368,565) (780,904,198)
NET ASSETS AT BEGINNING OF YEAR........ 6,559,617,883 7,409,986,448 8,190,890,646
-------------- --------------- ---------------
NET ASSETS END OF YEAR*................ $9,339,890,790 $ 6,559,617,883 $ 7,409,986,448
============== =============== ===============
*INCLUDES UNDISTRIBUTED NET INVESTMENT
INCOME............................... $ 17,835,012 $ 3,534,134 $ 1,397,529
-------------- --------------- ---------------
See accompanying notes to financial statements.
5
DIAMONDS TRUST, SERIES 1
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A DIAMOND OUTSTANDING DURING THE YEAR
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FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED ENDED
10/31/07 10/31/06 10/31/05 10/31/04 10/31/03
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF
YEAR............................ $ 120.69 $ 104.31 $ 100.48 $ 98.20 $ 84.12
---------- ---------- ---------- ---------- ----------
INVESTMENT OPERATIONS:
Net investment income(1)..... 2.85 2.45 2.39(5) 1.94 1.91
Net realized and unrealized
gain (loss) on
investments................ 18.57 16.37 3.91 2.28 14.06
---------- ---------- ---------- ---------- ----------
TOTAL FROM INVESTMENT OPERATIONS.. 21.42 18.82 6.30 4.22 15.97
---------- ---------- ---------- ---------- ----------
NET EQUALIZATION CREDITS AND
CHARGES(1)...................... (0.24) (0.03) (0.03) 0.00(2) (0.01)
---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS FROM:
Net investment income........ (2.70) (2.41) (2.44) (1.94) (1.88)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD.... $ 139.17 $ 120.69 $ 104.31 $ 100.48 $ 98.20
========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN(3)........ 17.72% 18.23% 6.23% 4.27% 19.22%
RATIOS AND SUPPLEMENTAL DATA
Ratios to average net assets:
Net investment income........ 2.19% 2.21% 2.27% 1.89% 2.12%
Total expenses............... 0.16% 0.18% 0.18% 0.18% 0.18%
Net expenses excluding
trustee earnings credit.... 0.14% 0.17% 0.17% 0.18% 0.18%
Net expenses excluding
rebates, trustee earnings
credit and waivers......... 0.14% 0.17% 0.17% 0.18% 0.18%
Portfolio turnover rate(4)........ 1.45% 0.01% 7.69% 13.88% 8.71%
NET ASSET VALUE, END OF YEAR
(000'S)......................... $9,339,891 $6,559,618 $7,409,986 $8,190,891 $5,991,092
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(1) Per share numbers have been calculated using the average shares method.
(2) Amount shown represents less than $0.005.
(3) Total return is calculated assuming a purchase of shares at net asset value
per share on the first day and a sale at net asset value per share on the
last day of each period reported. Distributions are assumed, for the
purposes of this calculation, to be reinvested at the net asset value per
share on the respective payment dates of the Fund. Total return for a period
of less than one year is not annualized. Broker commission charges are not
included in the calculation.
(4) Portfolio turnover ratio excludes securities received or delivered from
processing creations or redemptions of DIAMONDS.
(5) Net investment income per unit reflects receipt of a one time dividend from
a portfolio holding (Microsoft Corp.). The effect of this dividend amounted
to $0.22 per share.
See accompanying notes to financial statements.
6
DIAMONDS TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2007
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NOTE 1 -- ORGANIZATION
DIAMONDS Trust, Series 1 is a unit investment trust created under the laws of
the State of New York and registered under the Investment Company Act of 1940,
as amended. The Trust was created to provide investors with the opportunity to
purchase units of beneficial interest in the Trust representing proportionate
undivided interests in the portfolio of securities consisting of substantially
all of the component common stocks, which comprise the Dow Jones Industrial
Average (the "DJIA"). Each unit of fractional undivided interest in the Trust is
referred to as a "DIAMONDS". The Trust commenced operations on January 14, 1998
upon the initial issuance of 500,000 DIAMONDS (equivalent to ten "Creation
Units" -- see Note 4) in exchange for a portfolio of securities assembled to
reflect the intended portfolio composition of the Trust.
Under the Trust Agreement, the Sponsor and Trustee (each as defined below) are
indemnified against certain liabilities arising from the performance of their
duties to the Trust. Additionally, in the normal course of business, the Trust
enters into contracts with service providers that contain general
indemnification clauses. The Trust's maximum exposure under these arrangements
is unknown as this would involve future claims that may be made against the
Trust that have not yet occurred. However, based on experience the Trust expects
the risk of loss to be remote.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that effect the reported amounts and disclosures in
the financial statements. Actual results could differ from these estimates. The
following is a summary of significant accounting policies followed by the Trust.
SECURITY VALUATION
Portfolio securities are valued based on the closing sale price on the exchange
which is deemed to be the principal market for the security, except for
securities listed on the NASDAQ which are valued at the NASDAQ official closing
price. If there is no closing sale price available or official closing price,
valuation will be determined by the Trustee in good faith based on available
information.
In September, 2006, Statement of Financial Accounting Standards No. 157, Fair
Value Measurements ("SFAS 157"), was issued and is effective for fiscal years
beginning after November 15, 2007. SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. The Trustee is currently evaluating the impact, if any, the
adoption of SFAS 157 will have on the Trust's financial statements. The Trustee
does not anticipate SFAS 157 will have a material impact on the Trust's
financial statements.
INVESTMENT RISK
The Trust invests in various investments which are exposed to risks, such as
market risk. Due to the level of risk associated with certain investments it is
at least reasonably possibly that changes in the values of investment securities
will occur in the near term and that such changes could materially affect the
amounts reported in the financial statements.
7
DIAMONDS TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 2007
--------------------------------------------------------------------------------
INVESTMENT TRANSACTIONS
Investment transactions are recorded on the trade date. Realized gains and
losses from the sale or disposition of securities are recorded on the identified
cost basis. Dividend income is recorded on the ex-dividend date.
DISTRIBUTIONS TO UNITHOLDERS
The Trust declares and distributes dividends from net investment income to its
unitholders monthly. The Trust will distribute net realized capital gains, if
any, at least annually.
EQUALIZATION
The Trust follows the accounting practice known as "Equalization" by which a
portion of the proceeds from sales and costs of reacquiring the Trust's units,
equivalent on a per unit basis to the amount of distributable net investment
income on the date of the transaction, is credited or charged to undistributed
net investment income. As a result, undistributed net investment income per unit
is unaffected by sales or reacquisitions of the Trust's units.
FEDERAL INCOME TAX
The Trust has qualified and intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended. By
so qualifying and electing, the Trust will not be subject to federal income
taxes to the extent it distributes its taxable income, including any net
realized capital gains, for each fiscal year. In addition, by distributing
during each calendar year substantially all of its net investment income and
capital gains, if any, the Trust will not be subject to federal excise tax.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments for income
equalization, in-kind transactions and losses deferred due to wash sales. Net
investment income per share calculations in the financial highlights for all
years presented exclude these differences.
During the fiscal year ended October 31, 2007, the Trust reclassified
$854,650,408 of non-taxable security gains realized in the in-kind redemption of
Creation Units (Note 4) as an increase to paid in surplus in the Statements of
Assets and Liabilities.
At October 31, 2007, the Trust had the following capital loss carryforwards
which may be used to offset any net realized gains, expiring October 31:
2008...................................... 5,816,675
2010...................................... 2,065,467
2011...................................... 68,716,435
2012...................................... 221,460,585
2014...................................... 52,316
The tax character of distributions paid during the year ended October 31, 2007,
2006, and 2005 were as follows:
DISTRIBUTIONS PAID FROM: 2007 2006 2005
------------------------ ------------ ------------ ------------
Ordinary Income.............................. $147,731,248 $141,435,357 $168,178,022
8
DIAMONDS TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 2007
--------------------------------------------------------------------------------
As of October 31, 2007, the components of distributable earnings (excluding
unrealized appreciation (depreciation)) on a federal income tax basis were
undistributed ordinary income of $28,344,656 and undistributed long term capital
gain of $0.
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax positions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Recent SEC guidance allows
implementing FIN 48 in Fund NAV calculations as late as the Fund's last NAV
calculation in the first required financial statement reporting period. As a
result, the Fund will incorporate FIN 48 in its semi-annual report on April 30,
2008. At this time, the Trustee is evaluating the implications of FIN 48 and its
impact, if any, in the financial statements has not yet been determined.
NOTE 3 -- TRANSACTIONS WITH THE TRUSTEE AND SPONSOR
In accordance with the Trust Agreement, State Street Bank and Trust Company (the
"Trustee") maintains the Trust's accounting records, acts as custodian and
transfer agent to the Trust, and provides administrative services, including
filing of all required regulatory reports. The Trustee is also responsible for
determining the composition of the portfolio of securities which must be
delivered and/or received in exchange for the issuance and/or redemption of
Creation Units of the Trust, and for adjusting the composition of the Trust's
portfolio from time to time to conform to changes in the composition and/or
weighting structure of the DJIA. For these services, the Trustee received a fee
at the following annual rates for the fiscal year ended October 31, 2007:
FEE AS A PERCENTAGE OF NET ASSET VALUE
NET ASSET VALUE OF THE TRUST OF THE TRUST
---------------------------- --------------------------------------
$0 - $499,999,999 10/100 of 1% per annum plus or minus
the Adjustment Amount
$500,000,000 - $2,499,999,999 8/100 of 1% per annum plus or minus
the Adjustment Amount
$2,500,000,000 - and above 6/100 of 1% per annum plus or minus
the Adjustment Amount
The Adjustment Amount is the sum of (a) the excess or deficiency of transaction
fees received by the Trustee, less the expenses incurred in processing orders
for creation and redemption of DIAMONDS and (b) the amounts earned by the
Trustee with respect to the cash held by the Trustee for the benefit of the
Trust. During the year ended October 31, 2007, the Adjustment Amount reduced the
Trustee's fee by $1,770,836. The Adjustment Amount included an excess of net
transaction fees from processing orders of $805,094 and a Trustee earnings
credit of $965,742.
Effective November 1, 2006, the Trustee changed the method of computing the
Adjustment Amount to the Trustee Fee such that all income earned with respect to
cash held for the benefit of the Trust is credited against the Trustee's
9
DIAMONDS TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 2007
--------------------------------------------------------------------------------
Fee. In addition, during the period from December 1, 2006 through December 31,
2006, the Trustee applied incremental cash balance credits of $374,030 which is
included in the Trustee earnings credit of $965,742.
PDR Services LLC (the "Sponsor", a wholly-owned subsidiary of the American Stock
Exchange LLC) agreed to reimburse the Trust for, or assume, the ordinary
operating expenses of the Trust which exceeded 18.00/100 of 1% per annum of the
daily net asset value of the Trust. There were no such reimbursements by the
Sponsor for the fiscal years ended October 31, 2005, October 31, 2006 and
October 31, 2007.
Dow Jones & Company, Inc. ("Dow Jones"), the American Stock Exchange LLC (the
"AMEX"), the Sponsor and State Street Global Markets, LLC ("SSGM") have entered
into a License Agreement. The License Agreement grants SSGM, an affiliate of the
Trustee, a license to use the DJIA as a basis for determining the composition of
the Portfolio and to use certain trade names and trademarks of Dow Jones in
connection with the Portfolio. The Trustee on behalf of the Trust, the Sponsor
and the Exchange have each received a sublicense from SSGM for the use of the
DJIA and such trade names and trademarks in connection with their rights and
duties with respect to the Trust. The License Agreement may be amended without
the consent of any of the Beneficial Owners of DIAMONDS. Currently, the License
Agreement is scheduled to terminate on December 31, 2017, but its term may be
extended without the consent of any of the Beneficial Owners of DIAMONDS. The
Trust pays an annual sub-license fee to Dow Jones of an amount equal to 0.05% on
the first $1 billion of the then rolling average asset balance, and 0.04% on any
excess rolling average asset balance over and above $1 billion. The minimum
annual fee for the Trust is $1 million.
NOTE 4 -- TRUST TRANSACTIONS IN DIAMONDS
Transactions in DIAMONDS were as follows.
YEAR ENDED OCTOBER 31, 2007
--------------------------------
DIAMONDS AMOUNTS
------------ ----------------
DIAMONDS sold................................... 283,800,000 $ 37,094,855,531
DIAMONDS issued upon dividend reinvestment...... 9,870 1,275,186
DIAMONDS redeemed............................... (271,050,000) (35,324,440,592)
Net income equalization......................... -- 13,594,558
------------ ----------------
Net Increase.................................... 12,759,870 $ 1,785,284,683
============ ================
YEAR ENDED OCTOBER 31, 2006
--------------------------------
DIAMONDS AMOUNTS
------------ ----------------
DIAMONDS sold................................... 142,300,000 $ 15,848,129,501
DIAMONDS issued upon dividend reinvestment...... 12,974 1,429,406
DIAMONDS redeemed............................... (159,000,000) (17,633,216,795)
Net income equalization......................... -- 1,800,594
------------ ----------------
Net Decrease.................................... (16,687,026) $ (1,781,857,294)
============ ================
10
DIAMONDS TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 2007
--------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 2005
--------------------------------
DIAMONDS AMOUNTS
------------ ----------------
DIAMONDS sold................................... 117,800,000 $ 12,383,980,226
DIAMONDS issued upon dividend reinvestment...... 16,090 1,702,587
DIAMONDS redeemed............................... (128,300,000) (13,517,459,506)
Net income equalization......................... -- 2,410,446
------------ ----------------
Net Decrease.................................... (10,483,910) $ (1,129,366,247)
============ ================
Except for under the Trust's dividend reinvestment plan, DIAMONDS are issued and
redeemed by the Trust only in Creation Unit size aggregations of 50,000
DIAMONDS. Such transactions are only permitted on an in-kind basis, with a
separate cash payment which is equivalent to the undistributed net investment
income per DIAMOND (income equalization) and a balancing cash component to
equate the transaction to the net asset value per unit of the Trust on the
transaction date. Transaction fees at scheduled amounts ranging from $1,000 to
$4,000 are charged in connection with each creation or redemption of Creation
Units through the DIAMONDS Clearing Process per Participating party per day,
regardless of the number of Creation Units created or redeemed. Transaction fees
are received by the Trustee and used to offset the expense of processing orders.
NOTE 5 -- INVESTMENT TRANSACTIONS
For the fiscal year ended October 31, 2007, the Trust had net in-kind
contributions, net in-kind redemptions, purchases and sales of investment
securities of $29,091,375,495, $27,314,136,259, $113,841,346 and $105,502,079,
respectively. At October 31, 2007, the cost of investments for federal income
tax purposes was $9,781,179,496 accordingly, gross unrealized appreciation was
$151,349,478, and gross unrealized depreciation was $599,785,061, resulting in
net unrealized depreciation of $448,435,583.
11
DIAMONDS TRUST, SERIES 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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To the Trustee and Unitholders of
DIAMONDS Trust, Series 1
In our opinion, the accompanying statements of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of DIAMONDS Trust, Series 1 (the
"Trust") at October 31, 2007, the results of its operations, the changes in its
net assets and the financial highlights for the periods indicated, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trustee; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 2007 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 19, 2007
12
DIAMONDS TRUST, SERIES 1
OTHER INFORMATION (UNAUDITED)
OCTOBER 31, 2007
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TAX INFORMATION
For Federal income tax purposes, the percentage of Trust ordinary distributions
which qualify for the corporate dividends received deduction for the fiscal year
ended October 31, 2007 is 96.68%.
For the fiscal year ended October 31, 2007, certain dividends paid by the Trust
may be designated as qualified dividend income and subject to a maximum tax rate
of 15%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of
2003. Complete information will be reported in conjunction with your 2007 Form
1097-DIV.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK PRICE(1) VS NET ASSET VALUE
AS OF OCTOBER 31, 2007
BID/ASK PRICE BID/ASK PRICE
ABOVE NAV BELOW NAV
--------------------------- ---------------------------
50-99 100-199 >200 50-99 100-199 >200
BASIS BASIS BASIS BASIS BASIS BASIS
POINTS POINTS POINTS POINTS POINTS POINTS
------ ------- ------ ------ ------- ------
2007............................... 0 0 0 0 0 0
2006............................... 0 0 0 0 0 0
2005............................... 0 0 0 0 0 0
2004............................... 0 0 0 0 0 0
2003............................... 0 0 0 0 0 0
COMPARISON OF TOTAL RETURNS BASED ON NAV AND BID/ASK PRICE
CUMULATIVE TOTAL RETURN
1 YEAR 5 YEAR SINCE FIRST TRADE(2)
------ ------ --------------------
Return Based on NAV.............................. 17.72% 83.79% 115.21%
Return Based on Bid/Ask Price.................... 17.79% 84.05% 113.67%
DJIA............................................. 17.94% 85.66% 114.73%
AVERAGE ANNUAL TOTAL RETURN
1 YEAR 5 YEAR SINCE FIRST TRADE(2)
------ ------ --------------------
Return Based on NAV.............................. 17.72% 12.95% 8.14%
Return Based on Bid/Ask Price.................... 17.79% 12.97% 8.06%
DJIA............................................. 17.94% 13.17% 8.13%
--------
(1) Currently, the Bid/Ask Price is calculated based on the best bid and best
offer on the AMEX at 4:00 p.m. However, prior to April 3, 2001, the
calculation of the Bid/Ask Price was based on the midpoint of the best bid
and best offer at the close of trading on the AMEX, ordinarily 4:15 p.m.
(2) The Trust commenced trading on the AMEX on January 20, 1998.
13
DIAMONDS TRUST, SERIES 1
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SPONSOR
PDR Services LLC
c/o American Stock Exchange LLC
86 Trinity Place
New York, NY 10006
TRUSTEE
State Street Bank and Trust Company
One Lincoln Street
Boston, MA 02111
DISTRIBUTOR
ALPS Distributors, Inc.
1290 Broadway, Suite 1100
Denver, CO 80203
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
125 High Street
Boston, MA 02110
LEGAL COUNSEL
Katten Muchin Rosenman LLP
575 Madison Avenue
New York, NY 10022
DIAMONDS TRUST