THE DOW INDUSTRIALS(SM) ("DIAMONDS")(SM)
DIAMONDS TRUST, SERIES 1
A UNIT INVESTMENT TRUST
ANNUAL REPORT
OCTOBER 31, 2006
"Dow Jones Industrial Average", "DJIA", "Dow Jones", "The Dow", "THE DOW
INDUSTRIALS", and "DIAMONDS" are trademarks and service marks of Dow Jones &
Company, Inc. ("Dow Jones") and have been licensed for use for certain purposes
by PDR Services LLC, the American Stock Exchange LLC, and State Street Global
Markets, LLC 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.
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 US blue-chip
stocks that are generally considered leaders within their respective industries.
PERFORMANCE OVERVIEW:
The Trust ended its fiscal year on October 31, 2006 with a 12-month return of
18.23% on net asset value as compared to the Dow Jones Industrial Average (the
"Dow") return of 18.47%.
For the twelve month period ended October 31, 2006, the Dow rose 18.47%,
extending the performance from the previous year. In the first half of the
period, the Dow rose 10.24% as strong corporate profits and solid economic
growth overcame rising interest rates, inflation fears, and high commodity
prices. Volatility increased during the period as investors balanced these
concerns with fears of a hard landing in the economy and concerns over new
Federal Reserve Chairman Bernanke's ability to strike a balance between growth
and inflation.
At the end of June the Federal Funds rate was increased to 5.25%, and has since
paused at that level, while the Federal Reserve monitors the impact of the long,
steady increase of the overnight rate. The markets received an additional boost
in the second part of the year from falling energy prices. The Goldman Sachs
Commodity(R) Index (GSCI), with its very heavy energy weighting, fell 19.31% in
the three months ending October 31, 2006. This dramatic fall erased GSCI gains
earlier in the year, and the index ended the year down 14.32%. Lower commodity
prices helped to reduce some inflation concerns. In addition, some investors
hoped the falling energy prices would help boost consumer confidence and
spending. Consumer sentiment suffered during the year while the US housing
market moved through its first correction in some time. The Dow rebounded from a
slightly negative fiscal third quarter with a solid gain of 8.62% in the fiscal
fourth quarter, ending the twelve months up 18.47%.
Telecommunications stocks in the Dow had the highest returns during the year.
Several large mergers helped fuel gains in the sector. Energy stocks also posted
strong gains despite the fall of energy prices late in the year. High prices
during most of the year led to very strong earnings for Exxon Mobil. Healthcare
stocks also performed well. In fact, only the Consumer Staples stocks managed
less than a double digit gain, but still posted a respectable gain.
Gains were spread throughout the Dow, as twenty eight of the thirty names posted
gains for the year. Many names posted strong double digit gains. AT&T Inc ,
Merck & Co. Inc. and McDonald's Corp. were a few of the strongest contributors
during the year. AT&T benefited from mergers in the telecommunications sector,
while Merck and McDonald's benefited from improved results.
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
2
DIAMONDS TRUST, SERIES 1
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2006
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COMMON STOCKS SHARES VALUE
-----------------------------------------------------------------------------------------
3M Co. ..................................................... 4,341,934 $ 342,318,077
Alcoa, Inc. ................................................ 4,341,934 125,525,312
Altria Group, Inc. ......................................... 4,341,934 353,129,492
American Express Co. ....................................... 4,341,934 251,007,205
American International Group, Inc. ......................... 4,341,934 291,647,707
AT&T, Inc. ................................................. 4,341,934 148,711,240
Boeing Co. ................................................. 4,341,934 346,746,849
Caterpillar, Inc. .......................................... 4,341,934 263,598,813
Citigroup, Inc. ............................................ 4,341,934 217,791,409
Coca-Cola Co. (The)......................................... 4,341,934 202,855,156
Disney (Walt) Co. (The)..................................... 4,341,934 136,597,244
Du Pont (E.I.) de Nemours................................... 4,341,934 198,860,577
Exxon Mobil Corp. .......................................... 4,341,934 310,100,926
General Electric Co. ....................................... 4,341,934 152,445,303
General Motors Corp. ....................................... 4,341,934 151,620,335
Hewlett-Packard Co. ........................................ 4,341,934 168,206,523
Home Depot, Inc. ........................................... 4,341,934 162,084,396
Honeywell International, Inc. .............................. 4,341,934 182,882,260
Intel Corp. ................................................ 4,341,934 92,656,872
International Business Machines Corp. ...................... 4,341,934 400,890,766
Johnson & Johnson........................................... 4,341,934 292,646,352
JPMorgan Chase & Co. ....................................... 4,341,934 205,981,349
McDonald's Corp. ........................................... 4,341,934 182,013,873
Merck & Co., Inc. .......................................... 4,341,934 197,210,642
Microsoft Corp. ............................................ 4,341,934 124,656,925
Pfizer, Inc. ............................................... 4,341,934 115,712,541
Procter & Gamble Co. ....................................... 4,341,934 275,235,196
United Technologies Corp. .................................. 4,341,934 285,351,903
Verizon Communications, Inc. ............................... 4,341,934 160,651,558
Wal-Mart Stores, Inc. ...................................... 4,341,934 213,970,508
--------------
Total Common Stocks -- (Cost $7,140,804,351)................ $6,553,107,309
==============
See accompanying notes to financial statements.
3
DIAMONDS TRUST, SERIES 1
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2006
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ASSETS
Investments in securities, at value....................... $6,553,107,309
Cash...................................................... 11,833,239
Receivable for DIAMONDS issued in-kind.................... 22,743
Dividends receivable...................................... 6,124,585
--------------
TOTAL ASSETS................................................ 6,571,087,876
--------------
LIABILITIES
Income distribution payable............................... 7,883,043
Accrued Trustee expense................................... 324,070
Accrued expenses and other liabilities.................... 3,262,880
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TOTAL LIABILITIES........................................... 11,469,993
--------------
NET ASSETS.................................................. $6,559,617,883
==============
NET ASSETS REPRESENTED BY:
Paid in surplus........................................... 7,442,282,676
Undistributed net investment income....................... 3,534,134
Accumulated net realized loss on investments.............. (298,501,885)
Net unrealized depreciation on investments................ (587,697,042)
--------------
NET ASSETS.................................................. $6,559,617,883
==============
NET ASSET VALUE PER DIAMOND................................. $120.69
UNITS OF FRACTIONAL UNDIVIDED INTEREST
("DIAMONDS") OUTSTANDING, UNLIMITED UNITS AUTHORIZED,
$0.00 PAR VALUE........................................ 54,349,200
--------------
COST OF INVESTMENTS......................................... $7,140,804,351
==============
See accompanying notes to financial statements.
4
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, 2006 OCTOBER 31, 2005 OCTOBER 31, 2004
------------------ ------------------ ------------------
INVESTMENT INCOME
Dividend income..................... $ 154,659,959 $ 177,120,908 $ 145,895,782
-------------- ------------- -------------
EXPENSES:
Trustee expense..................... 4,562,765 4,928,790 4,708,689
Marketing expense................... 3,903,738 4,307,114 4,019,534
DJIA license fee.................... 2,555,000 2,655,783 3,750,004
SEC registration fee................ -- 324,223 73,883
Legal and audit services............ 100,378 149,889 89,900
Printing and postage expense........ 275,241 403,199 43,194
Other expenses...................... 109,678 120,310 661
-------------- ------------- -------------
Total expenses........................... 11,506,800 12,889,308 12,685,865
Trustee earnings credit............. (418,803) (280,392) (88,355)
-------------- ------------- -------------
Net expenses after Trustee earnings
credit................................. 11,087,997 12,608,916 12,597,510
-------------- ------------- -------------
NET INVESTMENT INCOME.................... 143,571,962 164,511,992 133,298,272
-------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on investment
transactions...................... 413,807,291 651,853,900 213,134,509
Net change in unrealized
appreciation (depreciation)....... 517,345,427 (297,315,375) (133,449,812)
-------------- ------------- -------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS............................ 931,152,718 354,538,525 79,684,697
-------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................. $1,074,724,680 $ 519,050,517 $ 212,982,969
============== ============= =============
See accompanying notes to financial statements.
5
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, 2006 OCTOBER 31, 2005 OCTOBER 31, 2004
------------------ ------------------ ------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS:
Net investment income............... $ 143,571,962 $ 164,511,992 $ 133,298,272
Net realized gain on investment
transactions...................... 413,807,291 651,853,900 213,134,509
Net change in unrealized
appreciation (depreciation)....... 517,345,427 (297,315,375) (133,449,812)
--------------- --------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................. 1,074,724,680 519,050,517 212,982,969
--------------- --------------- --------------
UNDISTRIBUTED NET INVESTMENT INCOME
INCLUDED IN PRICE OF UNITS ISSUED AND
REDEEMED............................... (1,800,594) (2,410,446) (1,282,877)
--------------- --------------- --------------
DISTRIBUTIONS TO UNITHOLDERS FROM NET
INVESTMENT INCOME...................... (141,435,357) (168,178,022) (130,617,261)
--------------- --------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
FROM ISSUANCE AND REDEMPTION OF
DIAMONDS............................... (1,781,857,294) (1,129,366,247) 2,118,716,178
--------------- --------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
DURING PERIOD.......................... (850,368,565) (780,904,198) 2,199,799,009
NET ASSETS AT BEGINNING OF YEAR.......... 7,409,986,448 8,190,890,646 5,991,091,637
--------------- --------------- --------------
NET ASSETS END OF YEAR*.................. $ 6,559,617,883 $ 7,409,986,448 $8,190,890,646
=============== =============== ==============
*INCLUDES UNDISTRIBUTED NET INVESTMENT
INCOME................................. $ 3,534,134 $ 1,397,529 $ 5,063,559
--------------- --------------- --------------
See accompanying notes to financial statements.
6
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
10/31/06 10/31/05 10/31/04 10/31/03 10/31/02
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF YEAR... $ 104.31 $ 100.48 $ 98.20 $ 84.12 $ 90.84
---------- ---------- ---------- ---------- ----------
INVESTMENT OPERATIONS:
Net investment income(1)......... 2.45 2.39(5) 1.94 1.91 1.73
Net realized and unrealized gain
(loss) on investments......... 16.37 3.91 2.28 14.06 (6.77)
---------- ---------- ---------- ---------- ----------
TOTAL FROM INVESTMENT OPERATIONS..... 18.82 6.30 4.22 15.97 (5.04)
---------- ---------- ---------- ---------- ----------
UNDISTRIBUTED NET INVESTMENT INCOME
INCLUDED IN PRICE OF UNITS ISSUED
AND REDEEMED....................... (0.03) (0.03) 0.00(2) (0.01) 0.00(2)
---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS FROM:
Net investment income............ (2.41) (2.44) (1.94) (1.88) (1.68)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD....... $ 120.69 $ 104.31 $ 100.48 $ 98.20 $ 84.12
========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN(3)........... 18.23% 6.23% 4.27% 19.22% (5.71)%
RATIOS AND SUPPLEMENTAL DATA
Ratios to average net assets:
Net investment income............ 2.21% 2.27% 1.89% 2.12% 1.85%
Total expenses................... 0.18% 0.18% 0.18% 0.18% 0.18%
Net expenses excluding trustee
earnings credit............... 0.17% 0.17% 0.18% 0.18% 0.18%
Net expenses excluding rebates,
trustee earnings credit and
waivers....................... 0.17% 0.17% 0.18% 0.18% 0.18%
Portfolio turnover rate(4)........... 0.01% 7.69% 13.88% 8.71% 0.26%
NET ASSET VALUE, END OF YEAR
(000'S)............................ $6,559,618 $7,409,986 $8,190,891 $5,991,092 $4,118,076
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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 returns do not reflect broker commission charges.
(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.
7
DIAMONDS TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2006
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NOTE 1 -- ORGANIZATION
DIAMONDS Trust, Series 1 (the "Trust") 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 "DIAMOND". 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.
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, Statements 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. Management is currently evaluating the impact, if any, the
adoption of SFAS 157 will have 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 possible 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.
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.
8
DIAMONDS TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 2006
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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 DIAMOND calculations in the financial highlights for all
years presented exclude these differences.
During the fiscal year ended October 31, 2006, the Trust reclassified
$413,859,607 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, 2006, the Trust had the following capital loss carryforwards
which may be used to offset any net realized gains, expiring October 31:
2008.......................................... $ 5,933,194
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, 2006,
2005, and 2004 were as follows:
DISTRIBUTIONS PAID FROM: 2006 2005 2004
------------------------ ------------ ------------ ------------
Ordinary Income................................... $141,435,357 $168,178,022 $130,617,261
As of October 31, 2006, the components of distributable earnings (excluding
unrealized appreciation (depreciation)) on a federal income tax basis were
undistributed ordinary income of $11,417,177 and undistributed long term capital
gain of $0.
9
DIAMONDS TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 2006
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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 a 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. At this time, management is
evaluating the implications, if any, of FIN 48 and its impact on the Trust's
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, 2006:
NET ASSET VALUE OF THE TRUST FEE AS A PERCENTAGE OF NET ASSET VALUE 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 excess amounts earned by the
Trustee with respect to the cash held by the Trustee for the benefit of the
Trust. During the fiscal year ended October 31, 2006, the Adjustment Amount
decreased the Trustee's fee by $359,776. The Adjustment Amount included a
deficiency of net transaction fees from processing orders of $59,027 and a
Trustee earning credit of $418,803.
Effective November 22, 2006, the Trustee has changed the method of computing the
Adjustment Amount to the Trustee Fee such that all income earned with respect to
the cash held for the benefit of the Trust is credited against the Trustee's
Fee. In addition, during the period from December 1, 2006 through December 31,
2006, the Trustee will apply an incremental cash balance credits of
approximately $375,000 (or less than $0.0003 per share per day, assuming 53
million outstanding shares) against its base fee. Such incremental credit will
be calculated and applied on a daily basis for such period.
10
DIAMONDS TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 2006
--------------------------------------------------------------------------------
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. The amounts of such reimbursements by the
Sponsor for the fiscal years ended October 31, 2004, October 31, 2005 and
October 31, 2006 were $0.
Dow Jones & Company, Inc. ("Dow Jones"), the American Stock Exchange LLC (the
"AMEX"), and PDR Services (the "Sponsor") and State Street Global Markets, LLC
("SSGM") have entered into a License Agreement pursuant to which certain Dow
Jones marks may be used in connection with the Trust subject to the payment of
license fees. SSGM is a subsidiary of the Trustee.
INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified against certain liability arising out of 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 4 -- TRUST TRANSACTIONS IN DIAMONDS
Transactions in DIAMONDS were as follows.
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)
============ ===============
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)
============ ================
11
DIAMONDS TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 2006
--------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 2004
-----------------------------
DIAMONDS AMOUNTS
----------- ---------------
DIAMONDS sold.......................................... 72,900,000 $ 7,485,525,585
DIAMONDS issued upon dividend reinvestment............. 11,705 1,201,305
DIAMONDS redeemed...................................... (52,400,000) (5,369,293,589)
Net income equalization................................ -- 1,282,877
----------- ---------------
Net Increase........................................... 20,511,705 $ 2,118,716,178
=========== ===============
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. A transaction fee of $1,000 is 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, 2006, the Trust had net in-kind
contributions, net in-kind redemptions, purchases and sales of investment
securities of $13,287,283,074, $11,504,484,973, $678,200 and $720,258,
respectively. At October 31, 2006, the cost of investments for federal income
tax purposes was $7,141,078,239 accordingly, gross unrealized appreciation was
$125,280,804, and gross unrealized depreciation was $713,251,734, resulting in
net unrealized depreciation of $587,970,930.
12
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 statement 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, 2006, and 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 Trust's management;
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 the Trustee,
and evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 2006 by
correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 15, 2006
13
DIAMONDS TRUST, SERIES 1
OTHER INFORMATION (UNAUDITED)
OCTOBER 31, 2006
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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, 2006 is 100%.
For the fiscal year ended October 31, 2006, 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 2006 Form
1099-DIV.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK PRICE(1) VS NET ASSET VALUE
AS OF OCTOBER 31, 2006
CLOSING PRICE CLOSING 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
------ ------- ------ ------ ------- ------
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
2002.......................... 1 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................................. 18.23% 47.22% 79.52%
Return Based on Bid/Ask Price....................... 18.30% 47.37% 79.22%
DJIA................................................ 18.47% 48.64% 82.07%
AVERAGE ANNUAL TOTAL RETURN
1 YEAR 5 YEAR SINCE FIRST TRADE(2)
------ ------ --------------------
Return Based on NAV................................. 18.23% 8.04% 6.89%
Return Based on Bid/Ask Price....................... 18.30% 8.07% 6.87%
DJIA................................................ 18.47% 8.25% 7.05%
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(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
14
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
State Street Financial Center
One Lincoln Street
Boston, MA 02111
DISTRIBUTOR
ALPS Distributors, Inc.
1625 Broadway, Suite 2200
Denver, CO 80202
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
125 High Street
Boston, MA 02110
LEGAL COUNSEL
Carter, Ledyard & Milburn
2 Wall Street
New York, NY 10005