THE DOW(R) INDUSTRIALS ("DIAMONDS(R)")
DIAMONDS TRUST, SERIES 1
A UNIT INVESTMENT TRUST
ANNUAL REPORT
OCTOBER 31, 2008
"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 ("SSgM") pursuant to a License Agreement with Dow
Jones. The DIAMONDS Trust, Series 1 (the "Trust"), based on the DJIA, is
permitted to use these marks pursuant to a sublicense from SSgM. The Trust 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:
The DIAMONDS Trust, Series 1 (the "Trust") is an exchange traded fund designed
to, 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.
PERFORMANCE OVERVIEW:
The Trust ended its fiscal year on October 31, 2008 with a 12-month total return
of -31.23% on net asset value as compared to the Dow Jones Industrial Average
(the "Index") return of -31.24%. Index returns do not reflect deductions for
fees and expenses associated with investing in the Fund, which would reduce
Index returns, if applied. It is not possible to invest directly in an Index.
U.S. equity markets posted their steepest declines in recent memory over the
last year. The declines in the U.S. equity markets, triggered by the sub-prime
mortgage crisis and losses on mortgage back securities, resulted in huge losses
at many financial firms and fueled a severe credit crunch for much of the year.
As funds available to borrow became scarce, consumers and companies began to
suffer the effects of a tight credit market. Consumers cut spending and
corporations began cutting expenses and laying-off staff. The unemployment rate
rose throughout the year, rising to levels not seen since the last recession.
Confidence fell sharply in the markets and the flight to quality became a
stampede; T-Bills traded at extremely low (and even negative) yields.
Governments and Central Banks around the world took unprecedented action to
combat the downturn. Interest rates were cut, facilities were created to help
create liquidity in short term markets, loans were made available to investments
banks, and a $700 billion relief program was passed by the U.S. Congress, the
Troubled Asset Relief Program ("TARP"). Many governments (including the U.S.
and U.K.) took equity stakes and/or nationalized banks. In addition, the U.S.
government helped broker a number of mergers and rescues in the financial sector
including JP Morgan and Bear Stearns, Bank of America and Merrill Lynch, and
issued emergency loans of well over $100 Billion to American International
Group, Inc. (AIG). All of these actions were taken with the intent to ease an
economic downturn and beginning to restore confidence in the credit markets.
In the Trust, every name lost value during the year and some of the biggest
companies in the United States took humbling losses to their stock prices. AIG
was rescued by the government and lost a significant amount of its value
resulting in AIG being removed from the Index in mid September. General Motors
lost value as the credit crunch lowered sales and created deep concerns over the
company's liquidity and ability to finance its operations. Exxon Mobil's stock
price fell, however the shares still had a relatively strong performance for the
year. Exxon reported the highest earnings ever in a single quarter earlier in
the year, but the stock fell along with the price of oil which plummeted almost
$100 per barrel in the last 4 months of the year. Three of the best performers
were McDonalds, Johnson & Johnson and Procter & Gamble. McDonalds benefited from
strong results outside the U.S. Big name consumer staples firms seemed to
benefit from the flight of investors to defensive stocks, which have
historically managed to post relatively steady results in economic downturns.
1
DIAMONDS TRUST, SERIES 1
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2008
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COMMON STOCKS SHARES VALUE
----------------------------------------------------------------------------------------
3M Co. ................................................. 7,776,952 $ 500,058,014
Alcoa, Inc. ............................................ 7,776,952 89,512,718
American Express Co. ................................... 7,776,952 213,866,180
AT&T, Inc. ............................................. 7,776,952 208,189,005
Bank of America Corp. .................................. 7,776,952 187,968,930
Boeing Co. ............................................. 7,776,952 406,501,281
Caterpillar, Inc. ...................................... 7,776,952 296,846,258
Chevron Corp. .......................................... 7,776,952 580,160,619
Citigroup, Inc. ........................................ 7,776,952 106,155,395
Coca-Cola Co. .......................................... 7,776,952 342,652,505
Du Pont (E.I.) de Nemours & Co. ........................ 7,776,952 248,862,464
Exxon Mobil Corp. ...................................... 7,776,952 576,427,682
General Electric Co. ................................... 7,776,952 151,728,333
General Motors Corp. ................................... 7,776,952 44,950,783
Hewlett-Packard Co. .................................... 7,776,952 297,701,723
Home Depot, Inc. ....................................... 7,776,952 183,458,298
Intel Corp. ............................................ 7,776,952 124,431,232
International Business Machines Corp. .................. 7,776,952 723,023,227
Johnson & Johnson....................................... 7,776,952 477,038,236
JPMorgan Chase & Co. ................................... 7,776,952 320,799,270
Kraft Foods, Inc. (Class A)............................. 7,776,952 226,620,381
McDonald's Corp. ....................................... 7,776,952 450,518,829
Merck & Co., Inc. ...................................... 7,776,952 240,696,664
Microsoft Corp. ........................................ 7,776,952 173,659,338
Pfizer, Inc. ........................................... 7,776,952 137,729,820
Procter & Gamble Co. ................................... 7,776,952 501,924,482
United Technologies Corp. .............................. 7,776,952 427,421,282
Verizon Communications, Inc. ........................... 7,776,952 230,742,166
Wal-Mart Stores, Inc. .................................. 7,776,952 434,031,691
Walt Disney Co. ........................................ 7,776,952 201,423,057
--------------
Total Common Stocks -- (Cost $12,791,948,720)........... $9,105,099,863
==============
See accompanying notes to financial statements.
2
DIAMONDS TRUST, SERIES 1
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2008
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ASSETS
Investments in securities, at value.......................... $ 9,105,099,863
Cash......................................................... 20,368,437
Dividends receivable......................................... 15,445,692
---------------
Total Assets................................................... 9,140,913,992
---------------
LIABILITIES
Income distribution payable.................................. 16,564,734
Payable for DIAMONDS redeemed in-kind........................ 17,535
Accrued Trustee expense...................................... 799,304
Accrued expenses and other liabilities....................... 9,302,143
---------------
Total Liabilities.............................................. 26,683,716
---------------
NET ASSETS .................................................... $ 9,114,230,276
===============
NET ASSETS CONSIST OF:
Paid in surplus.............................................. $13,599,260,467
Undistributed net investment income.......................... 2,493,120
Accumulated net realized loss on investments................. (800,674,454)
Net unrealized depreciation on investments................... (3,686,848,857)
---------------
NET ASSETS..................................................... $ 9,114,230,276
===============
NET ASSET VALUE PER DIAMOND.................................... $ 93.22
===============
UNITS OF FRACTIONAL UNDIVIDED INTEREST
("DIAMONDS") OUTSTANDING, UNLIMITED UNITS AUTHORIZED, $0.00
PAR VALUE................................................. 97,770,848
---------------
COST OF INVESTMENTS............................................ $12,791,948,720
===============
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, 2008 OCTOBER 31, 2007 OCTOBER 31, 2006
------------------ ------------------ ------------------
INVESTMENT INCOME
Dividend income................... $ 234,266,377 $ 172,683,551 $ 154,659,959
--------------- -------------- --------------
EXPENSES
Trustee expense................... 4,878,701 4,232,050 4,562,765
Marketing expense................. 5,319,946 4,437,144 3,903,738
DJIA license fee.................. 4,152,507 2,555,000 2,555,000
Legal and audit services.......... 181,128 174,890 100,378
Other expenses.................... 389,842 218,083 384,919
--------------- -------------- --------------
Total expenses......................... 14,922,124 11,617,167 11,506,800
Trustee earnings credits.......... -- (965,742) (418,803)
--------------- -------------- --------------
Net expenses after Trustee earnings
credits.............................. 14,922,124 10,651,425 11,087,997
--------------- -------------- --------------
NET INVESTMENT INCOME.................. 219,344,253 162,032,126 143,571,962
--------------- -------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on
investment transactions......... (172,099,218) 854,766,927 413,807,291
Net change in unrealized
appreciation (depreciation)..... (3,238,666,792) 139,514,977 517,345,427
--------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS....................... (3,410,766,010) 994,281,904 931,152,718
--------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS............ $(3,191,421,757) $1,156,314,030 $1,074,724,680
=============== ============== ==============
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, 2008 OCTOBER 31, 2007 OCTOBER 31, 2006
------------------ ------------------ ------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS:
Net investment income............. $ 219,344,253 $ 162,032,126 $ 143,571,962
Net realized gain (loss) on
investment transactions......... (172,099,218) 854,766,927 413,807,291
Net change in unrealized
appreciation (depreciation)..... (3,238,666,792) 139,514,977 517,345,427
--------------- -------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS............ (3,191,421,757) 1,156,314,030 1,074,724,680
--------------- -------------- ---------------
NET EQUALIZATION CREDITS AND CHARGES... 1,639,517 (13,594,558) (1,800,594)
--------------- -------------- ---------------
DISTRIBUTIONS TO UNITHOLDERS FROM NET
INVESTMENT INCOME.................... (218,527,182) (147,731,248) (141,435,357)
--------------- -------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS
FROM ISSUANCE AND REDEMPTION OF
DIAMONDS............................. 3,182,648,908 1,785,284,683 (1,781,857,294)
--------------- -------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS.. (225,660,514) 2,780,272,907 (850,368,565)
NET ASSETS AT BEGINNING OF YEAR........ 9,339,890,790 6,559,617,883 7,409,986,448
--------------- -------------- ---------------
NET ASSETS AT END OF YEAR*............. $ 9,114,230,276 $9,339,890,790 $ 6,559,617,883
=============== ============== ===============
*INCLUDES UNDISTRIBUTED NET INVESTMENT
INCOME............................... $ 2,493,120 $ 17,835,012 $ 3,534,134
--------------- -------------- ---------------
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
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2008 2007 2006 2005 2004
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF
YEAR............................ $ 139.17 $ 120.69 $ 104.31 $ 100.48 $ 98.20
---------- ---------- ---------- ---------- ----------
INVESTMENT OPERATIONS:
Net investment income(1)..... 2.96 2.85 2.45 2.39(5) 1.94
Net realized and unrealized
gain (loss) on
investments................ (45.91) 18.57 16.37 3.91 2.28
---------- ---------- ---------- ---------- ----------
TOTAL FROM INVESTMENT OPERATIONS.. (42.95) 21.42 18.82 6.30 4.22
---------- ---------- ---------- ---------- ----------
NET EQUALIZATION CREDITS AND
CHARGES(1)...................... 0.02 (0.24) (0.03) (0.03) 0.00(2)
---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS FROM:
Net investment income........ (3.02) (2.70) (2.41) (2.44) (1.94)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF YEAR...... $ 93.22 $ 139.17 $ 120.69 $ 104.31 $ 100.48
========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN(3)........ (31.23)% 17.72% 18.23% 6.23% 4.27%
RATIOS AND SUPPLEMENTAL DATA
Ratios to average net assets:
Net investment income........ 2.49% 2.19% 2.21% 2.27% 1.89%
Total expenses............... 0.17% 0.16% 0.18% 0.18% 0.18%
Net expenses excluding
Trustee earnings credit.... 0.17% 0.14% 0.17% 0.17% 0.18%
Portfolio turnover rate(4)........ 11.27% 1.45% 0.01% 7.69% 13.88%
NET ASSET VALUE, END OF YEAR
(000'S)......................... $9,114,230 $9,339,891 $6,559,618 $7,409,986 $8,190,891
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(1) Per unit 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 Trust. 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 unit.
See accompanying notes to financial statements.
6
DIAMONDS TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2008
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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 a security representing a proportionate undivided
interest in a portfolio of securities consisting of substantially all of the
component common stocks, in substantially the same weighting, 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.
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 material 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 ("US GAAP") requires
management to make estimates and assumptions that affect 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
The value of the Trust's portfolio securities is based on the market price of
the securities, which generally means a valuation obtained from an exchange or
other market (or based on a price quotation or other equivalent indication of
value supplied by an exchange or other market) or a valuation obtained from an
independent pricing service.
In September 2006, Statement of Financial Accounting Standards No. 157, Fair
Value Measurements ("SFAS 157" or the "Statement"), 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. As a result, the Trust will adopt SFAS 157 for the
fiscal year beginning November 1, 2008. The Trustee is evaluating the
application of the Statement to the Trust, and believes the impact will be
limited to expanded disclosures resulting from the adoption of this Statement in
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.
7
DIAMONDS TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 2008
--------------------------------------------------------------------------------
An investment in the Trust involves risks similar to those of investing in any
fund of equity securities, such as market fluctuations caused by such factors as
economic and political developments, changes in interest rates and perceived
trends in stock prices. You should anticipate that the value of DIAMONDS will
decline, more or less, in correlation with any decline in value of the DJIA. The
values of equity securities could decline generally or could underperform other
investments. Further, the Trust would not sell an equity security because the
security's issuer was in financial trouble unless that security is removed from
the DJIA.
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 continue 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 those determined in accordance with US
GAAP. 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 unit calculations in the financial highlights for all
years presented exclude these differences.
During the fiscal year ended October 31, 2008, the Trust reclassified
$341,238,222 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 Statement of
Assets and Liabilities.
8
DIAMONDS TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 2008
--------------------------------------------------------------------------------
At October 31, 2008, the Trust had the following capital loss carryforwards
which may be used to offset any net realized gains, expiring October 31:
2010...................................... $ 2,065,467
2011...................................... 68,716,435
2012...................................... 221,460,584
2014...................................... 52,316
2016...................................... 506,750,845
The tax character of distributions paid during the year ended October 31, 2008,
2007, and 2006 were as follows:
2008 2007 2006
DISTRIBUTIONS PAID FROM: ------------ ------------ ------------
Ordinary Income.............................. $218,527,182 $147,731,248 $141,435,357
There were no significant differences between the book basis and tax basis
components of net assets other than differences in the net unrealized
appreciation (depreciation) in value of investments attributable to the tax
deferral of losses on wash sales and undistributed ordinary income attributable
to dividends payable at period end.
As of October 31, 2008, the components of distributable earnings (excluding
unrealized appreciation/(depreciation)) on the tax basis were undistributed
ordinary income of $19,057,854 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" or the "Interpretation"). 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 Trust's tax return 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 a
"more-likely-than-not" threshold would be recorded as a tax 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.
The Trust adopted the provisions of FIN 48 on November 1, 2007. Management
evaluated the implications of FIN 48 and determined that the tax positions met
the "more-likely than not" threshold. There was no impact resulting from the
adoption of this Interpretation on the Trust's financial statements. The Trust's
federal tax returns for the prior three fiscal years remain subject to
examination by the Internal Revenue Service. It is the Trust's policy to record
interest and penalty charges on underpaid taxes associated with its tax
positions as interest expense and miscellaneous expense, respectively. No such
charges were recorded in the current financial statements.
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 certain administrative services. 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
9
DIAMONDS TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 2008
--------------------------------------------------------------------------------
weighting structure of the DJIA. For these services, the Trustee received a fee
at the following annual rates for the year ended October 31, 2008:
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, 2008, the Adjustment Amount reduced the
Trustee's fee by $1,011,636. The Adjustment Amount included an excess of net
transaction fees from processing orders of $624,774 and a Trustee earnings
credit of $386,862. Prior to 2008, the Trustee earnings credits were presented
seperately on the Statements of Operation.
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 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 NYSE Alternext US
LLC, formerly the American Stock Exchange LLC ("NYSE Alternext"), 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, 2006, October 31, 2007 and October 31, 2008.
Dow Jones & Company, Inc. ("Dow Jones"), NYSE Alternext, 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 owners of beneficial interests of DIAMONDS, as shown on, and effected only
through, records maintained by the Depository Trust Company ("DTC") and DTC's
Participants, as defined in the prospectus ("Beneficial Owners"). 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.
10
DIAMONDS TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 2008
--------------------------------------------------------------------------------
NOTE 4 -- TRUST TRANSACTIONS IN DIAMONDS
Transactions in DIAMONDS were as follows:
YEAR ENDED OCTOBER 31, 2008
--------------------------------
DIAMONDS AMOUNTS
------------ ----------------
DIAMONDS sold................................... 366,850,000 $ 43,007,862,019
DIAMONDS issued upon dividend reinvestment...... 11,778 1,388,124
DIAMONDS redeemed............................... (336,200,000) (39,824,961,718)
Net income equalization......................... -- (1,639,517)
------------ ----------------
Net increase.................................... 30,661,778 $ 3,182,648,908
============ ================
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)
============ ================
With the exception of 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. For creations and redemptions outside the DIAMONDS Clearing
Process, an additional amount not to exceed three (3) times the Transaction Fee
applicable for one Creation Unit is charged per Creation Unit per day. Under the
current schedule, therefore, the total fee charged in connection with creation
or redemption outside the DIAMONDS Clearing Process would be $1,000 (the
Transaction Fee for the creation or redemption of one Creation Unit) plus an
additional amount up to $3,000 (3 times $1,000), for a total not to exceed
$4,000. Transaction fees are received by the Trustee and used to defray the
expense of processing orders.
NOTE 5 -- INVESTMENT TRANSACTIONS
For the year ended October 31, 2008, the Trust had net in-kind contributions,
net in-kind redemptions, purchases and sales of investment securities of
$26,714,386,380, $23,539,127,988, $994,695,926 and $986,832,359, respectively.
At October 31, 2008, the cost of investments for federal income tax purposes was
$12,793,577,527, accordingly, gross unrealized appreciation was $0 and gross
unrealized depreciation was $3,688,477,664, resulting in net unrealized
depreciation of $3,688,477,664.
11
DIAMONDS TRUST, SERIES 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
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, 2008, 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 audits 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, 2008 by
correspondence with the custodian and brokers, and the application of
alternative auditing procedures where securities purchased had not been
received, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 23, 2008
12
DIAMONDS TRUST, SERIES 1
OTHER INFORMATION (UNAUDITED)
OCTOBER 31, 2008
--------------------------------------------------------------------------------
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, 2008 is 99.79%.
For the fiscal year ended October 31, 2008, 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 2008 Form
1099-DIV.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK PRICE(1) VS NET ASSET VALUE
AS OF OCTOBER 31, 2008
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
------ ------- ------ ------ ------- ------
2008............................... 3 2 2 2 0 0
2007............................... 1 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
COMPARISON OF TOTAL RETURNS BASED ON NAV AND BID/ASK PRICE(1)
The table below is provided to compare the Trust's total pre-tax returns at NAV
with the total pre-tax returns based on bid/ask price and the performance of the
DJIA. Past performance is not necessarily an indication of how the Trust will
perform in the future.
CUMULATIVE TOTAL RETURN
1 YEAR 5 YEAR 10 YEAR
------ ------ -------
DIAMONDS Trust, Series 1
Return Based on NAV..................................... -31.23% 6.02% 31.62%
Return Based on Bid/Ask Price........................... -31.37% 5.81% 31.06%
DJIA.................................................... -31.24% 6.83% 33.51%
AVERAGE ANNUAL TOTAL RETURN
1 YEAR 5 YEAR 10 YEAR
------ ------ -------
DIAMONDS Trust, Series 1
Return Based on NAV..................................... -31.23% 1.18% 2.79%
Return Based on Bid/Ask Price........................... -31.37% 1.14% 2.74%
DJIA.................................................... -31.24% 1.33% 2.93%
--------
(1) The Bid/Ask Price is calculated based on the best bid and best offer on the
NYSE Alternext at 4:00 p.m.
13
DIAMONDS TRUST, SERIES 1
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SPONSOR
PDR Services LLC
c/o NYSE Euronext
11 Wall Street
New York, NY 10005
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
DIA000135 12/31/09