<PAGE> 1
THE DOW INDUSTRIALS(SM) ("DIAMONDS")(SM)
DIAMONDS TRUST SERIES 1
A UNIT INVESTMENT TRUST
ANNUAL REPORT
OCTOBER 31, 1998
"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 and the American Stock Exchange 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.
<PAGE> 2
DIAMONDS TRUST SERIES 1
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCKS SHARES VALUE
- ------------- ------ -----
<S> <C> <C>
Allied Signal, Inc. ......................... 170,946 $ 6,656,210
Aluminum Co. of America ..................... 170,946 13,547,470
American Express Co. ........................ 170,946 15,107,353
AT & T Corp. ................................ 170,946 10,641,389
Boeing Co. .................................. 170,946 6,410,475
Caterpillar, Inc. ........................... 170,946 7,692,570
Chevron Corp. ............................... 170,946 13,932,099
Citigroup, Inc. ............................. 170,946 8,045,146
Coca Cola Co. ............................... 170,946 11,560,223
Disney (Walt) Co. (The) ..................... 170,946 4,604,858
Du Pont (E.I.) de Nemours & Co., Inc. ....... 170,946 9,829,395
Eastman Kodak Co. ........................... 170,946 13,248,315
Exxon Corp. ................................. 170,946 12,179,903
General Electric Co. ........................ 170,946 14,957,775
General Motors Corp. ........................ 170,946 10,780,282
Goodyear Tire & Rubber Co. (The) ............ 170,946 9,209,716
Hewlett Packard Co. ......................... 170,946 10,288,812
International Business Machines Corp. ....... 170,946 25,374,797
International Paper Co. ..................... 170,946 7,938,305
Johnson & Johnson ........................... 170,946 13,932,099
McDonald's Corp. ............................ 170,946 11,432,014
Merck & Co., Inc. ........................... 170,946 23,120,446
Minnesota Mining & Manufacturing Co. ........ 170,946 13,675,680
Morgan (J.P.) & Co., Inc. ................... 170,946 16,111,660
Philip Morris Cos., Inc. .................... 170,946 8,739,614
Procter & Gamble Co. ........................ 170,946 15,192,826
Sears, Roebuck & Co. ........................ 170,946 7,681,886
Union Carbide Corp. ......................... 170,946 6,581,421
United Technologies Corp. ................... 170,946 16,282,606
Wal-Mart Stores, Inc. ....................... 170,946 11,795,274
------------
Total Investments - (Cost $362,333,985) ..... $356,550,619
============
</TABLE>
See accompanying notes to financial statements
1
<PAGE> 3
DIAMONDS TRUST SERIES 1
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $362,333,985) ......................... $ 356,550,619
Cash ............................................................................ 367,881
Receivable for investments sold ................................................. 671,912
Dividends receivable ............................................................ 243,148
Deferred organization costs ..................................................... 2,112,268
-------------
TOTAL ASSETS ........................................................................ 359,945,828
LIABILITIES
Distributions payable ........................................................... 130,632
Payable for income delivered for DIAMONDS redeemed in-kind ...................... 682,857
Due to Sponsor .................................................................. 2,288,847
Accrued expenses and other liabilities .......................................... 162,301
-------------
Total Liabilities ................................................................... 3,264,637
-------------
NET ASSETS .......................................................................... $ 356,681,191
=============
NET ASSETS REPRESENTED BY:
Paid in surplus relating to 4,150,186 units of fractional undivided interest
("DIAMONDS") outstanding; unlimited units authorized ............................ $ 362,851,297
Distributions in excess of net investment income ................................ (103,209)
Accumulated net realized loss on investments .................................... (283,531)
Net unrealized depreciation on investments ...................................... (5,783,366)
-------------
NET ASSETS .......................................................................... $ 356,681,191
=============
Net asset value per DIAMOND ($356,681,191 / 4,150,186 DIAMONDS) ..................... $ 85.94
=============
</TABLE>
See accompanying notes to financial statements
2
<PAGE> 4
DIAMONDS TRUST SERIES 1
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED OCTOBER 31, 1998*
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividend income ............................ $ 3,218,084
------------
EXPENSES
Marketing expense .......................... 2,780,541
DJIA license fee ........................... 797,260
Printing and postage expense ............... 641,161
Trustee expense ............................ 240,341
Amortization of organization costs ......... 195,661
Legal and audit services ................... 136,370
SEC registration expense ................... 93,200
Miscellaneous expenses ..................... 100
------------
Total expenses ................................. 4,884,634
Rebate from Sponsor ........................ (4,301,113)
Rebate from Trustee ........................ (231,341)
------------
Net expenses ................................... 352,180
Trustee earnings credit .................... (5,168)
------------
Net expenses after Trustee earnings credit ..... 347,012
------------
NET INVESTMENT INCOME .......................... 2,871,072
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investment transactions 27,304,522
Net change in unrealized depreciation ...... (5,783,366)
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 21,521,156
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS ..... $ 24,392,228
============
</TABLE>
* The Trust commenced operations on January 14, 1998.
See accompanying notes to financial statements
3
<PAGE> 5
DIAMONDS TRUST SERIES 1
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED OCTOBER 31, 1998*
<TABLE>
<S> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income ................................. $ 2,871,072
Net realized gain on investment transactions .......... 27,304,522
Net increase in unrealized depreciation ............... (5,783,366)
-------------
NET INCREASE IN NET ASSETS FROM OPERATIONS ................ 24,392,228
-------------
UNDISTRIBUTED NET INVESTMENT INCOME INCLUDED IN
PRICE OF UNITS ISSUED AND REDEEMED, NET ............... 206,316
-------------
DISTRIBUTIONS TO UNITHOLDERS FROM:
Net investment income ................................. (2,871,072)
In excess of net investment income .................... (103,209)
-------------
TOTAL DISTRIBUTIONS TO UNITHOLDERS ........................ (2,974,281)
-------------
NET INCREASE IN NET ASSETS FROM ISSUANCE
AND REDEMPTION OF DIAMONDS ............................ 296,396,278
-------------
NET INCREASE IN NET ASSETS DURING PERIOD .................. 318,020,541
NET ASSETS AT BEGINNING OF PERIOD ......................... 38,660,650
-------------
NET ASSETS END OF PERIOD, including distributions in excess
of net investment income of $103,209 .............. $ 356,681,191
=============
</TABLE>
* The Trust commenced operations on January 14, 1998.
See accompanying notes to financial statements
4
<PAGE> 6
DIAMONDS TRUST SERIES 1
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A DIAMOND OUTSTANDING DURING THE PERIOD
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED
OCTOBER 31, 1998 (1)
--------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ..................... $ 77.32
-----------
INVESTMENT OPERATIONS:
Net investment income ............................ 0.98
Net realized and unrealized gain on investments .. 8.59
-----------
TOTAL FROM INVESTMENT OPERATIONS ......................... 9.57
-----------
UNDISTRIBUTED NET INVESTMENT INCOME
INCLUDED IN PRICE OF UNITS ISSUED AND REDEEMED, NET .. 0.05
-----------
LESS DISTRIBUTIONS FROM:
Net investment income ............................ (0.98)
In excess of net investment income ............... (0.02)
-----------
TOTAL DISTRIBUTIONS ...................................... (1.00)
-----------
NET ASSET VALUE, END OF PERIOD ........................... $ 85.94
===========
TOTAL INVESTMENT RETURN .................................. 12.44%
RATIOS AND SUPPLEMENTAL DATA Ratio to average net assets:
Net expenses (2) ................................. 0.18%
Net expenses after rebates and trustee
earnings credit (2)............................. 0.18%
Net investment income ............................ 1.49%
Portfolio turnover rate (4) .............................. 3.23%
NET ASSETS, END OF PERIOD (000'S) ........................ $ 356,681
</TABLE>
(1) The Trust commenced operations on January 14, 1998.
(2) Net of expenses reimbursed by the Sponsor and Trustee. If the Trust had
borne all expenses rebated by the Sponsor and Trustee, the ratio of
expenses to average net assets would have increased by 2.35% in 1998.
(3) Annualized.
(4) Portfolio turnover ratio excludes securities received or delivered from
processing creations or redemptions of DIAMONDS.
(5) Total returns for periods of less than one year are not annualized and
do not include transaction fees.
See accompanying notes to financial statements
5
<PAGE> 7
DIAMONDS TRUST SERIES 1
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
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. 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 Unit". 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 generally accepted
accounting principles 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. If no closing sale
price is available, then the security is valued at the closing bid price on the
exchange which is deemed to be the principal market for the security. If there
is no closing bid price available, valuation will be determined by the Trustee
in good faith based on available information.
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.
ORGANIZATION COSTS
The Trust incurred organization costs of $2,307,929, which have been capitalized
and are being charged to operations ratably over a period of 60 months.
6
<PAGE> 8
DIAMONDS TRUST SERIES 1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
FEDERAL INCOME TAX
The Trust intends to qualify for and elect treatment 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. During
the fiscal period ended October 31, 1998, the Trust reclassified $27,588,053 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. The Trust incurred net capital losses of $282,282 for the fiscal
period ended October 31, 1998. These losses may be utilized to offset any net
realized capital gains through October 31, 2006.
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 in exchange for the issuance 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 receives a fee at the following annual rates:
<TABLE>
<CAPTION>
Net asset value of the Trust Fee as a percentage of net asset value of the Trust
- ---------------------------- ---------------------------------------------------
<S> <C>
$0 - $499,999,999 15/100 of 1% per annum plus or minus the Adjustment Amount
$500,000,000 - $999,999,999 13/100 of 1% per annum plus or minus the Adjustment Amount
$1,000,000,000 - and above 11/100 of 1% per annum plus or minus the Adjustment Amount
</TABLE>
During the first two years of operation of the Trust, the Trustee's fee shall be
reduced to 12/100 of 1% per annum plus or minus the Adjustment Amount for any
day on which the net asset value of the Trust is below $350,000,000. The
Adjustment Amount is the excess or deficiency of expenses incurred in processing
orders for creations and redemptions of DIAMONDS less transaction fees and
Trustee earnings credits. During the period ended October 31, 1998, the
Adjustment Amount increased the Trustee's fee by $3,832. The Adjustment Amount
included a deficiency of net transaction fees from processing orders of ($9,000)
and a Trustee earnings credit of $5,168.
For the period ended October 31, 1998, PDR Services LLC (the "Sponsor", a
wholly-owned subsidiary of the American Stock Exchange LLC) and State Street
Bank and Trust Company (the "Trustee") 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 amount of such
reimbursement by the Sponsor and Trustee for the period ended October 31, 1998
was $4,301,113 and $231,341, respectively.
7
<PAGE> 9
DIAMONDS TRUST SERIES 1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
NOTE 4 -- TRUST TRANSACTIONS IN DIAMONDS
Transactions in DIAMONDS were as follows for the period ended October 31, 1998:
<TABLE>
<CAPTION>
DIAMONDS AMOUNTS
------------- -------------
<S> <C> <C>
DIAMONDS sold 6,900,000 $ 578,121,987
DIAMONDS issued upon dividend reinvestment 186 16,132
DIAMONDS redeemed (3,250,000) (281,535,525)
Net income equalization -- (206,316)
------------- -------------
Net Increase 3,650,186 $ 296,396,278
============= =============
</TABLE>
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 period ended October 31, 1998, the Trust had in-kind contributions,
in-kind redemptions, purchases and sales of investment securities of
$577,209,928, $280,275,121, $8,603,316, and $9,152,213, respectively. At October
31, 1998, the cost of investments for federal income tax purposes was
$362,335,234, accordingly, gross unrealized appreciation was $15,210,713 and
gross unrealized depreciation was $20,995,328, resulting in net unrealized
depreciation of $5,784,615.
8
<PAGE> 10
DIAMONDS TRUST SERIES 1
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1998, and the results of its operations, the changes in
its net assets and the financial highlights for the period indicated, in
conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards, which 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 audit, which included confirmation of investments owned at
October 31, 1998 by correspondence with the custodian, provides a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 16, 1998
9
<PAGE> 11
DIAMONDS TRUST SERIES 1
SPONSOR
- -------
PDR Services LLC
c/o American Stock Exchange LLC
86 Trinity Place
New York, NY 10006
TRUSTEE
- -------
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
DISTRIBUTOR
- -----------
ALPS Mutual Funds Services, Inc.
370 17th Street, Suite 3100
Denver, CO 80202
INDEPENDENT ACCOUNTANTS
- -----------------------
PricewaterhouseCoopers LLP
160 Federal Street
Boston, MA 02110
LEGAL COUNSEL
- -------------
Carter, Ledyard & Milburn
2 Wall Street
New York, NY 10005
