<PAGE> 1
THE DOW INDUSTRIALS(SM) ("DIAMONDS")(SM)
DIAMONDS TRUST SERIES 1
A UNIT INVESTMENT TRUST
ANNUAL REPORT
OCTOBER 31, 1999
"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
TRUST OVERVIEW
- --------------------------------------------------------------------------------
For the fiscal year ended October 31, 1999, the Diamonds Trust (the "Trust")
returned a very healthy 26.7%. The Trust started the fiscal year with a strong
6.4% gain for the month ending November 1998 on the heels of three successive
Federal Reserve interest rate cuts. Continued levels of record low unemployment
followed these rate cuts without any signs of inflationary pressures. During the
months of March 1999 and April 1999, the Trust gained 5.3% and 10.3%
respectively, contributing to the Trust's astonishing six-month fiscal return of
26.6%. The Federal Reserve then began to reverse its course of action in June
1999 by raising rates 25 basis points. The Trust maintained and posted another
strong gain of 4.0%, as most investors breathed a sigh of relief since they had
been worried that the hike might have been more substantial. The Federal Reserve
also announced that they were returning to a neutral bias following the rate
hike, news that was also accepted favorably by the investment community. In July
1999, inflationary fears emerged yet again, sparked by the rise in commodity
prices and mounting wage pressures. Consumer spending also declined, showing
signs that the economy may be slowing. August 1999 brought another 25 basis
point rate hike to counter what the Fed viewed as a continuing overheated
economy. In addition, further rises in commodity prices and wage pressures
helped to dampen the Trust's performance in August 1999. September 1999 proved
to be the worst month for the Diamonds Trust, with a loss of 4.4%. Concerns over
inflationary pressures, further rate hikes, and lofty valuations contributed to
this loss. In October 1999, several key economic variables pointed to a slowing
U.S. economy, causing fears of further interest rate hikes to temporarily
subside. With this, the equity market continued to show its resiliency as the
Diamonds Trust made up nearly all of September's losses during the final month
of the fiscal year, gaining 3.9%.
The biggest gainers in the Dow Jones Industrial Average ("Dow") during this
twelve month period included American Express (75.8%), Citigroup (74.9%), and
Wal-Mart (64.7%). The biggest losers in the Dow were Philip Morris (-47.2%),
Sears (-35.2%), and Goodyear (-21.1%). Only six of the thirty Dow stocks had
negative returns during this period. At the close of the fiscal year, the index
underwent some major changes as Sears, Goodyear, Union Carbide, and Chevron were
replaced by Microsoft, Intel, Home Depot, and SBC Communications. With the
additions of Microsoft and Intel, this marked the first time in Dow history that
the Nasdaq was represented in the Dow index.
1
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DIAMONDS TRUST SERIES 1
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
COMMON STOCKS SHARES VALUE
- --------------------------------------------------------------------------------
Alcoa, Inc. ........................................ 472,587 $ 28,709,660
Allied Signal, Inc. ................................ 472,587 26,907,922
American Express Co. ............................... 472,587 72,778,398
AT & T Corp. ....................................... 472,587 22,093,442
Boeing Co. ......................................... 472,587 21,768,539
Caterpillar, Inc. .................................. 472,587 26,110,432
Citigroup, Inc. .................................... 472,587 25,578,771
Coca-Cola Co. ...................................... 472,587 27,882,633
Disney (Walt) Co. (The) ............................ 472,587 12,464,482
Du Pont (E.I.) de Nemours & Co., Inc. .............. 472,587 30,452,325
Eastman Kodak Co. .................................. 472,587 32,578,966
Exxon Corp. ........................................ 472,587 35,000,975
General Electric Co. ............................... 472,587 64,065,075
General Motors Corp. ............................... 472,587 33,199,237
Hewlett-Packard Co. ................................ 472,587 35,000,975
Home Depot, Inc. ................................... 472,587 35,680,318
Intel Corp. ........................................ 472,587 36,567,184
International Business Machines Corp. .............. 472,587 46,490,746
International Paper Co. ............................ 472,587 24,869,891
Johnson & Johnson .................................. 472,587 49,503,488
McDonald's Corp. ................................... 472,587 19,494,214
Merck & Co., Inc. .................................. 472,587 37,600,203
Microsoft Corp. (a) ................................ 472,587 43,715,063
Minnesota Mining & Manufacturing Co. ............... 472,587 44,925,302
Morgan (J.P.) & Co., Inc. .......................... 472,587 61,849,824
Philip Morris Cos., Inc. ........................... 472,587 11,903,285
Procter & Gamble Co. ............................... 472,587 49,562,562
SBC Communications, Inc. ........................... 472,587 24,072,400
United Technologies Corp. .......................... 472,587 28,591,513
Wal-Mart Stores, Inc. .............................. 472,587 26,789,776
--------------
Total Investments - (Cost $1,049,298,154) $1,036,207,601
==============
(a) Denotes non-income producing security.
See accompanying notes to financial statements
2
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DIAMONDS TRUST SERIES 1
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
ASSETS
Investments in securities, at value
(cost $1,049,298,154)................................. $1,036,207,601
Cash.................................................... 1,766,660
Receivable for investments sold......................... 140,019,380
Dividends receivable.................................... 614,532
Deferred organization costs............................. 1,610,002
--------------
TOTAL ASSETS................................................ 1,180,218,175
LIABILITIES
Payable for investments purchased....................... 136,405,089
Payable for income delivered for DIAMONDS issued/
redeemed in-kind...................................... 83,187
Distributions payable................................... 312,838
Due to Sponsor.......................................... 2,192,040
Accrued expenses and other liabilities.................. 236,710
--------------
Total Liabilities........................................... 139,229,864
--------------
NET ASSETS.................................................. $1,040,988,311
==============
NET ASSETS REPRESENTED BY:
Paid in surplus relating to 9,700,380 units of
fractional undivided interest
("DIAMONDS") outstanding; unlimited units authorized.... $1,072,236,724
Distribution in excess of net investment income......... (366,116)
Accumulated net realized loss on investments............ (17,791,744)
Net unrealized depreciation on investments.............. (13,090,553)
--------------
NET ASSETS.................................................. $1,040,988,311
==============
Net asset value per DIAMOND ($1,040,988,311 /
9,700,380 DIAMONDS)....................................... $ 107.31
==============
See accompanying notes to financial statements
3
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DIAMONDS TRUST SERIES 1
STATEMENTS OF OPERATIONS
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FOR THE YEAR FOR THE PERIOD
ENDED ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998*
---------------- -----------------
INVESTMENT INCOME
Dividend income............................ $ 9,701,986 $ 3,218,084
------------ -----------
EXPENSES
DJIA license fee........................... 1,000,000 797,260
Trustee expense............................ 912,453 240,341
Marketing expense.......................... 712,625 2,780,541
Amortization of organization costs......... 502,266 195,661
Printing and postage expense............... 154,540 641,161
SEC registration expense................... 152,003 93,200
Legal and audit services................... 39,097 136,370
Miscellaneous expense...................... 1,280 100
------------ -----------
Total expenses............................... 3,474,264 4,884,634
Rebate from Sponsor........................ (1,418,867) (4,301,113)
Rebate from Trustee........................ (912,453) (231,341)
------------- -----------
Net expenses................................. 1,142,944 352,180
Trustee earnings credit.................... (22,000) (5,168)
------------- -----------
Net expenses after Trustee earnings
credit..................................... 1,120,944 347,012
------------ -----------
NET INVESTMENT INCOME........................ 8,581,042 2,871,072
------------ -----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investment
transactions............................. 115,756,556 27,304,522
Net change in unrealized depreciation...... (7,307,187) (5,783,366)
------------ -----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS................................ 108,449,369 21,521,156
------------ -----------
NET INCREASE IN NET ASSETS FROM OPERATIONS... $117,030,411 $24,392,228
============ ===========
* The Trust commenced operations on January 14, 1998.
See accompanying notes to financial statements
4
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DIAMONDS TRUST SERIES 1
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE YEAR FOR THE PERIOD
ENDED ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998*
---------------- -----------------
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income...................... $ 8,581,042 $ 2,871,072
Net realized gain on investment
transactions............................. 115,756,556 27,304,522
Net change in unrealized depreciation...... (7,307,187) (5,783,366)
-------------- ------------
NET INCREASE IN NET ASSETS FROM OPERATIONS... 117,030,411 24,392,228
-------------- ------------
UNDISTRIBUTED NET INVESTMENT INCOME
INCLUDED IN PRICE OF UNITS ISSUED
AND REDEEMED, NET.......................... 459,889 206,316
-------------- ------------
DISTRIBUTIONS TO UNITHOLDERS FROM:
Net investment income...................... (8,581,042) (2,871,072)
In excess of net investment income......... (262,907) (103,209)
-------------- ------------
TOTAL DISTRIBUTIONS TO UNITHOLDERS........... (8,843,949) (2,974,281)
-------------- ------------
NET INCREASE IN NET ASSETS FROM ISSUANCE
AND REDEMPTION OF DIAMONDS................. 575,660,769 296,396,278
-------------- ------------
NET INCREASE IN NET ASSETS DURING PERIOD..... 684,307,120 318,020,541
NET ASSETS AT BEGINNING OF PERIOD............ 356,681,191 38,660,650
-------------- ------------
NET ASSETS END OF PERIOD(a).................. $1,040,988,311 $356,681,191
============== ============
(a) Includes distribution in excess of net
investment income $ (366,116) $ (103,209)
-------------- ------------
* The Trust commenced operations on January 14, 1998.
See accompanying notes to financial statements
5
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DIAMONDS TRUST SERIES 1
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A DIAMOND OUTSTANDING DURING THE PERIOD
- --------------------------------------------------------------------------------
FOR THE YEAR FOR THE PERIOD
ENDED ENDED
OCTOBER 31, 1999(6) OCTOBER 31, 1998(1)
------------------ ------------------
NET ASSET VALUE, BEGINNING OF PERIOD........ $ 85.94 $ 77.32
---------- --------
INVESTMENT OPERATIONS:
Net investment income................... 1.41 0.98
Net realized and unrealized gain on
investments........................... 21.36 8.59
---------- --------
TOTAL FROM INVESTMENT OPERATIONS............ 22.77 9.57
---------- --------
UNDISTRIBUTED NET INVESTMENT INCOME
INCLUDED IN PRICE OF UNITS ISSUED AND
REDEEMED, NET......................... 0.08 0.05
---------- --------
LESS DISTRIBUTIONS FROM:
Net investment income................... (1.41) (0.98)
In excess of net investment income...... (0.07) (0.02)
---------- --------
TOTAL DISTRIBUTIONS......................... (1.48) (1.00)
---------- --------
NET ASSET VALUE, END OF PERIOD.............. $ 107.31 $ 85.94
---------- --------
TOTAL INVESTMENT RETURN (5)................. 26.71% 12.44%
RATIOS AND SUPPLEMENTAL DATA
Ratios to average net assets:
Net expenses (2)........................ 0.18% 0.18% (3)
Net expenses after rebates and trustee
earnings credit (2)................... 0.18% 0.18% (3)
Net investment income................... 1.37% 1.49% (3)
Portfolio turnover rate (4)................. 34.70% 3.23%
NET ASSET VALUE, END OF PERIOD (000'S)...... $1,040,988 $356,681
- --------------------------------------------------------------------------------
(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 0.37% and 2.35% in
1999 and 1998, respectively.
(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.
(6) Per share numbers have been calculated using the average shares method,
which more appropriately presents the per share data for the period.
See accompanying notes to financial statements
6
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DIAMONDS TRUST SERIES 1
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1999
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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. 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.
7
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DIAMONDS TRUST SERIES 1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Trust has qualified and intends to continue 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 year ended October 31, 1999, the Trust
reclassified $133,264,769 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, and $17,127,379 for the
fiscal year ended October 31, 1999. These losses may be utilized to offset any
net realized capital gains through October 31, 2006, and October 31, 2007,
respectively.
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 for any day on which the net asset value of
the Trust is below $350,000,000, plus or minus the Adjustment Amount. The
Adjustment Amount is the difference between expenses incurred by the Trustee in
processing orders for creations and redemptions of DIAMONDS less transaction
fees received and Trustee earnings credits. During the year ended October 31,
1999, the Adjustment Amount decreased the Trustee's fee by $27,385. The
Adjustment Amount included an excess of net transaction fees from processing
orders of $5,385 and a Trustee earnings credit of $22,000.
For the fiscal year ended October 31, 1999, 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 amount of such reimbursement by the Sponsor for the fiscal year ended
October 31, 1999 was $1,418,867. For the fiscal year ended October 31, 1999,
State Street Bank and Trust Company (the "Trustee") agreed to waive the
Trustee's fee. The amount of such waiver by the Trustee for the fiscal year
ended October 31, 1999 was $912,453.
8
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DIAMONDS TRUST SERIES 1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
NOTE 4 -- TRUST TRANSACTIONS IN DIAMONDS
Transactions in DIAMONDS were as follows.
YEAR ENDED
OCTOBER 31, 1999
DIAMONDS Amounts
---------- ---------------
DIAMONDS sold 17,200,000 $ 1,822,509,789
DIAMONDS issued upon dividend reinvestment 194 19,408
DIAMONDS redeemed (11,650,000) (1,246,408,539)
Net income equalization -- (459,889)
---------- ---------------
Net Increase 5,550,194 $ 575,660,769
========== ===============
PERIOD ENDED
OCTOBER 31, 1998
DIAMONDS Amounts
---------- -------------
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
========== =============
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, 1999, the Trust had in-kind contributions,
in-kind redemptions, purchases and sales of investment securities of
$1,820,399,500, $1,148,977,924, $218,832,771 and $319,046,734, respectively. At
October 31, 1999, the cost of investments for federal income tax purposes was
$1,049,680,237, accordingly, gross unrealized appreciation was $36,504,921 and
gross unrealized depreciation was $49,977,557, resulting in net unrealized
depreciation of $13,472,636.
9
<PAGE> 11
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, 1999, and the results of its operations, the changes in
its net assets and the financial highlights for the periods 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 audits. We conducted our audits 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 audits, which included confirmation of investments owned at
October 31, 1999 by correspondence with the custodian, provides a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 22, 1999
10
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(This page has been left blank intentionally.)
11
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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
