THE DOW INDUSTRIALS(SM) ("DIAMONDS")(SM)
DIAMONDS TRUST SERIES 1
A UNIT INVESTMENT TRUST
SEMI-ANNUAL REPORT
APRIL 30, 2004
(UNAUDITED)
"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.
DIAMONDS TRUST SERIES 1
SCHEDULE OF INVESTMENTS
APRIL 30, 2004 (UNAUDITED)
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COMMON STOCKS SHARES VALUE
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3M Co. ..................................................... 4,920,318 $ 425,509,101
Alcoa, Inc. ................................................ 4,920,318 151,299,778
Altria Group, Inc. ......................................... 4,920,318 272,487,211
American Express Co. ....................................... 4,920,318 240,849,566
American International Group, Inc. ......................... 4,920,318 352,540,785
Boeing Co. ................................................. 4,920,318 210,048,375
Caterpillar, Inc. .......................................... 4,920,318 382,456,318
Citigroup, Inc. ............................................ 4,920,318 236,618,093
Coca-Cola Co. (The)......................................... 4,920,318 248,820,481
Disney (Walt) Co. (The)..................................... 4,920,318 113,314,924
Du Pont (E.I.) de Nemours................................... 4,920,318 211,327,658
Exxon Mobil Corp. .......................................... 4,920,318 209,359,531
General Electric Co. ....................................... 4,920,318 147,363,524
General Motors Corp. ....................................... 4,920,318 233,321,480
Hewlett-Packard Co. ........................................ 4,920,318 96,930,265
Home Depot, Inc. ........................................... 4,920,318 173,145,990
Honeywell International, Inc. .............................. 4,920,318 170,144,596
Intel Corp. ................................................ 4,920,318 126,599,782
International Business Machines Corp. ...................... 4,920,318 433,824,438
J.P. Morgan Chase & Co. .................................... 4,920,318 185,003,957
Johnson & Johnson Company................................... 4,920,318 265,844,782
McDonald's Corp. ........................................... 4,920,318 133,980,259
Merck & Co., Inc. .......................................... 4,920,318 231,254,946
Microsoft Corp. ............................................ 4,920,318 127,780,658
Pfizer, Inc. ............................................... 4,920,318 175,950,572
Procter & Gamble Co. ....................................... 4,920,318 520,323,628
SBC Communications, Inc. ................................... 4,920,318 122,515,918
United Technologies Corp. .................................. 4,920,318 424,426,631
Verizon Communications, Inc. ............................... 4,920,318 185,692,801
Wal-Mart Stores, Inc. ...................................... 4,920,318 280,458,126
--------------
Total Common Stocks -- (Cost $7,633,572,495)................ $7,089,194,174
==============
See accompanying notes to financial statements.
2
DIAMONDS TRUST SERIES 1
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2004 (UNAUDITED)
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ASSETS
Investments in securities, at value....................... $7,089,194,174
Cash...................................................... 11,654,946
Dividends receivable...................................... 9,677,807
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TOTAL ASSETS................................................ 7,110,526,927
--------------
LIABILITIES
Distribution payable...................................... 4,091,339
Accrued Trustee fees...................................... 412,613
Accrued expenses and other liabilities.................... 3,493,796
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TOTAL LIABILITIES........................................... 7,997,748
--------------
NET ASSETS.................................................. $7,102,529,179
==============
NET ASSETS REPRESENTED BY:
Paid in surplus........................................... $7,970,973,717
Undistributed net investment income....................... 4,421,581
Accumulated net realized loss on investments.............. (328,487,798)
Net unrealized depreciation on investments................ (544,378,321)
--------------
NET ASSETS.................................................. $7,102,529,179
==============
NET ASSET VALUE PER DIAMOND................................. $102.47
------
------
UNITS OF FRACTIONAL UNDIVIDED INTEREST
("DIAMONDS") OUTSTANDING, UNLIMITED UNITS AUTHORIZED,
$0.00 PAR VALUE........................................ 69,313,791
--------------
COST OF INVESTMENTS......................................... $7,633,572,495
==============
See accompanying notes to financial statements.
3
DIAMONDS TRUST SERIES 1
STATEMENTS OF OPERATIONS
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FOR THE
SIX MONTHS ENDED
APRIL 30, 2004 FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
(UNAUDITED) OCTOBER 31, 2003 OCTOBER 31, 2002 OCTOBER 31, 2001
---------------- ------------------ ------------------ ------------------
INVESTMENT INCOME
Dividend income........ $ 70,424,490 $ 120,911,703 $ 71,072,353 $ 41,997,410
------------ -------------- ------------- -------------
EXPENSES:
Trustee fees........... 2,211,785 3,480,020 2,450,305 1,858,460
Marketing expense...... 2,130,847 3,230,848 1,549,601 356,933
DJIA license fee....... 1,620,677 1,947,815 1,567,729 1,300,000
Legal and audit
services.......... 52,358 249,444 64,908 49,800
SEC registration
expense........... 30,781 116,131 30,592 286,213
Printing and postage
expense........... 21,597 338,844 151,203 136,463
Amortization of
organization
costs............. -- 101,829 502,266 502,266
Miscellaneous
expense........... 310 715 687 218
------------ -------------- ------------- -------------
Total expenses.............. 6,068,355 9,465,646 6,317,291 4,490,353
Trustee earnings
credit............... (43,109) (61,870) (61,606) (160,833)
------------ -------------- ------------- -------------
Net expenses after Trustee
earnings credit........ 6,025,246 9,403,776 6,255,685 4,329,520
------------ -------------- ------------- -------------
NET INVESTMENT INCOME....... 64,399,244 111,507,927 64,816,668 37,667,890
------------ -------------- ------------- -------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain on
investment
transactions......... 105,776,765 276,147,528 173,854,529 218,849,002
Net change in
unrealized
depreciation......... 129,898,961 636,501,507 (496,933,157) (681,232,614)
------------ -------------- ------------- -------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS............... 235,675,726 912,649,035 (323,078,628) (462,383,612)
------------ -------------- ------------- -------------
NET INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS................ $300,074,970 $1,024,156,962 $(258,261,960) $(424,715,722)
============ ============== ============= =============
See accompanying notes to financial statements.
4
DIAMONDS TRUST SERIES 1
STATEMENTS OF CHANGES IN NET ASSETS
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FOR THE
SIX MONTHS ENDED
APRIL 30, 2004 FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
(UNAUDITED) OCTOBER 31, 2003 OCTOBER 31, 2002 OCTOBER 31, 2001
---------------- ------------------ ------------------ ------------------
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS:
Net investment income.... $ 64,399,244 $ 111,507,927 $ 64,816,668 $ 37,667,890
Net realized gain on
investment
transactions........... 105,776,765 276,147,528 173,854,529 218,849,002
Net change in unrealized
depreciation........ 129,898,961 636,501,507 (496,933,157) (681,232,614)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS...... 300,074,970 1,024,156,962 (258,261,960) (424,715,722)
-------------- -------------- -------------- --------------
UNDISTRIBUTED NET INVESTMENT
INCOME INCLUDED IN PRICE OF
UNITS ISSUED AND REDEEMED,
NET......................... (626,249) (398,863) 913,179 733,997
-------------- -------------- -------------- --------------
DISTRIBUTIONS TO UNITHOLDERS
FROM NET INVESTMENT
INCOME...................... (62,360,211) (110,187,836) (62,477,206) (38,220,448)
-------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
FROM ISSUANCE AND REDEMPTION
OF DIAMONDS................. 874,349,032 959,445,015 1,703,425,938 1,194,073,126
-------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
DURING PERIOD............... 1,111,437,542 1,873,015,278 1,383,599,951 731,870,953
NET ASSETS AT BEGINNING OF
PERIOD...................... 5,991,091,637 4,118,076,359 2,734,476,408 2,002,605,455
-------------- -------------- -------------- --------------
NET ASSETS END OF PERIOD*..... $7,102,529,179 $5,991,091,637 $4,118,076,359 $2,734,476,408
============== ============== ============== ==============
*INCLUDES UNDISTRIBUTED
(DISTRIBUTIONS IN EXCESS OF)
NET INVESTMENT INCOME....... $ 4,421,581 $ 2,382,548 $ 1,062,457 $ (1,277,005)
-------------- -------------- -------------- --------------
See accompanying notes to financial statements.
5
DIAMONDS TRUST SERIES 1
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A DIAMOND OUTSTANDING DURING THE PERIOD
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FOR THE
SIX MONTHS
ENDED FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
4/30/04(1) ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 10/31/03 10/31/02(1) 10/31/01(1) 10/31/00(1) 10/31/99(1)
----------- ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF
PERIOD...................... $ 98.20 $ 84.12 $ 90.84 $ 109.73 $ 107.31 $ 85.94
---------- ---------- ---------- ---------- ---------- ----------
INVESTMENT OPERATIONS:
Net investment income..... 0.98 1.91 1.73 1.56 1.43 1.41
Net realized and
unrealized gain (loss)
on investments.......... 4.26 14.06 (6.77) (18.86) 2.47 21.36
---------- ---------- ---------- ---------- ---------- ----------
TOTAL FROM INVESTMENT
OPERATIONS.................. 5.24 15.97 (5.04) (17.30) 3.90 22.77
---------- ---------- ---------- ---------- ---------- ----------
UNDISTRIBUTED NET INVESTMENT
INCOME INCLUDED IN PRICE OF
UNITS ISSUED AND REDEEMED,
NET......................... (0.00)(5) (0.01) 0.00(5) 0.00(5) 0.00(5) 0.08
---------- ---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS FROM:
Net investment income..... (0.97) (1.88) (1.68) (1.59) (1.48) (1.48)
---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF
PERIOD...................... $ 102.47 $ 98.20 $ 84.12 $ 90.84 $ 109.73 $ 107.31
========== ========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN(2).... 5.34% 19.22% (5.71)% (15.91)% 3.68% 26.71%
RATIOS AND SUPPLEMENTAL DATA
Ratios to average net assets:
Net investment income..... 1.91%(6) 2.12% 1.85% 1.51% 1.34% 1.37%
Total expenses............ 0.18%(6) 0.18% 0.18% 0.18% 0.36% 0.37%
Net expenses excluding
trustee earnings
credit.................. 0.18%(6) 0.18% 0.18% 0.18% 0.18% 0.18%
Net expenses excluding
rebates, trustee
earnings credit and
waivers(3).............. 0.18%(6) 0.18% 0.18% 0.17% 0.17% 0.18%
Portfolio turnover
rate(4)................. 10.80% 8.71% 0.26% 12.66% 23.85% 34.70%
NET ASSET VALUE, END OF PERIOD
(000'S)..................... $7,102,529 $5,991,092 $4,118,076 $2,734,476 $2,002,605 $1,040,988
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(1) Per share numbers have been calculated using the average shares method,
which more appropriately presents the per share data for the period.
(2) Total returns for periods of less than one year are not annualized and do
not include transaction fees.
(3) Excludes expenses reimbursed by the Sponsor and Trustee from the period
November 1, 1998 through February 29, 2000 and the Sponsor from the period
March 1, 2000 through October 31, 2000.
(4) Portfolio turnover ratio excludes securities received or delivered from
processing creations or redemption of DIAMONDS.
(5) Amount shown represents less than $0.01
(6) Annualized
See accompanying notes to financial statements.
6
DIAMONDS TRUST SERIES 1
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2004 (UNAUDITED)
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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 "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 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
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 no closing sale price or official closing price is available, then the
security is valued at the previous closing sale price on the exchange which is
deemed to be the principal market for the security, or at the previous official
closing price if the security is listed on the NASDAQ. 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.
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.
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
7
DIAMONDS TRUST SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 2004 (UNAUDITED)
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NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accepted accounting principles. These differences are primarily due to differing
treatments for income equalization, in-kind transactions and losses deferred due
to wash sales. Net investment income per share calculations in the financial
highlights for all periods presented excludes these differences.
During the six months ended April 30, 2004, the Trust reclassified $342,192,439
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, 2003, the Trust had the following capital loss carryforwards
which may be used to offset any net realized gains, expiring October 31:
2007..................................... $ 9,197,094
2008..................................... 11,386,433
2010..................................... 2,065,467
2011..................................... 68,716,435
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 six months ended April 30, 2004:
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 amounts earned by the
Trustee with respect to the cash held by the Trustee for the benefit of the
Trust. During the six months ended April 30, 2004, the Adjustment Amount
decreased the Trustee's fee by $152,470. The Adjustment Amount included an
excess of net transaction fees from processing orders of $109,361 and a Trustee
earnings credit of $43,109.
8
DIAMONDS TRUST SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 2004 (UNAUDITED)
--------------------------------------------------------------------------------
NOTE 3 -- TRANSACTIONS WITH THE TRUSTEE AND SPONSOR (CONTINUED)
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, 2001, October 31, 2002 and
October 31, 2003 and the six-month period ended April 30, 2004 were $0.
Dow Jones & Company, Inc. ("Dow Jones"), the American Stock Exchange LLC (the
"AMEX"), and PDR Services (the "Sponsor") 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.
NOTE 4 -- TRUST TRANSACTIONS IN DIAMONDS
Transactions in DIAMONDS were as follows.
SIX MONTHS ENDED APRIL 30, 2004
-------------------------------
DIAMONDS AMOUNTS
------------ ----------------
DIAMONDS sold.......................................... 38,050,000 $ 3,934,070,731
DIAMONDS issued upon dividend reinvestment............. 5,360 550,749
DIAMONDS redeemed...................................... (29,750,000) (3,060,898,697)
Net income equalization................................ -- 626,249
----------- ---------------
Net Increase........................................... 8,305,360 $ 874,349,032
=========== ===============
YEAR ENDED OCTOBER 31, 2003
-----------------------------
DIAMONDS AMOUNTS
----------- ---------------
DIAMONDS sold.......................................... 70,850,000 $ 6,167,457,123
DIAMONDS issued upon dividend reinvestment............. 4,321 385,016
DIAMONDS redeemed...................................... (58,800,000) (5,208,795,987)
Net income equalization................................ -- 398,863
----------- ---------------
Net Increase........................................... 12,054,321 $ 959,445,015
=========== ===============
YEAR ENDED OCTOBER 31, 2002
-----------------------------
DIAMONDS AMOUNTS
----------- ---------------
DIAMONDS sold.......................................... 85,000,000 $ 8,317,016,274
DIAMONDS issued upon dividend reinvestment............. 2,297 210,273
DIAMONDS redeemed...................................... (66,150,000) (6,612,887,430)
Net income equalization................................ -- (913,179)
----------- ---------------
Net Increase........................................... 18,852,297 $ 1,703,425,938
=========== ===============
9
DIAMONDS TRUST SERIES 1
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 2004 (UNAUDITED)
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NOTE 4 -- TRUST TRANSACTIONS IN DIAMONDS (CONTINUED)
YEAR ENDED OCTOBER 31, 2001
-----------------------------
DIAMONDS AMOUNTS
----------- ---------------
DIAMONDS sold.......................................... 76,050,000 $ 7,610,021,285
DIAMONDS issued upon dividend reinvestment............. 1,055 107,143
DIAMONDS redeemed...................................... (64,200,000) (6,415,321,305)
Net income equalization................................ -- (733,997)
----------- ---------------
Net Increase........................................... 11,851,055 $ 1,194,073,126
=========== ===============
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 six months ended April 30, 2004, the Trust had net in-kind
contributions, net in-kind redemptions, purchases and sales of investment
securities of $3,932,717,929, $3,058,942,490, $730,930,800 and $737,494,929,
respectively. The identified cost of investments in securities owned for federal
income tax purposes was substantially the same as the cost for financial
reporting purposes. At April 30, 2004, the cost of investments was
$7,633,572,495 accordingly, gross unrealized appreciation was $148,337,865, and
gross unrealized depreciation was $692,716,186, resulting in net unrealized
depreciation of $544,378,321. For the six months ended April 30, 2004, State
Street Corporation did not earn any brokerage commissions from investment
transactions.
10
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
225 Franklin Street
Boston, MA 02110
DISTRIBUTOR
ALPS Distributors, Inc.
1625 Broadway, Suite 2200
Denver, CO 80202
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
125 High Street
Boston, MA 02110
LEGAL COUNSEL
Carter, Ledyard & Milburn
2 Wall Street
New York, NY 10005