N-30B-2 1 a14-24967_1n30b2.htm N-30B-2

PowerShares QQQ TrustSM, Series 1

ANNUAL REPORT

SEPTEMBER 30, 2014

OBJECTIVE:

The PowerShares QQQ TrustSM, Series 1 (the "Trust") is a unit investment trust that issues securities called PowerShares QQQ Index Tracking StockSM. The Trust holds all of the component securities of the NASDAQ-100® Index (the "Index"). The investment objective of the Trust is to provide investment results that generally correspond to the price and yield performance of the Index (the component securities of the Index are sometimes referred to herein as "Index Securities"). There can be no assurance that this investment objective will be met fully.




PowerShares QQQ TrustSM, Series 1

Contents

Report of Independent Registered Public Accounting Firm

   

1

   

Financial Statements

 

Schedule of Investments

   

2

   

Statement of Assets and Liabilities

   

6

   

Statements of Operations

   

7

   

Statements of Changes in Net Assets

   

8

   

Financial Highlights

   

9

   

Notes to Financial Statements

   

10

   

Supplemental Information (Unaudited)

   

17

   



This page has been left blank intentionally.




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Sponsor, Trustee and Unitholders of the PowerShares QQQ TrustSM, 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 PowerShares QQQ TrustSM, Series 1 (the "Trust") at September 30, 2014, the results of its operations, the changes in its net assets and the financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at September 30, 2014 by correspondence with the custodian and brokers, and the application of alternative auditing procedures where confirmations of security purchases have not been received, provide a reasonable basis for our opinion. The statements of operations and of changes in net assets and the financial highlights for the years ended September 30, 2013 and prior were audited by other auditors whose report dated January 16, 2014 expressed an unqualified opinion on those statements and financial highlights.

PricewaterhouseCoopers LLP
Chicago, IL
December 23, 2014


1




PowerShares QQQ TrustSM, Series 1
Schedule of Investments
September 30, 2014

Common Stock

 

Shares

 

Value

 

Apple, Inc.

   

55,860,972

   

$

5,627,992,929

   

Microsoft Corp.

   

76,869,678

     

3,563,678,272

   

Google, Inc., Class C*

   

3,155,178

     

1,821,673,570

   

Intel Corp.

   

46,187,952

     

1,608,264,489

   

Google, Inc., Class A*

   

2,643,444

     

1,555,428,884

   

Gilead Sciences, Inc.*

   

14,102,424

     

1,501,203,035

   

Facebook, Inc., Class A*

   

18,798,426

     

1,485,827,591

   

Amazon.Com, Inc.*

   

4,310,300

     

1,389,813,132

   

Cisco Systems, Inc.

   

47,789,634

     

1,202,865,088

   

QUALCOMM, Inc.

   

15,635,661

     

1,169,078,373

   

Comcast Corp., Class A

   

20,053,467

     

1,078,475,455

   

Amgen, Inc.

   

7,086,415

     

995,357,851

   

Biogen IDEC, Inc.*

   

2,203,043

     

728,788,655

   

Celgene Corp.*

   

7,458,633

     

706,929,236

   

eBay, Inc.*

   

11,579,323

     

655,737,061

   

Priceline Group, Inc.*

   

489,328

     

566,925,634

   

Baidu, Inc. ADR*

   

2,582,380

     

563,552,787

   

Mondelez International, Inc., Class A

   

15,727,667

     

538,908,510

   

Starbucks Corp.

   

7,007,962

     

528,820,813

   

Costco Wholesale Corp.

   

4,088,827

     

512,411,800

   

Express Scripts Holding Co.*

   

6,954,288

     

491,181,361

   

Texas Instruments, Inc.

   

9,959,269

     

474,957,539

   

Twenty-First Century Fox, Inc., Class A

   

12,981,631

     

445,140,127

   

DIRECTV*

   

4,685,257

     

405,368,436

   

Yahoo!, Inc.*

   

9,278,719

     

378,107,799

   

Micron Technology, Inc.*

   

9,989,707

     

342,247,362

   

Regeneron Pharmaceuticals, Inc.*

   

924,427

     

333,274,422

   

Automatic Data Processing, Inc. when-issued

   

4,481,812

     

326,655,190

   

Adobe Systems, Inc.*

   

4,640,052

     

321,045,198

   

Kraft Foods Group, Inc.

   

5,541,164

     

312,521,650

   

Alexion Pharmaceuticals, Inc.*

   

1,845,471

     

306,016,001

   

Tesla Motors, Inc.*

   

1,162,715

     

282,167,676

   

Viacom, Inc., Class B

   

3,471,070

     

267,064,126

   
Cognizant Technology Solutions Corp.,
Class A*
   

5,671,364

     

253,906,966

   

NetFlix, Inc.*

   

560,564

     

252,915,265

   

Vertex Pharmaceuticals, Inc.*

   

2,221,016

     

249,442,307

   

Applied Materials, Inc.

   

11,366,453

     

245,629,049

   

See accompanying notes to financial statements which are an integral part of these financial statements.
2



PowerShares QQQ TrustSM, Series 1
Schedule of Investments (continued)
September 30, 2014

Common Stock

 

Shares

 

Value

 

Intuit, Inc.

   

2,648,349

   

$

232,127,790

   

Illumina, Inc.*

   

1,300,415

     

213,164,027

   

Western Digital Corp.

   

2,183,103

     

212,459,584

   

SanDisk Corp.

   

2,091,877

     

204,899,352

   

Avago Technologies Ltd., Class A

   

2,348,323

     

204,304,101

   

Broadcom Corp., Class A

   

5,047,299

     

204,011,826

   

Keurig Green Mountain, Inc.

   

1,515,214

     

197,174,798

   

Cerner Corp.*

   

3,181,720

     

189,535,060

   

Marriott International, Inc., Class A

   

2,710,728

     

189,479,887

   

PACCAR, Inc.

   

3,309,668

     

188,237,367

   

Sirius XM Holdings, Inc.*

   

52,913,007

     

184,666,394

   

Wynn Resorts Ltd.

   

945,470

     

176,878,528

   

Seagate Technology PLC

   

3,048,797

     

174,604,604

   

Mylan, Inc.*

   

3,489,529

     

158,738,674

   

Intuitive Surgical, Inc.*

   

335,430

     

154,908,283

   

Vodafone Group PLC ADR

   

4,675,712

     

153,784,168

   

Charter Communications, Inc., Class A*

   

1,013,538

     

153,419,247

   

NXP Semiconductor NV*

   

2,226,553

     

152,363,022

   

Symantec Corp.

   

6,441,349

     

151,436,115

   

Sigma-Aldrich Corp.

   

1,109,939

     

150,962,803

   

Fiserv, Inc.*

   

2,324,940

     

150,272,497

   

Paychex, Inc.

   

3,387,397

     

149,722,947

   

Ross Stores, Inc.

   

1,973,912

     

149,188,269

   

O'reilly Automotive, Inc.*

   

967,997

     

145,548,029

   

Analog Devices, Inc.

   

2,931,279

     

145,068,998

   

Monster Beverage Corp.*

   

1,559,585

     

142,967,157

   

Activision Blizzard, Inc.

   

6,693,418

     

139,156,160

   

DISH Network Corp., Class A*

   

2,073,112

     

133,881,573

   

SBA Communications Corp., Class A*

   

1,203,523

     

133,470,701

   

Whole Foods Market, Inc.

   

3,370,097

     

128,434,397

   

NetApp, Inc.

   

2,978,384

     

127,951,377

   

Fastenal Co.

   

2,768,546

     

124,307,715

   

Bed Bath & Beyond, Inc.*

   

1,884,031

     

124,025,761

   

Check Point Software Technologies Ltd.*

   

1,779,857

     

123,237,299

   

KLA-Tencor Corp.

   

1,542,718

     

121,535,324

   

Liberty Interactive Corp., Class A*

   

4,222,957

     

120,438,734

   

Autodesk, Inc.*

   

2,125,813

     

117,132,296

   

CA, Inc.

   

4,151,983

     

116,006,405

   

See accompanying notes to financial statements which are an integral part of these financial statements.
3



PowerShares QQQ TrustSM, Series 1
Schedule of Investments (continued)
September 30, 2014

Common Stock

 

Shares

 

Value

 

VimpelCom Ltd. ADR

   

15,412,400

   

$

111,277,528

   

Tripadvisor, Inc.*

   

1,212,662

     

110,861,560

   

Citrix Systems, Inc.*

   

1,534,344

     

109,460,101

   

Dollar Tree, Inc.*

   

1,918,287

     

107,558,352

   

Xilinx, Inc.

   

2,504,650

     

106,071,927

   

Equinix, Inc.*

   

496,272

     

105,447,875

   

Altera Corp.

   

2,882,486

     

103,135,349

   

Liberty Media Corp., Class C*

   

2,133,256

     

100,241,699

   

Akamai Technologies, Inc.*

   

1,662,083

     

99,392,563

   

Linear Technology Corp.

   

2,225,077

     

98,771,168

   

Mattel, Inc.

   

3,151,757

     

96,601,352

   

Verisk Analytics, Inc., Class A*

   

1,553,068

     

94,566,311

   

Expedia, Inc.

   

1,067,148

     

93,503,508

   

Garmin Ltd.

   

1,796,897

     

93,420,675

   

NVIDIA Corp.

   

5,055,537

     

93,274,658

   

Stericycle, Inc.*

   

791,176

     

92,219,475

   

Henry Schein, Inc.*

   

791,387

     

92,172,844

   

CH Robinson Worldwide, Inc.

   

1,372,839

     

91,046,682

   

Liberty Global PLC, Class A*

   

2,004,912

     

85,288,956

   

F5 Networks, Inc.*

   

691,140

     

82,065,964

   

Catamaran Corp.*

   

1,934,984

     

81,559,576

   

Maxim Integrated Products, Inc.

   

2,648,822

     

80,100,377

   

Tractor Supply Co.

   

1,284,350

     

79,000,368

   

Expeditors International of Washington, Inc.

   

1,820,112

     

73,860,145

   

Staples, Inc.

   

6,009,758

     

72,718,072

   

Discovery Communications, Inc., Class C*

   

1,406,247

     

52,424,888

   

Discovery Communications, Inc., Class A*

   

1,384,060

     

52,317,468

   

Liberty Media Corp., Class A*

   

974,535

     

45,978,561

   
Total Investments (Cost $41,112,024,704)      

$

42,033,212,910

   

*  Non-income producing security for the year ended September 30, 2014.

ADR - American Depositary Receipts

The securities of the Trust investment portfolio categorized by industry group, as a percentage of total investments at value, are as follows:

Industry Classification

 

Value

 

Percentage

 

Internet

 

$

9,333,735,479

     

22.20

%

 

Computers

   

6,601,814,812

     

15.71

%

 

See accompanying notes to financial statements which are an integral part of these financial statements.
4



PowerShares QQQ TrustSM, Series 1
Schedule of Investments (continued)
September 30, 2014

Industry Classification

 

Value

 

Percentage

 

Software

 

$

5,310,766,588

     

12.64

%

 

Semiconductors

   

5,148,813,562

     

12.25

%

 

Biotechnology

   

5,034,175,534

     

11.97

%

 

Media

   

3,004,266,930

     

7.14

%

 

Retail

   

1,719,271,463

     

4.09

%

 

Telecommunications

   

1,601,397,485

     

3.81

%

 

Food

   

979,864,557

     

2.33

%

 

Pharmaceuticals

   

731,479,611

     

1.74

%

 

Auto Manufacturers

   

470,405,044

     

1.12

%

 
Commercial Services    

421,221,501

     

1.00

%

 

Lodging

   

366,358,415

     

0.87

%

 

Beverages

   

340,141,955

     

0.81

%

 

Healthcare - Products

   

247,081,127

     

0.59

%

 

Transportation

   

164,906,827

     

0.40

%

 

Chemicals

   

150,962,803

     

0.36

%

 

Distribution / Wholesale

   

124,307,715

     

0.30

%

 

Toys / Games / Hobbies

   

96,601,352

     

0.23

%

 

Electronics

   

93,420,675

     

0.22

%

 

Environmental Control

   

92,219,475

     

0.22

%

 

Total

 

$

42,033,212,910

     

100.00

%

 

Various inputs are used in determining the value of the Trust's investments. These inputs are summarized in the three broad levels listed below.

Level 1 - quoted prices in active markets for identical securities

Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)

Level 3 - significant unobservable inputs (including the Trust's own assumptions in determining the fair value of investments)

As of September 30, 2014, all of the securities in the Trust were valued based on Level 1 inputs (see Industry Classification section of the Schedule of Investments for security categories).

See accompanying notes to financial statements which are an integral part of these financial statements.
5




PowerShares QQQ TrustSM, Series 1
Statement of Assets and Liabilities
September 30, 2014

Assets:

 
Investments in securites, at value
(cost $41,112,024,704)
 

$

42,033,212,910

   

Cash

   

132,080,494

   

Receivable for securities sold

   

1,739,189,379

   

Receivable from units created

   

103,745,692

   

Dividend receivable

   

22,936,721

   

Total Assets

 

$

44,031,165,196

   

Liabilities:

 

Payable for units redeemed

 

$

1,694,408,286

   

Payable for securities purchased

   

147,813,649

   

Distribution payable

   

110,624,560

   

Payable to Licensor

   

9,725,370

   

Payable to Sponsor

   

8,232,553

   

Payable to Trustee

   

2,111,227

   

Professional fees

   

74,190

   

Accrued expenses

   

371,851

   
Total Liabilities     1,973,361,686    

NET ASSETS

 

$

42,057,803,510

   

Net assets presented by:

 

Paid-in capital

 

$

49,073,067,046

   
Undistributed net investment income     10,684,900    
Accumulated net realized gain (loss) on
investments transactions
    (7,947,136,642

)

 

Net unrealized appreciation of investments

   

921,188,206

   

NET ASSETS

 

$

42,057,803,510

   
Shares outstanding (unlimited shares authorized,
no par value)
   

425,800,000

   

Net asset value per share:

 

$

98.77

   

See accompanying notes to financial statements which are an integral part of these financial statements.
6



PowerShares QQQ TrustSM, Series 1
Statements of Operations

   

Year Ended September 30,

 
   

2014

 

2013

 

2012

 

Investment Income

 

Dividend income*

 

$

769,959,106

   

$

554,152,705

   

$

367,115,398

   

Expenses:

 

Trustee fees

   

24,802,194

     

19,782,803

     

18,410,448

   

Marketing expenses

   

24,028,070

     

16,963,472

     

15,057,611

   

Licensing fees

   

37,223,496

     

29,193,493

     

27,006,353

   

Professional fees

   

138,439

     

231,114

     

303,997

   

Other fees and expenses

   

616,570

     

585,814

     

536,707

   

Total expenses

   

86,808,769

     

66,756,696

     

61,315,116

   

Net investment income

   

683,150,337

     

487,396,009

     

305,800,282

   
Realized and unrealized gain
(loss) on investments:
 
Net realized gain (loss) on sales of
investments
   

(392,168,338

)

   

(1,556,905,692

)

   

(1,145,643,548

)

 
Net realized gain on in-kind
redemptions
   

8,959,055,466

     

4,099,118,959

     

5,071,554,550

   
Net change in unrealized
appreciaton on investments
   

792,269,664

     

2,079,074,165

     

3,656,380,332

   
Net realized and unrealized gain
on investments
   

9,359,156,792

     

4,621,287,432

     

7,582,291,334

   
Net increase in net assets resulting
from operations
 

$

10,042,307,129

   

$

5,108,683,441

   

$

7,888,091,616

   

*  Net of foreign taxes withheld of $1,203,461, $0 and $1,337,982 for the years ended September 30, 2014, 2013 and 2012, respectively.

See accompanying notes to financial statements which are an integral part of these financial statements.
7



PowerShares QQQ TrustSM, Series 1
Statements of Changes in Net Assets

   

Year Ended September 30,

 
   

2014

 

2013

 

2012

 

Increase (Decrease) in net assets:

 

Operations:

 

Net investment income

 

$

683,150,337

   

$

487,396,009

   

$

305,800,282

   
Net realized gain on
investment transactions
   

8,566,887,128

     

2,542,213,267

     

3,925,911,002

   
Net change in unrealized
appreciation of investments
   

792,269,664

     

2,079,074,165

     

3,656,380,332

   
Net increase in net assets
resulting from operations
   

10,042,307,129

     

5,108,683,441

     

7,888,091,616

   

Distributions to Unitholders from:

 

Net investment income

   

(665,867,146

)

   

(471,616,338

)

   

(299,643,847

)

 

Unitholder Transactions:

 
Proceeds from subscriptions of
PowerShares QQQ Index
Tracking StockSM
   

63,740,600,578

     

58,809,719,118

     

67,738,018,105

   
Less redemptions of
PowerShares QQQ Index
Tracking StockSM
   

(69,310,164,621

)

   

(59,824,990,351

)

   

(62,163,656,427

)

 
Increase (decrease) in net assets due
to unitholder transactions
   

(5,569,564,043

)

   

(1,015,271,233

)

   

5,574,361,678

   

Total increase in Net Assets

   

3,806,875,940

     

3,621,795,870

     

13,162,809,447

   

Net Assets

 

Beginning of year

   

38,250,927,570

     

34,629,131,700

     

21,466,322,253

   
End of year(a)   

$

42,057,803,510

   

$

38,250,927,570

   

$

34,629,131,700

   

(a)  Includes undistributed (distributions in excess of) net investment income of $10,684,900, $7,034,013 and $(4,603,834) at September 30, 2014, 2013 and 2012, respectively.

See accompanying notes to financial statements which are an integral part of these financial statements.
8



PowerShares QQQ TrustSM, Series 1
Financial Highlights

   

Year Ended September 30,

 
   

2014

 

2013

 

2012

 

2011

 

2010

 
Net Asset Value, beginning
of year
 

$

78.80

   

$

68.61

   

$

52.47

   

$

49.05

   

$

42.29

   

Investment Operations:

 

Net investment income(1)

   

1.41

     

1.02

     

0.63

     

0.39

     

0.30

   
Net realized and
unrealized gain
on investments
   

19.90

     

10.16

     

16.13

     

3.44

     

6.79

   
Total from Investment
Operations
   

21.31

     

11.18

     

16.76

     

3.83

     

7.09

   

Less Distributions from:

 

Net investment income

   

(1.34

)

   

(0.99

)

   

(0.62

)

   

(0.41

)

   

(0.33

)

 

Net Asset Value, end of year

 

$

98.77

   

$

78.80

   

$

68.61

   

$

52.47

   

$

49.05

   
Total investment return(2)     

27.20

%

   

16.48

%

   

32.04

%

   

7.78

%

   

16.80

%

 

Ratios/Supplemental Data

 
Net assets, end of
year (000's ommitted)
 

$

42,057,804

   

$

38,250,928

   

$

34,629,132

   

$

21,466,322

   

$

21,222,874

   

Ratio to average net assets:

 

Expenses

   

0.20

%

   

0.20

%

   

0.20

%

   

0.20

%

   

0.20

%

 

Net investment income

   

1.57

%

   

1.46

%

   

1.00

%

   

0.70

%

   

0.67

%

 
Portfolio turnover rate(3)     

5.19

%

   

14.73

%

   

9.12

%

   

28.68

%

   

4.96

%

 

The financial highlights summarize the impact of net investment income, net realized and unrealized gains and losses and distributions on a single share of the Trust, outstanding for each period presented. Additionally, important relationships between certain financial statement items are expressed in ratio form.

(1)  Calculated using average shares outstanding method.

(2)  Total return calculation assumes the reinvestment of dividends and capital gain distributions, if any, at net asset value. Total return excludes the effect of transation fees connected to the creation and redemption of Creation Units and brokerage commissions incurred by purchasing and/or selling shares of the Trust in the secondary market. Currently, the Trust does not have a dividend reinvestment program.

(3)  Portfolio turnover excludes securities received or delivered from processing creations or redemptions of Trust units.

See accompanying notes to financial statements which are an integral part of these financial statements.
9




PowerShares QQQ TrustSM, Series 1
Notes to Financial Statements
September 30, 2014

1. Organization

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 held by the Trust, which consists of substantially all of the securities, in substantially the same weighting, as the component securities of the Index.

Invesco PowerShares Capital Management, LLC is the Sponsor of the Trust and The Bank of New York Mellon is the Trustee.

The Trustee has entered into an Agency Agreement with the Sponsor, dated November 16, 2012 (the "Agency Agreement"). Under the terms of the Agency Agreement, the Sponsor will perform certain functions on behalf of the Trustee: (a) relating to the evaluation of the portfolio securities held by the Trust for the purposes of determining the net asset value of the Trust, and (b) relating to rebalancing and adjustments of the Trust's portfolio.

2. Significant Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. In addition, the Trust monitors for material events and transactions that may occur or become known after the period-end date and before the date the financial statements are released to print. The following is a summary of significant accounting policies followed by the Trust.

Security Valuation

Portfolio securities are valued at the NASDAQ last trade or official closing price of The NASDAQ Stock Market, Inc. (the "NASDAQ Stock Market"), which is deemed to be the principal market on which the securities are traded. If there is no NASDAQ last trade or official closing price on the day of valuation, a security is valued at the closing bid price of the NASDAQ Stock Market. If a security is not quoted on the NASDAQ Stock Market, or the principal market of the security is other than the NASDAQ Stock Market, or the Sponsor deems the last trade or official close price or closing bid price inappropriate for valuation purposes, then the security shall be fair valued in good faith by the Sponsor, in a manner consistent with the Standard Terms and Conditions of Trust Indenture and Agreement (the "Trust Agreement") and the Agency Agreement based (a) on the last trade or


10



closing price for the security on another market on which the security is traded or if there is no such appropriate closing price, at the closing bid price on such other market, (b) on current bid prices on the NASDAQ Stock Market or such other markets, (c) if bid prices are not available, on the basis of current bid prices for comparable securities, (d) by the Sponsor appraising the value of the securities in good faith, or (e) any combination thereof. In the event that the Agency Agreement is terminated, the Trustee would be responsible for the valuation steps set forth above in accordance with the terms and conditions of the Trust Agreement.

GAAP defines fair value as the price the Trust would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP also establishes a framework for measuring fair value and a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. GAAP establishes three tiers of inputs ("Levels") that may be used to measure fair value. The three tiers of inputs are summarized at the end of the Schedule of Investments.

Other Risks

Index Risk. Unlike many investment companies, the Trust does not utilize an investing strategy that seeks returns in excess of its Underlying Index. Therefore, the Trust would not necessarily buy or sell a security unless that security is added or removed, respectively, from its Underlying Index, even if that security generally is underperforming.

Equity Risk. Equity risk is the risk that the value of the securities that the Trust holds will fall due to general market and economic conditions, perceptions regarding the industries in which the issuers of securities the Trust holds participate or factors relating to specific companies in which the Trust invests. For example, an adverse event, such as an unfavorable earnings report, may depress the value of securities the Trust holds; the price of securities may be particularly sensitive to general movements in the stock market; or a drop in the stock market may depress the price of most or all of the securities the Trust holds. In addition, securities of an issuer in the Trust's portfolio may decline in price if the issuer fails to make anticipated dividend payments because, among other reasons, the issuer of the security experiences a decline in its financial condition.

Investment Transactions and Investment Income

Investment transactions are recorded on trade date. Realized gains and losses from the sale or disposition of securities are recorded on a specific identification basis. Dividend income is recorded on the ex-dividend date. Dividends received by the Trust may be subject to withholding and other taxes imposed by foreign countries.


11



Distributions to Unitholders

The Trust declares and distributes dividends, if any, from net investment income quarterly. The Trust will declare and distribute net realized capital gains, if any, at least annually.

Federal Taxes

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 the ("Internal Revenue Code"). By so qualifying, the Trust will not be subject to federal income taxes to the extent it distributes all of its investment company taxable income and any net realized capital gains, each fiscal year. In addition, by distributing 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 GAAP. To the extent these differences are permanent, such amounts are reclassified within the capital accounts based on their federal tax basis treatment; temporary differences do not require such reclassification.

The Trust is subject to authoritative guidance with respect to accounting for uncertainties in income taxes. Management has analyzed the Trust's tax positions taken or expected to be taken on its federal income tax return for all open tax years and has concluded that, as of September 30, 2014, no provision for income tax would be required in the Trust's financial statements. The Trust files tax returns in the U.S. Federal jurisdiction and certain other jurisdictions. Generally, the Trust is subject to examinations by such taxing authorities for up to three years after the filing of the return for the tax period.

3. Federal Tax Information

At September 30, 2014, permanent differences primarily due to the tax treatment of in-kind transactions, return of capital distributions received and capital loss carry forward expirations were reclassified within the components of net assets of the Trust. These differences resulted in a net decrease in undistributed net investment income in the amount of $13,632,304, a net decrease in accumulated net realized gain (loss) on investment transactions in the amount of $7,818,214,277 and a net increase to paid in capital in the amount of $7,831,846,581. This reclassification had no effect on net assets of the Trust.

The tax character of distributions paid during the years ended September 30, 2014, 2013 and 2012 was $665,867,146, $471,616,338, and $299,643,847 of ordinary income, respectively.

Capital loss carryforward is calculated and reported as of a specific date. Results of transactions and other activity after that date may affect the amount of capital loss carryforward actually available for the Trust to utilize. Capital losses generated in


12



years beginning after December 22, 2010 can be carried forward for an unlimited period, whereas previous losses expire within eight tax years. Capital losses with an expiration date may not be used to offset capital gains until all net capital losses without an expiration date have been utilized. Capital loss carryforwards with no expiration date will retain their character as either short-term or long-term capital losses instead of as short-term capital losses as under prior law. The ability to utilize capital loss carryforward in the future may be limited under the Internal Revenue Code and related regulations based on the results of future transactions.

The Trust has a capital loss carryforward as of October 31, 2014, which expires as follows:

2015  

2016

 

2017

 

2018

 

$

1,409,611,668

   

$

1,887,411,542

   

$

610,749,524

   

$

1,571,731,420

   
2019   Short-Term Loss
Carryforward
No Expiration
  Long-Term Loss
Carryforward No
Expiration
 

Total

 

$

145,185,141

   

$

135,693,272

   

$

1,794,082,313

   

$

7,554,464,880

   

In addition, during the year ended September 30, 2014, the Trust had a capital loss carryforward of $654,169,365 that expired.

Under current tax regulations, capital losses on securities transactions realized after October 31 ("Post-October Capital Losses") may be deferred and treated as occurring on the first business day of the following fiscal year. The Trust is permitted to defer certain net investment losses incurred after December 31 and treat as occurring on the first business day of the following fiscal year. During the fiscal year ended September 30, 2014, the Trust deferred Post-October Capital Losses of $132,609,792.

As of September 30, 2014, the components of accumulated earnings/(deficit) on a tax basis were as follows:

Accumulated capital and other losses

 

$

(7,687,074,672

)

 
Undistributed ordinary income    

119,948,891

   
Net unrealized appreciation (depreciation)    

662,486,802

   

Other Temporary Differences

   

(110,624,557

)

 

Total accumulated deficit

 

$

(7,015,263,536

)

 

4. Transactions with the Trustee, Licensor and Sponsor

The Trust pays the expenses of its operations, including Trustee fees, reimbursement to the Sponsor for expenses relating to the marketing of the Trust and fees to The NASDAQ OMX Group, Inc. (the "Licensor") for a license to use the NASDAQ-100 Index as a basis for determining the composition and weighting of securities held by the Trust.


13



The Sponsor entered into a license agreement with the Licensor (the "License Agreement"). Under the License Agreement, the license fee payable by the Trust is at an annual rate equal to the sum of (i) the product of (A) that portion of the average net assets of the Trust and the PowerShares EQQQ Fund, on an aggregate basis, up to and including $25,000,000,000 and (B) 0.09%, and (ii) the product of (A) an amount equal to that portion of the average net assets of the Trust and the PowerShares EQQQ Fund, on an aggregate basis, in excess of $25,000,000,000 and (B) 0.08%, with such sum multiplied by the percentage of the aggregate average net assets attributable to the Trust. License fees of $9,725,370 were payable to the Licensor at September 30, 2014. The license fee, under no circumstances, will exceed 0.09% of the aggregate average net assets, but may be lower in the future based on the aggregate average net assets. The License Agreement may be amended by the parties thereto without the consent of any of the beneficial owners of PowerShares QQQ shares and the License Agreement has no express termination date.

The Sponsor, until otherwise determined, has agreed to reimburse the Trust for ordinary operating expenses of the Trust, to the extent that such expenses exceed 0.20% per annum of the daily net asset value.

The Sponsor retains the ability to be repaid by the Trust for expenses so reimbursed or assumed to the extent that subsequently during the fiscal year expenses fall below the applicable per annum level on any given day. For the years ended September 30, 2014, 2013 and 2012, ordinary operating expenses incurred by the Trust did not exceed the 0.20% per annum level and, accordingly, no expenses of the Trust were assumed by the Sponsor.

In accordance with the Trust Agreement, 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 compositions and/or weighting structure of the respective index.

For these services, the Trustee receives a fee at the following annual rates:

Net Assets of the Trust

  Fee as a Percentage of
Net Assets of the Trust
 
$0-$499,999,999*  

10/100 of 1% per annum

 
$500,000,000-$2,499,999,999*  

8/100 of 1% per annum

 
$2,500,000,000-$24,999,999,999*  

6/100 of 1% per annum

 
$25,000,000,000-$49,999,999,999*  

5/100 of 1% per annum

 
$50,000,000,000 and over*  

4/100 of 1% per annum

 

*  The fee indicated applies to that portion of the net assets of the Trust which falls in the size category indicated and is computed each business day on the basis of the net assets of the Trust on such day.


14



The minimum annual fee, which shall be paid to the Trustee, is $180,000. To the extent that the amount of the Trustee's compensation is less than such minimum annual fee, the Sponsor has agreed to pay the amount of such shortfall. Trustee fees of $2,111,227 were payable to the Trustee at September 30, 2014.

Marketing expenses paid by the Sponsor on behalf of the Trust for invoices received directly by the Sponsor during the year remain payable in the amount of $8,232,553 to the Sponsor at September 30, 2014.

In accordance with the terms of the Trust Agreement and the Agency Agreement, the Trustee will pay, from its own assets, the Sponsor to perform the following services for the Trust: adjust the composition of the portfolio, calculate and adjust, if necessary, the weighting of each security in the portfolio, dispose of or exchange securities after it has been determined that such securities will be removed from the Index and direct securities transactions to brokers or dealers, which may include affiliates of the Trustee, including BNY ConvergEx Group, but will not include affiliates of the Sponsor.

ALPS Distributors, Inc. (the "Distributor") is the distributor for the Trust. The Sponsor, not the Trust, pays the Distributor a flat annual fee of $35,000 for its distribution services.

5. Related Party Transactions

During the fiscal years ended September 30, 2014, 2013 and 2012, the Trust paid $0, $713,699, and $3,575,000, respectively, in commissions on trades to a related party, BNY ConvergEx Group. BNY ConvergEx Group was not utilized for the fiscal year ended September 30, 2014. BNY ConvergEx Group is an affiliate of the Trustee.

6. Transactions in Shares of the Trust

Transactions in shares were as follows:

    For the Year Ended
September 30, 2014
  For the Year Ended
September 30, 2013
  For the Year Ended
September 30, 2012
 
PowerShares QQQ Index
Tracking StockSM
shares sold
   

713,900,000

     

850,700,000

     

1,094,750,000

   
PowerShares QQQ Index
Tracking StockSM
shares redeemed
   

(773,500,000

)

   

(870,000,000

)

   

(999,200,000

)

 

Net increase (decrease)

   

(59,600,000

)

   

(19,300,000

)

   

95,550,000

   

PowerShares QQQ Index Tracking StockSM shares are issued and redeemed by the Trust only in Creation Unit size aggregations of 50,000. Such transactions are only permitted on an in-kind basis, with a separate cash payment that is equivalent to the undistributed net investment income per PowerShares QQQ Index Tracking StockSM share and a balancing cash component to equate the transaction to the net asset value per share of the Trust on the transaction date. The transaction fee charged in


15



connection with creation or redemption of Creation Units through the PowerShares QQQ Trust Clearing Process is either, $0, $500 or $1,000 per Participating Party per day, depending on specific circumstances. The total fee charged in connection with the creation or redemption of Creation Units outside the PowerShares QQQ Trust Clearing Process is $4,000 per Participating Party per day.

Transaction fees are received by the Trustee from the Participating Party and used to offset the expense of processing orders. For the years ended September 30, 2014, 2013 and 2012, the Trustee earned $972,050, $1,006,900 and $1,106,000, respectively, in transaction fees. The Trustee, in its sole discretion, may voluntarily reduce or waive the transaction fee, or modify the transaction fee schedule, subject to certain limitations. There were no such reductions or waivers for the years ended September 30, 2014, 2013 and 2012.

7. Investment Transactions

For the year ended September 30, 2014, the Trust had purchases and sales of investment securities of $2,309,469,126 and $2,243,633,018, respectively. This excludes securities received or delivered from processing creations or redemptions of the Trust. For the year ended September 30, 2014, the cost of securities received and the value of securities delivered from in-kind transactions associated with creations and redemptions were $63,635,995,422 and $69,212,115,869, respectively. At September 30, 2014, the cost of investments for federal income tax purposes was $41,370,726,108. Accordingly, gross unrealized depreciation was $1,384,670,213 and gross unrealized appreciation was $2,047,157,015 resulting in net unrealized appreciation of $662,486,802.

8. Representations and Indemnifications

In the normal course of business, the Trust enters into contracts that contain a variety of representations and warranties, which provide general indemnifications. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. However, based on experience, the Trust expects the risk of loss to be remote.


16




Supplemental Information (Unaudited)

Information Regarding Closing Prices vs. Net Asset Value
Frequency Distribution

The table that follows presents information about the differences between the daily market prices on secondary market for one share of the Trust and that Trust's net asset value. Net Asset Value, or "NAV", is the price at which a Trust issues and redeems shares. The "Closing Market Price" of a share in the Trust is determined and published by the Nasdaq Stock Market, as of the time that the Trust's NAV is calculated. The Trust's Closing Market Price may be below, at or above, its NAV. The NAV will fluctuate with the changes in the market value or its portfolio holdings.

Premiums or discounts are the differences (expressed as a percentage) between the NAV and Closing Market Price of a Trust on a given day, generally at the time the NAV is calculated. A premium is the amount that a Trust is trading above the reported NAV, expressed as a percentage of the NAV. A discount is the amount that a Trust is trading below the reported NAV, expressed as a percentage of the NAV.

The following information shows the frequency distributions of premiums and discounts for the Trust for the period October 1, 2009 through September 30, 2014.

Each line in the table shows the number of trading days that the Trust traded within the premium/discount range indicated. The number of trading days in each premium/discount range is also shown as a percentage of the total number of trading days in the period covered by the table. All data presented here represents past performance, which cannot be used to predict future performance.

PowerShares QQQ TrustSM
Frequency Distribution of Discounts and Premiums
Closing Price vs. Net Asset Value (NAV)*

Five Year Period Ended 09/30/14 (unaudited)

Premium/Discount Range

  Number of
Trading Days(1)
  Percentage of
Total Trading Days
 
Greater than 0.25%    

6

     

0.48

%

 
Between zero and 0.25%    

536

     

42.61

%

 
Closing Price Equal to NAV    

33

     

2.62

%

 
Between zero and -0.25%    

678

     

53.89

%

 
Less than -0.25%    

5

     

0.40

%

 
Total    

1,258

     

100.00

%

 

*  Consolidated closing prices and non-truncated NAVs were used.

(1)  Number of Trading Days refers to the number of days during which there is buy/sell activity for the Trust on the Exchange.


17



Comparison of Total Returns Based on NAV and Close Price(1)
From Inception to 09/30/2014 (unaudited)

Cumulative Total Return

   

1 Year

 

5 Year

 

10 Year

  Since
Inception
 

PowerShares QQQ TrustSM

 
Return Based on NAV    

27.20

%

   

146.26

%

   

204.42

%

   

109.93

%

 
Return Based on Close Price    

27.36

%

   

146.72

%

   

205.53

%

   

109.67

%

 
Index    

27.52

%

   

148.98

%

   

210.70

%

   

116.74

%

 

Annualized Total Return

   

1 Year

 

5 Year

 

10 Year

  Since
Inception
 

PowerShares QQQ TrustSM

 

Return Based on NAV

   

27.20

%

   

19.75

%

   

11.78

%

   

4.88

%

 
Return Based on Close Price    

27.35

%

   

19.80

%

   

11.78

%

   

4.87

%

 
Index    

27.52

%

   

20.01

%

   

12.00

%

   

5.10

%

 

(1)  Cumulative Total Return and Average Annual Total Return for the period since inception is calculated from the inception date March 10, 1999.

Tax Information
(Unaudited)

For the year ended September 30, 2014, the Fund reports, in accordance with Section 854 of the Internal Revenue Code, the following percentages of ordinary income distributions paid as qualified dividend income (QDI) and eligible for corporate dividends received deduction (DRD):

QDI  

DRD

 
  100.00

%

   

92.86

%

 

In January 2015, you will be advised on IRS Form 1099 DIV as to the Federal tax status of the distributions received by you in calendar year 2014.


18



PowerShares QQQ TrustSM, Series 1

Sponsor

Invesco PowerShares Capital Management LLC
3500 Lacey Road, Suite 700
Downers Grove, IL 60515

Trustee

The Bank of New York Mellon
2 Hanson Place
Brooklyn, NY 11217

Distributor

ALPS Distributors, Inc.
1290 Broadway, Suite 1100
Denver, CO 80203

Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP
1 N. Wacker Drive
Chicago, IL 60606

Legal Counsel

K&L Gates LLP
1601 K Street NW
Washington, D.C. 20006


19




P-QQQ-AR-1