<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
NOVEMBER 30, 1999 REGISTRATION NOS.: 333-57791 811-08837
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 1
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 4
THE SELECT SECTOR SPDR(R) TRUST
(Exact Name of Registrant as Specified in Charter)
225 Franklin Street
Boston, Massachusetts 02110
(Address of Principal Executive Offices)
Registrant's Telephone Number: (303) 623-2577
Stuart M. Strauss, Esq.
Mayer Brown & Platt
1675 Broadway
New York, New York 10019
(Name and Address of Agent for Service)
Copy to: Michael E. Gillespie, Esq.
Vice President and Associate Counsel
State Street Bank and Trust Company 2 Avenue de Lafayette
Boston, Massachusetts 02111
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to Rule 485, paragraph (b)
[ ] on _________________ pursuant to Rule 485, paragraph (b)
[X] 60 days after filing pursuant to Rule 485, paragraph (a)(1)
[ ] on _________________ pursuant to Rule 485, paragraph (a)(1)
[ ] 75 days after filing pursuant to Rule 485, paragraph (a)(2)
[ ] on _________________ pursuant to Rule 485, paragraph (a)(2)
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE> 2
THE SELECT SECTOR SPDR(R) TRUST
THE BASIC INDUSTRIES SELECT SECTOR SPDR FUND
THE CONSUMER SERVICES SELECT SECTOR SPDR FUND
THE CONSUMER STAPLES SELECT SECTOR SPDR FUND
THE CYCLICAL/TRANSPORTATION SELECT SECTOR SPDR FUND
THE ENERGY SELECT SECTOR SPDR FUND
THE FINANCIAL SELECT SECTOR SPDR FUND
THE INDUSTRIAL SELECT SECTOR SPDR FUND
THE TECHNOLOGY SELECT SECTOR SPDR FUND
THE UTILITIES SELECT SECTOR SPDR FUND
The Select Sector SPDR Trust is an "index fund" consisting of nine separate
investment portfolios (each a "Select Sector SPDR Fund" or a "Fund" and
collectively the "Select Sector SPDR Funds" or the "Funds"). The investment
objective of each Fund is to provide investment results that, before expenses,
correspond generally to the price and yield performance of publicly traded
equity securities of companies in a particular sector or group of industries, as
represented by a specified market sector index (each a "Select Sector Index").
State Street Bank and Trust Company manages each Fund.
The Shares of each Select Sector SPDR Fund are listed on the American Stock
Exchange LLC (the "AMEX"). The Shares trade on the AMEX at market prices that
may differ to some degree from the Shares' net asset value. Each Select Sector
SPDR Fund issues and redeems Shares on a continuous basis -- at net asset value
- -- only in a large specified number of Shares called a "Creation Unit,"
principally in-kind for securities included in the relevant Select Sector Index.
EXCEPT WHEN AGGREGATED IN CREATION UNITS, THE SHARES ARE NOT REDEEMABLE
SECURITIES OF THE SELECT SECTOR SPDR FUNDS.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. SHARES IN EACH SELECT
SECTOR SPDR FUND ARE NOT GUARANTEED OR INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT, NOR ARE SHARES DEPOSITS
OR OBLIGATIONS OF ANY BANK. SUCH SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE
LOSS OF PRINCIPAL.
[SELECT SECTOR SPDRS LOGO]
<PAGE> 3
TABLE OF CONTENTS
- -------------------------------------------------------------------------- -----
BASIC INFORMATION ABOUT THE FUNDS
- -------------------------------------------------------------------------- -----
Who Should Invest
- -------------------------------------------------------------------------- -----
The Funds and Their Investment Objectives
- -------------------------------------------------------------------------- -----
Principal Investment Strategies of the Funds
- -------------------------------------------------------------------------- -----
Principal Risks of Investing in the Funds
- -------------------------------------------------------------------------- -----
Bar Chart and Tables
- -------------------------------------------------------------------------- -----
FEES AND EXPENSES
- -------------------------------------------------------------------------- -----
ADDITIONAL INVESTMENT STRATEGIES, RISKS AND OTHER CONSIDERATIONS
- -------------------------------------------------------------------------- -----
Additional Investment Strategies
- -------------------------------------------------------------------------- -----
Additional Risks
- -------------------------------------------------------------------------- -----
Other Considerations
- -------------------------------------------------------------------------- -----
MANAGEMENT
- -------------------------------------------------------------------------- -----
INDEX LICENSE
- -------------------------------------------------------------------------- -----
DETERMINATION OF NET ASSET VALUE
- -------------------------------------------------------------------------- -----
BUYING AND SELLING SELECT SECTOR SPDR FUNDS
- -------------------------------------------------------------------------- -----
CREATION AND REDEMPTION OF CREATION UNITS
- -------------------------------------------------------------------------- -----
DISTRIBUTIONS
- -------------------------------------------------------------------------- -----
TAX MATTERS
- -------------------------------------------------------------------------- -----
ADDITIONAL INFORMATION CONCERNING THE ROLE OF S&P, MERRILL LYNCH AND
THE AMEX
- -------------------------------------------------------------------------- -----
GENERAL INFORMATION
- -------------------------------------------------------------------------- -----
2
<PAGE> 4
BASIC INFORMATION ABOUT THE FUNDS
Each Select Sector SPDR Fund is an "index fund" that invests in a particular
sector or group of industries represented by a specified Select Sector Index
published by the AMEX. The companies included in each Select Sector Index are
selected on the basis of general industry classification from a universe of
companies defined by the Standard & Poor's 500 Composite Stock Index ("S&P
500")(1). The nine Select Sector Indexes upon which the Funds are based together
comprise all of the companies in the S&P 500.
WHO SHOULD INVEST
Each Select Sector SPDR Fund is designed for investors who seek a relatively
low-cost "passive" approach for investing in a portfolio of equity securities of
companies in a particular sector or group of industries as represented by a
specified Select Sector Index. Taken together, the Select Sector SPDR Funds are
designed to represent all of the 500 stocks included in the S&P 500. Bought and
sold separately, the Select Sector SPDR Funds are designed to enable investors
to tailor asset allocations within the universe of S&P 500 companies to fit
their particular investment needs.
Select Sector SPDR Funds may be suitable for long term investment in the market
or market segment represented in the relevant Select Sector Index. Shares of
each Select Sector SPDR Fund may also be used as an asset allocation tool or as
a speculative trading instrument. Unlike many conventional mutual funds which
are only bought and sold at closing net asset values, each Select Sector SPDR
Fund's Shares have been designed to be tradable in a secondary market on the
AMEX on an intraday basis and to be created and redeemed principally in kind in
Creation Units at each day's next calculated net asset value. These arrangements
are designed to protect ongoing shareholders from adverse effects on the
portfolio of a Select Sector SPDR Fund that could arise from frequent cash
creation and redemption transactions that affect the net asset value of such
Fund. Moreover, in contrast to conventional mutual funds where redemptions can
have an adverse tax impact on taxable shareholders because of the need to sell
portfolio securities which, in turn, may generate taxable gain, the in-kind
redemption mechanism of the Select Sector SPDR Funds generally will not lead to
a tax event for ongoing shareholders.
THE FUNDS AND THEIR INVESTMENT OBJECTIVES
Each Select Sector SPDR Fund seeks to provide investment results that, before
expenses, correspond to the performance of its benchmark Select Sector Index.
The Funds and the Indexes are as follows:
THE BASIC INDUSTRIES SELECT SECTOR SPDR FUND
The Basic Industries Select Sector Index includes integrated steel products,
chemicals, fibers, paper and gold, and included 53 component stocks as of
September 30, 1999.
- --------------------------
(1) "Standard & Poor's(R)", "S&P(R)" "S&P 500(R)", "Standard & Poor's 500(R)",
"500" "Standard & Poor's Depositary Receipts(R)", "SPDRs(R)", "Select Sector
SPDR", "Select Sector SPDRs" and "Select Sector Standard & Poor's Depositary
Receipts" are trademarks of the McGraw-Hill Companies, Inc.
3
<PAGE> 5
THE CONSUMER SERVICES SELECT SECTOR SPDR FUND
The Consumer Services Select Sector Index includes entertainment and publishing,
prepared foods, medical services, lodging and gaming, and included 46 component
stocks as of September 30, 1999.
THE CONSUMER STAPLES SELECT SECTOR SPDR FUND
The Consumer Staples Select Sector Index includes cosmetic and personal care,
pharmaceuticals, soft drinks, tobacco and food products, and included 68
component stocks as of September 30, 1999.
THE CYCLICAL/TRANSPORTATION SELECT SECTOR SPDR FUND
The Cyclical/Transportation Select Sector Index includes building materials,
retailers, appliances, housewares, air transportation, automotive manufacturing,
shipping and trucking, and included 71 component stocks as of September 30,
1999.
THE ENERGY SELECT SECTOR SPDR FUND
The Energy Select Sector Index includes companies that develop and produce crude
oil and natural gas, and provide drilling and other energy related services, and
included 32 component stocks as of September 30, 1999.
THE FINANCIAL SELECT SECTOR SPDR FUND
The Financial Select Sector Index includes a wide array of diversified financial
services firms whose business lines range from investment management to
commercial and business banking, and included 71 component stocks as of
September 30, 1999.
THE INDUSTRIAL SELECT SECTOR SPDR FUND
The Industrial Select Sector Index includes companies that are involved in the
development and production of industrial products, including electrical
equipment, construction equipment, waste management services and industrial
machinery products, and included 33 component stocks as of September 30, 1999.
THE TECHNOLOGY SELECT SECTOR SPDR FUND
The Technology Select Sector Index includes products developed by defense
manufacturers, telecommunications equipment, microcomputer components,
integrated computer circuits and process monitoring systems, and included 84
component stocks as of September 30, 1999.
4
<PAGE> 6
THE UTILITIES SELECT SECTOR SPDR FUND
The Utilities Select Sector Index includes communication services, electrical
power providers and natural gas distributors, and included 42 component stocks
as of September 30, 1999.
PRINCIPAL INVESTMENT STRATEGIES OF THE FUNDS
The Funds utilize a low cost "passive" or "indexing" investment approach to
attempt to approximate the investment performance of its benchmark Select Sector
Index.
Each Fund generally will hold all of the securities which comprise its benchmark
Select Sector Index. There may, however, be instances where the Adviser may
choose to overweight another stock in the Select Sector Index, purchase
securities not included within the Select Sector Index which the Adviser
believes are appropriate to substitute for the Select Sector Index securities or
utilize various combinations of other available investment techniques in seeking
to track accurately the benchmark Select Sector Index.
Each Fund will normally invest at least 95% of its total assets in common stocks
that comprise the relevant Select Sector Index.
PRINCIPAL RISKS OF INVESTING IN THE FUNDS
GENERAL RISKS OF INVESTING IN INDEX FUNDS
Each of the Funds is subject to the same general risks.
Unlike many investment companies, the Funds are not actively "managed."
Therefore, a Fund would not sell a stock because the stock's issuer was in
financial trouble, unless that stock is removed from the Fund's benchmark Select
Sector Index. An investment in a Fund involves risks similar to those of
investing in any fund of equity securities traded on exchanges, such as market
fluctuations caused by such factors as economic and political developments,
changes in interest rates and perceived trends in stock prices. You should
anticipate that the value of the Shares will decline, more or less, in
correspondence with any decline in value of the Fund's applicable Select Sector
Index.
The Adviser believes that over time the correlation between each Fund's
performance and that of its benchmark Index, before expenses, will be 95% or
better. A figure of 100% will indicate perfect correlation. The Funds' returns
may not match the return of their benchmark Indexes as a result of Fund expenses
and other factors. For example, rebalancing of the Fund's securities holdings
may at times be necessary to reflect changes in the composition of the relevant
Select Sector Index. Rebalancing will result in transaction and other costs and
could result in the realization of capital gains or losses.
You can lose money by investing in a Select Sector SPDR Fund.
RISKS SPECIFIC TO EACH SELECT SECTOR SPDR FUND
5
<PAGE> 7
Each Fund is subject to the additional risks associated with concentrating its
investments in companies in the market sector that its benchmark Select Sector
Index targets. Additional fund specific risks include:
The Basic Industries Select Sector SPDR Fund. Many companies in this sector are
significantly affected by the level and volatility of commodity prices, the
exchange value of the dollar, import controls, and worldwide competition. At
times, worldwide production of industrial materials has exceeded demand as a
result of over-building or economic downturns, leading to poor investment
returns or losses. Other risks may include liability for environmental damage,
depletion of resources, and mandated expenditures for safety and pollution
control. The success of equipment manufacturing and distribution companies is
closely tied to overall capital spending levels, which are influenced by an
individual company's profitability and broader factors such as interest rates
and cross-border competition. The basic industries sector may also be affected
by economic cycles, technical progress, labor relations, and government
regulations.
The Consumer Services Select Sector SPDR Fund. The success of consumer product
manufacturers and retailers is tied closely to the performance of the overall
domestic and international economy, interest rates, competition, and consumer
confidence. Success depends heavily on disposable household income and consumer
spending. Changes in demographics and consumer tastes can also affect the demand
for, and success of, consumer products in the marketplace.
The Consumer Staples Select Sector SPDR Fund. Companies in this Select Sector
Index are subject to government regulation affecting the permissibility of using
various food additives and production methods, which regulations could affect
company profitability. Tobacco companies may be adversely affected by the
adoption of proposed legislation and/or by litigation. Also, the success of
food, soft drink, and fashion-related products may be strongly affected by fads,
marketing campaigns and other factors affecting supply and demand.
The Cyclical/Transportation Select Sector SPDR Fund. Companies involved in the
building industry may be affected by a variety of factors such as government
spending on housing subsidies, public works, and transportation facilities.
Other factors include changes in interest rates, consumer confidence and
spending, taxation, demographic patterns, the level of new and existing home
sales and other economic activity. Transportation stocks are cyclical and have
occasional sharp price movements which may result from changes in the economy,
fuel prices, labor agreements and insurance costs. The United States has been
deregulating these industries but it is uncertain whether this trend will
continue and what its effect will be. See also "The Consumer Services Select
Sector SPDR Fund".
The Energy Select Sector SPDR Fund. Energy companies in this Select Sector Index
develop and produce crude oil and natural gas and provide drilling and other
energy resources production and distribution related services. Stock prices for
these types of companies are affected by supply and demand both for their
specific product or service and for energy products in general. The price of oil
and gas, exploration and production spending, government regulation, world
events and economic conditions will likewise affect the performance of these
companies. Correspondingly, securities of companies in the energy field are
subject to swift price and supply fluctuations caused
6
<PAGE> 8
by events relating to international politics, energy conservation, the success
of exploration projects, and tax and other governmental regulatory policies.
Weak demand for the companies' products or services or for energy products and
services in general, as well as negative developments in these other areas,
would adversely impact this Select Sector SPDR Fund's performance.
The Financial Select Sector SPDR Fund. Financial services companies are subject
to extensive governmental regulation which may limit both the amounts and types
of loans and other financial commitments they can make, and the interest rates
and fees they can charge. Profitability is largely dependent on the availability
and cost of capital funds, and can fluctuate significantly when interest rates
change. Credit losses resulting from financial difficulties of borrowers can
negatively impact the sector. Insurance companies may be subject to severe price
competition. Legislation has been recently enacted that would reduce the
separation between commercial and investment banking businesses. This
legislation could significantly impact the sector and the Fund.
The Industrial Select Sector SPDR Fund. Stock prices for the types of companies
included in this industry are affected by supply and demand both for their
specific product or service and for industrial sector products in general.
Government regulation, world events and economic conditions will likewise affect
the performance of these companies. See also "The Basic Industries Select Sector
SPDR Fund", "The Consumer Services Select Sector SPDR Fund" and "The
Cyclical/Transportation Select Sector SPDR Fund".
The Technology Select Sector SPDR Fund. Products included in this Select Sector
Index include telecommunications equipment, microcomputer components, integrated
computer circuits, process monitoring systems and products developed by defense
manufacturers. The financial condition of, and investor interest in, defense
companies are heavily influenced by governmental defense spending policies.
Defense spending is under pressure from efforts to control the U.S. budget.
Competitive pressures may have a significant effect on the financial condition
of companies in the technology sector. Also, many of the products and services
offered by technology companies are subject to the risk of rapid obsolescence.
The Utilities Select Sector SPDR Fund. The rates that traditional regulated
utility companies may charge their customers generally are subject to review and
limitation by governmental regulatory commissions. Although rate changes of a
utility usually fluctuate in approximate correlation with financing costs due to
political and regulatory factors, rate changes ordinarily occur only following a
delay after the changes in financing costs. This factor will tend to favorably
affect a regulated utility company's earnings and dividends in times of
decreasing costs, but conversely, will tend to affect adversely earnings and
dividends when costs are rising. The value of regulated utility debt securities
(and, to a lesser extent, equity securities) tends to have an inverse
relationship to the movement of interest rates. Certain utility companies have
experienced full or partial deregulation in recent years. These utility
companies are frequently more similar to industrial companies in that they are
subject to greater competition and have been permitted by regulators to
diversify outside of their original geographic regions and their traditional
lines of business. These opportunities may permit certain utility companies to
earn more than their traditional regulated rates of return. Some companies,
however, may be forced to defend their core business and may be less profitable.
7
<PAGE> 9
Among the risks that may affect utility companies are the following: risks of
increases in fuel and other operating costs; the high cost of borrowing to
finance capital construction during inflationary periods; restrictions on
operations and increased costs and delays associated with compliance with
environmental and nuclear safety regulations; and the difficulties involved in
obtaining natural gas for resale or fuel for generating electricity at
reasonable prices. Other risks include those related to the construction and
operation of nuclear power plants; the effects of energy conservation and the
effects of regulatory changes, such as the possible adverse effects on profits
of recent increased competition among telecommunications companies and the
uncertainties resulting from such companies' diversification into new domestic
and international businesses, as well as agreements by any such companies
linking future rate increases to inflation or other factors not directly related
to the actual operating profits of the enterprise.
8
<PAGE> 10
The bar charts and tables below provide some indication of the risks of
investing in the Funds by showing the variability of the Funds' returns and
comparing Funds' performance to a broad measure of market performance.
THE BASIC INDUSTRIES SELECT SECTOR SPDR FUND
The Basic Industries Select Sector SPDR Fund's year-to-date return for the
period ended December 31, 1999 was [ ]%. During the periods shown below, the
highest quarterly return was 19.61% for the quarter ended June 30, 1999, and the
lowest was -8.54% for the quarter ended September 30, 1999.
- ---------------------------------------------- ------------------
Average Annual Total Return Life of Fund
(for periods ending September 30, 1999) (since 12/14/98)
- ---------------------------------------------- ------------------
The Basic Industries Select Sector SPDR Fund 15.59%
- ---------------------------------------------- ------------------
Standard & Poor's 500 Index 11.52%
- ---------------------------------------------- ------------------
The Basic Industries Select Sector Index 15.84%
- ---------------------------------------------- ------------------
THE CONSUMER SERVICES SELECT SECTOR SPDR FUND
The Consumer Services Select Sector SPDR Fund's year-to-date return for the
period ended December 31, 1999 was [ ]%. During the periods shown below, the
highest quarterly return was 8.19% for the quarter ended December 31, 1998, and
the lowest was -8.89% for the quarter ended September 30, 1999.
- ---------------------------------------------- ------------------
Average Annual Total Return Life of Fund
(for periods ending September 30, 1999) (since 12/14/98)
- ---------------------------------------------- ------------------
The Consumer Services Select Sector SPDR Fund 12.03%
- ---------------------------------------------- ------------------
Standard & Poor's 500 Index 11.52%
- ---------------------------------------------- ------------------
The Consumer Services Select Sector Index 12.77%
- ---------------------------------------------- ------------------
THE CONSUMER STAPLES SELECT SECTOR SPDR FUND
The Consumer Staples Select Sector SPDR Fund's year-to-date return for the
period ended December 31, 1999 was [ ]%. During the periods shown below, the
highest quarterly return was 4.53% for the quarter ended December 31, 1998, and
the lowest was -11.48% for the quarter ended September 30, 1999.
- ---------------------------------------------- ------------------
Average Annual Total Return Life of Fund
(for periods ending September 30, 1999) (since 12/14/98)
- ---------------------------------------------- ------------------
The Consumer Staples Select Sector SPDR Fund -12.45%
- ---------------------------------------------- ------------------
Standard & Poor's 500 Index 11.52%
- ---------------------------------------------- ------------------
The Consumer Staples Select Sector Index -12.38%
- ---------------------------------------------- ------------------
THE CYCLICAL/TRANSPORTATION SELECT SECTOR SPDR FUND
9
<PAGE> 11
The Cyclical/Transportation Select Sector SPDR Fund's year-to-date return for
the period ended December 31, 1999 was [ ]%. During the periods shown below, the
highest quarterly return was 8.84% for the quarter ended March 31, 1999, and the
lowest was -11.75% for the quarter ended September 30, 1999.
- ---------------------------------------------------- ------------------
Average Annual Total Return Life of Fund
(for periods ending September 30, 1999) (since 12/14/98)
- ---------------------------------------------------- ------------------
The Cyclical/Transportation Select Sector SPDR Fund 7.17%
- ---------------------------------------------------- ------------------
Standard & Poor's 500 Index 11.52%
- ---------------------------------------------------- ------------------
The Cyclical/Transportation Select Sector SPDR Fund 7.30%
- ---------------------------------------------------- ------------------
THE ENERGY SELECT SECTOR SPDR FUND
The Energy Select Sector SPDR Fund's year-to-date return for the period ended
December 31, 1999 was [ ]%. During the periods shown below, the highest
quarterly return was 14.41% for the quarter ended June 30, 1999, and the lowest
was -1.69% for the quarter ended September 30, 1999.
- ---------------------------------------------------- ------------------
Average Annual Total Return Life of Fund
(for periods ending September 30, 1999) (since 12/14/98)
- ---------------------------------------------------- ------------------
The Energy Select Sector SPDR Fund 17.91%
- ---------------------------------------------------- ------------------
Standard & Poor's 500 Index 11.52%
- ---------------------------------------------------- ------------------
The Energy Select Sector Index 17.99%
- ---------------------------------------------------- ------------------
THE FINANCIAL SELECT SECTOR SPDR FUND
The Financial Select Sector SPDR Fund's year-to-date return for the period ended
December 31, 1999 was [ ]%. During the periods shown below, the highest
quarterly return was 7.30% for the quarter ended March 31, 1999, and the lowest
was -15.34% for the quarter ended September 30, 1999.
- ---------------------------------------------------- ------------------
Average Annual Total Return Life of Fund
(for periods ending September 30, 1999) (since 12/14/98)
- ---------------------------------------------------- ------------------
The Financial Select Sector SPDR Fund 0.97%
- ---------------------------------------------------- ------------------
Standard & Poor's 500 Index 11.52%
- ---------------------------------------------------- ------------------
The Financial Select Sector Index 0.86%
- ---------------------------------------------------- ------------------
THE INDUSTRIAL SELECT SECTOR SPDR FUND
The Industry Select Sector SPDR Fund's year-to-date return for the period ended
December 31, 1999 was [ ]%. During the periods shown below, the highest
quarterly return was 19.47% for the quarter ended June 30, 1999, and the lowest
was -3.14% for the quarter ended September 30, 1999.
- ---------------------------------------------------- ------------------
Average Annual Total Return Life of Fund
- ---------------------------------------------------- ------------------
10
<PAGE> 12
- ---------------------------------------------------- ------------------
(for periods ending September 30, 1999) (since 12/14/98)
- ---------------------------------------------------- ------------------
The Industrial Select Sector SPDR Fund 27.40%
- ---------------------------------------------------- ------------------
Standard & Poor's 500 Index 11.52%
- ---------------------------------------------------- ------------------
The Industrial Select Sector Index 27.74%
- ---------------------------------------------------- ------------------
THE TECHNOLOGY SELECT SECTOR SPDR FUND
The Technology Select Sector SPDR Fund's year-to-date return for the period
ended December 31, 1999 was [ ]%. During the periods shown below, the highest
quarterly return was 12.35% for the quarter ended March 31, 1999, and the lowest
was 1.90% for the quarter ended September 30, 1999.
- ---------------------------------------------------- ------------------
Average Annual Total Return Life of Fund
(for periods ending September 30, 1999) (since 12/14/98)
- ---------------------------------------------------- ------------------
The Technology Select Sector SPDR Fund 37.00%
- ---------------------------------------------------- ------------------
Standard & Poor's 500 Index 11.52%
- ---------------------------------------------------- ------------------
The Technology Select Sector Index 31.17%
- ---------------------------------------------------- ------------------
THE UTILITIES SELECT SECTOR SPDR FUND
The Utilities Select Sector SPDR Fund's year-to-date return for the period ended
December 31, 1999 was [ ]%. During the periods shown below, the highest
quarterly return was 17.09% for the quarter ended June 30, 1999, and the lowest
was -10.90% for the quarter ended March 31, 1999.
- ---------------------------------------------------- ------------------
Average Annual Total Return Life of Fund
(for periods ending September 30, 1999) (since 12/14/98)
- ---------------------------------------------------- ------------------
The Utilities Select Sector SPDR Fund 3.66%
- ---------------------------------------------------- ------------------
Standard & Poor's 500 Index 11.52%
- ---------------------------------------------------- ------------------
The Utilities Select Sector Index 3.26%
- ---------------------------------------------------- ------------------
11
<PAGE> 13
FEES AND EXPENSES
<TABLE>
<CAPTION>
- --------------------------------- ------------- --------------- -------------- -------------- ------------- -------------
THE BASIC THE CONSUMER THE CONSUMER THE CYCLICAL/ THE ENERGY THE FINANCIAL
INDUSTRIES SERVICES SELECT STAPLES SELECT TRANSPORTATION SELECT SECTOR SELECT SECTOR
SELECT SECTOR SECTOR SPDR SECTOR SPDR SELECT SECTOR SPDR FUND SPDR FUND
SPDR FUND FUND FUND SPDR FUND
- --------------------------------- ------------- --------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
I. SHAREHOLDER TRANSACTION
EXPENSES
- --------------------------------- ------------- --------------- -------------- -------------- ------------- -------------
A. CREATION TRANSACTION
EXPENSES
- --------------------------------- ------------- --------------- -------------- -------------- ------------- -------------
Through the Continuous Net $1,000 $1,000 $1,000 $1,000 $1,000 $1,000
Settlement System of the National
Securities Clearing Corporation
("NSCC")(a)......................
- --------------------------------- ------------- --------------- -------------- -------------- ------------- -------------
Outside Up to $4,000 Up to $4,000 Up to $4,000 Up to $4,000 Up to $4,000 Up to $4,000
NSCC(a)..........................
- --------------------------------- ------------- --------------- -------------- -------------- ------------- -------------
B. REDEMPTION TRANSACTION
EXPENSES
- --------------------------------- ------------- --------------- -------------- -------------- ------------- -------------
Through $1,000 $1,000 $1,000 $1,000 $1,000 $1,000
NSCC(b)..........................
- --------------------------------- ------------- --------------- -------------- -------------- ------------- -------------
Outside Up to $4,000 Up to $4,000 Up to $4,000 Up to $4,000 Up to $4,000 Up to $4,000
NSCC(b)..........................
- --------------------------------- ------------- --------------- -------------- -------------- ------------- -------------
II. ANNUAL FUND OPERATING
EXPENSES BASED ON ACTUAL FUND
EXPENSES FOR THE FISCAL YEAR
ENDED SEPTEMBER 30, 1999
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
- --------------------------------- ------------- --------------- -------------- -------------- ------------- -------------
Management .05% .05% .05% .05% .05% .05%
Fees.............................
- --------------------------------- ------------- --------------- -------------- -------------- ------------- -------------
12b-1 Fees....................... .25% .25% .25% .25% .25% .25%
- --------------------------------- ------------- --------------- -------------- -------------- ------------- -------------
Other Operating .26% .27% .27% .28% .26% .27%
Expenses(c)......................
- --------------------------------- ------------- --------------- -------------- -------------- ------------- -------------
------ ------ ------ ------ ------ ------
- --------------------------------- ------------- --------------- -------------- -------------- ------------- -------------
Total .56% .57% .57% .58% .56% .57%
Expenses.........................
- --------------------------------- ------------- --------------- -------------- -------------- ------------- -------------
- --------------------------------- ------------- --------------- --------------
THE THE THE UTILITIES
INDUSTRIAL TECHNOLOGY SELECT SECTOR
SELECT SECTOR SELECT SECTOR SPDR FUND
SPDR FUND SPDR FUND
- --------------------------------- ------------- --------------- --------------
I. SHAREHOLDER TRANSACTION
EXPENSES
- --------------------------------- ------------- --------------- --------------
A. CREATION TRANSACTION
EXPENSES
- --------------------------------- ------------- --------------- --------------
Through the Continuous Net $1,000 $1,000 $1,000
Settlement System of the National
Securities Clearing Corporation
("NSCC")(a)......................
- --------------------------------- ------------- --------------- --------------
Outside Up to $4,000 Up to $4,000 Up to $4,000
NSCC(a)..........................
- --------------------------------- ------------- --------------- --------------
B. REDEMPTION TRANSACTION
EXPENSES
- --------------------------------- ------------- --------------- --------------
Through $1,000 $1,000 $1,000
NSCC(b)..........................
- --------------------------------- ------------- --------------- --------------
Outside Up to $4,000 Up to $4,000 Up to $4,000
NSCC(b)..........................
- --------------------------------- ------------- --------------- --------------
II. ANNUAL FUND OPERATING
EXPENSES BASED ON ACTUAL FUND
EXPENSES FOR THE FISCAL YEAR
ENDED SEPTEMBER 30, 1999
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
- --------------------------------- ------------- --------------- --------------
Management .05% .05% .05%
Fees.............................
- --------------------------------- ------------- --------------- --------------
12b-1 Fees....................... .25% .25% .25%
- --------------------------------- ------------- --------------- --------------
Other Operating .27% .26% .27%
Expenses(c)......................
- --------------------------------- ------------- --------------- --------------
------ ------ ------
- --------------------------------- ------------- --------------- --------------
Total .57% .56% .57%
Expenses.........................
- --------------------------------- ------------- --------------- --------------
</TABLE>
(a) The creation transaction fee is the same regardless of the number of
Creation Units being purchased pursuant to any one creation order. One
Creation Unit consists of 50,000 Shares.
(b) The redemption transaction fee is the same regardless of the number of
Creation Units being redeemed pursuant to any one redemption order. One
Creation Unit consists of 50,000 Shares.
(c) A "unitary" fee is paid by each Select Sector SPDR Fund to State Street for
the administration, custody and transfer agency services it provides to the
Funds. The unitary fee is equal to the greater of: (a) a sliding scale fee
calculated as follows: (i) .10% of average daily net assets of the Trust up
to the first $4.5 billion of net assets (such $4.5 billion to be increased
by $500 million each time a new Select Sector SPDR Fund is added); (ii)
.08% of average daily net assets up to the next $4.5 billion of net assets
of the Trust (such $4.5 billion to be increased by $500 million each time a
new Select Sector SPDR Fund is added); and (iii) .06% of average daily net
assets on the remainder of net assets; or (b) a minimum fee of $3.15
million increased by $350,000 each time a new Select Sector SPDR Fund is
added. The minimum fee will not be in effect for the first two years of the
Trust's operation.
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EXAMPLES OF EXPENSES
Each Select Sector SPDR Fund sells and redeems Shares in Creation Units
principally on an in-kind basis for portfolio securities of the relevant Select
Sector Index. SHARES IN LESS THAN CREATION UNIT AGGREGATIONS ARE NOT REDEEMABLE.
An investor purchasing a Creation Unit on an in-kind basis would pay the
following expenses on a $10,000 investment (payment with a deposit of securities
included in the relevant Select Sector Index), assuming a 5% annual return and
that the Funds' operating expenses remain the same. INVESTORS SHOULD NOTE THAT
THE PRESENTATION BELOW OF A $10,000 INVESTMENT IN A CREATION UNIT IS FOR
ILLUSTRATION PURPOSES ONLY, AS SHARES WILL BE ISSUED BY THE SELECT SECTOR SPDR
FUNDS ONLY IN CREATION UNITS. FURTHER, THE RETURN OF 5% AND ESTIMATED EXPENSES
ARE FOR ILLUSTRATION PURPOSES ONLY AND SHOULD NOT BE CONSIDERED INDICATIONS OF
EXPECTED SELECT SECTOR SPDR FUND EXPENSES OR PERFORMANCE, WHICH MAY BE GREATER
OR LESSER THAN THE ESTIMATES.
An investor would pay the following expenses, assuming no redemptions:
- --------------------------------------------------- ------ ------- ------- -----
1 3 5 10
YEAR YEARS YEARS YEARS
- --------------------------------------------------- ------ ------- ------- -----
($) ($) ($) ($)
- --------------------------------------------------- ------ ------- ------- -----
The Basic Industries Select Sector SPDR Fund 57 180 314 703
- --------------------------------------------------- ------ ------- ------- -----
The Consumer Services Select Sector SPDR Fund 58 183 319 715
- --------------------------------------------------- ------ ------- ------- -----
The Consumer Staples Select Sector SPDR Fund 58 183 319 715
- --------------------------------------------------- ------ ------- ------- -----
The Cyclical/Transportation Select Sector SPDR Fund 59 186 325 727
- --------------------------------------------------- ------ ------- ------- -----
The Energy Select Sector SPDR Fund 57 180 314 703
- --------------------------------------------------- ------ ------- ------- -----
The Financial Select Sector SPDR Fund 58 183 319 715
- --------------------------------------------------- ------ ------- ------- -----
The Industrial Select Sector SPDR Fund 58 183 319 715
- --------------------------------------------------- ------ ------- ------- -----
The Technology Select Sector SPDR Fund 57 180 314 703
- --------------------------------------------------- ------ ------- ------- -----
The Utilities Select Sector SPDR Fund 58 183 319 715
- --------------------------------------------------- ------ ------- ------- -----
ADDITIONAL INVESTMENT STRATEGIES, RISKS AND OTHER CONSIDERATIONS
ADDITIONAL INVESTMENT STRATEGIES
Each Select Sector SPDR Fund may invest its remaining assets in money market
instruments including repurchase agreements or funds which invest exclusively in
money market instruments (subject to applicable limitations under the 1940 Act),
in convertible securities, structured notes (notes on which the amount of
principal repayment and interest payments are based on the movement of one or
more specified factors such as the movement of a particular stock or stock
index) and in options and futures contracts. Options and future contracts (and
convertible securities and structured notes) may be used by a Fund in seeking
performance that corresponds to its benchmark Select Sector Index and in
managing cash flows. The Funds will not invest in money market instruments as
part of a temporary defensive strategy to protect against potential stock market
declines. The Adviser anticipates that it will take approximately three business
days for additions and deletions to the S&P 500 to be reflected in the portfolio
composition of each Fund.
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<PAGE> 15
Lending Securities. Each Select Sector SPDR Fund may in the future lend
securities from its holdings to brokers, dealers and other financial
institutions desiring to borrow securities to complete transactions and for
other purposes.
Borrowing Money. Each Select Sector SPDR Fund may borrow money from a bank up to
a limit of 10% of the value of its assets, but only for temporary or emergency
purposes.
ADDITIONAL RISKS
Lack of Diversification. Each Select Sector SPDR Fund intends to maintain the
required level of diversification so as to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code, in order to avoid liability
for federal income tax to the extent that its earnings are distributed to
shareholders. Compliance with the diversification requirements of the Internal
Revenue Code could limit the investment flexibility of a Select Sector SPDR
Fund.
The stocks of particular issuers, or of issuers in particular industries, may
represent a large portion of a Select Sector Index. Consequently, a Select
Sector SPDR Fund may be more adversely affected by the performance of one
security (or group of securities) and be subject to greater price volatility
than a more diversified investment company. Also, a Select Sector SPDR Fund may
be more susceptible to any single economic, political or regulatory occurrence
than the securities holdings of an investment company that is more broadly
diversified than the Select Sector SPDR Fund.
Trading Issues. Trading in Shares on the AMEX may be halted due to market
conditions or for reasons that, in the view of the AMEX, make trading in Shares
inadvisable. In addition, trading in Shares on the AMEX is subject to trading
halts caused by extraordinary market volatility pursuant to AMEX "circuit
breaker" rules. There can be no assurance that the requirements of the AMEX
necessary to maintain the listing of a Select Sector SPDR Fund will continue to
be met or will remain unchanged.
Fluctuation of Net Asset Value. The net asset value of the Shares will fluctuate
with changes in the market value of a Select Sector SPDR Fund's securities
holdings. The market prices of Shares will fluctuate in accordance with changes
in net asset value and supply and demand on the AMEX. The Adviser cannot predict
whether Shares will trade below, at or above their net asset value. Price
differences may be due, in large part, to the fact that supply and demand forces
at work in the secondary trading market for Shares will be closely related to,
but not identical to, the same forces influencing the prices of the stocks of
the Select Sector Index trading individually or in the aggregate at any point in
time. However, given that Shares can be created and redeemed in Creation Units
(unlike shares of many closed-end funds, which frequently trade at appreciable
discounts from, and sometimes at premiums to, their net asset value), the
Adviser believes that large discounts or premiums to the net asset value of
Shares should not be sustained.
Foreign Investments. Each Select Sector SPDR Fund may invest in foreign
securities or American Depository Receipts, if any, included in its benchmark
Select Sector Index. Foreign investments may involve additional risks and
considerations. These risks include, for example, fluctuations in foreign
currency, as well as the political and economic risks of an issuer's country.
Securities of foreign companies may be more volatile than securities of U.S.
companies.
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<PAGE> 16
Lending of Securities. Although each Select Sector SPDR Fund that may lend its
portfolio Securities will receive collateral in connection with all loans of its
securities holdings, a Select Sector SPDR Fund would be exposed to a risk of
loss should a borrower default on its obligation to return the borrowed
securities (e.g., the loaned securities may have appreciated beyond the value of
the collateral held by the Fund). In addition, a Select Sector SPDR Fund will
bear the risk of loss of any cash collateral that it invests.
Leverage. To the extent that a Select Sector SPDR Fund borrows money, it may be
leveraged. Leveraging generally exaggerates the effect on net asset value of any
increase or decrease in the market value of a Select Sector SPDR Fund's
portfolio securities.
Year 2000. The services provided to the Select Sector SPDR Funds by their
various service providers depend on the smooth functioning of their computer
systems. Many computer software systems in use today cannot recognize the year
2000, but revert to 1900 or some other date, due to the manner in which dates
were encoded and calculated. That failure could have a negative impact on the
handling of securities trades, pricing and on individual issuers.
OTHER CONSIDERATIONS
CONSTRUCTION AND MAINTENANCE STANDARDS FOR THE SELECT SECTOR INDEXES
Each Select Sector Index is developed and maintained in accordance with the
following criteria:
- - Each of the component securities in a Select Sector Index is a constituent
company of the S&P 500.
- - Each stock in the S&P 500 is allocated to one and only one of the Select
Sector Indexes.
- - The Index Compilation Agent, Merrill Lynch Pierce Fenner & Smith, assigns
each constituent stock of the S&P 500 to a Select Sector Index. The Index
Compilation Agent, after consultation with S&P, assigns a company's stock
to a particular Select Sector Index on the basis of such company's sales
and earnings composition and the sensitivity of the company's stock price
and business results to the common factors that affect other companies in
each Select Sector Index. S&P has sole control over the removal of stocks
from the S&P 500 and the selection of replacement stocks to be added to the
S&P 500. However, S&P plays only a consulting role in the Select Sector
Index assignment of the S&P 500 component stocks, which is the sole
responsibility of the Index Compilation Agent.
- - Each Select Sector Index is calculated by the AMEX's Index Services Group
using a modified "market capitalization" methodology. This design ensures
that each of the component stocks within a Select Sector Index is
represented in a proportion consistent with its percentage with respect to
the total market capitalization of such Select Sector Index. Under certain
conditions, however, the number of shares of a component stock within the
Select Sector Index may be adjusted to conform to Internal Revenue Code
requirements. See "Construction and Maintenance Standards for the Select
Sector Indexes" under "GENERAL DESCRIPTION OF THE TRUST" in the Statement
of Additional Information.
MANAGEMENT
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<PAGE> 17
Adviser. State Street serves as the Adviser to each Select Sector SPDR Fund and,
subject to the supervision of the Board of Trustees, is responsible for the
investment management of the Select Sector SPDR Funds. As of October 31, 1999,
the Adviser managed approximately $587 billion in assets, including
approximately $299.4 billion in index funds. The Adviser's principal business
address is 225 Franklin Street, Boston, Massachusetts 02210.
For the services provided to the Select Sector SPDR Funds under the Investment
Advisory Agreement, each Fund pays the Adviser monthly fees based on a
percentage of each Fund's average daily net assets at the annual rate of .05%.
From time to time, the Adviser may waive all or a portion of its fee.
Administrator, Custodian, and Transfer Agent. State Street is the Administrator
for each Select Sector SPDR Fund, the Custodian of each Select Sector SPDR
Fund's assets, and serves as the Transfer Agent to the Select Sector SPDR Funds.
State Street is paid a "unitary fee" for these services. The unitary fee is
equal to the greater of: (a) a sliding scale fee calculated as follows: (i) .10%
of average daily net assets of the Trust up to the first $4.5 billion of net
assets (such $4.5 billion to be increased by $500 million each time a new Select
Sector SPDR Fund is added); (ii) .08% of average daily net assets up to the next
$4.5 billion of net assets of the Trust (such $4.5 billion to be increased by
$500 million each time a new Select Sector SPDR Fund is added); and (iii) .06%
of average daily net assets on the remainder of net assets; or (b) a minimum fee
of $3.15 million increased by $350,000 each time a new Select Sector SPDR Fund
is added. The minimum fee will not be in effect for the first two years of the
Trust's operation. Each Select Sector SPDR Fund will also bear all other
expenses of its operation.
Lending Agent. State Street is expected to be designated as the lending agent
for the Trust. In such capacity, it would cause the delivery of loaned
securities from each Select Sector SPDR Fund to borrowers, arrange for the
return of loaned securities to the Select Sector SPDR Fund at the termination of
the loans, request deposit of collateral, monitor daily the value of the loaned
securities and collateral, request that borrowers add to the collateral when
required by the loan agreements, and provide recordkeeping and accounting
services necessary for the operation of the program. For its services, the
lending agent would typically receive a portion of the net investment income, if
any, earned on the collateral for the securities loaned.
Distributor. ALPS Mutual Funds Services, Inc. is the Distributor of each Select
Sector SPDR Fund's Shares. The Distributor will not distribute Shares in less
than Creation Units, and it does not maintain a secondary market in the Shares.
The Distributor may enter into selected dealer agreements with other
broker-dealers or other qualified financial institutions for the sale of
Creation Units of Shares.
The Board of Trustees of the Trust has adopted for each Select Sector SPDR Fund
a distribution plan pursuant to Rule 12b-1 under the 1940 Act. In accordance
with its Rule 12b-1 plan, each Fund is authorized to pay an amount up to .25% of
its average daily net assets per annum for certain distribution-related
activities. Because these fees are paid out of each Fund's assets, over time
these fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
INDEX LICENSE
The Trust pays an annual licensing fee to (i) S&P equal to the greater of .03%
of the aggregate net assets of the Trust or $450,000 (the "Minimum Annual Fee"),
and (ii) Merrill Lynch equal to .03% of the aggregate net assets of the Trust.
The Minimum Annual Fee is payable in full on each anniversary of the
16
<PAGE> 18
first day of trading, December 14, 1998. The fee to Merrill Lynch is payable on
a quarterly basis. Each Select Sector SPDR Fund will pay its proportionate share
of the fees based on the relative net assets of such Fund.
DETERMINATION OF NET ASSET VALUE
Net asset value per Share for each Select Sector SPDR Fund is computed by
dividing the value of the net assets of such Select Sector SPDR Fund (i.e., the
value of its total assets less total liabilities) by its total number of Shares
outstanding. Expenses and fees, including the management, administration and
distribution fees, are accrued daily and taken into account for purposes of
determining net asset value. The net asset value of each Select Sector SPDR Fund
is calculated by the Custodian and determined each business day at the earlier
of (i) the close of trading of the New York Stock Exchange ("NYSE") or (ii) 4:00
p.m. New York time.
BUYING AND SELLING SELECT SECTOR SPDR FUNDS
The Select Sector SPDR Fund Shares are listed for secondary trading on the AMEX.
If you buy or sell Select Sector SPDR Fund Shares in the secondary market, you
will incur customary brokerage commissions and charges and may pay some or all
of the spread between the bid and the offered price in the secondary market on
each leg of a round trip (purchase and sale) transaction. The Select Sector SPDR
Fund Shares will trade on the AMEX at prices that may differ to varying degrees
from the daily net asset values of the Shares. Given, however, that Select
Sector SPDR Fund Shares can be issued and redeemed in Creation Units, the
Adviser believes that large discounts and premiums to net asset value should not
be sustained for very long.
CREATION AND REDEMPTION OF CREATION UNITS
Each Select Sector SPDR Fund issues Shares (through the Distributor) and redeems
Shares (through the Transfer Agent) only in Creation Units (50,000 Shares per
Creation Unit) at their net asset value on a continuous basis. Set forth below
is a brief description of the procedures applicable to creation and redemption
of Creation Units. For more detailed information, see "CREATION AND REDEMPTION
OF CREATION UNITS" in the Statement of Additional Information.
17
<PAGE> 19
Creation
In order to create (i.e., purchase) Creation Units of a Select Sector SPDR Fund,
an investor must deposit a designated portfolio of equity securities
constituting a substantial replication, or a representation, of the stocks
included in the relevant Select Sector SPDR Fund's Select Sector Index (the
"Deposit Securities") and generally make a small cash payment referred to as the
"Cash Component." The list of the names and the number of shares of the Deposit
Securities is made available by the Custodian through the facilities of the NSCC
immediately prior to the opening of business on the AMEX. The Cash Component
represents the difference between the net asset value of a Creation Unit and the
market value of the Deposit Securities, and includes the Dividend Equivalent
Payment. The Dividend Equivalent Payment is an amount intended to enable a
Select Sector SPDR Fund to make a distribution of dividends on the next dividend
payment date as if all the portfolio securities of the Fund had been held for
the entire dividend period. See the Statement of Additional Information for a
description as to the manner in which the Dividend Equivalent Payment is
calculated.
Orders must be placed in proper form by or through either (i) a "Participating
Party", i.e., a broker-dealer or other participant in the clearing process of
the Continuous Net Settlement System of the NSCC (the "Clearing Process"); or
(ii) a DTC Participant, that, in either case, has entered into an agreement with
the Trust, the Distributor and the Transfer Agent, with respect to creations and
redemptions of Creation Units ("Participant Agreement"). Investors should
contact the Distributor for the names of Participating Parties and/or DTC
Participants that have signed a Participant Agreement. All orders must be placed
for one or more whole Creation Units of Shares of a Select Sector SPDR Fund and
must be received by the Distributor in proper form no later than the earlier of
(i) the closing time of the NYSE (ordinarily 4:00 p.m., New York time) or (ii)
4:00 p.m. New York time ("Closing Time") in order to receive that days closing
net asset value per Share.
Orders may be effected through the Clearing Process or outside the Clearing
Process. An order to create Creation Units through the Clearing Process (through
a Participating Party), or outside the Clearing Process (through a DTC
Participant), is considered received by the Distributor on the date transmitted
if the order is received by the Distributor no later than the Closing Time on
such date and all other procedures set forth in the Participant Agreement are
followed. However, in the case of orders effected outside the Clearing Process,
if the Custodian does not receive the requisite Deposit Securities and the Cash
Component by 11:00 a.m. and 2:00 p.m., New York time, respectively, on the next
business day immediately following the transmittal date, the order will be
canceled. Any order may be rejected under certain limited circumstances which
are specified in the Statement of Additional Information.
A fixed transaction fee of $1,000 is applicable to each creation transaction
regardless of the number of Creation Units created in the transaction. An
additional charge of up to three (3) times the fixed transaction fee (for a
total charge of up to $4,000) may be imposed with respect to transactions
effected outside the Clearing Process (through a DTC Participant) and in the
limited circumstances specified in the Statement of Additional Information in
which any cash can be used in lieu of Deposit Securities to create Creation
Units. Shares may be issued in advance of receipt of Deposit Securities subject
to various conditions including a requirement to maintain on deposit with the
Trust cash at least equal to 115% of the market value of the missing Deposit
Securities. Any such transaction effected must be effected outside the Clearing
Process. See "CREATION AND REDEMPTION OF CREATION UNITS" in the Statement of
Additional Information.
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<PAGE> 20
Legal Restrictions on Transactions in Certain Stocks. An investor subject to a
legal restriction with respect to a particular stock required to be deposited in
connection with the creation of a Creation Unit may, at the Fund's discretion,
be permitted to deposit an equivalent amount of cash in substitution for any
stock which would otherwise be included in the Deposit Securities applicable to
the creation of a Creation Unit.
Redemption
Shares may be redeemed only in Creation Units at their net asset value and only
on a day the NYSE is open for business. The Custodian makes available
immediately prior to the opening of business on the AMEX, through the facilities
of the NSCC, the list of the names and the number of Shares of each Select
Sector SPDR Fund's portfolio securities that will be applicable that day to
redemption requests in proper form ("Fund Securities"). Fund Securities received
on redemption may not be identical to Deposit Securities which are applicable to
creations of Creation Units. Unless cash redemptions are available or specified
for a particular Select Sector SPDR Fund, the redemption proceeds consist of the
Fund Securities, plus cash in an amount equal to the difference between the net
asset value of the Shares being redeemed as next determined after receipt by the
Transfer Agent of a redemption request in proper form, and the value of the Fund
Securities (the "Cash Redemption Amount"), less the applicable redemption fee.
Should the Fund Securities have a value greater than the net asset value of the
Shares, a compensating cash payment to the Trust equal to the differential will
be required to be arranged for by or on behalf of the redeeming shareholder by
the Participating Party or DTC Participant, as the case may be. For more detail,
see "CREATION AND REDEMPTION OF CREATION UNITS" in the Statement of Additional
Information.
Orders to redeem Creation Units of a Select Sector SPDR Fund may only be
effected by or through a Participating Party (with respect to redemptions
through the Clearing Process) or a DTC Participant (with respect to redemptions
outside the Clearing Process). An order to redeem through the Clearing Process
is deemed received on the date of transmittal if such order is received by the
Transfer Agent prior to the Closing Time on the date of transmittal and all
other procedures set forth in the Participant Agreement are properly followed.
An order to redeem outside the Clearing Process is considered received by the
Transfer Agent on the date of transmittal if: (i) such order is received by the
Transfer Agent no later than the earlier of (a) the close of trading of the New
York Stock Exchange ("NYSE") or (b) 4:00 p.m. New York time, on the transmittal
date; (ii) such order is accompanied or proceeded by the requisite number of
Shares specified in the order, which delivery must be made through DTC to the
Custodian no later than 11:00 a.m., New York time, on the next business day
after the transmittal date; and (iii) all other procedures set forth in the
Participant Agreement are followed.
A fixed transaction fee of $1,000 is applicable to each redemption transaction
regardless of the number of Creation Units redeemed in the transaction. An
additional charge of up to three (3) times the fixed transaction fee (for a
total charge of up to $4,000) may be charged with respect to transactions
effected outside the Clearing Process and in the limited circumstances specified
in the Statement of Additional Information in which any cash may be used in lieu
of securities to redeem Creation Units.
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<PAGE> 21
Legal Restrictions on Transactions in Certain Stocks. An investor subject to a
legal restriction with respect to a particular stock included in the Fund
Securities applicable to the redemption of a Creation Unit may be paid an
equivalent amount of cash.
DISTRIBUTIONS
Dividends and Capital Gains. As a Select Sector SPDR Fund shareholder, you are
entitled to your share of the Fund's income and net realized gains on its
investments. Each Select Sector SPDR Fund pays out substantially all of its net
earnings to its shareholders as "distributions."
Each Select Sector SPDR Fund typically earns income dividends from stocks and
interest from debt securities. These amounts, net of expenses, are passed along
to Fund shareholders as "income dividend distributions." Each Select Sector SPDR
Fund realizes capital gains or losses whenever it sells securities. Net
long-term capital gains are distributed to shareholders as "capital gain
distributions."
Income dividends, if any, are distributed to shareholders quarterly. Net capital
gains are distributed at least annually. Dividends may be declared and paid more
frequently to improve Select Sector Index tracking or to comply with the
distribution requirements of the Internal Revenue Code. In addition, each Select
Sector SPDR Fund intends to distribute at least annually amounts representing
the full dividend yield net of expenses on the underlying investment securities
as if the Select Sector SPDR Fund owned the underlying investment securities for
the entire dividend period. As a result, some portion of each distribution may
result in a return of capital. You will be notified regarding the portion of the
distribution which represents a return of capital.
Distributions in cash may be reinvested automatically in additional whole Shares
only if the broker through which you purchased Shares makes such option
available.
TAX MATTERS
As with any investment, you should consider how your Select Sector SPDR Fund
investment will be taxed. The tax information in this Prospectus is provided as
general information. You should consult your own tax professional about the tax
consequences of an investment in a Select Sector SPDR Fund.
Unless your investment in a Select Sector SPDR Fund is through a tax-exempt
entity or taxed-deferred retirement account, such as a 401(k) plan, you need to
be aware of the possible tax consequences when:
- - The Select Sector SPDR Fund makes distributions,
- - You sell Shares listed on the AMEX, and
- - You create or redeem Creation Units.
Taxes on Distributions. Each Select Sector SPDR Fund will distribute any net
investment income quarterly, and any net realized long-term or short-term
capital gains annually. Each Select Sector SPDR Fund may also pay a special
distribution at the end of the calendar year to comply with federal tax
requirements. In general, your distributions are subject to federal income tax
when they are paid, whether
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<PAGE> 22
you take them in cash or reinvest them in a Select Sector SPDR Fund. Dividends
paid out of a Select Sector SPDR Fund's income and net short-term gains, if any,
are taxable as ordinary income. Distributions of net long-term capital gains, if
any, in excess of net short-term capital losses are taxable as long-term capital
gains, regardless of how long you have held the Shares.
Distributions in excess of a Select Sector SPDR Fund's current and accumulated
earnings and profits are treated as a tax-free return of capital to the extent
of your basis in the Shares, and as capital gain thereafter. A distribution will
reduce a Select Sector SPDR Fund's net asset value per Share and may be taxable
to you as ordinary income or capital gain even though, from an investment
standpoint, the distribution may constitute a return of capital.
If you are not a citizen of the United States, or if you are a foreign entity or
if you are not a permanent resident of the United States, each Select Sector
SPDR Fund's ordinary income dividends (which include distributions of net
short-term capital gains) will generally be subject to a 30% U.S. withholding
tax, unless a lower treaty rate applies.
Dividends and interest received by each Select Sector SPDR Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes.
By law, your Select Sector SPDR Fund must withhold 31% of your distributions and
proceeds if you have not provided a taxpayer identification number or social
security number.
Taxes on AMEX-Listed Share Sales. Currently, any capital gain or loss realized
upon a sale of Shares is generally treated as long-term capital gain or loss if
the Shares have been held for more than one year and as short-term capital gain
or loss if the Shares have been held for one year or less.
Taxes on Creations and Redemptions of Creation Units. A person who exchanges
equity securities for Creation Units generally will recognize a gain or loss.
The gain or loss will be equal to the difference between the market value of the
Creation Units at the time and the exchanger's aggregate basis in the securities
surrendered and the Cash Component paid. A person who exchanges Creation Units
for equity securities will generally recognize a gain or loss equal to the
difference between the exchanger's basis in the Creation Units and the aggregate
market value of the securities received and the Cash Redemption Amount. The
Internal Revenue Service, however, may assert that a loss realized upon an
exchange of securities for Creation Units cannot be deducted currently under the
rules governing "wash sales," or on the basis that there has been no significant
change in economic position. Persons exchanging securities should consult their
own tax advisor with respect to whether wash sale rules apply and when a loss
might be deductible.
Under current federal tax laws, any capital gain or loss realized upon a
redemption of Creation Units is generally treated as long-term capital gain or
loss if the Shares have been held for more than one year and as a short-term
capital gain or loss if the Shares have been held for one year or less.
If you create or redeem Creation Units, you will be sent a confirmation
statement showing how many Shares you purchased or sold and at what price.
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<PAGE> 23
The foregoing discussion summarizes some of the consequences under current
federal tax law of an investment in a Select Sector SPDR Fund. It is not a
substitute for personal tax advice. Consult your personal tax adviser about the
potential tax consequences of an investment in a Select Sector SPDR Fund under
all applicable tax laws.
ADDITIONAL INFORMATION CONCERNING THE ROLE OF
S&P, MERRILL LYNCH AND THE AMEX
The stocks included in each Select Sector Index are selected by Merrill Lynch,
Pierce, Fenner & Smith Incorporated acting as Index Compilation Agent in
consultation with S&P from the universe of companies represented by the S&P 500.
The composition and weighting of the stocks included in each Select Sector Index
will likely differ from the composition and weighting of stocks included in any
similar S&P 500 sector index that is published and disseminated by S&P. The AMEX
acts as "index calculation agent" in connection with the calculation and
dissemination of each Select Sector Index.
S&P does not sponsor, endorse, sell or promote the Shares. Additionally, Merrill
Lynch and the AMEX do not sponsor or promote the Shares.
Neither S&P, Merrill Lynch nor the AMEX make any representation or warranty,
express or implied, to the owners of Shares of the Select Sector SPDR Funds or
any member of the public regarding the ability of a Select Sector SPDR Fund to
track the performance of the various sectors represented in the stock market.
Additionally S&P does not make any representation or warranty, express or
implied, to the owners of the Shares or any member of the public regarding the
advisability of investing in securities generally or in the Shares particularly.
S&P's only relationship to the Index Compilation Agent is the licensing of
certain trademarks and trade names of S&P and of the S&P 500 which is
determined, composed and calculated by S&P without regard to Merrill Lynch or
any Select Sector SPDR Fund. S&P has no obligation to take the needs of the
index compilation agent, the Trust or the owners of Shares of the Select Sector
SPDR Funds into consideration in determining, composing or calculating the S&P
500.
S&P does not guarantee the accuracy and/or completeness of the S&P 500, the
Select Sector Indexes or any data included therein. S&P makes no warranty,
express or implied, as to results to be obtained by Merrill Lynch, the Trust,
owners of the product, or any other person or entity from the use of the S&P
500, the Select Sector Indexes or any data included therein in connection with
the rights licensed under the license agreement or for any other use. S&P makes
no express or implied warranties, and hereby expressly disclaims all warranties
of merchantability or fitness for a particular purpose with respect to the S&P
500, the Select Sector Indexes or any data included therein. Without limiting
any of the foregoing, in no event shall S&P have any liability for any special,
punitive, indirect or consequential damages (including lost profits), even if
notified of the possibility of such damages.
The Select Sector Indexes identified herein are determined, composed and
calculated without regard to the shares of any Select Sector SPDR Fund or the
issuer thereof. Merrill Lynch and the AMEX are not responsible for, nor have
they participated in, the determination of the timing of, prices of, or
quantities of the shares of any Select Sector SPDR Fund to be issued, nor in the
determination or calculation of the equation by which the shares are redeemable.
22
<PAGE> 24
Although Merrill Lynch seeks to obtain and provide information to the AMEX from
sources which it considers reliable, Merrill Lynch and the AMEX do not guarantee
the accuracy and/or the completeness of any Select Sector Index or any data
included therein. Merrill Lynch and the AMEX make no warranty, express or
implied, as to results to be obtained by the Trust as licensee, licensee's
customers and counterparties, owners of the shares, or any other person or
entity from the use of the Select Sector Indexes or any data included therein in
connection with the rights licensed as described herein or for any other use.
Merrill Lynch and the AMEX make no express or implied warranties, and each
hereby expressly disclaims all warranties of merchantability or fitness for a
particular purpose with respect to the Select Sector Indexes or any data
included therein. Without limiting any of the foregoing, in no event shall
Merrill Lynch or the AMEX have any liability for any direct, indirect, special,
punitive, consequential or any other damages (including lost profits) even if
notified of the possibility of such damages.
GENERAL INFORMATION
The Trust was organized as a Massachusetts business trust on June 10, 1998. If
shareholders are required to vote on any matters, each Share outstanding would
be entitled to one vote. Annual meetings of shareholders will not be held except
as required by the 1940 Act and other applicable law. See the Statement of
Additional Information for more information concerning the Trust's form of
organization.
For purposes of the 1940 Act, Shares of the Select Sector SPDR Funds are issued
by the respective Funds and the acquisition of Shares by investment companies is
subject to the restrictions of section 12(d)(1) of the Act.
From time to time, the Select Sector SPDR Funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total return is
a measure of past dividend income (assuming that it has been reinvested) plus
capital appreciation. Neither yield nor total return should be used to predict
the future performance of a Select Sector SPDR Fund. For a more detailed
description of how each Select Sector SPDR Fund computes its performance figures
and how these numbers may be used in advertisements, please consult the
Statement of Additional Information.
Mayer Brown & Platt serve as counsel to the Trust, including each Select Sector
SPDR Fund. PricewaterhouseCoopers LLP serves as independent accountants and will
audit each Fund's financial statement annually.
23
<PAGE> 25
THE SELECT SECTOR SPDR TRUST
FINANCIAL HIGHLIGHTS
For a Select Sector SPDR outstanding for the period
December 16, 1998 (1) through September 30, 1999
<TABLE>
<CAPTION>
THE BASIC THE CONSUMER THE CONSUMER THE CYCLICAL/
INDUSTRIES SERVICES STAPLES TRANSPORTATION
SELECT SECTOR SELECT SECTOR SELECT SECTOR SELECT SECTOR
SPDR FUND SPDR FUND SPDR FUND SPDR FUND
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period .................. $20.72 $23.97 $26.06 $24.51
------ ------ ------ ------
Net investment income (loss) .......................... 0.24 (0.02) 0.20 0.09
Net realized and unrealized gain (loss) ............... 3.01(2) 2.90 (3.44) 1.66(2)
------ ------ ------ ------
Total from investment operations ...................... 3.25 2.88 (3.24) 1.75
------ ------ ------ ------
Undistributed net investment income included
in price of units issued and redeemed ................. -- -- 0.01 0.01
------ ------ ------ ------
Distributions to shareholders from:
Net investment income ................................. (0.23) -- (0.20) (0.09)
In excess of net investment income .................... -- -- -- (0.01)
------ ------ ------ ------
Total distributions ................................... (0.23) -- (0.20) (0.10)
------ ------ ------ ------
Net asset value, end of period ........................ $23.74 $26.85 $22.63 $26.17
====== ====== ====== ======
Total return (3) ...................................... 15.59% 12.03% (12.45)% 7.17%
Net assets, end of period (in 000's) .................. $81,887 $60,420 $117,651 $35,324
Ratio of expenses to average net assets (4) ........... 0.56% 0.57% 0.57% 0.58%
Ratio of net investment income (loss)
to average net assets (4) ......................... 1.44% (0.11)% 1.10% 0.49%
Portfolio turnover rate (5) ........................... 9.70% 14.56% 2.91% 9.56%
</TABLE>
(1) Investment operations commenced on December 16, 1998.
(2) The amounts shown at this caption for a share outstanding may not accord
with the change in aggregate gains and losses in securities for the fiscal
period because of the timing of sales and repurchases of Fund shares in
relation to fluctuating market values for the Fund.
(3) Total return is calculated assuming a purchase of shares at net asset value
per share on the first day and a sale at net asset value per share on the
last day of each period reported. Distributions are assumed, for the
purposes of this calculation, to be reinvested at the net asset value per
share on the respective payment dates of each Fund. Total return for a
period of less than one year is not annualized. Broker commission charges
are not included in the calculation.
(4) Annualized.
(5) Portfolio turnover rate excludes securities received or delivered from
processing creations or redemptions on Select Sector SPDRs.
The beginning net asset values shown above have been adjusted to reflect reverse
stock splits which were effective on December 16, 1998, in order to adjust the
net asset value per share of each Fund to be approximately 1/10th of the value
of its respective Select Sector Index. The ratio of the reverse stock split for
The Basic Industries Select Sector SPDR Fund, The Consumer Services Select
Sector SPDR Fund, The Consumer Staples Select Sector SPDR Fund, The
Cyclical/Transportation Select Sector SPDR Fund, The Energy Select Sector SPDR
Fund, The Financial Select Sector SPDR Fund, The Industrial Select Sector SPDR
Fund, The Technology Select Sector SPDR Fund, and The Utilities Select Sector
SPDR Fund was 1 for 2.072, 1 for 2.397, 1 for 2.606, 1 for 2.451, 1 for 2.359, 1
for 2.202, 1 for 2.266, 1 for 3.009, and 1 for 2.906, respectively.
24
<PAGE> 26
THE ENERGY THE FINANCIAL THE INDUSTRIAL THE TECHNOLOGY THE UTILITIES
SELECT SECTOR SELECT SECTOR SELECT SECTOR SELECT SECTOR SELECT SECTOR
SPDR FUND SPDR FUND SPDR FUND SPDR FUND SPDR FUND
--------- --------- --------- --------- ---------
$23.59 $22.02 $22.66 $30.09 $29.06
------ ------ ------ ------ ------
0.29 0.21 0.21 (0.04) 0.56
3.88 0.02(2) 6.00 11.18 0.45(2)
------ ------ ------ ------ ------
4.17 0.23 6.21 11.14 1.01
------ ------ ------ ------ ------
0.07 0.01 -- (0.01) 0.05
------ ------ ------ ------ ------
(0.29) (0.21) (0.19) -- (0.56)
(0.08) (0.01) -- -- (0.04)
------ ------ ------ ------ ------
(0.37) (0.22) (0.19) -- (0.60)
------ ------ ------ ------ ------
$27.46 $22.04 $28.68 $41.22 $29.52
====== ====== ====== ====== ======
17.91% 0.97% 27.40% 37.00% 3.66%
$149,636 $123,409 $65,963 $731,719 $81,168
0.56% 0.57% 0.57% 0.56% 0.57%
1.73% 1.14% 0.94% (0.15)% 2.62%
20.15% 5.71% 12.42% 21.23% 38.86%
25
<PAGE> 27
This Prospectus does not contain all the information included in the
Registration Statement filed with the SEC with respect to each Select Sector
SPDR Fund's Shares. A Statement of Additional Information (dated January [ ],
2000) and the annual and semi-annual reports to shareholders, each of which has
been filed with the SEC, provide more information about each Select Sector SPDR
Fund. The Statement of Additional Information and the financial statements
included in the Trust's most recent annual reports to shareholders are
incorporated herein by reference (i.e., is legally part of this Prospectus).
These materials may be obtained without charge by writing to the Distributor,
ALPS Mutual Funds Services, Inc., at 370 17th Street, Suite 3100, Denver, CO
80202, or by calling the following number:
Investor Information: (800) 843-2639
The Registration Statement, including this Prospectus, the Statement of
Additional Information, and the exhibits as well as the reports may be reviewed
and copied at the SEC's public reference room (450 Fifth Street, N.W.,
Washington D.C. 20549) or at the SEC's Web site (http://www.sec.gov). These
documents and other information concerning the Trust also may be inspected at
the offices of the AMEX (86 Trinity Place, New York, New York 10006). You may
get copies of this and other information receive copies of this information,
with payment of a duplication fee, by writing the Public Reference Section of
the SEC, Washington, D.C. 20549-6009.
Shareholder inquiries may be directed to the Select Sector SPDR Funds in writing
to ALPS Mutual Funds Services, Inc. at 370 17th Street, Suite 3100, Denver, CO
80202.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER OF A SELECT SECTOR SPDR FUND'S SHARES, AND, IF GIVEN OR MADE, THE
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST OR ANY SELECT SECTOR SPDR FUND. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE OF SHARES SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE AFTER THE DATE OF THIS
PROSPECTUS.
DEALERS EFFECTING TRANSACTIONS IN A SELECT SECTOR SPDR FUND'S SHARES, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, ARE GENERALLY REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO ANY OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS.
THE SELECT
SECTOR
SPDR(R) TRUST
PROSPECTUS
JANUARY ____, 2000
[SELECT SECTOR SPDRS LOGO]
26
<PAGE> 28
THE SELECT SECTOR SPDR(R) TRUST
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY ___, 2000
This Statement of Additional Information is not a Prospectus. It should be read
in conjunction with the Prospectus dated January ___, 2000 (the "Prospectus")
for The Select Sector SPDR Trust (the "Trust"), as it may be revised from time
to time. Capitalized terms used herein that are not defined have the same
meaning as in the Prospectus, unless otherwise noted. A copy of the Prospectus
for the Trust may be obtained without charge by writing to the Trust's
Distributor, ALPS Mutual Funds Services, Inc., at 370 17th Street, Suite 3100,
Denver, CO 80202.
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's 500(R)",
"500", "Standard & Poor's Depositary Receipts(R)", "SPDRs(R)", "Select Sector
SPDR", "Select Sector SPDRs" and "Select Sector Standard & Poor's Depositary
Receipts" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use in connection with the listing and trading of Select Sector
SPDRs on the American Stock Exchange LLC (the "AMEX"). The stocks included in
each Select Sector Index (upon which the Select Sector SPDRs are based) are
selected by Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"
and sometimes referred to as the "Index Compilation Agent") in consultation with
Standard & Poor's ("S&P") from the universe of companies represented by the
Standard & Poor's 500 Composite Stock Index ("S&P 500"). The composition and
weighting of the stocks included in each Select Sector Index can be expected to
differ from the composition and weighting of stocks included in any similar S&P
500 sector index that is published and disseminated by S&P.
TABLE OF CONTENTS
- ------------------------------------------------------------ ------
General Description of the Trust...........................
- ------------------------------------------------------------ ------
Investment Policies and Restrictions.......................
- ------------------------------------------------------------ ------
Special Considerations and Risks...........................
- ------------------------------------------------------------ ------
Exchange Listing and Trading...............................
- ------------------------------------------------------------ ------
Management of the Trust....................................
- ------------------------------------------------------------ ------
Brokerage Transactions.....................................
- ------------------------------------------------------------ ------
Book Entry Only System.....................................
- ------------------------------------------------------------ ------
Creation and Redemption of Creation Units..................
- ------------------------------------------------------------ ------
Determination of Net Asset Value...........................
- ------------------------------------------------------------ ------
Dividends and Distributions................................
- ------------------------------------------------------------ ------
Taxes......................................................
- ------------------------------------------------------------ ------
Capital Stock and Shareholder Reports......................
- ------------------------------------------------------------ ------
Performance and Other Information..........................
- ------------------------------------------------------------ ------
Counsel and Independent Auditors...........................
- ------------------------------------------------------------ ------
Report of Independent Accountants..........................
- ------------------------------------------------------------ ------
Exhibit A
- ------------------------------------------------------------ ------
<PAGE> 29
The information contained herein regarding the Select Sector Indexes, securities
markets and The Depository Trust Company ("DTC") was obtained from publicly
available sources.
EACH SELECT SECTOR INDEX IS BASED ON EQUITY SECURITIES OF PUBLIC COMPANIES THAT
ARE COMPONENTS OF THE S&P 500, SELECTED ON THE BASIS OF GENERAL INDUSTRIAL
CLASSIFICATION, AND INCLUDED AS CONSTITUENT SECURITIES OF A PARTICULAR SELECT
SECTOR INDEX BY THE INDEX COMPILATION AGENT IN CONSULTATION WITH S&P, A DIVISION
OF THE MCGRAW-HILL COMPANIES, INC. THE AMEX ACTS AS "INDEX CALCULATION AGENT" IN
CONNECTION WITH THE CALCULATION AND DISSEMINATION OF EACH SELECT SECTOR INDEX.
SELECT SECTOR SPDRS ARE NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY S&P. S&P
MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS OF THE
SELECT SECTOR SPDRS OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF
INVESTING IN SECURITIES GENERALLY OR IN THE SELECT SECTOR SPDRS PARTICULARLY OR
THE ABILITY OF A SELECT SECTOR SPDR FUND TO TRACK THE PERFORMANCE OF THE VARIOUS
SECTORS REPRESENTED IN THE STOCK MARKET. THE STOCKS INCLUDED IN EACH SELECT
SECTOR INDEX WERE SELECTED BY THE INDEX COMPILATION AGENT IN CONSULTATION WITH
S&P FROM A UNIVERSE OF COMPANIES REPRESENTED BY THE S&P 500. THE COMPOSITION AND
WEIGHTING OF STOCKS INCLUDED IN EACH SELECT SECTOR INDEX CAN BE EXPECTED TO
DIFFER FROM THE COMPOSITION AND WEIGHTING OF STOCKS INCLUDED IN THE
CORRESPONDING S&P 500 SECTOR INDEX THAT IS PUBLISHED AND DISSEMINATED BY S&P.
S&P'S ONLY RELATIONSHIP TO THE INDEX COMPILATION AGENT IS THE LICENSING OF
CERTAIN TRADEMARKS AND TRADE NAMES OF S&P AND OF THE S&P 500 WHICH IS
DETERMINED, COMPOSED AND CALCULATED BY S&P WITHOUT REGARD TO THE INDEX
COMPILATION AGENT OR ANY SELECT SECTOR SPDR FUND. S&P HAS NO OBLIGATION TO TAKE
THE NEEDS OF THE INDEX COMPILATION AGENT, THE TRUST OR THE OWNERS OF THE SELECT
SECTOR SPDRS INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE S&P
500. S&P IS NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN ANY DETERMINATION OR
CALCULATION MADE WITH RESPECT TO ISSUANCE OR REDEMPTION OF THE SELECT SECTOR
SPDRS. S&P HAS NO OBLIGATION OR LIABILITY IN CONNECTION WITH THE ADMINISTRATION,
MARKETING OR TRADING OF THE SELECT SECTOR SPDRS.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR COMPLETENESS OF THE S&P 500, THE
SELECT SECTOR INDEXES OR ANY DATA INCLUDED THEREIN. S&P MAKES NO WARRANTY,
EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE INDEX COMPILATION AGENT,
THE TRUST, OWNERS OF THE PRODUCT, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF
THE S&P 500, THE SELECT SECTOR INDEXES OR ANY DATA INCLUDED THEREIN IN
CONNECTION WITH THE RIGHTS LICENSED UNDER THE LICENSE AGREEMENT OR FOR ANY OTHER
USE. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS
ALL
2
<PAGE> 30
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT
TO THE S&P 500, THE SELECT SECTOR INDEXES OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY
SPECIAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
THE SHARES ARE NOT SPONSORED OR PROMOTED BY EITHER THE INDEX CALCULATION AGENT
OR THE INDEX COMPILATION AGENT.
NEITHER THE INDEX CALCULATION AGENT NOR THE INDEX COMPILATION AGENT MAKES ANY
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS OF THE SHARES OF
ANY SELECT SECTOR SPDR FUND OR ANY MEMBER OF THE PUBLIC REGARDING THE ABILITY OF
THE INDEXES IDENTIFIED HEREIN TO TRACK STOCK MARKET PERFORMANCE. THE SELECT
SECTOR INDEXES IDENTIFIED HEREIN ARE DETERMINED, COMPOSED AND CALCULATED WITHOUT
REGARD TO THE SHARES OF ANY SELECT SECTOR SPDR FUND OR THE ISSUER THEREOF. THE
INDEX CALCULATION AGENT AND THE INDEX COMPILATION AGENT ARE NOT RESPONSIBLE FOR,
NOR HAVE THEY PARTICIPATED IN, THE DETERMINATION OF THE TIMING OF, PRICES OF, OR
QUANTITIES OF THE SHARES OF ANY SELECT SECTOR SPDR FUND TO BE ISSUED, NOR IN THE
DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH THE SHARES ARE REDEEMABLE.
THE INDEX CALCULATION AGENT AND THE INDEX COMPILATION AGENT HAVE NO OBLIGATION
OR LIABILITY TO OWNERS OF THE SHARES OF ANY SELECT SECTOR SPDR FUND IN
CONNECTION WITH THE ADMINISTRATION, MARKETING OR TRADING OF THE SHARES OF ANY
SELECT SECTOR SPDR FUND.
ALTHOUGH MERRILL LYNCH -- AS THE INDEX COMPILATION AGENT - SHALL OBTAIN AND
PROVIDE INFORMATION TO THE AMEX -- AS THE INDEX CALCULATION AGENT -- FROM
SOURCES WHICH IT CONSIDERS RELIABLE, THE INDEX COMPILATION AGENT AND THE INDEX
CALCULATION AGENT DO NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF ANY
SELECT SECTOR INDEX OR ANY DATA INCLUDED THEREIN. THE INDEX COMPILATION AGENT
AND THE INDEX CALCULATION AGENT MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY THE TRUST AS LICENSEE, LICENSEE'S CUSTOMERS AND
COUNTERPARTIES, OWNERS OF THE SHARES, OR ANY OTHER PERSON OR ENTITY FROM THE USE
OF THE SELECT SECTOR INDEXES OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE
RIGHTS LICENSED AS DESCRIBED HEREIN OR FOR ANY OTHER USE. THE INDEX COMPILATION
AGENT AND THE INDEX CALCULATION AGENT MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND
EACH HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE WITH RESPECT TO THE SELECT SECTOR INDEXES OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE
INDEX COMPILATION AGENT OR THE INDEX CALCULATION AGENT HAVE ANY LIABILITY FOR
ANY
3
<PAGE> 31
DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES
(INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
GENERAL DESCRIPTION OF THE TRUST
The Trust is an open-end management investment company. The Trust currently
consists of nine investment series (each, a "Select Sector SPDR Fund" or "Fund"
and collectively the "Select Sector SPDR Funds" or "Funds"). The Trust was
organized as a Massachusetts business trust on June 10, 1998. The shares of each
Select Sector SPDR Fund are referred to herein as "Shares." The Select Sector
SPDR Funds offered by the Trust are: The Basic Industries Select Sector SPDR
Fund; The Consumer Services Select Sector SPDR Fund; The Consumer Staples Select
Sector SPDR Fund; The Cyclical/Transportation Select Sector SPDR Fund; The
Energy Select Sector SPDR Fund; The Financial Select Sector SPDR Fund; The
Industrial Select Sector SPDR Fund; The Technology Select Sector SPDR Fund; and
The Utilities Select Sector SPDR Fund. The investment objective of each Select
Sector SPDR Fund is to provide investment results that, before expenses,
correspond generally to the price and yield performance of publicly traded
equity securities of companies in a particular sector or group of industries, as
represented by a specified market sector index (each a "Select Sector Index").
State Street Bank and Trust Company ("State Street" or the "Adviser") manages
each Select Sector SPDR Fund.
Each Select Sector SPDR Fund offers and issues Shares at their net asset value
only in aggregations of a specified number of Shares (each, a "Creation Unit")
generally in exchange for a basket of equity securities included in its Select
Sector Index ("Deposit Securities") together with the deposit of a specified
cash payment ("Cash Component"). The Shares are approved for listing and
secondary trading on the AMEX, subject to notice of issuance. The Shares trade
on the AMEX at market prices. These prices may differ from the Shares' net asset
value. The Shares are also redeemable only in Creation Unit aggregations, and
generally in exchange for portfolio securities and a specified cash payment. A
Creation Unit of each Select Sector SPDR Fund consists of 50,000 Shares.
The Trust reserves the right to offer a "cash" option for creations and
redemptions of Shares (subject to applicable legal requirements) although it has
no current intention of doing so. Shares may be issued in advance of receipt of
Deposit Securities subject to various conditions including a requirement to
maintain on deposit with the Trust cash at least equal to 115% of the market
value of the missing Deposit Securities. See "CREATION AND REDEMPTION OF
CREATION UNITS." In each instance of such cash creations or redemptions, the
Trust may impose transaction fees that will be higher than the transaction fees
associated with in-kind creations or redemptions. In all cases, such fees will
be limited in accordance with the requirements of the Securities and Exchange
Commission (the "SEC") applicable to management investment companies offering
redeemable securities.
THE SELECT SECTOR INDEXES AND RELEVANT EQUITY MARKETS
Each of the nine Select Sector Indexes which is the benchmark for a Select
Sector SPDR Fund is intended to give investors an efficient, modified market
capitalization-based way to track the
4
<PAGE> 32
movement of baskets of equity securities of public companies that are components
of the S&P 500 and are included in specific sectors.
CONSTRUCTION AND MAINTENANCE STANDARDS FOR THE SELECT SECTOR INDEXES
SELECTION CRITERIA
Each Select Sector Index was developed and is maintained in accordance with the
following criteria:
- - Each of the component stocks in a Select Sector Index (the "Component Stocks")
has been selected from the universe of companies defined by the S&P 500.
- - The nine Select Sector Indexes together will include all of the companies
represented in the S&P 500 and each of the stocks in the S&P 500 will be
allocated to one and only one of the Select Sector Indexes.
- - The Component Stocks have been assigned to a Select Sector Index by the Index
Compilation Agent. The Index Compilation Agent, after consultation with S&P,
assigns Component Stocks to a particular Select Sector Index on the basis of
such company's sales and earnings composition and the sensitivity of the
company's stock price and business results to the common factors that affect
other companies in such Select Sector Index. S&P has sole control over the
removal of stocks from the S&P 500 and the selection of replacement stocks to be
added to the S&P 500. However, S&P plays only a consulting role in the
assignment of the S&P 500 component securities to any Select Sector Index, which
is the sole responsibility of the Index Compilation Agent.
- - Each Select Sector Index is weighted based on the market capitalization of
each of the Component Stocks, subject to the following asset diversification
requirements: (i) the market capitalization-based weighted value of any single
Component Stock measured on the last day of a calendar quarter may not exceed
24.99% of the total value of its respective Select Sector Index; and (ii) with
respect to 50% of the total value of the Select Sector Index, the market
capitalization-based weighted value of the Component Stocks must be diversified
so that no single Component Stock measured on the last day of a calendar quarter
represents more than 4.99% of the total value of its respective Select Sector
Index.
- - Rebalancing the Select Sector Indexes to meet the asset diversification
requirements will be the responsibility of the American Stock Exchange Index
Services Group ("ISG"). If shortly prior to the last business day of any
calendar quarter (a "Quarterly Qualification Date"), a Component Stock (or two
or more Component Stocks) approaches the maximum allowable value limits set
forth above (the "Asset Diversification Limits"), the percentage that such
Component Stock (or Component Stocks) represents in the Select Sector Index will
be reduced and the market capitalization-based weighted value of such Component
Stock (or Component Stocks) will be redistributed across the Component Stocks
that do not closely approach the Asset Diversification Limits in accordance with
the following methodology: First, each Component Stock that exceeds 24% of the
total value of the Select Sector Index will be reduced to 23% of the total value
of the
5
<PAGE> 33
Select Sector Index and the aggregate amount by which all Component Stocks
exceed 24% will be redistributed equally across the remaining Component Stocks
that represent less than 23% of the total value of the Select Sector Index. If
as a result of this redistribution, another Component Stock then exceeds 24%,
the redistribution will be repeated as necessary. Second, with respect to the
50% of the value of the Select Sector Index accounted for by the lowest weighted
Component Stocks, each Component Stock that exceeds 4.8% of the total value of
the Select Sector Index will be reduced to 4.6% and the aggregate amount by
which all Component Stocks exceed 4.8% will be distributed equally across all
remaining Component Stocks that represent less than 4.6% of the total value of
the Select Sector Index. If as a result of this redistribution another Component
Stock that did not previously exceed 4.8% of the Select Sector Index value then
exceeds 4.8%, the redistribution will be repeated as necessary until at least
50% of the value of the Select Sector Index is accounted for by Component Stocks
representing no more than 4.8% of the total value of the Select Sector Index. If
necessary, this reallocation process may take place more than once prior to a
Quarterly Qualification Date to insure that the Select Sector Index and the
Select Sector SPDR Fund portfolio based upon it conform to the requirements for
qualification of the Fund as a regulated investment company.
- - As detailed below, the Select Sector Indexes are calculated and disseminated
by ISG. As of the market close on September 30, 1999, the weighting of each
Select Sector Index in the S&P 500 based on the capitalization of the stocks in
the index was as follows:
- ------------------------------------------------------------- ----------------
LIST OF THE INDEXES WEIGHTING
- ------------------------------------------------------------- ----------------
- ------------------------------------------------------------- ----------------
The Basic Industries Select Sector Index 3.41
- ------------------------------------------------------------- ----------------
The Consumer Services Select Sector Index 5.83
- ------------------------------------------------------------- ----------------
The Consumer Staples Select Sector Index 19.03%
- ------------------------------------------------------------- ----------------
The Cyclical/Transportation Select Sector Index 8.59
- ------------------------------------------------------------- ----------------
The Energy Select Sector Index 6.52%
- ------------------------------------------------------------- ----------------
The Financial Select Sector Index 15.83
- ------------------------------------------------------------- ----------------
The Industrial Select Sector Index 6.78
- ------------------------------------------------------------- ----------------
The Technology Select Sector Index 27.21%
- ------------------------------------------------------------- ----------------
The Utilities Select Sector Index 6.80%
- ------------------------------------------------------------- ----------------
-------
- ------------------------------------------------------------- ----------------
100.00%
- ------------------------------------------------------------- ----------------
- - Periodically, the Index Compilation Agent will supply ISG with sector
designations for a number of stocks deemed likely candidates for replacement
selection by the Standard & Poor's 500 Index Committee. If a replacement not on
the current list is selected by the Standard & Poor's 500 Index Committee, ISG
will ask the Index Compilation Agent to assign the stock to one of the nine
sectors promptly. AMEX will disseminate information on this assignment and on
consequent changes in the Select Sector Index(es).
- - The Index Compilation Agent at any time may determine that a Component Stock
which has been assigned to one Select Sector Index has undergone such a
transformation in the composition of its business that it should be removed from
that Select Sector Index and assigned to a different Select Sector Index. In the
event that the Index Compilation Agent notifies ISG that a Component
6
<PAGE> 34
Stock's Select Sector Index assignment should be changed, the AMEX will
disseminate notice of the change following its standard procedure for announcing
index changes and will implement the change in the affected Select Sector
Indexes on a date no less than one week after the initial dissemination of
information on the sector change to the maximum extent practicable. It is not
anticipated that Component Stocks will change sectors frequently.
- - Component Stocks removed from and added to the S&P 500 will be deleted from
and added to the appropriate Select Sector Index on the same schedule used by
S&P for additions and deletions from the S&P 500 insofar as practicable.
Select Sector Index Calculations
With the exception of the weighting constraints described above, each
Select Sector Index is calculated using the same methodology utilized by S&P in
calculating the S&P 500. In particular:
- - Each Select Sector Index is calculated using a base-weighted aggregate
methodology; that means the level of the Select Sector Index reflects the total
market value of all of its Component Stocks relative to a particular base
period. Statisticians refer to this type of index, one with a set of combined
variables (such as price and number of shares), as a composite index.
- - Total market value of a company is determined by multiplying the price of the
stock by the number of common shares outstanding. An indexed number is used to
represent the results of the aggregate market value calculation in order to make
the value easier to work with and track over time.
- - The daily calculation of each Select Sector Index is computed by dividing the
total market value of the companies in the Select Sector Index by a number
called the "Index Divisor." By itself, the Index Divisor is an arbitrary number.
However, in the context of the calculation of the Select Sector Index, it is the
only link to the original base period value of the Select Sector Index. The
Index Divisor keeps the Select Sector Index comparable over time and adjustments
to the Index Divisor ensure that there are no changes in the Select Sector Index
level as a result of non-market forces (corporate actions, replacements of
stocks in a Select Sector Index, weighting changes, etc.).
- - Four times a year on a Friday close to the end of each calendar quarter, the
share totals of the companies in the S&P 500 are updated by S&P. This
information is utilized to update the share totals of companies in each Select
Sector Index. After the totals are updated, the Index Divisor is adjusted to
compensate for the net change in the market value of the Select Sector Index.
- - Once a week the database containing the current common shares outstanding for
the S&P 500 companies is compared by S&P against the shares outstanding used to
actually calculate the S&P 500. Any difference of 5% or more is screened for
review by S&P. If appropriate, a share change will be implemented by S&P after
the close of trading on the following Wednesday. Preannounced corporate actions
such as restructurings and recapitalizations can significantly change a
company's shares outstanding. Any changes over 5% are reviewed by S&P and, when
appropriate, an immediate adjustment is made to the number of shares outstanding
used to calculate the Select
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<PAGE> 35
Sector Index. Any adjustment made by S&P in shares outstanding will result in a
corresponding adjustment to each affected Select Sector Index.
- - S&P will advise ISG regarding the handling of nonroutine corporate actions
which may arise from time to time and which may have an impact on the
calculation of the S&P 500 and, consequently, on the calculation of the Select
Sector Index Corporate actions such as a merger or acquisition, stock splits,
routine spin-offs, etc., which require adjustments in the Select Sector Index
calculation, will be handled by the AMEX staff and Index Divisor adjustments
calculated when necessary in the same manner they are handled by S&P in its
maintenance of the S&P 500. In the event a merger or acquisition changes the
relative importance of a company's participation in two or more sectors in a
major way, the Select Sector Index assignment of the stock may change. In any
event, a new Index Divisor for affected Select Sector Indexes will be
disseminated promptly by ISG.
Select Sector Index Dissemination
Similar to other stock index values published by the AMEX, the value of each
Select Sector Index will be calculated continuously and disseminated every 15
seconds over the Consolidated Tape Association's Network B. The major electronic
financial data vendors - Bloomberg, Quotron, Reuters and Bridge Information
Systems - are expected to publish information on each Select Sector Index for
their subscribers.
Brief descriptions of the Select Sector Indexes on which the Select Sector SPDR
Funds are based and the equity markets in which the Select Sector SPDR Funds are
invested are provided below. (All dollar figures reflected in the tables below
are in millions.)
THE BASIC INDUSTRIES SELECT SECTOR INDEX
General Background
The Basic Industries Select Sector Index is intended to give investors an
efficient, modified market capitalization-based way to track the movements of
certain public companies that are components of the S&P 500 and are in basic
industries. Basic industries include integrated steel products, chemicals,
fibers, paper and gold. A list of the 53 Component Stocks included in the Index
as of September 30, 1999 and the industry groups comprising the Index as of
September 30, 1999 is included in Exhibit A hereto.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (9/30/99): $[AMOUNT]
10 Largest Components by Market Capitalization:
8
<PAGE> 36
- --------------------- ---------------- -------- --------------- ----------------
COMPANY NAME MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
10 Largest Industries (% Index Weight):
- --------------------- ---------------- -------- --------------- ----------------
INDUSTRY MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
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- --------------------- ---------------- -------- --------------- ----------------
THE CONSUMER SERVICES SELECT SECTOR INDEX
General Background
The Consumer Services Select Sector Index is intended to give investors an
efficient, modified market capitalization-based way to track the movements of
certain public companies that are components of the S&P 500 and are consumer
services firms. Consumer services include entertainment and publishing, prepared
foods, medical services, lodging and gaming. A list of the 46 Component Stocks
included in the Index as of September 30, 1999 and the industry groups
comprising the Index as of September 30, 1999 is included in Exhibit A hereto.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (9/30/99): $[AMOUNT]
10 Largest Components by Market Capitalization:
- --------------------- ---------------- -------- --------------- ----------------
COMPANY NAME MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
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<PAGE> 37
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
10 Largest Industries (% Index Weight):
- --------------------- ---------------- -------- --------------- ----------------
INDUSTRY MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
ENTERTAINMENT $125,226.30 27.09% 27.09% 27.09%
- --------------------- ---------------- -------- --------------- ----------------
MEDIA
BROADCASTING $ 95,955.09 20.75% 20.75% 47.84%
- --------------------- ---------------- -------- --------------- ----------------
NEWS - INFO
SERVICES $ 63,224.82 13.68% 13.68% 61.52%
- --------------------- ---------------- -------- --------------- ----------------
RESTAURANTS $ 51,881.55 11.22% 11.22% 72.74%
- --------------------- ---------------- -------- --------------- ----------------
HOSPITAL
MANAGEMENT $ 24,989.65 5.41% 5.41% 78.14%
- --------------------- ---------------- -------- --------------- ----------------
HEALTH CARE INFO
TECH $ 24,143.23 5.22% 5.22% 83.37%
- --------------------- ---------------- -------- --------------- ----------------
LODGING & CRUISE $ 20,143.46 4.36% 4.36% 87.72%
- --------------------- ---------------- -------- --------------- ----------------
HMOs $ 19,603.99 4.24% 4.24% 91.96%
- --------------------- ---------------- -------- --------------- ----------------
ADVERTISING &
MARKETING $ 14,982.73 3.24% 3.24% 95.20%
- --------------------- ---------------- -------- --------------- ----------------
DEATH CARE $ 8,200.16 1.77% 1.77% 96.98%
- --------------------- ---------------- -------- --------------- ----------------
THE CONSUMER STAPLES SELECT SECTOR INDEX
General Background
The Consumer Staples Select Sector Index is intended to give investors an
efficient, modified market capitalization-based way to track the movements of
certain public companies that are components of the S&P 500 and are involved in
the development and production of consumer products. Consumer staples include
cosmetic and personal care, pharmaceuticals, soft drinks, tobacco and food
products. A list of the 68 Component Stocks included in the Index as of
September 30, 1999 and the industry groups comprising the Index as of September
30, 1999 is included in Exhibit A hereto.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (9/30/99): $[AMOUNT]
10 Largest Components by Market Capitalization:
[FUND ADMIN, PLEASE UPDATE]
- --------------------- ---------------- -------- --------------- ----------------
COMPANY NAME MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
10
<PAGE> 38
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
10 Largest Industries (% Index Weight):
[FUND ADMIN, PLEASE UPDATE]
- --------------------- ---------------- -------- --------------- ----------------
INDUSTRY MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
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- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
THE CYCLICAL/TRANSPORTATION SELECT SECTOR INDEX
General Background
The Cyclical/Transportation Select Sector Index is intended to give investors an
efficient, modified market capitalization-based way to track the movements of
certain public companies that are components of the S&P 500 and are involved in
the development and production of cyclical products or the transportation
industry. Cyclical and transportation products include building materials,
retailers, appliances, housewares, air transportation, automotive manufacturing,
shipping and trucking. A list of the 71 Component Stocks included in the Index
as of September 30, 1999 and the industry groups comprising the Index as of
September 30, 1999 is included in Exhibit A hereto.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (9/30/99): $[NUMBER]
10 Largest Components by Market Capitalization:
- --------------------- ---------------- -------- --------------- ----------------
COMPANY NAME MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
11
<PAGE> 39
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
10 Largest Industries (% Index Weight):
- --------------------- ---------------- -------- --------------- ----------------
INDUSTRY MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
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- --------------------- ---------------- -------- --------------- ----------------
THE ENERGY SELECT SECTOR INDEX
General Background
The Energy Select Sector Index is intended to give investors an efficient,
modified market capitalization-based way to track the movements of certain
public companies that are components of the S&P 500 and are involved in the
development and production of energy products. Energy companies in the Index
develop and produce crude oil and natural gas and provide drilling and other
energy related services. A list of the 32 Component Stocks included in the Index
as of September 30, 1999 and the industry groups comprising the Index as of
September 30, 1999 is included in Exhibit A hereto.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (9/30/99): $[AMOUNT]
10 Largest Components by Market Capitalization:
- --------------------- ---------------- -------- --------------- ----------------
COMPANY NAME MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
6 Largest Industries (% Index Weight):
12
<PAGE> 40
- --------------------- ---------------- -------- --------------- ----------------
INDUSTRY MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
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THE FINANCIAL SELECT SECTOR INDEX
General Background
The Financial Select Sector Index is intended to give investors an efficient,
modified market capitalization-based way to track the movements of certain
public companies that are components of the S&P 500 and are involved in the
development and production of financial products. Companies in the Index include
a wide array of diversified financial services firms whose business lines range
from investment management to commercial and business banking. A list of the 71
Component Stocks included in the Index as of September 30, 1999 and the industry
groups comprising the Index as of September 30, 1999 is included in Exhibit A
hereto.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (9/30/99): $[AMOUNT]
10 Largest Components by Market Capitalization:
- --------------------- ---------------- -------- --------------- ----------------
COMPANY NAME MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
10 Largest Industries (% Index Weight):
- --------------------- ---------------- -------- --------------- ----------------
INDUSTRY MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
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13
<PAGE> 41
- --------------------- ---------------- -------- --------------- ----------------
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THE INDUSTRIAL SELECT SECTOR INDEX
General Background
The Industrial Select Sector Index is intended to give investors an efficient,
modified market capitalization-based way to track the movements of certain
public companies that are components of the S&P 500 and are industrials.
Industrials include electrical equipment, construction equipment, waste
management services and industrial machinery products. A list of the 33
Component Stocks included in the Index as of September 30, 1999 and the industry
groups comprising the Index as of September 30, 1999 is included in Exhibit A
hereto.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (9/30/99): $[AMOUNT]
10 Largest Components by Market Capitalization:
- --------------------- ---------------- -------- --------------- ----------------
COMPANY NAME MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
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- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
10 Largest Industries (% Index Weight):
- --------------------- ---------------- -------- --------------- ----------------
INDUSTRY MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
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- --------------------- ---------------- -------- --------------- ----------------
THE TECHNOLOGY SELECT SECTOR INDEX
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<PAGE> 42
General Background
The Technology Select Sector Index is intended to give investors an efficient,
modified market capitalization-based way to track the movements of certain
public companies that are components of the S&P 500 and are involved in the
development and production of technology products. Technology products include
products developed by defense manufacturers, telecommunications equipment,
microcomputer components, integrated computer circuits and process monitoring
systems. A list of the 84 Component Stocks included in the Index as of September
30, 1999 and the industry groups comprising the Index as of September 30, 1999
is included in Exhibit A hereto.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (9/30/99): $[AMOUNT]
10 Largest Components by Market Capitalization:
- --------------------- ---------------- -------- --------------- ----------------
COMPANY NAME MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
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- --------------------- ---------------- -------- --------------- ----------------
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- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
10 Largest Industries (% Index Weight):
- --------------------- ---------------- -------- --------------- ----------------
INDUSTRY MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
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THE UTILITIES SELECT SECTOR INDEX
General Background
15
<PAGE> 43
The Utilities Select Sector Index is intended to give investors an efficient,
modified market capitalization-based way to track the movements of certain
public companies that are components of the S&P 500 and are in the utilities
industry. Utilities include communication services, electrical power providers
and natural gas distributors. A list of the 42 Component Stocks included in the
Index as of September 30, 1999 and the industry groups comprising the Index as
of September 30, 1999 is included in Exhibit A hereto.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (9/30/99): $[AMOUNT]
10 Largest Components by Market Capitalization:
- --------------------- ---------------- -------- --------------- ----------------
COMPANY NAME MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
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- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
3 Largest Industries (% Index Weight):
- --------------------- ---------------- -------- --------------- ----------------
INDUSTRY MARKET MARKET INDEX WEIGHT CUMULATIVE
CAPITALIZATION WEIGHT INDEX WEIGHT
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
- --------------------- ---------------- -------- --------------- ----------------
INVESTMENT POLICIES AND RESTRICTIONS
LENDING PORTFOLIO SECURITIES
Each Select Sector SPDR Fund may lend portfolio securities to brokers, dealers
and other financial institutions needing to borrow securities to complete
transactions and for other purposes. Because the U.S. government securities or
other assets that are pledged as collateral to each Select Sector SPDR Fund in
connection with these loans generate income, securities lending may enable a
Select Sector SPDR Fund to earn additional income that may partially offset the
expenses of such Select Sector SPDR Fund, and thereby reduce the effect that
expenses have on such Select Sector SPDR Fund's ability to provide investment
results that substantially correspond to the price and yield performance of its
respective Select Sector Index.
16
<PAGE> 44
Loans of portfolio securities may not exceed 33% of a Select Sector SPDR Fund's
total assets. The documentation for these loans provides that a Select Sector
SPDR Fund will receive collateral equal to at least 100% of the current market
value of the loaned securities, as marked to market each day that the net asset
value of the Select Sector SPDR Fund is determined. Each Select Sector SPDR Fund
will pay reasonable administrative and custodial fees in connection with the
loan of securities and invests collateral in money market instruments or funds
which invest exclusively in money market instruments.
Each Select Sector SPDR Fund will comply with the conditions for lending
established by the SEC. Although each Select Sector SPDR Fund will receive
collateral in connection with all loans of portfolio securities, and such
collateral will be marked to market, each Select Sector SPDR Fund will be
exposed to the risk of loss should a borrower default on its obligation to
return the borrowed securities (e.g., the loaned securities may have appreciated
beyond the value of the collateral held by the Select Sector SPDR Fund). In
addition, each Select Sector SPDR Fund bears the risk of loss of any cash
collateral that it invests in money market instruments.
REPURCHASE AGREEMENTS
Each Select Sector SPDR Fund may invest in repurchase agreements with commercial
banks, brokers or dealers to generate income from its excess cash balances and
to invest securities lending cash collateral. A repurchase agreement is an
agreement under which a Select Sector SPDR Fund acquires a money market
instrument (generally a security issued by the U.S. Government or an agency
thereof, a banker's acceptance or a certificate of deposit) from a seller,
subject to resale to the seller at an agreed upon price and date (normally, the
next business day). A repurchase agreement may be considered a loan
collateralized by securities. The resale price reflects an agreed upon interest
rate effective for the period the instrument is held by a Select Sector SPDR
Fund and is unrelated to the interest rate on the underlying instrument.
In these repurchase agreement transactions, the securities acquired by a Select
Sector SPDR Fund (including accrued interest earned thereon) must have a total
value in excess of the value of the repurchase agreement and are held by the
Custodian until repurchased. In addition, the Trust's Board of Trustees ("Board"
or "Trustees") monitors each Select Sector SPDR Fund's repurchase agreement
transactions generally and has established guidelines and standards for review
of the creditworthiness of any bank, broker or dealer counterparty to a
repurchase agreement with a Select Sector SPDR Fund. No more than an aggregate
of 15% of each Select Sector SPDR Fund's net assets will be invested in illiquid
securities, including repurchase agreements having maturities longer than seven
days and securities subject to legal or contractual restrictions on resale, or
for which there are no readily available market quotations.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, a
Select Sector SPDR Fund may incur a loss upon disposition of the security. If
the other party to the agreement becomes insolvent and subject to liquidation or
reorganization under the U.S. Bankruptcy Code or other laws, a court may
determine that the underlying security is collateral for a loan by a Select
Sector SPDR Fund not within the control of the Select Sector SPDR Fund and,
therefore, the Select Sector SPDR Fund may not be able to
17
<PAGE> 45
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement.
OTHER MONEY MARKET INSTRUMENTS
In addition to repurchase agreements, other money market instruments in which
the Select Sector SPDR Funds may invest are certificates of deposit of U.S.
domestic banks with assets of $1 billion or more, bankers' acceptances, time
deposits, U.S. Government and U.S. Government agency securities, or commercial
paper rated within the two highest grades by S&P or Moody's Investors Service,
Inc., or, if not rated, are of comparable quality as determined by the Adviser,
and which mature within one year from the date of purchase, and investment
companies which invest exclusively in such money market instruments (subject to
applicable limitations under Section 12(d)(1) of the Investment Company Act of
1940, as amended ("1940 Act").
FUTURES CONTRACTS, OPTIONS AND SWAP AGREEMENTS
Each Select Sector SPDR Fund may utilize exchange-traded futures and options
contracts and swap agreements.
FUTURES CONTRACTS AND OPTIONS
Futures contracts generally provide for the future sale by one party and
purchase by another party of a specified commodity at a specified future time
and at a specified price. Stock index futures contracts are settled daily with a
payment by one party to the other of a cash amount based on the difference
between the level of the stock index specified in the contract from one day to
the next. Futures contracts are standardized as to maturity date and underlying
instrument and are traded on futures exchanges.
Futures traders are required to make a good faith margin deposit in cash or U.S.
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying commodity
or payment of the cash settlement amount) if it is not terminated prior to the
specified delivery date. Brokers may establish deposit requirements which are
higher than the exchange minimums. Futures contracts are customarily purchased
and sold on margin deposits which may range upward from less than 5% of the
value of the contract being traded.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. In such case, a Select Sector
SPDR Fund would expect to earn interest income on its margin deposits. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract position is opened or closed.
18
<PAGE> 46
Each Select Sector SPDR Fund may use exchange-traded futures and options,
together with positions in cash and money market instruments, to simulate full
investment in the underlying Select Sector SPDR Index. Exchange-traded futures
and options contracts are not currently available for the Select Sector Indexes.
Under such circumstances, the Adviser may seek to utilize other instruments that
it believes to be correlated to the underlying Select Sector Index components or
a subset of the components. The AMEX currently anticipates that options on the
Shares will be listed on the AMEX at the same time that the Shares are available
for trading although there is no assurance in this regard.
RESTRICTIONS ON THE USE OF FUTURES AND OPTIONS
A Select Sector SPDR Fund would not enter into futures contract transactions for
purposes other than hedging to the extent that, immediately thereafter, the sum
of its initial margin deposits on open contracts exceeds 5% of the market value
of a Select Sector SPDR Fund's total assets after taking into account unrealized
gains and unrealized losses on such contracts it has entered into. Each Select
Sector SPDR Fund would take steps to prevent its futures positions from
"leveraging" its securities holdings. When it has a long futures position, it
will maintain with its custodian bank, cash or liquid securities having a value
equal to the notional value of the contract (less any margin deposited in
connection with the position). When it has a short futures position, it will
maintain with its custodian bank assets substantially identical to those
underlying the contract or cash and liquid securities (or a combination of the
foregoing) having a value equal to the net obligation of the Select Sector SPDR
Fund under the contract (less the value of any margin deposits in connection
with the position).
SWAP AGREEMENTS
Swap agreements are contracts between parties in which one party agrees to make
payments to the other party based on the change in market value or level of a
specified rate, index or asset. In return, the other party agrees to make
payments to the first party based on the return of a different specified rate,
index or asset. Swap agreements will usually be done on a net basis, i.e., where
the two parties make net payments with the Select Sector SPDR Fund receiving or
paying, as the case may be, only the net amount of the two payments. The net
amount of the excess, if any, of a Select Sector SPDR Fund's obligations over
its entitlements with respect to each swap is accrued on a daily basis and an
amount of cash or high liquid securities having an aggregate value at least
equal to the accrued excess is maintained in an account at the Trust's custodian
bank.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions as fundamental
policies with respect to each Select Sector SPDR Fund. These restrictions cannot
be changed with respect to a Select Sector SPDR Fund without the approval of the
holders of a majority of such Select Sector SPDR Fund's outstanding voting
securities. For purposes of the 1940 Act, a majority of the outstanding voting
securities of a Select Sector SPDR Fund means the vote, at an annual or a
special meeting of the security holders of the Trust, of the lesser of (1) 67%
or more of the voting securities of the Select Sector SPDR Fund present at such
meeting, if the holders of more than 50% of the outstanding
19
<PAGE> 47
voting securities of such Select Sector SPDR Fund are present or represented by
proxy, or (2) more than 50% of the outstanding voting securities of the Select
Sector SPDR Fund. Except with the approval of a majority of the outstanding
voting securities, a Select Sector SPDR Fund may not:
1. Change its investment objective;
2. Lend any funds or other assets except through the purchase of all or a
portion of an issue of securities or obligations of the type in which it is
permitted to invest (including participation interests in such securities or
obligations) and except that a Select Sector SPDR Fund may lend its portfolio
securities in an amount not to exceed 33% of the value of its total assets;
3. Issue senior securities or borrow money, except borrowings from banks for
temporary or emergency purposes in an amount up to 10% of the value of the
Select Sector SPDR Fund's total assets (including the amount borrowed), valued
at market, less liabilities (not including the amount borrowed) valued at the
time the borrowing is made, and the Select Sector SPDR Fund will not purchase
securities while borrowings in excess of 5% of the Select Sector SPDR Fund's
total assets are outstanding, provided, that for purposes of this restriction,
short-term credits necessary for the clearance of transactions are not
considered borrowings (this limitation on purchases does not apply to acceptance
by the Select Sector SPDR Fund of a deposit principally of securities included
in the relevant Select Sector Index for creation of Creation Units);
4. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure permitted borrowings. (The deposit of underlying securities and other
assets in escrow and collateral arrangements with respect to initial or
variation margin for futures contracts or options contracts will not be deemed
to be pledges of the Select Sector SPDR Fund's assets);
5. Purchase, hold or deal in real estate, or oil, gas or mineral interests or
leases, but a Select Sector SPDR Fund may purchase and sell securities that are
issued by companies that invest or deal in such assets;
6. Act as an underwriter of securities of other issuers, except to the extent
the Select Sector SPDR Fund may be deemed an underwriter in connection with the
sale of securities in its portfolio;
7. Purchase securities on margin, except for such short-term credits as are
necessary for the clearance of transactions, except that a Select Sector SPDR
Fund may make margin deposits in connection with transactions in options,
futures and options on futures;
8. Sell securities short; or
9. Invest in commodities or commodity contracts, except that a Select Sector
SPDR Fund may transact in exchange traded futures contracts on securities, stock
indexes and options on such futures contracts and make margin deposits in
connection with such contracts.
In addition to the investment restrictions adopted as fundamental policies as
set forth above, each Select Sector SPDR Fund observes the following
restrictions, which may be changed by the Board of Trustees without a
shareholder vote. A Select Sector SPDR Fund will not:
20
<PAGE> 48
1. Invest in the securities of a company for the purpose of exercising
management or control, or in any event purchase and hold more than 10% of the
securities of a single issuer, provided that the Trust may vote the investment
securities owned by each Select Sector SPDR Fund in accordance with its views;
or
2. Hold illiquid assets in excess of 15% of its net assets. An illiquid asset is
any asset which may not be sold or disposed of in the ordinary course of
business within seven days at approximately the value at which the Select Sector
SPDR Fund has valued the investment.
If a percentage limitation is adhered to at the time of investment or contract,
a later increase or decrease in percentage resulting from any change in value or
total or net assets will not result in a violation of such restriction, except
that the percentage limitations with respect to the borrowing of money and
illiquid securities will be observed continuously.
SPECIAL CONSIDERATIONS AND RISKS
A discussion of the risks associated with an investment in a Select Sector SPDR
Fund is contained in the Prospectus under the heading "INVESTMENT CONSIDERATIONS
AND RISKS." The discussion below supplements, and should be read in conjunction
with, such section of the Prospectus.
GENERAL
Investment in a Select Sector SPDR Fund should be made with an understanding
that the value of a Select Sector SPDR Fund's portfolio securities may fluctuate
in accordance with changes in the financial condition of the issuers of the
portfolio securities, the value of common stocks generally and other factors.
An investment in a Select Sector SPDR Fund should also be made with an
understanding of the risks inherent in an investment in equity securities,
including the risk that the financial condition of issuers may become impaired
or that the general condition of the stock market may deteriorate (either of
which may cause a decrease in the value of the portfolio securities and thus in
the value of Shares). Common stocks are susceptible to general stock market
fluctuations and to volatile increases and decreases in value as market
confidence in and perceptions of their issuers change. These investor
perceptions are based on various and unpredictable factors including
expectations regarding government, economic, monetary and fiscal policies,
inflation and interest rates, economic expansion or contraction, and global or
regional political, economic and banking crises.
While S&P often chooses a replacement company for the S&P 500 with some
characteristics in common with a company or companies removed from the index, it
is not uncommon for a replacement company to have little in common with the
company it replaces. Consequently, the removal of one company and its
replacement by another may affect two Select Sector Indexes and two Select
Sector SPDR Funds, one of which included a company now removed from the S&P 500
and another which may have a company added to it.
21
<PAGE> 49
Holders of common stocks incur more risk than holders of preferred stocks and
debt obligations because common stockholders, as owners of the issuer, have
generally inferior rights to receive payments from the issuer in comparison with
the rights of creditors of, or holders of debt obligations or preferred stocks
issued by, the issuer. Further, unlike debt securities which typically have a
stated principal amount payable at maturity (whose value, however, will be
subject to market fluctuations prior thereto), or preferred stocks which
typically have a liquidation preference and which may have stated optional or
mandatory redemption provisions, common stocks have neither a fixed principal
amount nor a maturity. Common stock values are subject to market fluctuations as
long as the common stock remains outstanding.
Although most of the securities in the Select Sector Indexes are listed on a
national securities exchange, the principal trading market for some may be in
the over-the-counter market. The existence of a liquid trading market for
certain securities may depend on whether dealers will make a market in such
securities. There can be no assurance that a market will be made or maintained
or that any such market will be or remain liquid. The price at which securities
may be sold and the value of a Select Sector SPDR Fund's Shares will be
adversely affected if trading markets for a Select Sector SPDR Fund's portfolio
securities are limited or absent or if bid/ask spreads are wide.
FUTURES AND OPTIONS TRANSACTIONS
Positions in futures contracts and options may be closed out only on an exchange
which provides a secondary market therefor. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close a futures or
options position. In the event of adverse price movements, a Select Sector SPDR
Fund would continue to be required to make daily cash payments to maintain its
required margin. In such situations, if a Select Sector SPDR Fund has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. In addition, a
Select Sector SPDR Fund may be required to make delivery of the instruments
underlying futures contracts it has sold.
A Select Sector SPDR Fund will minimize the risk that it will be unable to close
out a futures or options contract by only entering into futures and options for
which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts or uncovered call options in some
strategies (e.g., selling uncovered stock index futures contracts) is
potentially unlimited. The Select Sector SPDR Funds do not plan to use futures
and options contracts, when available, in this way. The risk of a futures
position may still be large as traditionally measured due to the low margin
deposits required. In many cases, a relatively small price movement in a futures
contract may result in immediate and substantial loss or gain to the investor
relative to the size of a required margin deposit. The Select Sector SPDR Funds,
however, intend to utilize futures and options contracts in a manner designed to
limit their risk exposure to that which is comparable to what they would have
incurred through direct investment in stocks.
Utilization of futures transactions by a Select Sector SPDR Fund involves the
risk of imperfect or even negative correlation to the benchmark Select Sector
Index if the index underlying the futures
22
<PAGE> 50
contracts differs from the benchmark Select Sector Index. There is also the risk
of loss by a Select Sector SPDR Fund of margin deposits in the event of
bankruptcy of a broker with whom a Select Sector SPDR Fund has an open position
in the futures contract or option.
Certain financial futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
RISKS OF SWAP AGREEMENTS
Swap agreements are subject to the risk that the swap counterparty will default
on its obligations. If such a default occurs, a Select Sector SPDR Fund will
have contractual remedies pursuant to the agreements related to the transaction,
but such remedies may be subject to bankruptcy and insolvency laws which could
affect such Fund's rights as a creditor.
CONTINUOUS OFFERING
The method by which Creation Units of Shares are created and traded may raise
certain issues under applicable securities laws. Because new Creation Units of
Shares are issued and sold by the Trust on an ongoing basis, at any point a
"distribution," as such term is used in the Securities Act of 1933 (the
"Securities Act"), may occur. Broker-dealers and other persons are cautioned
that some activities on their part may, depending on the circumstances, result
in their being deemed participants in a distribution in a manner which could
render them statutory underwriters and subject them to the prospectus delivery
and liability provisions of the Securities Act.
For example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Units after placing an order with the
Distributor, breaks them down into constituent Shares, and sells such Shares
directly to customers, or if it chooses to couple the creation of a supply of
new Shares with an active selling effort involving solicitation of secondary
market demand for Shares. A determination of whether one is an underwriter for
purposes of the Securities Act must take into account all the facts and
circumstances pertaining to the activities of the broker-dealer or its client in
the particular case, and the examples mentioned above should not be considered a
complete description of all the activities that could lead to a categorization
as an underwriter.
Broker-dealer firms should also note that dealers who are not "underwriters" but
are effecting transactions in Shares, whether or not participating in the
distribution of Shares, are generally required to deliver a prospectus. This is
because the prospectus delivery exemption in Section 4(3) of the Securities Act
is not available in respect of such transactions as a result of Section 24(d) of
the 1940 Act. Firms that incur a prospectus-delivery obligation with respect to
Shares of a Select
23
<PAGE> 51
Sector SPDR Fund are reminded that under Securities Act Rule 153, a
prospectus-delivery obligation under Section 5(b)(2) of the Securities Act owed
to an exchange member in connection with a sale on the AMEX is satisfied by the
fact that such Select Sector SPDR Fund's prospectus is available at the AMEX
upon request. The prospectus delivery mechanism provided in Rule 153 is only
available with respect to transactions on an exchange.
EXCHANGE LISTING AND TRADING
A discussion of exchange listing and trading matters associated with an
investment in the Select Sector SPDR Funds is contained in the Prospectus under
the "DETERMINATION OF NET ASSET VALUE" and "BUYING AND SELLING SELECT SECTOR
SPDRs." The discussion below supplements, and should be read in conjunction
with, such sections of the Prospectus.
The Shares of each Select Sector SPDR Fund are approved for listing and trading
on the AMEX, subject to notice of issuance. The Shares trade on the AMEX at
prices that may differ to some degree from their net asset value. There can be
no assurance that the requirements of the AMEX necessary to maintain the listing
of Shares of any Select Sector SPDR Fund will continue to be met.
The AMEX may but is not required to remove the Shares of a Select Sector SPDR
Fund from listing if (1) following the initial twelve-month period beginning
upon the commencement of trading of a Select Sector SPDR Fund, there are fewer
than 50 beneficial holders of the Shares for 30 or more consecutive trading
days; (2) the value of the underlying Select Sector Index or portfolio of
securities on which such Select Sector SPDR Fund is based is no longer
calculated or available; or (3) such other event shall occur or condition exists
that, in the opinion of the AMEX, makes further dealings on the AMEX
inadvisable. In addition, the AMEX will remove the Shares from listing and
trading upon termination of the Trust.
As in the case of other stocks traded on the AMEX, brokers' commissions on
transactions will be based on negotiated commission rates at customary levels.
MANAGEMENT OF THE TRUST
The following information supplements and should be read in conjunction with the
section in the Prospectus entitled "MANAGEMENT."
TRUSTEES AND OFFICERS OF THE TRUST
The Board has responsibility for the overall management and operations of the
Trust, including general supervision of the duties performed by the Adviser and
other service providers. The Board currently consists of six (6) Trustees, none
of whom is an "interested person" (as defined in the 1940 Act) of the Trust or
any of the Select Sector SPDR Funds.
- ---------------------------- ----------------------- ---------------------------
NAME/ADDRESS/AGE POSITION WITH THE TRUST PRINCIPAL OCCUPATIONS
DURING THE PAST FIVE YEARS
- ---------------------------- ----------------------- ---------------------------
John W. English Trustee Private Investor, Chairman
P.O. Box 640 of the Board of The China
Summit, New Jersey Fund, Inc. (1992 to
07902-0640 present); Trustee of
Age 66 Northern Trust Company's
Institutional Funds (1993
to present); Trustee of
Washington Mutual's WM
Funds (1994 to present);
- ---------------------------- ----------------------- ---------------------------
24
<PAGE> 52
- ---------------------------- ----------------------- ---------------------------
Chairman of the Advisory
Board of Andrew M. Carter &
Company, an investment
adviser (1995 to present);
Director, Adviser or
Trustee for numerous
not-for-profit
organizations (1989 to
present); formerly Vice
President and Chief
Investment Officer of the
Ford Foundation
(1981-1993).
- ---------------------------- ----------------------- ---------------------------
George R. Gaspari Trustee Consultant to various
100-38 75th Avenue financial services
Forest Hills, New York organizations (1996 to
11375 present); Senior Vice
Age 59 President and Chief
Financial and
Administrative Officer of
Evergreen Asset Management
Co., a subsidiary of First
Union Corp. (1987-1996).
- ---------------------------- ----------------------- ---------------------------
Burton G. Malkiel Trustee Director of Baker Fentress
Department of Economics & Company, a closed-end
Princeton University investment company traded
Princeton, New Jersey on the New York Stock
08544 Exchange (1980 to present),
Age 67 Insurance Company of
America (1977 to present);
DirectorDirector of
Prudential of The Vanguard
Group of Investment
Companies (1977 to
present); Professor of
Economics at Princeton
University (1964 to
present); formerly Dean of
Yale School of Management
(1981-1988); formerly
Chairman of the Economics
Department and Director of
the Financial Research
Center at Princeton
University(1974-1975 and
1977-1981); formerly
Member, President's Council
of Economic Advisors
(1975-1977).
- ---------------------------- ----------------------- ---------------------------
Ernest J. Scalberg Trustee Dean of the Graduate School
Fordham Graduate School of Business Administration
of Business and Dean of Faculty of the
113 West 60th Street School of Business at
New York, New York Fordham University (April
10023 1994 to present); Director,
Age 54 Adviser or Trustee to
numerous non-profit
organizations (1974 to
present); formerly Founding
Dean, School of Business
and Management, Hong Kong
University of Science and
Technology (1991-1993);
formerly Associate Dean of
UCLA Graduate School of
Management(1981-1994).
- ---------------------------- ----------------------- ---------------------------
R. Charles Tschampion Trustee Managing Director of
General Motors Investment Investment Strategy and
Management Corp. Asset Allocation, General
767 Fifth Avenue Motors Investment
New York, New York Management Corporation
10153 (1994 to present); Vice
Age 53 Chairman of the Association
for Investment Management
Research (1989 to present);
Governor of the Association
for Investment Management
Research (1995 to present);
Director of the India
Magnum Fund (1994 to
present), Trustee of Lehigh
University and Member of
the Investment
Sub-Committee for the
Lehigh University Endowment
Fund (October 1998 to
present).
- ---------------------------- ----------------------- ---------------------------
Cheryl Burgermeister Trustee Director and Chief Officer
The Crabbe Huson Group, Inc. of Finance of The Crabbe
121 S.W. Morrison Huson Group and Treasurer
Suite 1400 of the Crabbe Huson Family
Portland, Oregon 97204 of Funds (1987 to present);
Age 48 formerly Senior Auditor at
KPMG Peat Marwick (1982-
1986).
- ---------------------------- ----------------------- ---------------------------
Howard H. Fairweather President and Secretary Retired; formerly Executive
4 Parsons Street Vice President of State
Newburyport, MA 02110 Street Bank and Trust
Age 61 Company (1977 to September
1996); formerly Vice
President and head of the
New England Division of
Commercial Lending and head
of the National Division at
State Street Bank and Trust
Company (1972-1977);
formerly Commercial Lending
Officer at State Street
Bank and Trust Company
(1965-1972).
- ---------------------------- ----------------------- ---------------------------
E. Davis Hawkes, Jr. Treasurer and Assistant Retired; formerly Vice
47 Washington Street Secretary President of State Street
Marblehead, MA 01945 Bank and Trust Company
Age 68 (1954-1990).
- ---------------------------- ----------------------- ---------------------------
25
<PAGE> 53
REMUNERATION OF TRUSTEES AND OFFICERS
The Trust pays each Trustee an annual fee of $12,000 plus a per meeting fee of
$2,000 for meetings of the Board of Trustees attended by the Trustee. The Trust
also reimburses each Trustee for travel and other out-of-pocket expenses
incurred by him/her in connection with attending such meetings.
Assuming that four (4) meetings of the Board of Trustees are held annually, it
is estimated that the compensation paid to each Trustee during the fiscal year
ended September 30, 1999 will be:
- ----------------------------------- --------------------------------------------
NAME OF TRUSTEE AGGREGATE COMPENSATION FROM TRUST
- ----------------------------------- --------------------------------------------
John W. English $20,000
- ----------------------------------- --------------------------------------------
George R. Gaspari $20,000
- ----------------------------------- --------------------------------------------
Burton G. Malkiel $20,000
- ----------------------------------- --------------------------------------------
Ernest J. Scalberg $20,000
- ----------------------------------- --------------------------------------------
R. Charles Tschampion $20,000
- ----------------------------------- --------------------------------------------
Cheryl Burgermeister $20,000
- ----------------------------------- --------------------------------------------
The following table sets forth the total (estimated) remuneration of Trustees
and officers of the Trust for the fiscal year ended September 30, 1999.
<TABLE>
<CAPTION>
- ------------------------- ----------------------- ----------------------- ----------------------- -----------------------
NAME/ POSITION AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION
COMPENSATION FROM BENEFITS ACCRUED AS BENEFITS UPON FROM TRUST & TRUST
TRUST PART OF TRUST EXPENSES RETIREMENT COMPLEX PAID TO
TRUSTEES
- ------------------------- ----------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
John W. English, Trustee $20,000 $0 $0 $20,000
- ------------------------- ----------------------- ----------------------- ----------------------- -----------------------
George R. Gaspari, $20,000 $0 $0 $20,000
Trustee
- ------------------------- ----------------------- ----------------------- ----------------------- -----------------------
Burton G. Malkiel, $20,000 $0 $0 $20,000
Trustee
- ------------------------- ----------------------- ----------------------- ----------------------- -----------------------
Ernest J. Scalberg, $20,000 $0 $0 $20,000
Trustee
- ------------------------- ----------------------- ----------------------- ----------------------- -----------------------
R. Charles Tschampion, $20,000 $0 $0 $20,000
Trustee
- ------------------------- ----------------------- ----------------------- ----------------------- -----------------------
Cheryl Burgermeister, $20,000 $0 $0 $20,000
Trustee
- ------------------------- ----------------------- ----------------------- ----------------------- -----------------------
Howard H. Fairweather, $20,000 $0 $0 $20,000
President and Secretary
- ------------------------- ----------------------- ----------------------- ----------------------- -----------------------
E Davis Hawkes, Jr., $20,000 $0 $0 $20,000
Treasurer and Assistant
Secretary
- ------------------------- ----------------------- ----------------------- ----------------------- -----------------------
</TABLE>
No Trustee or officer is entitled to any pension or retirement benefits from the
Trust.
THE INVESTMENT ADVISER
State Street, through its State Street Global Advisors division, acts as
investment adviser to the Trust and, subject to the supervision of the Board, is
responsible for the investment management of each Select Sector SPDR Fund. State
Street is a wholly owned subsidiary of State Street Boston Corporation, a
publicly held bank holding company. State Street, with over $587 billion (U.S.)
under management as of October 31, 1999, provides complete global investment
management services from offices in the U.S., London, Sydney, Hong Kong, Tokyo,
Toronto, Luxembourg, Montreal, Paris, Dublin, Munich and Brussels.
26
<PAGE> 54
The Adviser serves as investment adviser to each Select Sector SPDR Fund
pursuant to an Investment Advisory Agreement between the Trust and the Adviser.
Under the Investment Advisory Agreement, the Adviser, subject to the supervision
of the Board and in conformity with the stated investment policies of each
Select Sector SPDR Fund, manages the investment of each Select Sector SPDR
Fund's assets. The Adviser is responsible for placing purchase and sale orders
and providing continuous supervision of the investment portfolio of each Select
Sector SPDR Fund.
Pursuant to the Investment Advisory Agreement, the Trust has agreed to indemnify
the Adviser for certain liabilities, including certain liabilities arising under
the federal securities laws, unless such loss or liability results from willful
misfeasance, bad faith or gross negligence in the performance of its duties or
the reckless disregard of its obligations and duties.
THE ADMINISTRATOR
In addition to serving as Adviser to each Select Sector SPDR Fund, State Street,
through its Global Investors Services Group, serves as Administrator for the
Trust pursuant to an Administrative Services Agreement. Under the Administrative
Services Agreement, State Street is obligated on a continuous basis to provide
such administrative services as the Board of Trustees of the Trust reasonably
deems necessary for the proper administration of the Trust and each Select
Sector SPDR Fund. State Street will generally assist in all aspects of the
Trust's and the Select Sector SPDR Funds' operations; supply and maintain office
facilities (which may be in State Street's own offices), statistical and
research data, data processing services, clerical, accounting, bookkeeping and
record keeping services (including without limitation the maintenance of such
books and records as are required under the 1940 Act and the rules thereunder,
except as maintained by other agents), internal auditing, executive and
administrative services, and stationery and office supplies; prepare reports to
shareholders or investors; prepare and file tax returns; supply financial
information and supporting data for reports to and filings with the SEC and
various state Blue Sky authorities; supply supporting documentation for meetings
of the Board of Trustees; provide monitoring reports and assistance regarding
compliance with the Declaration of Trust, by-laws, investment objectives and
policies and with federal and state securities laws; arrange for appropriate
insurance coverage; and negotiate arrangements with, and supervise and
coordinate the activities of, agents and others to supply services.
Pursuant to the Administrative Services Agreement, the Trust has agreed to
indemnify the Administrator for certain liabilities, including certain
liabilities arising under the federal securities laws, unless such loss or
liability results from gross negligence or willful misconduct in the performance
of its duties.
CUSTODIAN AND TRANSFER AGENT
State Street also serves as Custodian for the Select Sector SPDR Funds pursuant
to a Custodian Agreement. As Custodian, State Street holds the Select Sector
SPDR Funds' assets, calculates the net asset value of the Shares and calculates
net income and realized capital gains or losses. State Street also serves as
Transfer Agent of the Select Sector SPDR Funds pursuant to a Transfer Agency
Agreement. State Street may be reimbursed by the Select Sector SPDR Funds for
its out-
27
<PAGE> 55
of-pocket expenses. State Street and the Trust will comply with the self-
custodian provisions of Rule 17f-2 under the 1940 Act.
Compensation. As compensation for its services under the Investment Advisory
Agreement, State Street is paid a monthly fee based on a percentage of each
Select Sector SPDR Fund's average daily net assets at the annual rate of .05%.
From time to time, the Adviser may waive all or a portion of its fee. As
compensation for its services under the Administrative Services Agreement, the
Custodian Agreement and the Transfer Agency Agreement, State Street is paid a
"unitary fee." Each Select Sector SPDR Fund will also bear all other expenses of
its operation.
Term. The Investment Advisory Agreement with respect to each Select Sector SPDR
Fund continues in effect for two years from its effective date, and thereafter
is subject to annual approval by (1) the Board of Trustees or (2) vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Select Sector SPDR Fund, provided that in either event such continuance also
is approved by a majority of the Board of Trustees who are not interested
persons (as defined in the 1940 Act) of the Trust by a vote cast in person at a
meeting called for the purpose of voting on such approval. The Investment
Advisory Agreement with respect to each Select Sector SPDR Fund is terminable
without penalty, on 60 days notice, by the Board of Trustees or by a vote of the
holders of a majority (as defined in the 1940 Act) of the applicable Select
Sector SPDR Fund's outstanding voting securities. The Investment Advisory
Agreement is also terminable upon 60 days notice by the Adviser and will
terminate automatically in the event of its assignment (as defined in the 1940
Act).
BANKING AND REGULATORY MATTERS
State Street has been advised by its counsel that, in counsel's opinion, State
Street currently may perform the services for the Trust and the Select Sector
SPDR Funds contemplated by the Investment Advisory Agreement and other
activities for the Trust and the Select Sector SPDR Funds described in the
Prospectus and this Statement of Additional Information without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. However,
counsel has pointed out that future changes in either federal or state statutes
and regulations concerning the permissible activities of banks or trust
companies, as well as future judicial or administrative decisions or
interpretations of present and future statutes and regulations, might prevent
State Street from continuing to perform those services for the Trust and the
Select Sector SPDR Funds. State laws on this issue may differ from the
interpretations of relevant federal law and banks and financial institutions may
be required to register as dealers pursuant to state securities law. If the
circumstances described above should change, the Board of Trustees would review
the relationships with State Street and consider taking all actions necessary in
the circumstances.
THE DISTRIBUTOR
ALPS Mutual Funds Services, Inc. is the principal underwriter and Distributor of
Shares. Its principal address is 370 17th Street, Suite 3100, Denver, CO 80202.
Investor information can be obtained by calling 1-800-843-2639. The Distributor
has entered into a Distribution Agreement
28
<PAGE> 56
with the Trust pursuant to which it distributes Shares of each Select Sector
SPDR Fund. The Distribution Agreement will continue for two years from its
effective date and is renewable annually thereafter. Shares will be continuously
offered for sale by the Trust through the Distributor only in Creation Units, as
described in the Prospectus and below under "CREATION AND REDEMPTION OF CREATION
UNITS." Shares in less than Creation Units are not distributed by the
Distributor. The Distributor will deliver the Prospectus and Statement of
Additional Information to persons purchasing Creation Units and will maintain
records of both orders placed with it and confirmations of acceptance furnished
by it. The Distributor is a broker-dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act") and a member of the National
Association of Securities Dealers, Inc. ("NASD"). The Distributor has no role in
determining the investment policies of the Trust or which securities are to be
purchased or sold by the Trust.
The Board of Trustees, consisting of Independent Trustees described below, has
adopted a distribution plan pursuant to Rule 12b-1 under the 1940 Act (each, a
"Plan") for each Select Sector SPDR Fund. The terms of each Plan are described
in the Prospectus.
Under its terms, each Select Sector SPDR Fund's Plan remains in effect from year
to year, provided such continuance is approved annually by vote of the Board,
including a majority of the "Independent Trustees" (Trustees who are not
interested persons of the Fund (as defined in the 1940 Act) and have no direct
or indirect financial interest in the operation of the Plan or any agreement
related to the Plan). The Plan may not be amended to increase materially the
amount to be spent for the services provided by the Distributor without approval
by the shareholders of the Select Sector SPDR Fund to which the Plan applies,
and all material amendments of the Plan also require Board approval (as
described above). Each Plan may be terminated at any time, without penalty, by
vote of a majority of the Independent Trustees, or, by a vote of a majority of
the outstanding voting securities of such Select Sector SPDR Fund (as such vote
is defined in the 1940 Act). Pursuant to the Distribution Agreement, the
Distributor will provide the Board with periodic reports of any amounts expended
under the Plan and the purpose for which such expenditures were made.
The Distribution Agreement provides that it may be terminated at any time,
without the payment of any penalty, as to each Select Sector SPDR Fund: (i) by
vote of a majority of the Independent Trustees or (ii) by vote of a majority (as
defined in the 1940 Act) of the outstanding voting securities of the Select
Sector SPDR Fund, on at least 60 days written notice to the Distributor. The
Distribution Agreement is also terminable upon 60 days notice by the Distributor
and will terminate automatically in the event of its assignment (as defined in
the 1940 Act).
Pursuant to agreements entered into with such persons, the Distributor will make
payments under each Select Sector SPDR Fund's Plan to certain broker-dealers or
other persons ("Investor Services Organizations") that enter into agreements
with the Distributor in the form approved by the Board of Trustees to provide
distribution assistance and shareholder support, account maintenance and
educational and promotional services (which may include compensation and sales
incentives to the registered brokers or other sales personnel of the
broker-dealer or other financial entity that is a party to an investor services
agreement) ("Investor Services Agreements"). Each Investor Services Agreement
will be a "related agreement" under the Plan of the relevant Select Sector SPDR
Fund.
29
<PAGE> 57
No Investor Services Agreement will provide for annual fees of more than 0.10%
of a Select Sector SPDR Fund's average daily net assets per annum attributable
to Shares subject to such agreement.
Subject to an aggregate limitation of .25% of a Select Sector SPDR Fund's
average net assets per annum, the fees paid by a Select Sector SPDR Fund under
its Plan will be compensation for distribution, investor services or marketing
services for that Fund. To the extent the Plan fees aggregate less than .25% per
annum of the average daily net assets of a Select Sector SPDR Fund, each Fund
may also reimburse the Distributor and other persons for their respective costs
incurred in printing prospectuses and producing advertising or marketing
material prepared at the request of the Fund. The aggregate payments under each
Plan will not exceed, on an annualized basis, .25% of average daily net assets
of any Select Sector SPDR Fund.
The continuation of the Distribution Agreement, any Investor Services Agreements
and any other related agreements is subject to annual approval of the Board,
including by a majority of the Independent Trustees, as described above.
Each of the Investor Services Agreements will provide that it may be terminated
at any time, without the payment of any penalty, (i) by vote of a majority of
the Independent Trustees or (ii) by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the relevant Select Sector SPDR Fund,
on at least 60 days' written notice to the other party. Each of the Distribution
Agreement and the Investor Services Agreements is also terminable upon 60 days'
notice by the Distributor and will terminate automatically in the event of its
assignment (as defined in the 1940 Act). Each Investor Services Agreement is
also terminable by the applicable Investor Service Organization upon 60 days'
notice to the other party thereto.
The allocation among the Select Sector SPDR Funds of fees and expenses payable
under the Distribution Agreement and the Investor Services Agreements will be
made pro rata in accordance with the daily net assets of the respective Funds.
The Distributor may also enter into agreements with securities dealers
("Soliciting Dealers") who will solicit purchases of Creation Unit aggregations
of Select Sector SPDR Fund Shares. Such Soliciting Dealers may also be
Participating Parties (as defined below), DTC Participants (as defined below)
and/or Investor Services Organizations.
Pursuant to the Distribution Agreement, the Trust has agreed to indemnify the
Distributor, and may indemnify Soliciting Dealers entering into agreements with
the Distributor, for certain liabilities, including certain liabilities arising
under the federal securities laws, unless such loss or liability results from
willful misfeasance, bad faith or gross negligence in the performance of its
duties or the reckless disregard of its obligations and duties under the
Distribution Agreement or other agreement, as applicable.
ADDITIONAL EXPENSES
S&P, the AMEX and Merrill Lynch have entered into a license agreement with
respect to each Select Sector SPDR Fund's Select Sector Index. The Trust pays an
annual sub-license fee per annum (i) to S&P equal to the greater of .03% of the
aggregate net assets of the Trust or $450,000
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(the "Minimum Annual Fee"), and (ii) to Merrill Lynch equal to .03% of the
aggregate net assets of the Trust. The Minimum Annual Fee is payable in full on
each anniversary of the first day of trading, December 22, 1998 (the "First
Trading Day"). The fee to Merrill Lynch is payable on a quarterly basis. Each
Select Sector SPDR Fund will pay its proportionate share of the annual
sub-license fees based on the relative net assets of such Fund.
BROKERAGE TRANSACTIONS
The policy of the Trust regarding purchases and sales of securities for the
Select Sector SPDR Funds is that primary consideration will be given to
obtaining the most favorable prices and efficient executions of transactions.
Consistent with this policy, when securities transactions are effected on a
stock exchange, the Trust's policy is to pay commissions which are considered
fair and reasonable without necessarily determining that the lowest possible
commissions are paid in all circumstances. The Trust believes that a requirement
always to seek the lowest possible commission cost could impede effective
portfolio management and preclude the Select Sector SPDR Funds and the Adviser
from obtaining a high quality of brokerage and research services. In seeking to
determine the reasonableness of brokerage commissions paid in any transaction,
the Adviser relies upon its experience and knowledge regarding commissions
generally charged by various brokers and on its judgment in evaluating the
brokerage and research services received from the broker effecting the
transaction. Such determinations are necessarily subjective and imprecise, as in
most cases an exact dollar value for those services is not ascertainable.
In seeking to implement the Trust's policies, the Adviser effects transactions
with those brokers and dealers who the Adviser believes provides the most
favorable prices and are capable of providing efficient executions. If the
Adviser believes such price and execution are obtainable from more than one
broker or dealer, it may give consideration to placing portfolio transactions
with those brokers and dealers who also furnish research and other services to
the Select Sector SPDR Funds or the Adviser. Such services may include, but are
not limited to, information as to the availability of securities for purchase or
sale and statistical information pertaining to corporate actions affecting
stocks, including but not limited to, stocks within the S&P 500.
The Select Sector SPDR Funds will not deal with affiliates in principal
transactions unless permitted by exemptive order or applicable rule or
regulation.
The Adviser assumes general supervision over placing orders on behalf of the
Trust for the purchase or sale of portfolio securities. If purchases or sales of
portfolio securities of the Trust and one or more other investment companies or
clients supervised by the Adviser are considered at or about the same time,
transactions in such securities are allocated among the several investment
companies and clients in a manner deemed equitable to all by the Adviser. In
some cases, this procedure could have a detrimental effect on the price or
volume of the security so far as the Trust is concerned. However, in other
cases, it is possible that the ability to participate in volume transactions and
to negotiate lower brokerage commissions will be beneficial to the Trust. The
primary consideration is prompt execution of orders at the most favorable net
price.
Portfolio turnover may vary from year to year, as well as within a year. High
turnover rates are likely to result in comparatively greater brokerage expenses.
The portfolio turnover rate for each
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Select Sector SPDR Fund is expected to be under 50%. See "INVESTMENT POLICIES
AND STRATEGIES" in the Prospectus. The overall reasonableness of brokerage
commissions is evaluated by the Adviser based upon its knowledge of available
information as to the general level of commissions paid by other institutional
investors for comparable services.
BOOK ENTRY ONLY SYSTEM
The following information supplements and should be read in conjunction with the
section in the Prospectus entitled "BUYING AND SELLING SELECT SECTOR SPDRs."
DTC acts as securities depositary for the Shares. Shares of each Select Sector
SPDR Fund are represented by securities registered in the name of DTC or its
nominee and deposited with, or on behalf of, DTC. Except in the limited
circumstance provided below, certificates will not be issued for Shares.
DTC, a limited-purpose trust company, was created to hold securities of its
participants (the "DTC Participants") and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. More specifically, DTC is owned by
a number of its DTC Participants and by the New York Stock Exchange ("NYSE"),
the AMEX and the NASD. Access to the DTC system is also available to others such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a DTC Participant, either directly or indirectly
(the "Indirect Participants").
Beneficial ownership of Shares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants and Indirect
Participants. Ownership of beneficial interests in Shares (owners of such
beneficial interests are referred to herein as "Beneficial Owners") is shown on,
and the transfer of ownership is effected only through, records maintained by
DTC (with respect to DTC Participants) and on the records of DTC Participants
(with respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase of Shares.
Conveyance of all notices, statements and other communications to Beneficial
Owners is effected as follows. Pursuant to the Depositary Agreement between the
Trust and DTC, DTC is required to make available to the Trust upon request and
for a fee to be charged to the Trust a listing of the Shares of each Fund held
by each DTC Participant. The Trust shall inquire of each such DTC Participant as
to the number of Beneficial Owners holding Shares, directly or indirectly,
through such DTC Participant. The Trust shall provide each such DTC Participant
with copies of such notice, statement or other communication, in such form,
number and at such place as such DTC Participant may reasonably request, in
order that such notice, statement or communication may be transmitted by such
DTC Participant, directly or indirectly, to such Beneficial Owners. In addition,
the Trust shall pay to each such DTC Participant a fair and reasonable amount as
reimbursement for
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the expenses attendant to such transmittal, all subject to applicable statutory
and regulatory requirements.
Share distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all Shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants' accounts with payments
in amounts proportionate to their respective beneficial interests in Shares of
each Fund as shown on the records of DTC or its nominee. Payments by DTC
Participants to Indirect Participants and Beneficial Owners of Shares held
through such DTC Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in a "street name," and will be the
responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspects of the records
relating to or notices to Beneficial Owners, or payments made on account of
beneficial ownership interests in such Shares, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests or for
any other aspect of the relationship between DTC and the DTC Participants or the
relationship between such DTC Participants and the Indirect Participants and
Beneficial Owners owning through such DTC Participants.
DTC may determine to discontinue providing its service with respect to Shares at
any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action either to find a replacement for DTC
to perform its functions at a comparable cost or, if such a replacement is
unavailable, to issue and deliver printed certificates representing ownership of
Shares, unless the Trust makes other arrangements with respect thereto
satisfactory to the AMEX.
CREATION AND REDEMPTION OF CREATION UNITS
CREATION
The Trust issues and sells Shares of each Select Sector SPDR Fund only in
Creation Units on a continuous basis through the Distributor, without a sales
load, at their net asset value next determined after receipt, on any Business
Day (as defined below), of an order in proper form.
A "Business Day" with respect to each Select Sector SPDR Fund is any day on
which the NYSE is open for business. As of the date of the Prospectus, the NYSE
observes the following holidays: New Year's Day, Martin Luther King, Jr. Day,
President's Day (Washington's Birthday), Good Friday, Memorial Day (observed),
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
FUND DEPOSIT
The consideration for purchase of a Creation Unit of a Select Sector SPDR Fund
generally consists of the in-kind deposit of a designated portfolio of equity
securities -- the "Deposit Securities" -- per each Creation Unit constituting a
substantial replication, or a representation, of the stocks included in the
relevant Select Sector SPDR Fund's Select Sector Index and an amount of cash --
the "Cash
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Component" -- computed as described below. Together, the Deposit Securities and
the Cash Component constitute the "Fund Deposit," which represents the minimum
initial and subsequent investment amount for a Creation Unit of any Select
Sector SPDR Fund. The Cash Component is an amount equal to the Dividend
Equivalent Payment (as defined below), plus or minus, as the case may be, a
Balancing Amount (as defined below). The "Dividend Equivalent Payment" enables
each Fund to make a complete distribution of dividends on the next dividend
payment date, and is an amount equal, on a per Creation Unit basis, to the
dividends on all the portfolio securities of the Fund ("Fund Securities") with
ex-dividend dates within the accumulation period for such distribution (the
"Accumulation Period"), net of expenses and liabilities for such period, as if
all of the Fund Securities had been held by the Fund for the entire Accumulation
Period. The Accumulation Period begins on the ex-dividend date for each Fund and
ends on the next ex-dividend date. The "Balancing Amount" is an amount equal to
the difference between the net asset value of the Shares (per Creation Unit) and
the "Deposit Amount" -- an amount equal to the sum of the market value of the
Deposit Securities and the Dividend Equivalent Payment. If the Balancing Amount
is a positive number (i.e., the net asset value per Creation Unit exceeds the
Deposit Amount), the Cash Component shall be increased by such positive amount.
If the Balancing Amount is a negative number (i.e., the net asset value per
Creation Unit is less than the Deposit Amount), the Cash Component shall be
decreased by such negative amount. If the negative number is greater than the
Dividend Equivalent Payment, the creator will be entitled to receive cash in an
amount equal to the differential. The Balancing Amount serves the function of
compensating for any differences between the net asset value per Creation Unit
and the Deposit Amount.
The Custodian, through the National Securities Clearing Corporation ("NSCC")
(discussed below), makes available on each Business Day, immediately prior to
the opening of business on the AMEX (currently 9:30 a.m., New York time), the
list of the names and the required number of shares of each Deposit Security to
be included in the current Fund Deposit (based on information at the end of the
previous Business Day) for each Select Sector SPDR Fund. Such Fund Deposit is
applicable, subject to any adjustments as described below, in order to effect
creations of Creation Units of a given Select Sector SPDR Fund until such time
as the next-announced composition of the Deposit Securities is made available.
The identity and number of shares of the Deposit Securities required for a Fund
Deposit for each Select Sector SPDR Fund changes as rebalancing adjustments and
corporate action events are reflected from time to time by the Adviser with a
view to the investment objective of the Select Sector SPDR Fund. The composition
of the Deposit Securities may also change in response to adjustments to the
weighting or composition of the Component Stocks of the relevant Select Sector
Index. In addition, the Trust reserves the right to permit or require the
substitution of an amount of cash -- i.e., a "cash in lieu" amount -- to be
added to the Cash Component to replace any Deposit Security which may not be
available in sufficient quantity for delivery or which may not be eligible for
transfer through the Clearing Process (discussed below), or which may not be
eligible for trading by an Authorized Participant (as defined below) or the
investor for which it is acting. Brokerage commissions incurred in connection
with acquisition of Deposit Securities not eligible for transfer through the
systems of DTC and hence not eligible for transfer through the Clearing Process
(discussed below) will be at the expense of the Fund and will affect the value
of all Shares; but the Adviser, subject to the approval of the Board of
Trustees, may adjust the transaction fee within the parameters described above
to protect ongoing shareholders. The adjustments described
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above will reflect changes, known to the Adviser on the date of announcement to
be in effect by the time of delivery of the Fund Deposit, in the composition of
the subject Select Sector Index being tracked by the relevant Select Sector SPDR
Fund or resulting from certain corporate actions.
In addition to the list of names and numbers of securities constituting the
current Deposit Securities of a Fund Deposit, the Custodian, through the NSCC,
also makes available on each Business Day, the Dividend Equivalent Payment,
effective through and including the previous Business Day, per outstanding Share
of each Select Sector SPDR Fund.
PROCEDURES FOR CREATION OF CREATION UNITS
To be eligible to place orders with the Distributor to create a Creation Unit of
a Select Sector SPDR Fund, an entity must be (i) a "Participating Party", i.e.,
a broker-dealer or other participant in the clearing process through the
Continuous Net Settlement System of the NSCC (the "Clearing Process"), a
clearing agency that is registered with the SEC; or (ii) a DTC Participant (see
"BOOK ENTRY ONLY SYSTEM"), and, in each case, must have executed an agreement
with the Trust, the Distributor and the Transfer Agent with respect to creations
and redemptions of Creation Units ("Participant Agreement") (discussed below). A
Participating Party and DTC Participant are collectively referred to as an
"Authorized Participant". Investors should contact the Distributor for the names
of Authorized Participants that have signed a Participant Agreement. All Shares
of Select Sector SPDR Funds, however created, will be entered on the records of
DTC in the name of Cede & Co. for the account of a DTC Participant.
All orders to create Select Sector SPDR Funds must be placed for one or more
Creation Unit size aggregations of Shares (50,000 in the case of each Fund). All
orders to create Creation Units, whether through the Clearing Process (through a
Participating Party) or outside the Clearing Process (through a DTC
Participant), must be received by the Distributor no later than the earlier of
(i) closing time of the regular trading session on the NYSE ("Closing Time") or
(ii) 4:00 p.m. New York time in each case on the date such order is placed in
order for creation of Creation Units to be effected based on the net asset value
of Shares of each Select Sector SPDR Fund as next determined on such date after
receipt of the order in proper form. The date on which an order to create
Creation Units (or an order to redeem Creation Units as discussed below) is
placed is referred to as the "Transmittal Date". Orders must be transmitted by
an Authorized Participant by telephone or other transmission method acceptable
to the Distributor pursuant to procedures set forth in the Participant
Agreement, as described below (see "Placement of Creation Orders Using Clearing
Process" and "Placement of Creation Orders Outside Clearing Process"). Severe
economic or market disruptions or changes, or telephone or other communication
failure, may impede the ability to reach the Distributor or an Authorized
Participant.
Orders to create Creation Units of Select Sector SPDR Funds shall be placed with
an Authorized Participant, as applicable, in the form required by such
Authorized Participant. In addition, the Authorized Participant may request the
investor to make certain representations or enter into agreements with respect
to the order, e.g., to provide for payments of cash, when required. Investors
should be aware that their particular broker may not have executed a
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Participant Agreement, and that, therefore, orders to create Creation Units of
Select Sector SPDR Funds have to be placed by the investor's broker through an
Authorized Participant that has executed a Participant Agreement. At any given
time there may be only a limited number of broker-dealers that have executed a
Participant Agreement. Those placing orders for Creation Units through the
Clearing Process should afford sufficient time to permit proper submission of
the order to the Distributor prior to the Closing Time on the Transmittal Date.
Orders for creation that are effected outside the Clearing Process are likely to
require transmittal by the DTC Participant earlier on the Transmittal Date than
orders effected using the Clearing Process. Those persons placing orders outside
the Clearing Process should ascertain the deadlines applicable to DTC and the
Federal Reserve Bank wire system by contacting the operations department of the
broker or depository institution effectuating such transfer of Deposit
Securities and Cash Component.
PLACEMENT OF CREATION ORDERS USING CLEARING PROCESS
The Clearing Process is the process of creating or redeeming Creation Units
through the Continuous Net Settlement System of the NSCC. Fund Deposits made
through the Clearing Process must be delivered through a Participating Party
that has executed a Participant Agreement. The Participant Agreement authorizes
the Distributor to transmit through the Transfer Agent to NSCC, on behalf of the
Participating Party, such trade instructions as are necessary to effect the
Participating Party's creation order. Pursuant to such trade instructions to
NSCC, the Participating Party agrees to deliver the requisite Deposit Securities
and the Cash Component to the Trust, together with such additional information
as may be required by the Distributor. An order to create Select Sector SPDR
Funds in Creation Units through the Clearing Process is deemed received by the
Distributor on the Transmittal Date if (i) such order is received by the
Distributor not later than the Closing Time on such Transmittal Date and (ii)
all other procedures set forth in the Participant Agreement are properly
followed.
PLACEMENT OF CREATION ORDERS OUTSIDE CLEARING PROCESS
Fund Deposits made outside the Clearing Process must be delivered through a DTC
Participant that has executed a Participant Agreement with the Trust, the
Distributor and the Transfer Agent. A DTC Participant who wishes to place an
order creating Creation Units to be effected outside the Clearing Process need
not be a Participating Party, but such orders must state that the DTC
Participant is not using the Clearing Process and that the creation of Creation
Units will instead be effected through a transfer of securities and cash
directly through DTC. The Fund Deposit transfer must be ordered by the DTC
Participant on the Transmittal Date in a timely fashion so as to ensure the
delivery of the requisite number of Deposit Securities through DTC to the
account of the Trust by no later than 11:00 a.m., New York time, of the next
Business Day immediately following the Transmittal Date. All questions as to the
number of Deposit Securities to be delivered, and the validity, form and
eligibility (including time of receipt) for the deposit of any tendered
securities, will be determined by the Trust, whose determination shall be final
and binding. The cash equal to the Cash Component must be transferred directly
to the Custodian through the Federal Reserve wire system in a timely manner so
as to be received by the Custodian no later than 2:00 p.m., New York time, on
the next Business Day immediately following such Transmittal Date. An order to
create Creation Units of Select Sector SPDR Funds outside the Clearing Process
is deemed received by the Distributor on the Transmittal Date if (i) such order
is received by the Distributor
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not later than the Closing Time on such Transmittal Date; and (ii) all other
procedures set forth in the Participant Agreement are properly followed.
However, if the Custodian does not receive both the requisite Deposit Securities
and the Cash Component by 11:00 a.m. and 2:00 p.m., respectively, on the next
Business Day immediately following the Transmittal Date, such order will be
cancelled. Upon written notice to the Distributor, such cancelled order may be
resubmitted the following Business Day using a Fund Deposit as newly constituted
to reflect the then current net asset value of the Fund. The delivery of
Creation Units of Select Sector SPDR Funds so created will occur no later than
the third (3rd) Business Day following the day on which the purchase order is
deemed received by the Distributor.
Creation Units of Select Sector SPDR Funds may be created in advance of receipt
by the Trust of all or a portion of the applicable Deposit Securities as
described below. In these circumstances, the initial deposit will have a value
greater than the net asset value of the Shares on the date the order is placed
in proper form since in addition to available Deposit Securities, cash must be
deposited in an amount equal to the sum of (i) the Cash Component, plus (ii)
115% of the market value of the undelivered Deposit Securities (the "Additional
Cash Deposit"). The order shall be deemed to be received on the Business Day on
which the order is placed provided that the order is placed in proper form prior
to 4:00 p.m., New York time, on such date and federal funds in the appropriate
amount are deposited with the Trust's Custodian by 11:00 a.m., New York time,
the following Business Day. If the order is not placed in proper form by 4:00
p.m. or federal funds in the appropriate amount are not received by 11:00 a.m.
the next Business Day, then the order may be deemed to be rejected and the
investor shall be liable to the Trust for losses, if any, resulting therefrom.
An additional amount of cash shall be required to be deposited with the Trust,
pending delivery of the missing Deposit Securities to the extent necessary to
maintain the Additional Cash Deposit with the Trust in an amount at least equal
to 115% of the daily marked to market value of the missing Deposit Securities.
To the extent that missing Deposit Securities are not received by 1:00 p.m., New
York time, on the third Business Day following the day on which the purchase
order is deemed received by the Distributor or in the event a mark to market
payment is not made within one Business Day following notification by the
Distributor that such a payment is required, the Trust may use the cash on
deposit to purchase the missing Deposit Securities. Authorized Participants will
be liable to the Trust for the costs incurred by the Trust in connection with
any such purchases. These costs will be deemed to include the amount by which
the actual purchase price of the Deposit Securities exceeds the market value of
such Deposit Securities on the day the purchase order was deemed received by the
Distributor plus the brokerage and related transaction costs associated with
such purchases. The Trust will return any unused portion of the Additional Cash
Deposit once all of the missing Deposit Securities have been properly received
by the Custodian or purchased by the Trust and deposited into the Trust. In
addition, a transaction fee of $4,000 will be charged in all cases. The delivery
of Creation Units of Select Sector SPDR Funds so created will occur no later
than the third Business Day following the day on which the purchase order is
deemed received by the Distributor.
ACCEPTANCE OF ORDERS FOR CREATION UNITS
The Trust reserves the absolute right to reject a creation order transmitted to
it by the Distributor in respect of any Select Sector SPDR Fund if (a) the order
is not in proper form; (b) the investor(s), upon obtaining the Shares ordered,
would own 80% or more of the currently outstanding Shares of
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any Select Sector SPDR Fund; (c) the Deposit Securities delivered are not as
disseminated through the facilities of the AMEX for that date by the Custodian,
as described above; (d) acceptance of the Deposit Securities would have certain
adverse tax consequences to the Select Sector SPDR Fund; (e) the acceptance of
the Fund Deposit would, in the opinion of counsel, be unlawful; (f) the
acceptance of the Fund Deposit would otherwise, in the discretion of the Trust
or the Adviser, have an adverse effect on the Trust or the rights of beneficial
owners; or (g) in the event that circumstances outside the control of the Trust,
the Distributor and the Adviser make it for all practical purposes impossible to
process creation orders. Examples of such circumstances include acts of God or
public service or utility problems such as fires, floods, extreme weather
conditions and power outages resulting in telephone, telecopy and computer
failures; market conditions or activities causing trading halts; systems
failures involving computer or other information systems affecting the Trust,
the Adviser, the Distributor, DTC, NSCC or any other participant in the creation
process, and similar extraordinary events. The Distributor shall notify a
prospective creator of a Creation Unit and/or the Authorized Participant acting
on behalf of the creator of a Creation Unit of its rejection of the order of
such person. The Trust, the Transfer Agent, the Custodian and the Distributor
are under no duty, however, to give notification of any defects or
irregularities in the delivery of Fund Deposits nor shall either of them incur
any liability for the failure to give any such notification.
All questions as to the number of shares of each security in the Deposit
Securities and the validity, form, eligibility and acceptance for deposit of any
securities to be delivered shall be determined by the Trust, and the Trust's
determination shall be final and binding.
CREATION TRANSACTION FEE
To compensate the Trust for transfer and other transaction costs involved in
creation transactions, investors will be required to pay a fixed creation
transaction fee of $1,000 payable to the Trust. An additional charge of up to
three (3) times the fixed transaction fee (expressed as a percentage of the
value of the Deposit Securities) may be imposed for (i) creations effected
outside the Clearing Process; and (ii) cash creations (to offset the Trust's
brokerage and other transaction costs associated with using cash to purchase the
requisite Deposit Securities), for a total charge of up to $4,000. Investors are
responsible for the costs of transferring the securities constituting the
Deposit Securities to the account of the Trust.
REDEMPTION
Shares may be redeemed only in Creation Units at their net asset value next
determined after receipt of a redemption request in proper form by the Select
Sector SPDR Fund through the Transfer Agent and only on a Business Day. THE
TRUST WILL NOT REDEEM SHARES IN AMOUNTS LESS THAN CREATION UNITS. Beneficial
Owners must accumulate enough Shares in the secondary market to constitute a
Creation Unit in order to have such Shares redeemed by the Trust. There can be
no assurance, however, that there will be sufficient liquidity in the public
trading market at any time to permit assembly of a Creation Unit. Investors
should expect to incur brokerage and other costs in connection with assembling a
sufficient number of Shares to constitute a redeemable Creation Unit. As of
September 30, 1999, the value of the securities comprising a deposit of
designated equity securities necessary for an in-kind purchase of a Creation
Unit for each
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Select Sector SPDR Fund was as follows: The Basic Industries Select Sector SPDR
Fund - $1,187,000; The Consumer Services Select Sector SPDR Fund - $1,342,500;
The Consumer Staples Select Sector SPDR Fund - $1,131,500; The
Cyclical/Transportation Select Sector SPDR Fund - $1,308,500; The Energy Select
Sector SPDR Fund - $1,373,000; The Financial Select Sector SPDR Fund -
$1,102,000; The Industrial Select Sector SPDR Fund - $1,434,000; The Technology
Select Sector SPDR Fund - $2,061,000; and The Utilities Select Sector SPDR Fund
- - $1,476,000.
With respect to each Select Sector SPDR Fund, the Custodian, through the NSCC,
makes available immediately prior to the opening of business on the AMEX
(currently 9:30 am, New York time) on each Business Day, the Fund Securities
that will be applicable (subject to possible amendment or correction) to
redemption requests received in proper form (as defined below) on that day. Fund
Securities received on redemption may not be identical to Deposit Securities
which are applicable to creations of Creation Units.
Unless cash redemptions are available or specified for a Select Sector SPDR
Fund, the redemption proceeds for a Creation Unit generally consist of Fund
Securities -- as announced by the Custodian on the Business Day of the request
for redemption received in proper form -- plus cash in an amount equal to the
difference between the net asset value of the Shares being redeemed, as next
determined after a receipt of a request in proper form, and the value of the
Fund Securities (the "Cash Redemption Amount"), less a redemption transaction
fee of $1,000. In the event that the Fund Securities have a value greater than
the net asset value of the Shares, a compensating cash payment equal to the
differential is required to be made by or through an Authorized Participant by
the redeeming shareholder.
REDEMPTION TRANSACTION FEE
A redemption transaction fee of $1,000 is paid to the Trust to offset transfer
and other transaction costs that may be incurred in connection with the
redemption of Creation Units. The redemption transaction fee is the same no
matter how many Creation Units are being redeemed pursuant to any one redemption
request. The Select Sector SPDR Funds, subject to approval by the Board of
Trustees, may adjust the fee from time to time based upon actual experience. An
additional charge for cash redemptions or partial cash redemptions (when cash
redemptions are available) for each Select Sector SPDR Fund may be imposed.
Investors who use the services of a broker or other such intermediary in
addition to an Authorized Participant to effect a redemption of a Creation Unit
may be charged a fee for such services.
PLACEMENT OF REDEMPTION ORDERS USING CLEARING PROCESS
Orders to redeem Creation Units of Select Sector SPDR Funds through the Clearing
Process must be delivered through a Participating Party that has executed the
Participant Agreement. An order to redeem Creation Units of Select Sector SPDR
Funds using the Clearing Process is deemed received on the Transmittal Date if
(i) such order is received by the Transfer Agent not later than 4:00 p.m., New
York time, on such Transmittal Date; and (ii) all other procedures set forth in
the Participant Agreement are properly followed; such order will be effected
based on the net asset value of the Fund as next determined. An order to redeem
Creation Units of a Select Sector SPDR Fund using
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the Clearing Process made in proper form but received by the Fund after 4:00
p.m., New York time, will be deemed received on the next Business Day
immediately following the Transmittal Date and will be effected at the net asset
value next determined on such Business Day. The requisite Fund Securities and
the Cash Redemption Amount will be transferred by the third (3rd) NSCC Business
Day following the date on which such request for redemption is deemed received.
PLACEMENT OF REDEMPTION ORDERS OUTSIDE CLEARING PROCESS
Orders to redeem Creation Units of Select Sector SPDR Funds outside the Clearing
Process must be delivered through a DTC Participant that has executed the
Participant Agreement. A DTC Participant who wishes to place an order for
redemption of Creation Units of Select Sector SPDR Funds to be effected outside
the Clearing Process need not be a Participating Party, but such orders must
state that the DTC Participant is not using the Clearing Process and that
redemption of Creation Units will instead be effected through transfer of Shares
directly through DTC. An order to redeem Creation Units of Select Sector SPDR
Funds outside the Clearing Process is deemed received by the Transfer Agent on
the Transmittal Date if (i) such order is received by the Transfer Agent not
later than 4:00 p.m., New York time, on such Transmittal Date; (ii) such order
is accompanied or proceeded by the requisite number of Shares of Select Sector
SPDR Funds specified in such order, which delivery must be made through DTC to
the Custodian no later than 11:00 a.m., New York time, on the next Business Day
following such Transmittal Date (the "DTC Cut-Off-Time"); and (iii) all other
procedures set forth in the Participant Agreement are properly followed.
After the Transfer Agent has deemed an order for redemption outside the Clearing
Process received, the Transfer Agent will initiate procedures to transfer the
requisite Fund Securities which are expected to be delivered within three
Business Days and the Cash Redemption Amount to the Authorized Participant on
behalf of the redeeming Beneficial Owner by the third Business Day following the
Transmittal Date on which such redemption order is deemed received by the
Transfer Agent.
The calculation of the value of the Fund Securities and the Cash Redemption
Amount to be delivered upon redemption will be made by the Custodian according
to the procedures set forth under "DETERMINATION OF NET ASSET VALUE" computed on
the Business Day on which a redemption order is deemed received by the Transfer
Agent. Therefore, if a redemption order in proper form is submitted to the
Transfer Agent by a DTC Participant not later than the Closing Time on the
Transmittal Date, and the requisite number of Shares of the relevant Select
Sector SPDR Fund are delivered to the Custodian prior to the DTC Cut-Off-Time,
then the value of the Fund Securities and the Cash Redemption Amount to be
delivered will be determined by the Custodian on such Transmittal Date. If,
however, a redemption order is submitted to the Distributor by a DTC Participant
not later than the Closing Time on the Transmittal Date but either (1) the
requisite number of Shares of the relevant Select Sector SPDR Fund are not
delivered by the DTC Cut-Off-Time as described above on the next Business Day
following the Transmittal Date or (2) the redemption order is not submitted in
proper form, then the redemption order will not be deemed received as of the
Transmittal Date. In such case, the value of the Fund Securities and the Cash
Redemption Amount to be delivered will be computed on the Business Day that such
order is deemed received by the Transfer Agent, i.e., the Business Day on which
the Shares of the relevant
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Select Sector SPDR Funds are delivered through DTC to the Custodian by the DTC
Cut-Off-Time on such Business Day pursuant to a properly submitted redemption
order.
If it is not possible to effect deliveries of the Fund Securities, the Trust may
in its discretion exercise its option to redeem such Shares in cash, and the
redeeming Beneficial Owner will be required to receive its redemption proceeds
in cash. In addition, an investor may request a redemption in cash which the
Select Sector SPDR Fund may, in its sole discretion, permit. In either case, the
investor will receive a cash payment equal to the net asset value of its Shares
based on the net asset value of Shares of the relevant Select Sector SPDR Fund
next determined after the redemption request is received in proper form (minus a
redemption transaction fee and additional charge for requested cash redemptions
specified above, to offset the Trust's brokerage and other transaction costs
associated with the disposition of Fund Securities). The Select Sector SPDR Fund
may also, in its sole discretion, upon request of a shareholder, provide such
redeemer a portfolio of securities which differs from the exact composition of
the Fund Securities but does not differ in net asset value.
Redemptions of Shares for Fund Securities will be subject to compliance with
applicable federal and state securities laws and each Select Sector SPDR Fund
(whether or not it otherwise permits cash redemptions) reserves the right to
redeem Creation Units for cash to the extent that the Select Sector SPDR Fund
could not lawfully deliver specific Fund Securities upon redemptions or could
not do so without first registering the Fund Securities under such laws. An
Authorized Participant or an investor for which it is acting subject to a legal
restriction with respect to a particular stock included in the Fund Securities
applicable to the redemption of a Creation Unit may be paid an equivalent amount
of cash. The Authorized Participant may request the redeeming Beneficial Owner
of the Shares to complete an order form or to enter into agreements with respect
to such matters as compensating cash payment, beneficial ownership of Shares or
delivery instructions.
The right of redemption may be suspended or the date of payment postponed with
respect to any Select Sector SPDR Fund (1) for any period during which the NYSE
is closed (other than customary weekend and holiday closings); (2) for any
period during which trading on the NYSE is suspended or restricted; (3) for any
period during which an emergency exists as a result of which disposal of the
Shares of the Select Sector SPDR Fund or determination of the Shares' net asset
value is not reasonably practicable; or (4) in such other circumstance as is
permitted by the SEC.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction with the
section in the Prospectus entitled "DETERMINATION OF NET ASSET VALUE."
Net asset value per Share for each Select Sector SPDR Fund of the Trust is
computed by dividing the value of the net assets of such Select Sector SPDR Fund
(i.e., the value of its total assets less total liabilities) by the total number
of Shares outstanding, rounded to the nearest cent. Expenses and fees, including
the management, administration and distribution fees, are accrued daily and
taken into account for purposes of determining net asset value. The net asset
value of each Select Sector SPDR is calculated by the Custodian and determined
at the earlier of the close of the regular
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trading session on the NYSE or (ii) 4:00 p.m. New York time on each day that
such exchange is open.
In computing a Select Sector SPDR Fund's net asset value per Share, the Select
Sector SPDR Fund's securities holdings are valued based on their last quoted
current price. Price information on listed securities is taken from the exchange
where the security is primarily traded. Securities regularly traded in an
over-the-counter market are valued at the latest quoted bid price in such
market. Other portfolio securities and assets for which market quotations are
not readily available are valued based on fair value as determined in good faith
by the Adviser in accordance with procedures adopted by the Board.
DIVIDENDS AND DISTRIBUTIONS
The following information supplements and should be read in conjunction with the
section in the Prospectus entitled "DISTRIBUTIONS."
GENERAL POLICIES
Dividends from net investment income, if any, are declared and paid quarterly by
each Select Sector SPDR Fund. Distributions of net realized securities gains, if
any, generally are declared and paid once a year, but the Trust may make
distributions on a more frequent basis for certain Select Sector SPDR Funds to
improve index tracking or to comply with the distribution requirements of the
Internal Revenue Code, in all events in a manner consistent with the provisions
of the 1940 Act. In addition, the Trust intends to distribute at least annually
amounts representing the full dividend yield on the underlying portfolio
securities of each Fund, net of expenses of such Select Sector SPDR, as if such
Select Sector SPDR Fund owned such underlying portfolio securities for the
entire dividend period. As a result, some portion of each distribution may
result in a return of capital for tax purposes for shareholders.
Dividends and other distributions on Shares are distributed, as described below,
on a pro rata basis to Beneficial Owners of such Shares. Dividend payments are
made through DTC Participants and Indirect Participants to Beneficial Owners
then of record with proceeds received from the Trust.
The Trust makes additional distributions to the extent necessary (i) to
distribute the entire annual taxable income of the Trust, plus any net capital
gains and (ii) to avoid imposition of the excise tax imposed by Section 4982 of
the Internal Revenue Code. Management of the Trust reserves the right to declare
special dividends if, in its reasonable discretion, such action is necessary or
advisable to preserve the status of each Select Sector SPDR Fund as a regulated
investment company ("RIC") or to avoid imposition of income or excise taxes on
undistributed income.
DIVIDEND REINVESTMENT SERVICE
Broker-dealers may make available the DTC book-entry Dividend Reinvestment
Service for use by Beneficial Owners of Select Sector SPDR Funds through DTC
Participants for reinvestment of their dividend distributions. If this service
is available and used, dividend distributions of both
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income and realized gains will be automatically reinvested in additional whole
Shares purchased in the secondary market of the same Select Sector SPDR Fund.
TAXES
The following information also supplements and should be read in conjunction
with the section in the Prospectus entitled "TAX MATTERS."
Each Select Sector SPDR Fund intends to qualify for and to elect treatment as a
separate RIC under Subchapter M of the Internal Revenue Code. To qualify for
treatment as a RIC, a company must annually distribute at least 90% of its net
investment company taxable income (which includes dividends, interest and net
short-term capital gains) and meet several other requirements.
Each Select Sector SPDR Fund is treated as a separate corporation for federal
income tax purposes. Each Fund therefore is considered to be a separate entity
in determining its treatment under the rules for RICs described herein and in
the Prospectus. Losses in one Select Sector SPDR Fund do not offset gains in
another and the requirements (other than certain organizational requirements)
for qualifying RIC status are determined at the Fund level rather than at the
Trust level.
A Select Sector SPDR Fund will be subject to a 4% excise tax on certain
undistributed income if it does not distribute to its shareholders in each
calendar year at least 98% of its ordinary income for the calendar year plus 98%
of its capital gain net income for the twelve months ended September 30 of such
year. Each Select Sector SPDR Fund intends to declare and distribute dividends
and distributions in the amounts and at the times necessary to avoid the
application of this 4% excise tax.
As a result of tax requirements, the Trust on behalf of each Select Sector SPDR
Fund has the right to reject an order to purchase Shares if the purchaser (or
group of purchasers) would, upon obtaining the Shares so ordered, own 80% or
more of the outstanding Shares of a given Select Sector SPDR Fund and if,
pursuant to section 351 of the Internal Revenue Code, the respective Select
Sector SPDR Fund would have a basis in the Deposit Securities different from the
market value of such securities on the date of deposit. The Trust also has the
right to require information necessary to determine beneficial share ownership
for purposes of the 80% determination. See "CREATION AND REDEMPTION OF CREATION
UNITS."
Dividends and interest received by a Select Sector SPDR Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes.
Each Select Sector SPDR Fund will report to shareholders annually the amounts of
dividends received from ordinary income, the amount of distributions received
from capital gains and the portion of dividends which may qualify for the
dividends received deduction.
A loss realized on a sale or exchange of Shares of a Select Sector SPDR Fund may
be disallowed if other Fund Shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a sixty-one (61) day period
beginning thirty (30) days before and ending thirty
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(30) days after the date that the Shares are disposed of. In such a case, the
basis of the Shares acquired will be adjusted to reflect the disallowed loss.
Any loss upon the sale or exchange of Shares held for six (6) months or less
will be treated as long-term capital loss to the extent of any capital gain
dividends received by the shareholders.
Distribution of ordinary income and capital gains may also be subject to state
and local taxes.
Distributions reinvested in additional Shares of a Select Sector SPDR Fund
through the means of the service (see "DIVIDEND REINVESTMENT SERVICE") will
nevertheless be taxable dividends to Beneficial Owners acquiring such additional
Shares to the same extent as if such dividends had been received in cash.
Distributions of ordinary income paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisors concerning the applicability of the United States withholding
tax.
Some shareholders may be subject to a 31% withholding tax on distributions of
ordinary income, capital gains and any cash received on redemption of Creation
Units ("backup withholding"). Generally, shareholders subject to backup
withholding will be those for whom no certified taxpayer identification number
is on file with the Select Sector SPDR Fund or who, to the Fund's knowledge,
have furnished an incorrect number. When establishing an account, an investor
must certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
The foregoing discussion is a summary only and is not intended as a substitute
for careful tax planning. Purchasers of Shares of the Trust should consult their
own tax advisors as to the tax consequences of investing in such shares,
including under state, local and other tax laws. Finally, the foregoing
discussion is based on applicable provisions of the Internal Revenue Code,
regulations, judicial authority and administrative interpretations in effect on
the date hereof. Changes in applicable authority could materially affect the
conclusions discussed above, and such changes often occur.
FEDERAL TAX TREATMENT OF FUTURES AND OPTIONS CONTRACTS
Each Select Sector SPDR Fund is required for federal income tax purposes to mark
to market and recognize as income for each taxable year its net unrealized gains
and losses on certain futures contracts as of the end of the year as well as
those actually realized during the year. Gain or loss from futures and options
contracts on broad-based indexes required to be marked to market will be 60%
long-term and 40% short-term capital gain or loss. Application of this rule may
alter the timing and character of distributions to shareholders. A Select Sector
SPDR Fund may be required to defer the recognition of losses on futures
contracts, option contracts and swaps to the extent of any unrecognized gains on
offsetting positions held by the Select Sector SPDR Fund.
In order for a Select Sector SPDR Fund to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived
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from qualifying income, i.e., dividends, interest, income derived from loans of
securities, gains from the sale of securities or of foreign currencies or other
income derived with respect to the Select Sector SPDR Fund's business of
investing in securities. It is anticipated that any net gain realized from the
closing out of futures or options contracts will be considered gain from the
sale of securities and therefore will be qualifying income for purposes of the
90% requirement.
Each Select Sector SPDR Fund distributes to shareholders annually any net
capital gains which have been recognized for federal income tax purposes
(including unrealized gains at the end of the Select Sector SPDR Fund's fiscal
year) on futures or options transactions. Such distributions are combined with
distributions of capital gains realized on the Select Sector SPDR Fund's other
investments and shareholders are advised on the nature of the distributions.
CAPITAL STOCK AND SHAREHOLDER REPORTS
The Trust currently is comprised of nine Select Sector SPDR Funds. Each Select
Sector SPDR Fund issues shares of beneficial interest, par value $.001 per
Share. The Board of Trustees may designate additional Select Sector SPDR Funds.
Each Share issued by the Trust has a pro rata interest in the assets of the
corresponding Select Sector SPDR Fund. Shares have no preemptive, exchange,
subscription or conversion rights and are freely transferable. Each Share is
entitled to participate equally in dividends and distributions declared by the
Board with respect to the relevant Select Sector SPDR Fund, and in the net
distributable assets of such Select Sector SPDR Fund on liquidation.
Each Share has one vote with respect to matters upon which a shareholder vote is
required consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. Shares of all Select Sector SPDR Funds vote together as
a single class except that if the matter being voted on affects only a
particular Select Sector SPDR Fund it will be voted on only by that Select
Sector SPDR Fund and if a matter affects a particular Select Sector SPDR Fund
differently from other Select Sector SPDR Funds, that Select Sector SPDR Fund
will vote separately on such matter. Under Massachusetts law, the Trust is not
required to hold an annual meeting of shareholders unless required to do so
under the 1940 Act. The policy of the Trust is not to hold an annual meeting of
shareholders unless required to do so under the 1940 Act. All Shares of the
Trust (regardless of the Select Sector SPDR Fund) have noncumulative voting
rights for the election of Trustees. Under Massachusetts law, Trustees of the
Trust may be removed by vote of the shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for obligations of the
Trust. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust, requires that Trust
obligations include such disclaimer, and provides for indemnification and
reimbursement of expenses out of the Trust's property for any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of each Fund's assets and operations, the risk to shareholders of
personal liability is believed to be remote.
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Shareholder inquiries may be made by writing to the Trust, c/o the Distributor,
ALPS Mutual Funds Services, Inc., at 370 17th Street, Suite 3100, Denver, CO
80202.
Absent an applicable exemption or other relief from the SEC or its staff,
officers and directors of the Trust and beneficial owners of 10% of the Shares
of a Select Sector SPDR Fund ("Insiders") would be subject to the insider
reporting, short-swing profit and short sale provisions in Section 16 of the
Exchange Act and the SEC's rules thereunder. The Trust has applied for a "no
action letter" seeking advice from the SEC staff that it will not recommend SEC
enforcement action if Insiders do not file reports required by Section 16(a) of
the Exchange Act and the rules thereunder with respect to transactions in a
substantially similar investment product. There is no assurance that the SEC
staff will issue the requested relief. Insiders should consult with their own
legal counsel concerning their obligations under Section 16 of the Exchange Act,
and should note that the no action letter does not address other requirements
under the Exchange Act, including those imposed by Section 13(d) thereof and the
rules thereunder.
PERFORMANCE AND OTHER INFORMATION
The performance of a Select Sector SPDR Fund may be quoted in advertisements,
sales literature or reports to shareholders in terms of average annual total
return, cumulative total return and yield.
Quotations of average annual total return are expressed in terms of the average
annual rate of return of a hypothetical investment in a Select Sector SPDR Fund
over periods of 1, 5 and 10 years (or the life of a Select Sector SPDR Fund, if
shorter). Such total return figures will reflect the deduction of a proportional
share of such Select Sector SPDR Fund's expenses on an annual basis, and will
assume that all dividends and distributions are reinvested when paid.
Total return is calculated according to the following formula: P(1 + T)(n) = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the 1, 5 or 10 year
period).
Quotations of a cumulative total return will be calculated for any specified
period by assuming a hypothetical investment in a Select Sector SPDR Fund on the
date of the commencement of the period and will assume that all dividends and
distributions are reinvested on ex date. The net increase or decrease in the
value of the investment over the period will be divided by its beginning value
to arrive at cumulative total return. Total return calculated in this manner
will differ from the calculation of average annual total return in that it is
not expressed in terms of an average rate of return.
The yield of a Select Sector SPDR Fund is the net annualized yield based on a
specified 30-day (or one month) period assuming a semiannual compounding of
income. Included in net investment income is the amortization of market premium
or accretion of market and original issue discount on bonds. Yield is calculated
by dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula: YIELD = (a-b) divided by 2[(cd + 1)(6)-1] (where a =
dividends and interest earned
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during the period, b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends, and d = the maximum offering price per share on
the last day of the period).
Quotations of cumulative total return, average annual total return or yield
reflect only the performance of a hypothetical investment in a Select Sector
SPDR Fund during the particular time period on which the calculations are based.
Such quotations for a Select Sector SPDR Fund will vary based on changes in
market conditions and the level of such Select Sector SPDR Fund's expenses, and
no reported performance figure should be considered an indication of performance
which may be expected in the future.
The cumulative and average total returns and yields do not take into account
federal or state income taxes which may be payable by shareholders; total
returns and yields would, of course, be lower if such charges were taken into
account.
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods for calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of the Funds with performance quoted with respect to other
investment companies or types of investments.
From time to time, in advertising and marketing literature, the Funds'
performance may be compared to the performance of broad groups of open-end and
closed-end investment companies with similar investment goals, as tracked by
independent organizations such as Investment Company Data, Inc., Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar, Inc.,
Value Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, the Funds will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk.
Information may be provided to investors regarding capital gains distributions
by one or more Select Sector SPDR Funds. Comparisons between the Select Sector
SPDR Funds and other investment vehicles such as conventional mutual funds may
be made regarding such capital gains distributions, as well as relative tax
efficiencies between the Funds and such other investment vehicles (e.g.,
realization of capital gains or losses to a Fund and to such other investment
vehicles in connection with redemption of their respective securities).
Investors may be informed that, while no unequivocal statement can be made as to
the net tax impact on a mutual fund resulting from the purchases and sales of
its portfolio stocks over a period of time, conventional mutual funds that have
accumulated substantial unrealized capital gains, if they experience net
redemptions and do not have sufficient available cash, may be required to sell
appreciated securities and make taxable capital gains distributions that are
generated by changes in such fund's portfolio. In contrast to conventional
mutual funds where redemption transactions that effect an adverse tax impact on
taxable shareholders because of the need to sell portfolio securities which, in
turn, may generate taxable gain, the in-kind redemption mechanism of the Select
Sector SPDR Funds generally will not lead to a tax event for ongoing
shareholders. Since shareholders are
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generally required to pay tax on capital gains distributions, the smaller the
amount of such distributions, the less taxes that are payable currently. To the
extent that a Select Sector SPDR Fund is not required to recognize capital
gains, a shareholder of such Fund is able, in effect, to defer tax on such gains
until he sells or otherwise disposes of his shares. If such holder retains his
shares until his death, under current law the tax basis of such shares would be
adjusted to their then fair market value.
In addition, in connection with the communication of the performance of the
Funds to current or prospective shareholders, the Trust also may compare those
figures to the performance of certain unmanaged indexes which may assume the
reinvestment of dividends or interest but generally do not reflect deductions
for administrative and management costs. Examples of such indexes include, but
are not limited to the following: Dow Jones Industrial Average; Consumer Price
Index; Standard & Poor's 500 Composite Stock Price Index (S&P 500); Russell 1000
& NASDAQ non-financial 100 and their subsidiary sector indexes.
Performance of an index is historical and does not represent performance of the
Trust, and is not a guarantee of future results.
In addition, information may be presented to current or prospective shareholders
regarding the purchase of Select Sector SPDR Funds in the secondary market, such
as margin requirements, types of orders that may be entered and information
concerning short sales.
Evaluation of each Fund's performance or other relevant statistical information
made by independent sources may also be used in advertisements and sales
literature concerning the Trust, including reprints of, or selections from,
editorials or articles about the Trust. Sources for Trust performance
information and articles about the Trust include, but are not limited to, the
following: American Association of Individual Investors' Journal, a monthly
publication of the AAII that includes articles on investment analysis
techniques; Barron's, a Dow Jones and Company, Inc. business and financial
weekly that periodically reviews investment company performance data; Business
Week, a national business weekly that periodically reports the performance
rankings of investment companies; CDA Investment Technologies, an organization
that provides performance and ranking information through examining the dollar
results of hypothetical mutual fund investments and comparing these results
against appropriate indexes; Forbes, a national business publication that from
time to time reports the performance of specific investment companies; Fortune,
a national business publication that periodically rates the performance of a
variety of investment companies; The Frank Russell Company, a West-Coast
investment management firm that periodically evaluates international stock
markets and compares foreign equity market performance to U.S. stock market
performance; Ibbotson Associates, Inc., a company specializing in investment
research and data; Investment Company Data, Inc., an independent organization
that provides performance ranking information for broad classes of mutual funds;
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news; Kiplinger's Personal Finance Magazine, a monthly investment
advisory publication that periodically features the performance of a variety of
securities; Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis,
a weekly publication of industry-wide mutual fund averages by type of fund;
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole; The New York Times, a nationally
distributed newspaper that regularly covers financial
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news; Smart Money, a national personal finance magazine published monthly by Dow
Jones & Company, Inc. and The Hearst Corporation that focuses on ideas for
investing, spending and saving; Value Line Mutual Fund Survey, an independent
publication that provides biweekly performance and other information on mutual
funds; The Wall Street Journal, a Dow Jones and Company, Inc. newspaper that
regularly covers financial news; Wiesenberger Investment Companies Services, an
annual compendium of information about mutual funds and other investment
companies, including comparative data on funds' backgrounds, management
policies, salient features, management results, income and dividend records and
price ranges; Worth, a national publication distributed ten times per year by
Capital Publishing Company that focuses on personal finance.
COUNSEL AND INDEPENDENT AUDITORS
Mayer Brown & Platt, 1675 Broadway, New York, New York 10019.
PricewaterhouseCoopers LLP serves as the independent auditors of the Trust.
FINANCIAL STATEMENTS
The Reports of Independent Accountants, financial highlights, and financial
statements in respect of the Funds included in the Trust's Annual Report to
Shareholders for the fiscal year ended September 30, 1999 on Form N-30D under
the Investment Company Act, filed electronically on [DATE] (File No. [NUMBER
WHEN AVAILABLE]) are incorporated by reference into this Statement of Additional
Information.
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PART C
OTHER INFORMATION
ITEM 23. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Part B: Statements of Assets and Liabilities as of December 14, 1998
(b) EXHIBITS
(1)(a) Declaration of Trust dated June 9, 1998 and filed on June 26, 1998.
(b) Amendment No.1 to the Declaration of Trust dated October 8, 1998 and
filed on October 16, 1998
(c) Amended and Restated Declaration of Trust dated October 23, 1998 and
filed November 17, 1998.
(2) By-Laws of the Trust dated June 10, 1998 and filed November 17, 1998.
(3) Not applicable.
(4) Global certificate evidencing shares of the Beneficial Interest, $.001
par value, of each Select Sector SPDR Fund filed November 17, 1998.
(5) Investment Advisory Agreement between the Trust and State Street Bank
and Trust Company filed November 17, 1998.
(6)(a) Distribution Agreement between the Trust and ALPS Mutual Funds Services,
Inc. filed November 17, 1998.
(b) Participant Agreement filed on November 17, 1998.
(c) Investor Services Agreement filed on November 17, 1998.
(d) Soliciting Dealer Agreement filed on November 17, 1998.
(7) Not applicable.
(8) Custodian Agreement between the Trust and State Street Bank and Trust
Company filed on November 17, 1998.
(9)(a) Administration Agreement between the Trust and State Street Bank and
Trust Company filed on November 17, 1998.
(b) Transfer Agency Services Agreement between the Trust and State Street
Bank and Trust Company filed on November 17, 1998.
(c) Sub-License Agreement between the Trust, Merrill Lynch and Standard &
Poor's filed on December 15, 1998.
(d) DTC Letter of Representation filed on November 17, 1998.
(10) Opinion of Gordon Altman Butowsky Weitzen Shalov & Wein filed on
November 17, 1998.
(11) Consent of Independent Accountants to be filed by amendment.
(12) Not applicable.
(13) Subscription Agreement(s) between the Trust and ALPS Mutual Funds
Services, Inc. filed on December 15, 1998.
(14) Not applicable.
(15) 12b-1 Plan filed on November 17, 1998.
(16) Not applicable.
(17) Not applicable.
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(18) Not applicable.
Other Powers of Attorney filed November 17, 1998.
* Previously filed.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 25. INDEMNIFICATION
Pursuant to Section 5.3 of the Registrant's Amended and Restated Declaration of
Trust and under Section 4.8 of the Registrant's By-Laws, the Trust will
indemnify any person who is, or has been, a Trustee, officer, employee or agent
of the Trust against all expenses reasonably incurred or paid by him/her in
connection with any claim, action, suit or proceeding in which he/she becomes
involved as a party or otherwise by virtue of his/her being or having been a
Trustee, officer, employee or agent and against amounts paid or incurred by
him/her in the settlement thereof, if he/she acted in good faith and in a manner
he/she reasonably believed to be in or not opposed to the best interests of the
Trust, and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his/her conduct was unlawful. In addition, indemnification is
permitted only if it is determined that the actions in question did not render
him/her liable by reason of willful misfeasance, bad faith or gross negligence
in the performance of his/her duties or by reason of reckless disregard of
his/her obligations and duties to the Registrant. The Registrant may also
advance money for litigation expenses provided that Trustees, officers,
employees and/or agents give their undertakings to repay the Registrant unless
their conduct is later determined to permit indemnification. Pursuant to Section
5.2 of the Registrant's Amended and Restated Declaration of Trust, no Trustee,
officer, employee or agent of the Registrant shall be liable for any action or
failure to act, except in the case of willful misfeasance, bad faith or gross
negligence or reckless disregard of duties to the Registrant. Pursuant to
paragraph 9 of the Registrant's Investment Advisory Agreement, the Adviser shall
not be liable for any action or failure to act, except in the case of willful
misfeasance, bad faith or gross negligence or reckless disregard of duties to
the Registrant. Insofar as indemnification for liability arising under the
Securities Act of1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions of Rule 484 under the Act,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue. The Registrant hereby
undertakes that it will apply the indemnification provision of its by-laws in a
manner consistent with Release 11330 of the Securities and Exchange Commission
under the Investment Company Act of 1940, so long as the interpretation of
Sections 17(h) and
<PAGE> 79
17(i) of such Act remains in effect. The Registrant maintains insurance on
behalf of any person who is or was a Trustee, officer, employee or agent of
Registrant, or who is or was serving at the request of Registrant as a trustee,
director, officer, employee or agent of another trust or corporation, against
any liability asserted against him/her and incurred by him/her or arising out of
his/her position. However, in no event will Registrant maintain insurance to
indemnify any such person for any act for which Registrant itself is not
permitted to indemnify him/her.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See "MANAGEMENT OF THE TRUST" in the Statement of Additional Information.
Neither the investment adviser of the Registrant nor any director, officer or
partner of the investment adviser is, or has been, at any time during the past
two years, engaged for his own account or in the capacity of director, officer,
employee, partner or trustee, in any other business, profession, vocation or
employment of a substantial nature.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) ALPS Mutual Funds Services, Inc. is the Trust's principal
underwriter/distributor. ALPS also acts as a principal
underwriter/distributor for various other unrelated investment companies.
(b) The following is a list of the executive officers and directors of ALPS
Mutual Funds Services, Inc.:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
POSITIONS
NAME AND PRINCIPAL POSITIONS AND OFFICES WITH AND OFFICES
BUSINESS ADDRESS* UNDERWRITER WITH REGISTRANT
- --------------------------------------------------------------------------------
<S> <C> <C>
W. Robert Alexander Chairman and Chief Executive Officer None
- --------------------------------------------------------------------------------
Arthur J. L. Lucey President and Secretary None
- --------------------------------------------------------------------------------
Thomas A. Carter Vice President and Chief Financial None
Officer
- --------------------------------------------------------------------------------
Edmund J. Burke Executive Vice President None
- --------------------------------------------------------------------------------
James V. Hyatt General Counsel None
- --------------------------------------------------------------------------------
Jeremy O. May Vice President None
- --------------------------------------------------------------------------------
William N. Paston Vice President None
- --------------------------------------------------------------------------------
John S. Hannon, Jr. Director None
- --------------------------------------------------------------------------------
Rick A. Pederson Director None
- --------------------------------------------------------------------------------
Chris Woessner Director None
- --------------------------------------------------------------------------------
</TABLE>
* All addresses are 370 Seventeenth Street, Suite 3100, Denver, Colorado 80202.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORD
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder will be maintained at the offices
of the Administrator, State Street Bank & Trust Company, 2 Avenue de Lafayette,
Boston, Massachusetts 02111.
<PAGE> 80
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
No applicable.
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment to Registrant's Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York on the 30th day of November 1999.
THE SELECT SECTOR SPDR(R) TRUST
By: Howard H. Fairweather*
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to Registrant's Registration Statement has been signed below by the
following person in the capacities and on the date indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
1. Principal Executive Officer
Howard H. Fairweather* President and Secretary November 30, 1999
- --------------------------------------------------------------------------------------------
2. Principal Financial Officer November 30, 1999
E. Davis Hawkes, Jr.* Treasurer and Assistant Secretary November 30, 1999
- --------------------------------------------------------------------------------------------
3. Majority of Trustees November 30, 1999
- --------------------------------------------------------------------------------------------
John W. English* Trustee November 30, 1999
- --------------------------------------------------------------------------------------------
George R. Gaspari* Trustee November 30, 1999
- --------------------------------------------------------------------------------------------
Burton G. Malkiel* Trustee November 30, 1999
- --------------------------------------------------------------------------------------------
Ernest J. Scalberg* Trustee November 30, 1999
- --------------------------------------------------------------------------------------------
R. Charles Tschampion* Trustee November 30, 1999
- --------------------------------------------------------------------------------------------
Cheryl Burgermeister* Trustee November 30, 1999
- --------------------------------------------------------------------------------------------
Stuart M. Strauss, Esq. Attorney-in-Fact November 30, 1999
- --------------------------------------------------------------------------------------------
*By: /s/ Stuart M. Strauss
</TABLE>
Power of Attorney Dated: October 26, 1998
