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PROSPECTUS
STANDARD & POOR'S MIDCAP 400 DEPOSITARY RECEIPTS (TM) ("MIDCAP SPDRS") (TM)
MIDCAP SPDR TRUST, SERIES 1
A UNIT INVESTMENT TRUST
----------------------
This Trust (the "Trust") was formed by PDR Services Corporation, a Delaware
corporation (the "Sponsor") and a wholly-owned subsidiary of the American
Stock Exchange, Inc. (the "Exchange"), to provide investors with the
opportunity to purchase units of beneficial interest in the Trust representing
proportionate undivided interests in the portfolio of securities held by the
Trust (the "Securities") consisting of substantially all of the common stocks,
in substantially the same weighting, as the component common stocks of the
Standard & Poor's MidCap 400 Index (the "S&P MidCap 400 Index").* While the
investment objective of the Trust is to provide investment results that
generally correspond to the price and yield performance of the S&P MidCap 400
Index, there is no assurance that this investment objective can be achieved.
Each unit of fractional undivided interest in the Trust is referred to as a
Standard & Poor's MidCap 400 Depositary Receipt ("MidCap SPDR"). The value of
the Securities and, consequently, the value of MidCap SPDRs, will fluctuate.
The minimum number of MidCap SPDRs that may be created or redeemed at any one
time as described below is 25,000, which aggregation is referred to herein as
a "Creation Unit".
MidCap SPDRs are listed on the Exchange. MidCap SPDRs are traded in the
secondary market on a per-MidCap SPDR basis, and need not be traded in
Creation Unit size aggregations.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
----------------------
Prospectus dated January 28, 1998
MIDCAP
SPDR(TM)
[LOGO]
Investors are advised to read and retain this Prospectus for future reference.
----------------------
* "Standard & Poor's MidCap 400 Index",(TM) "S&P MidCap 400 Index",(TM)
"Standard & Poor's MidCap 400 Depositary Receipts"(TM) and "MidCap
SPDRs"(TM) are trademarks of The McGraw-Hill Companies, Inc. PDR Services
Corporation and the American Stock Exchange, Inc. are permitted to use these
trademarks pursuant to a License Agreement with Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. The Trust, however, is not
sponsored by or affiliated with Standard & Poor's or The McGraw-Hill
Companies, Inc.
COPYRIGHT (C) 1994 BY PDR SERVICES CORPORATION
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ESSENTIAL INFORMATION AS OF SEPTEMBER 30, 1997*
Number of MidCap SPDRs: 7,683,489
Fractional Undivided Interest in
Trust Represented by each MidCap
SPDR: 1/7,683,489th
Record Date: Quarterly, on the second (2nd)
Business Day after the third Friday
in each of March, June, September and
December**.
Dividend Payment Dates: Quarterly, on the last Business Day
of April, July, October and
January**.
Trustee's Annual Fee: From 10/100 of one percent to 14/100
of one percent, based on net asset
value of the Trust, as the same may
be reduced by certain amounts, plus
the Transaction Fee***.
Estimated Ordinary Operating Expenses
of the Trust:
30/100 of one percent (inclusive of
Trustee's annual fee)***
Net Asset Value per MidCap SPDR
(based on the value of the
securities, other net assets of the
Trust and number of MidCap SPDR's
outstanding):
$64.65
Evaluation Time: Closing time of the regular trading
session on the New York Stock
Exchange, Inc. (ordinarily 4:00 p.m.
New York time).
Licensor: Standard & Poor's, a division of The
McGraw-Hill Companies, Inc.
Mandatory Termination Date:
The first to occur of (i) April 27,
2120 or (ii) the date 20 years after
the death of the last survivor of
eleven persons named in
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the Agreement, the oldest of whom was
born in 1990 and the youngest of whom
was born in 1993.
Discretionary Termination: Trust may be terminated if at any
time after six months following and
prior to three years following the
Initial Date of Deposit the value of
the securities held by the Trust is
less than $25,000,000 or if at any
time after three years following the
Initial Date of Deposit such value is
less than $100,000,000, as such
amount shall be adjusted for
inflation****.
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* The Trust Agreement became effective and the initial deposit was made on
April 27, 1995 (the "Initial Date of Deposit").
** See "Administration of the Trust--Distributions to Beneficial Owners".
*** See "Expenses of the Trust".
**** The Trust may also be terminated under other circumstances. See
"Administration of the Trust--Termination".
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus.
OBJECTIVES
The Sponsor formed the Trust to provide investors with the opportunity to
purchase units of beneficial interest in the Trust representing proportionate
undivided interests in the Securities which consist of substantially all of the
common stocks, in substantially the same weighting, as the component common
stocks of the S&P MidCap 400 Index, in the form of a security that closely
tracks the S&P MidCap 400 Index and that may be traded as a share of common
stock. The investment objective of the Trust is to provide investment results
that generally correspond to the price and yield performance of the component
common stocks of the S&P MidCap 400 Index (the "Index Securities"). There can
be no assurance that this investment objective will be met fully. For example,
it will not be possible for the Trust to replicate and maintain exactly the
composition and relative weightings of the Index Securities. It is also
possible that, from time to time, the Trust will be unable to purchase all of
the Index Securities. In certain circumstances, the Trust may be required to
make distributions in excess of the yield performance of the Index Securities
(see "Tax Status of the Trust"). The value of the Securities and, consequently,
the value of MidCap SPDRs, is subject to changes in the value of common stocks
generally and to other factors. Further, the payment of dividends and
maintenance of capital are subject to a number of conditions, including the
financial condition of the issuers of the Securities (see "Special
Considerations and Risk Factors").
THE TRUST
The Trust is a unit investment trust organized under the laws of the State of
New York. The Trust is governed by a trust agreement (the "Trust Agreement")
between The Bank of New York, a corporation organized under the laws of New
York with powers of a trust company under the New York Banking Law (the
"Trustee"), and the Sponsor dated and executed as of April 27, 1995.
DISTRIBUTOR
The Distributor for MidCap SPDRs is ALPS Mutual Funds Services, Inc., a
registered broker-dealer, and a member of the National Association of
Securities Dealers, Inc. (see "Underwriting").
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PORTFOLIO DEPOSITS
All orders to create MidCap SPDRs in Creation Unit size aggregations must be
placed with the Distributor (see "Underwriting" and "Procedure for Creation of
Creation Units"). To be eligible to place orders with the Distributor to create
Creation Unit size aggregations of MidCap SPDRs, an entity or person either
must be (1) a Participating Party, as hereinafter defined or (2) a Depository
Trust Company Participant (see "Book-Entry Ownership of MidCap SPDRs"), and in
each case must have executed a Participant Agreement, as hereinafter defined
(see "The Trust--Procedures for Creation of Creation Units" and "The Trust--
Placement of Creation Orders Using MidCap SPDR Clearing Process"). As used
herein, the term "Participating Party" means a broker-dealer or other
participant in the MidCap SPDR Clearing Process, as hereinafter defined,
through the Continuous Net Settlement ("CNS") System of the National Securities
Clearing Corporation ("NSCC"), a clearing agency that is registered with the
Securities and Exchange Commission (the "Commission"). Upon acceptance of an
order to create MidCap SPDRS, the Distributor will transmit such order to the
Trustee and instruct the Trustee to initiate the book entry movement of the
appropriate number of MidCap SPDRs to the account of the entity placing the
order. Payment for orders to create MidCap SPDRs will be made by deposits with
the Trustee of a portfolio of securities that is substantially similar in
composition and weighting to the Index Securities (see "The Trust--Creation of
MidCap SPDRs"), together with a cash payment in an amount which shall be equal
to the Dividend Equivalent Payment (as hereinafter defined), plus or minus, as
the case may be, the Balancing Amount (as hereinafter defined--see "The
Portfolio--Adjustments to the Portfolio Deposit"). The "Dividend Equivalent
Payment" enables the Trustee to make a distribution of dividends on the next
Dividend Payment Date (as hereinafter defined), and is an amount equal, on a
per Creation Unit basis, to the dividends on all the Securities with ex-
dividend dates within the accumulation period, net of expenses and accrued
liabilities for such period (including, without limitation, (x) taxes or other
governmental charges against the Trust not previously deducted, if any, and (y)
accrued fees of the Trustee and other expenses of the Trust (including legal
and auditing expenses) and other expenses not previously deducted (see
"Expenses of the Trust")), as if all of the Securities had been held for the
entire accumulation period for such distribution. For federal income tax
purposes, a portion of dividend distributions may result in a return of capital
to Beneficial Owners (as hereinafter defined) of MidCap SPDRs (see "Tax Status
of the Trust").
The Dividend Equivalent Payment and the Balancing Amount are collectively
referred to herein as the "Cash Component" and the deposit of such
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a portfolio of securities and the Cash Component are collectively referred to
herein as a "Portfolio Deposit". In connection with the creation of MidCap
SPDRs, in the event that the Trustee determines, in its discretion, that one or
more Index Securities are likely to be unavailable for delivery or available in
insufficient quantity for delivery to the Trust upon the creation of MidCap
SPDRs in Creation Unit size aggregations, then the Trustee shall have the right
in its discretion to permit the cash equivalent value of such Index Security or
Index Securities to be included in the Portfolio Deposit as a part of the Cash
Component in lieu of the inclusion of such Index Security or Index Securities
in the securities portion of the Portfolio Deposit (see "The Trust--Creation of
Creation Units"). If an Index Security is not eligible for transfer through the
MidCap SPDR Clearing Process, the Trustee shall include the cash equivalent
value of such Index Security as a part of the Cash Component to be received
from the creator in the manner discussed in the preceding sentence. Such cash
equivalent value will be based on the market value of such Index Security or
Index Securities as of the Evaluation Time on the date such creation order is
deemed received by the Distributor (see "Procedures for Creation of Creation
Units", "Placement of Creation Orders Using MidCap SPDR Clearing Process" and
"Placement of Creation Orders Outside MidCap SPDR Clearing Process".) As of the
Initial Date of Deposit, one of the Index Securities, the common stock issued
by Overseas Shipholding Group Inc. ("OSG"), is not eligible for transfer
through the MidCap SPDR Clearing Process. Therefore, creators will provide the
Trustee with the cash equivalent value of OSG stock as a part of the Cash
Component in lieu of including OSG stock in the securities portion of a
Portfolio Deposit. Pursuant to the Trust Agreement, the Trustee will use such
cash to purchase the appropriate number of OSG shares and will hold such
securities in physical form. If OSG stock subsequently becomes eligible for
transfer through the MidCap SPDR Clearing Process, the Trustee shall notify the
Distributor and DTC. Thereafter, OSG stock would be included in the Portfolio
Deposit and would be treated in the same manner as other Index Securities.
In connection with the creation of MidCap SPDRs, if a creator is restricted
by regulation or otherwise from investing or engaging in a transaction in one
or more Index Securities, the Trustee shall have the right, in its discretion,
to permit the cash equivalent value of such Index Security or Index Securities
to be included in the Portfolio Deposit based on the market value of such Index
Security or Index Securities as of the Evaluation Time on the date such
creation order is deemed received by the Distributor (see "Placement of
Creation Orders Outside MidCap SPDR Clearing Process") as part of the Cash
Component in lieu of the inclusion of such Index Security or Index Securities
in the securities
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portion of the Portfolio Deposit. In such case such creator will pay the
Trustee the standard Transaction Fee, plus an additional amount per Creation
Unit not to exceed three (3) times the Transaction Fee applicable for one
Creation Unit, as described below.
Investors should be aware that when the Trustee receives a Cash Component, a
portion of which is to be used to purchase certain Index Securities under
certain circumstances discussed above and under "The Trust--Creation of
Creation Units," the Trust will bear brokerage commissions incurred in
connection with the purchase of such Index Securities as well as the risk of
any market price increase or decrease that may occur with regard to such Index
Security until the cash is used by the Trustee to purchase such Index Security
(see "Special Considerations and Risk Factors--General").
An entity or person placing creation orders with the Distributor must deposit
Portfolio Deposits either (i) through the CNS clearing processes of NSCC, as
such processes have been enhanced to effect creations and redemptions of
Creation Unit size aggregations of MidCap SPDRs, such processes being referred
to herein as the "MidCap SPDR Clearing Process", or (ii) with the Trustee
outside the MidCap SPDR Clearing Process (i.e., through the facilities of DTC).
TRANSACTION FEE
A transaction fee is payable to the Trustee in connection with each creation
and each redemption made through the MidCap SPDR Clearing Process of Creation
Unit size aggregations of MidCap SPDRs (the "Transaction Fee") subject to the
changes, modifications or waivers, if any, described below. Such Transaction
Fee is non-refundable, regardless of the net asset value of the Trust.
Until further notice is given as described below, the Transaction Fee charged
in connection with each creation or redemption of Creation Units through the
MidCap SPDR Clearing Process is $3,000 per Participating Party per day,
regardless of the number of Creation Units created or redeemed on such day (see
"Procedures for Creation of Creation Units" and "Procedure for Redemption of
MidCap SPDRs"). This $3,000 charge is subject to a limit not to exceed 20/100
of one percent (20 basis points) of the value of one Creation Unit at the time
of creation (the "20 Basis Point Limit")*. No modifications to, or reductions,
discounts or waivers of, the Transaction Fee charged in
- ------------
* The amount of the Transaction Fee currently in effect will be available from
the Trustee.
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connection with the creation or redemption of Creation Units are scheduled or
currently contemplated by the Sponsor.
If Creation Units are created or redeemed outside the MidCap SPDR Clearing
Process, an additional amount not to exceed three (3) times the Transaction Fee
applicable for one Creation Unit will be charged to the creator or redeemer per
Creation Unit per day. Under the current schedule, therefore, the total fee
charged in connection with the creation or redemption of one Creation Unit
outside the MidCap SPDR Clearing Process would be $3,000 (the Transaction Fee
for the creation or redemption of one Creation Unit) plus an additional amount
up to $9,000 ((3) times $3,000) for a total not to exceed $12,000.
From time to time and for such periods as the Sponsor, in its sole
discretion, may determine, the Transaction Fee (as well as any additional
amounts charged in connection with creations and/or redemptions made outside
the MidCap SPDR Clearing Process) may be increased, decreased, otherwise
modified or waived in its entirety for certain lot-size creations and/or
redemptions of MidCap SPDRs, or for creations and/or redemptions made under
certain specified circumstances, without consent of Beneficial Owners, subject
to certain conditions (see "The Trust--Creation of Creation Units" and
"Procedures for Redemption of MidCap SPDRs"). The Sponsor also reserves the
right, from time to time, to vary the lot-size of the creations and/or
redemptions of MidCap SPDRs subject to such an increase or decrease and/or
entitled to such waiver of the Transaction Fee. Any change so made will not
cause the amount of the Transaction Fee to exceed the 20 Basis Point Limit at
the time of a creation, or redemption, as the case may be. Such changes and
variations will be effected by an amendment to the current Trust prospectus.
The amount of the new Transaction Fee in effect at any given time will be
available from the Trustee.
SIZE OF CREATION UNIT AGGREGATIONS OF MIDCAP SPDRS
MidCap SPDRs may be created or redeemed only in Creation Unit size
aggregations of 25,000 MidCap SPDRs, or in multiples thereof (e.g., 50,000,
75,000, 100,000 MidCap SPDRs), and in no event will fractional Creation Units
be created or redeemed.* The Sponsor reserves the right to direct the Trustee
to declare a split or reverse split in the number of MidCap SPDRs outstanding
and
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* See "Dividend Reinvestment Service", however, for a description of the sole
case in which MidCap SPDRs may be created by the Trustee in less than a
Creation Unit size aggregation of 25,000 MidCap SPDRs.
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a corresponding change in the number of MidCap SPDRs constituting a Creation
Unit in the event that the per MidCap SPDR price in the secondary market
changes to an amount that the Sponsor believes falls outside a desirable retail
range. For example, if a 2-for-1 split were declared, the number of MidCap
SPDRs in a Creation Unit size aggregation of MidCap SPDRs would double (e.g.,
from 25,000 to 50,000 MidCap SPDRs per Creation Unit).
PORTFOLIO ADJUSTMENTS
To maintain the correspondence between the composition and weighting of
Securities and that of the Index Securities, the composition and weightings of
the Securities are adjusted from time to time to conform to periodic changes in
the identity and/or relative weightings of the Index Securities made by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc., ("Standard &
Poor's" or "S&P"). The Trustee aggregates certain of these adjustments and
makes conforming changes to the Trust's portfolio at least monthly; adjustments
are made more frequently, however, in the case of changes to the S&P MidCap 400
Index that are significant (see "The Portfolio--Adjustments to the Portfolio").
The composition and weightings of the securities portion of a Portfolio Deposit
are also adjusted to conform to changes in the S&P MidCap 400 Index. Any change
in the identity or weighting of an Index Security will result in a
corresponding adjustment to the prescribed Portfolio Deposit effective on the
Business Day (a "Business Day" being any day that the New York Stock Exchange
is open for business) following the third (3rd) day on which the change to the
S&P MidCap 400 Index takes effect after the close of the market (see "The
Portfolio--Adjustments to the Portfolio Deposit").
BOOK ENTRY OWNERSHIP OF MIDCAP SPDRS
The Depository Trust Company, New York, New York, a limited purpose trust
company organized under the laws of the State of New York (the "Depository") or
its nominee will be the record or registered owner of all outstanding MidCap
SPDRs. Beneficial ownership of MidCap SPDRs will be shown on the records of the
Depository or its participants. Certificates will not be issued for MidCap
SPDRs, whether in Creation Unit size aggregations or otherwise (see "The
Trust--Book-Entry-Only System").
EXPENSES
The expenses incident to the organization of the Trust and its registration
as an investment company were capitalized and are being amortized on a straight
line basis over five years following the Initial Date of Deposit (see
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"Expenses of the Trust"). The Trustee's fees are set forth generally in the
Summary of Essential Information and more specifically in "Expenses of the
Trust" below. Other expenses of the Trust are also described more fully in
"Expenses of the Trust".
FEDERAL INCOME TAX CONSIDERATIONS
Effective September 30, 1997, the Trust changed from a calendar year ending
on each December 31 to a fiscal year ending each September 30. For the period
ended September 30, 1997, the Trust believes that it qualified for tax
treatment as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). The Trust intends to
continue to so qualify and to distribute annually its entire investment company
taxable income and net capital gain. Distributions that are taxable as ordinary
income to Beneficial Owners generally are expected to constitute dividend
income for federal income tax purposes and to be eligible for the dividends-
received deduction available to many corporations to the extent of qualifying
dividend income received by the Trust (see "Tax Status of the Trust"). The
Trust's regular quarterly distributions are based on the dividend performance
of the Securities held during such quarterly distribution period rather than
the actual taxable income of the Trust. As a result, a portion of the
distributions of the Trust may be treated as a return of capital or a capital
gain dividend for federal income tax purposes or the Trust may be required to
make additional distributions to maintain its status as a regulated investment
company or to avoid imposition of income or excise taxes on undistributed
income (see "Tax Status of the Trust" and "Administration of the Trust--
Distributions to Beneficial Owners").
ERISA CONSIDERATIONS
In considering the advisability of an investment in MidCap SPDRs, fiduciaries
of pension, profit sharing or other tax-qualified retirement plans (including
Keogh Plans) and welfare plans (collectively, "Plans") subject to the fiduciary
responsibility requirements of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), should consider whether an investment in MidCap
SPDRs is permitted by the documents and instruments governing the Plan and
whether the investment satisfies the diversification requirements of ERISA.
Individual retirement account ("IRA") investors should consider that an IRA may
make only such investments as are authorized by its governing instruments.
The fiduciary standards and prohibited transaction rules of ERISA and the
Code will not apply to transactions involving the Trust's assets while MidCap
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SPDRs are held by a Plan or IRA. Unlike many other investment vehicles offered
to Plans and IRAs, the Trust's assets will not be treated as "plan assets" of
the Plans or IRAs which acquire or purchase MidCap SPDRs. Although ERISA
imposes certain duties on Plan fiduciaries and ERISA and/or Section 4975 of the
Code prohibit certain transactions involving "plan assets" between Plans or
IRAs and their fiduciaries or certain related persons, those rules will not
apply to transactions involving the Trust's assets because MidCap SPDRs
represent an interest in the Trust, and the Trust is registered as an
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"). ERISA, the Code and U.S. Department of Labor regulations contain
unconditional language exempting the assets of registered investment companies
from treatment as "plan assets" in applying the fiduciary and prohibited
transaction provisions of ERISA and the Code.
RESTRICTIONS ON PURCHASES BY INVESTMENT COMPANIES
The acquisition of MidCap SPDRs by registered investment companies is subject
to the restrictions set forth in section 12(d)(1) of the 1940 Act.
INVESTMENT MANAGEMENT
The Trust holds the Securities and cash and is not actively "managed" by
traditional methods, which typically involve effecting changes in the
Securities on the basis of judgments made relating to economic, financial and
market considerations. The composition and relative weightings of the
Securities are, however, adjusted to conform to changes in the composition and
weighting of the Index Securities in the manner set forth in the Trust
Agreement (see "The Portfolio--Adjustments to the Portfolio").
DISTRIBUTIONS
Quarterly distributions based on the amount of dividends payable with respect
to Securities held by the Trust and other income, if any, received by the
Trust, net of fees and expenses, are made via the Depository and its
participants to Beneficial Owners (see "The Trust--Book-Entry-Only System") on
each Dividend Payment Date (see "Administration of the Trust--Distributions to
Beneficial Owners"). Any capital gain income recognized by the Trust in any
taxable year that is not previously treated as distributed during the year
ordinarily is to be distributed at least annually in January of the following
taxable year. The Trust may make additional distributions shortly after the end
of the year in order to satisfy certain distribution requirements imposed by
the
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Code (see "Tax Status of the Trust" and "Administration of the Trust--
Distributions to Beneficial Owners"). Although all distributions are currently
made quarterly, the Trustee reserves the right to vary the periodicity with
which distributions are made (see "Administration of the Trust--Distributions
to Beneficial Owners"). Those Beneficial Owners interested in reinvesting their
quarterly distributions may participate through DTC Participants in the DTC
book-entry Dividend Reinvestment Service (the "Service") available through
certain brokers. (See "Dividend Reinvestment Service" for a brief description
thereof.)
REDEMPTION
MidCap SPDRs in Creation Unit size aggregations are redeemable in kind only
and are not redeemable for cash (see "Redemption of MidCap SPDRs"). MidCap
SPDRs can be redeemed only in Creation Unit size aggregations effected by a
Participating Party (with respect to redemptions through the MidCap SPDR
Clearing Process) or a DTC Participant (with respect to redemptions outside the
MidCap SPDR Clearing Process), in either case which has executed a Participant
Agreement (see "Redemption of MidCap SPDRs--Procedure for Redemption of MidCap
SPDRs"). Individual MidCap SPDRs are not redeemable, but entitle the owners
thereof to certain payments upon termination of the Trust (see "Administration
of the Trust--Termination"). Prior to termination, MidCap SPDR owners may
aggregate individual MidCap SPDRs to Creation Unit size or multiples thereof
(e.g., 25,000, 50,000 MidCap SPDRs, etc.) and request that the Trustee redeem
the MidCap SPDRs so aggregated. There can be no assurance, however, that there
always will be sufficient depth and liquidity in the public trading market to
complete all such transactions (see "Special Considerations"). Owners of MidCap
SPDRs in less than Creation Unit size aggregations may have to pay brokerage
fees and commissions to acquire sufficient MidCap SPDRs (i.e., 25,000 MidCap
SPDRs) to constitute a Creation Unit. Each redemption will also be accompanied
by a Cash Redemption Payment (as hereinafter defined, see "Redemption of MidCap
SPDRs--Procedure for Redemption of MidCap SPDRs") which on any given Business
Day is an amount identical to the Cash Component of a Portfolio Deposit.
In the event that the Trustee determines in its discretion that an Index
Security is likely to be unavailable for delivery or available in insufficient
quantity for delivery by the Trust upon the redemption of MidCap SPDRs in
Creation Unit size aggregations, then the Trustee shall have the right in its
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discretion to deliver the cash equivalent value of such Index Security or Index
Securities, based on the market value of such Index Security or Index
Securities as of the Evaluation Time on the date such redemption order is
deemed received by the Trustee (see "Procedure for Redemption of MidCap
SPDRs"), as part of the Cash Redemption Payment in lieu of delivering such
Index Security or Index Securities to the redeemer. If an Index Security is not
eligible for transfer through the MidCap SPDR Clearing Process, the Trustee
shall include the cash equivalent value of such Index Security as a part of the
Cash Redemption Payment to the redeemer in the manner discussed in the
preceding sentence. As discussed above, OSG stock is currently not eligible for
transfer through the MidCap SPDR Clearing Process. Therefore, the Trustee will
deliver the cash equivalent value of OSG stock as a part of the Cash Redemption
Payment in lieu of delivering OSG stock to the redeemer. If OSG stock
subsequently becomes eligible for transfer through the MidCap SPDR Process, the
Trustee will deliver OSG stock to all redeemers in the same manner as all the
Index Securities transferring through the MidCap SPDR Clearing Process.
In connection with the redemption of MidCap SPDRs, if a redeemer is
restricted by regulation or otherwise from investing or engaging in a
transaction in one or more Index Securities, the Trustee shall have the right
in its discretion to deliver the cash equivalent value of such Index Security
or Index Securities based on the market value of such Index Security or Index
Securities as of the Evaluation Time on the date such redemption order is
deemed received by the Trustee (see "Placement of Redemption Orders Outside
MidCap SPDR Clearing Process") as a part of the Cash Redemption Payment in lieu
of delivering such Index Security or Index Securities to the redeemer. In such
case, such investor will pay the Trustee the Standard Transaction Fee, plus an
additional amount per Creation Unit not to exceed three (3) times the
Transaction Fee applicable for one Creation Unit.
MidCap SPDR owners may also be required to pay Excess Cash Amounts, (as
hereinafter defined) when applicable, in connection with a redemption of MidCap
SPDRs (see "Redemption of MidCap SPDRs--Procedure for Redemption of SPDRs.")
The Transaction Fee will be charged in connection with the redemption of each
Creation Unit size aggregation of MidCap SPDRs. If a request for redemption is
made directly to the Trustee outside the MidCap SPDR Clearing Process, an
additional amount not to exceed three (3) times the Transaction Fee applicable
for one Creation Unit will be charged to the redeemer due to the increased
expense associated with delivery outside the MidCap SPDR Clearing Process (see
"Prospectus Summary--Transaction Fee").
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TERMINATION
The Trust will terminate by its terms on the first to occur of: (i) the date
one hundred twenty-five (125) years from the Initial Date of Deposit (i.e.
April 27, 2120) or (ii) the date twenty (20) years after the death of the last
survivor of eleven persons named in the Agreement, the oldest of whom was born
in 1990 and the youngest of whom was born in 1993 (the "Termination Date"). The
Trust may also be terminated earlier upon the agreement of the Beneficial
Owners of 66 2/3% of the then outstanding MidCap SPDRs or in the event that
MidCap SPDRs are de-listed from the Exchange (see "Exchange Listing"). The
Sponsor will also have the discretionary right to terminate the Trust if at any
time after six months following and prior to three years following the Initial
Date of Deposit the net asset value of the Trust shall fall below $25,000,000
or if at any time after three years following the Initial Date of Deposit such
value is less than $100,000,000, as such dollar amount shall be adjusted for
inflation in accordance with the National Consumer Price Index for All Urban
Consumers (the "CPI-U")* as published by the United States Department of Labor,
such adjustment to take effect at the end of the fourth year following the
Initial Date of Deposit and at the end of each year thereafter and to be made
so as to reflect the percentage increase in consumer prices as set forth in the
CPI-U for the twelve month period ending in the month preceding the month in
which such adjustment is made. The Trustee shall also have the right to
terminate the Trust in the event that (a) the Sponsor resigns or becomes
incapable of discharging its duties and a successor is not appointed; (b) the
Depository is unable or unwilling to continue to perform its functions as set
forth under the Trust Agreement and a comparable replacement is unavailable;
(c) NSCC no longer provides clearance services with respect to MidCap SPDRs, or
if the Trustee is no longer a member of NSCC; (d) Standard & Poor's ceases
publishing the S&P MidCap 400 Index; or (e) the License Agreement (as
hereinafter defined) is terminated. The License Agreement is currently
scheduled to expire on April 27, 2020. The Trust shall also terminate if the
Trustee resigns or becomes incapable of discharging its duties and a successor
is not appointed (see "Administration of the Trust--Termination").
UNDERWRITING
ALPS Mutual Funds Services, Inc. (the "Distributor") acts as underwriter of
MidCap SPDRs on an agency basis. All orders to create MidCap SPDRs in Creation
Unit size aggregations must be placed with the Distributor, and it is
- -----------
* The CPI-U, as published by the United States Department of Labor, measures
the inflation rate of specified commodities deemed representative of the
purchases of all urban consumers.
14
<PAGE>
the responsibility of the Distributor to transmit such orders to the Trustee.
The Distributor will furnish to those placing such orders confirmation that the
orders have been accepted, but the Distributor shall reject any order which is
not submitted in proper form. Upon acceptance of an order to create MidCap
SPDRs, the Distributor instructs the Trustee to initiate the book-entry
movement of the appropriate number of MidCap SPDRs to the account of the entity
placing the order. The Distributor is also responsible for delivering a
prospectus to those persons creating MidCap SPDRs. The Distributor also
maintains records of both the orders placed with it for the creation of MidCap
SPDRs and the confirmations of acceptance issued by it. In addition, the
Distributor maintains a record of the instructions given to implement delivery
of MidCap SPDRs in response to orders placed with it. The Distributor may also
provide certain other administrative services, such as those related to state
securities law compliance. The Distributor is a corporation organized under the
laws of the State of Colorado and is located at 370 17th Street, Suite 3100,
Denver, CO 80202. The Distributor is a registered broker-dealer and a member of
the National Association of Securities Dealers, Inc. The Sponsor pays the
Distributor for its services a flat annual fee. The Sponsor will not seek
reimbursement for such payment from the Trust without obtaining prior exemptive
relief from the Commission.
15
<PAGE>
SPECIAL CONSIDERATIONS AND RISK FACTORS
GENERAL
Investment in the Trust should be made with an understanding that the value
of the Securities may fluctuate in accordance with changes in the financial
condition of the issuers of the Securities (particularly those that are
heavily weighted in the S&P MidCap 400 Index), the value of common stocks
generally and other factors. The identity and weighting of the Index
Securities and the Securities also changes from time to time (see "The
Portfolio--Adjustments to the Portfolio" and "The Portfolio--Selection and
Acquisition of Securities"). There can be no assurance that the issuers of the
Securities will pay dividends on outstanding shares of common stock.
Distributions on the Securities will generally depend upon the declaration of
dividends by the issuers of the Securities; the declaration of such dividends
generally depends upon various factors, including the financial condition of
the issuers and general economic conditions. As discussed above, the Trust,
unlike a managed investment company, will not be actively "managed" by
traditional methods, and therefore the adverse financial condition of an
issuer will not result in the elimination of its securities from the
Securities held by the Trust unless the Securities of such issuer are removed
from the S&P MidCap 400 Index (see "The Portfolio--Adjustments to the
Portfolio").
An investment in the Trust 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 the issuers of the Securities 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 Securities and thus in the
value of MidCap SPDRs). 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. As discussed above, the Trust
is not actively "managed" and therefore common stocks held by the Trust will
not be disposed of as a result of normal fluctuations in the market.
Holders of common stocks of any given issuer incur more risk than holders of
preferred stocks and debt obligations of such issuer because common
stockholders, as owners of such issuer, have generally inferior rights to
receive payments from such issuer in comparison with the rights of creditors
of, or holders of debt obligations or preferred stocks issued by, such 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
16
<PAGE>
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. The value of the Securities thus may be
expected to fluctuate over the entire life of the Trust to values higher or
lower than those prevailing on the Initial Date of Deposit (see "Market
Risks"). 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 for any of the Securities, that any
market for the Securities will be maintained or that any such market will be
or remain liquid. The price at which the Securities may be sold and the value
of the Trust will be adversely affected if trading markets for the Securities
are limited or absent.
An investment in the Trust should also be made with an understanding that
the Trust will not be able to replicate exactly the performance of the S&P
MidCap 400 Index because the total return generated by the Securities will be
reduced by transaction costs incurred in adjusting the actual balance of the
Portfolio Securities and other Trust expenses, whereas such transaction costs
and expenses are not included in the calculation of the S&P MidCap 400 Index.
It is also possible that for a period of time, the Trust may not fully
replicate the performance of the S&P MidCap 400 Index due to the
unavailability of certain Index Securities in the secondary market or due to
other extraordinary circumstances. Such events are unlikely to continue for an
extended period of time, because the Trustee is required to correct such
imbalances by means of adjusting the composition or weighting of Portfolio
Securities (see "The Portfolio--Adjustments to the Portfolio").
Investors should also be aware that when the Trustee receives a Cash
Component, a portion of which is to be used to purchase certain Index
Securities under the circumstances discussed under "The Trust--Creation of
Creation Units" (e.g., when a security is ineligible for transfer through the
MidCap SPDR Clearing Process), the Trust will bear the risk of any price
increase or decrease that may occur with regard to such Index Security during
the period beginning with the receipt of the Cash Component and ending when
such cash is used by the Trustee to purchase some or all of the appropriate
number of shares of such Index Security. Beneficial Owners of MidCap SPDRs
will also be at risk, therefore, because if the price of such Index Security
were to increase, Beneficial Owners would have an interest in fewer shares of
such Index Security than if such Index Security had been either tendered as
part of the Portfolio Deposit or purchased on the date on which the Cash
Component was delivered to the Trustee. Conversely, if the price of such Index
Security were to decrease, Beneficial Owners would have an interest in a
greater number of shares of such Index Security than if such Index Security
had been either tendered as part of the Portfolio Deposit or purchased on the
date on which the Cash Component was delivered to the Trustee.
Neither the Depository nor Beneficial Owners of MidCap SPDRs are entitled
either to dispose of any of the Securities in the Trust, as such, or to vote
the Securities.
17
<PAGE>
As the beneficial owner of the Securities, the Trustee has the right to vote
all of the voting Securities (see "Administration of the Trust--Voting").
Except as otherwise specifically noted, the time frames for delivery of
securities, cash, or MidCap SPDRs in connection with creation and redemption
activity within the MidCap SPDR Clearing Process as set forth herein are based
on NSCC's current "regular way" settlement period of three (3) days during
which NSCC is open for business (each such day an "NSCC Business Day"). NSCC
may in the future, reduce such "regular way" settlement period, in which case
it is anticipated that there would be a corresponding reduction in settlement
periods applicable to MidCap SPDR creations and redemptions. Investors should
note that NSCC Business Days do not always coincide with the days during which
the Trustee is open for business.
NET ASSET VALUE AND MARKET PRICES
The Trust's assets consist primarily of the Securities. Therefore, the net
asset value of MidCap SPDRs in Creation Unit size aggregations and,
proportionately, the net asset value per MidCap SPDR, changes as fluctuations
occur in the market value of Securities. Investors should also be aware that
the aggregate public trading market price of 25,000 MidCap SPDRs may be
different from the net asset value of a Creation Unit aggregation of MidCap
SPDRs (i.e., 25,000 MidCap SPDRs may trade at a premium over or at a discount
to the net asset value of a Creation Unit) and similarly the public trading
market price per MidCap SPDR may be different from the net asset value of a
Creation Unit on a per MidCap SPDR basis (see "Special Considerations and Risk
Factors--Market Risks"). This price difference may be due, in large part, to
the fact that supply and demand forces at work in the secondary trading market
for MidCap SPDRs will be closely related to, but not identical to, the same
forces influencing the prices of the S&P MidCap 400 Index stocks trading
individually or in the aggregate at any point in time. The expenses of the
Trust are reflected in the net asset value of MidCap SPDRs in Creation Unit
size aggregations and the expenses of the Trust are accrued daily (see
"Expenses of the Trust").
TRADING CONSIDERATIONS
The Sponsor does not maintain a secondary market in MidCap SPDRs. MidCap
SPDRs are listed for trading on the Exchange. The market symbol for MidCap
SPDRs is MDY. Trading in MidCap SPDRs on the Exchange may be halted due to
market conditions or, in light of Exchange rules and procedures, for reasons
that, in the view of the Exchange, make trading in MidCap SPDRs inadvisable.
In addition, trading in MidCap SPDRs on the Exchange is subject to trading
halts caused by extraordinary market volatility pursuant to Exchange "circuit
breaker" rules that require trading in securities on the Exchange to be halted
for a specified time period based on a specified market decline. There can be
no assurance that the requirements of the Exchange necessary to maintain the
listing of MidCap SPDRs will continue to be met or will
18
<PAGE>
remain unchanged. The Trust will be terminated in the event MidCap SPDRs are
delisted from the Exchange. (For a description of the conditions to listing of
MidCap SPDRs and the circumstances under which the Exchange would consider the
suspension of trading in or the delisting of MidCap SPDRs, see "Exchange
Listing".) Further, the Trust may be terminated, among other reasons, in the
event that the License Agreement is terminated or the net asset value of the
Trust falls below a specified level (see "Administration of the Trust--
Termination").
MARKET RISKS
MidCap SPDRs are subject to the risks of an investment in a broad-based
portfolio of common stocks, including the risk that the general level of stock
prices may decline, thereby adversely affecting the value of such investment.
Investors should also note that the S&P MidCap 400 Index contains the stocks
of mid-capitalization issuers and such stocks may be subject to liquidity and
trading patterns and market and performance cycles different from those
experienced by stocks issued by larger capitalization issuers. MidCap SPDRs
are also subject to risks other than those associated with an investment in a
broadly based portfolio of common stocks in that the selection of the stocks
included in the Trust's portfolio, the expenses associated with the Trust or
other factors distinguishing an ownership interest in a trust from the direct
ownership of a portfolio of securities may affect trading in MidCap SPDRs as
compared with trading in a broadly based portfolio of common stocks. MidCap
SPDRs are further subject to the risk that extraordinary events may cause any
of the parties providing services to the Trust, such as the Trustee, the
Sponsor, the Distributor, the Depository or NSCC, to be closed or otherwise
unable to perform such party's obligations as set forth herein and in the
agreements between and among such parties. According to the terms of the Trust
Agreement, if any of the above named entities fails or is otherwise unable to
perform adequately its duties, a successor entity may be named or appointed to
assume all duties and obligations of its predecessor. If, however, no suitable
successor is available or willing to undertake all such duties and
obligations, under the Trust Agreement the Trust will then be terminated (see
"Administration of the Trust--Termination").
The Trustee will deliver a portfolio of Securities for each Creation Unit
size aggregation of MidCap SPDRs delivered for redemption, identical in
weighting and composition to the securities portion of a Portfolio Deposit as
in effect on the date request for redemption is deemed received by the Trustee
(see "Redemption of MidCap SPDRs"). If a redemption is processed through the
MidCap SPDR Clearing Process, to the extent that the Securities to be
delivered on settlement date are not delivered, they will be covered by NSCC's
guarantee of the completion of such delivery. Any Securities not received on
settlement date will be marked to the market until delivery is completed. The
Trust, to the extent it has not already done so, remains obligated to deliver
such Securities to NSCC, and the market risk of any increase in
19
<PAGE>
the value of such Securities until delivery is made by the Trust to NSCC could
adversely affect the net asset value of the Trust. Investors should note that
the Securities to be delivered to a redeemer submitting a redemption request
outside the MidCap SPDR Clearing Process that are not delivered to such
redeemer are not covered by NSCC's guarantee of completion of such delivery.
Investors should also note that the size of the Trust in terms of total
assets held may change substantially over time and from time to time as MidCap
SPDRs in Creation Unit size aggregations are created and redeemed. Such
fluctuations in Trust size should not adversely impact the net asset value at
any time, because the amount of the Cash Component or the Cash Redemption
Payment upon creations or redemptions, respectively, of MidCap SPDRs in
Creation Unit size aggregations is determined each day to equate the value of
the Portfolio Deposit to the net asset value of the Trust, on a per Creation
Unit basis, at the close of business on the day such request is deemed
received by the Trustee (see "The Portfolio--Adjustments to the Portfolio
Deposit").
Investors in the Trust should also be aware that there are tax consequences
associated with the ownership of MidCap SPDRs resulting from the distribution
of Trust dividends and sales of MidCap SPDRs as well as the sales of
underlying Securities held by the Trust in connection with redemptions under
certain circumstances (see "Tax Status of the Trust--Tax Consequences to
Beneficial Owners").
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEE AND THE UNITHOLDERS OF MIDCAP SPDR TRUST, SERIES 1:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Midcap SPDR Trust,
Series 1 ( the "Trust") at September 30, 1997, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1997 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
New York, New York
January 8, 1998
21
<PAGE>
MIDCAP SPDR TRUST, SERIES 1
STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investment in securities, at value (cost $429,275,228)............ $496,761,298
Cash.............................................................. 1,982,180
Dividends receivable.............................................. 331,520
Receivable for securities sold.................................... 1,870,330
Deferred organization costs....................................... 100,251
------------
Total Assets...................................................... $501,045,579
============
<CAPTION>
LIABILITIES:
<S> <C>
Payable for securities purchased.................................. 2,710,630
Distribution payable.............................................. 1,080,548
Organizational expenses payable .................................. 168,501
Accrued liabilities............................................... 349,466
------------
Total Liabilities................................................. 4,309,145
------------
Net Assets.......................................................... $496,736,434
============
<CAPTION>
NET ASSETS REPRESENTED BY:
<S> <C>
Interest of Unitholders (7,683,489 units of fractional undivided
interest (MidCap SPDRs) outstanding)
Cost to investors of outstanding units............................ $423,251,769
Undistributed net investment income............................... 49,353
Undistributed net realized gains on investment.................... 5,949,242
Unrealized appreciation on investments............................ 67,486,070
------------
Net assets.......................................................... $496,736,434
============
Net asset value per MidCap SPDR ($496,736,434/7,683,489 MidCap $ 64.65
SPDRs)............................................................ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
MIDCAP SPDR TRUST, SERIES 1
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
JANUARY 1, 1997 FOR THE YEAR APRIL 27, 1995
THROUGH ENDED (COMMENCEMENT OF
SEPTEMBER 30, DECEMBER 31, OPERATIONS) THROUGH
1997 1996 DECEMBER 31, 1995
--------------- ------------ -------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS
Operations:
Net investment income....... $ 1,914,859 $ 1,619,324 $ 403,960
Net realized gains on
investments and in-kind
redemptions................ 6,283,281 9,956,652 286,107
Net change in unrealized
appreciation on
investments................ 62,097,630 2,962,996 2,423,172
------------ ------------ -----------
Net increase in net assets
resulting from operations... 70,295,770 14,538,972 3,113,239
------------ ------------ -----------
Dividends and Distributions
to Unitholders from:
Net investment income....... (2,239,301) (1,308,513) (340,976)
Net realized gains.......... -- (2,212,679) (229,753)
------------ ------------ -----------
Total dividends and
distributions............... (2,239,301) (3,521,192) (570,729)
------------ ------------ -----------
Unitholder Transactions:
Proceeds from subscriptions
of MidCap SPDR units....... 277,641,581 132,790,764 51,569,121
Reinvestment of dividends
and distributions.......... 300,685 115,579 8,895
Less: Redemptions of MidCap
SPDR units................. -- (47,306,950) --
------------ ------------ -----------
Increase in net assets due
to unitholder transactions. 277,942,266 85,599,393 51,578,016
------------ ------------ -----------
Total increase............... 345,998,735 96,617,173 54,120,526
Net Assets:
Beginning of period......... 150,737,699 54,120,526 --
------------ ------------ -----------
End of period (including
undistributed net
investment income of
$49,353, $373,795 and
$62,984, respectively)..... $496,736,434 $150,737,699 $54,120,526
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
MIDCAP SPDR TRUST, SERIES 1
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
APRIL 27, 1995
JANUARY 1, 1997 FOR THE YEAR (COMMENCEMENT OF
THROUGH ENDED OPERATIONS) THROUGH
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ----------------- -------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividend income...... $ 2,432,529 $ 1,889,445 $ 468,019
EXPENSES
Trustee fees and
expenses........... 352,066 149,634 25,626
Printing and
distribution
expenses........... 240,061 185,362 --
Audit fees........... 25,000 25,500 25,000
Amortization of
organization costs. 29,250 39,000 26,499
Legal fees........... 16,559 158,763 97,732
License fees......... 25,191 30,218 7,917
Other expenses....... -- -- 14,721
----------- ----------- ----------
Total expenses....... 688,127 588,477 197,495
Less: expenses as-
sumed by the Spon-
sor (see Note 3)... (170,457) (318,356) (133,436)
----------- ----------- ----------
Net expenses......... 517,670 270,121 64,059
----------- ----------- ----------
Net investment income.. 1,914,859 1,619,324 403,960
----------- ----------- ----------
REALIZED AND UNREALIZED
GAINS ON INVESTMENTS
Net realized gains... 6,283,281 1,822,286 286,107
Net realized gains
from in-kind
redemptions........ -- 8,134,366 --
Net change in
unrealized
appreciation of
investments........ 62,097,630 2,962,996 2,423,172
----------- ----------- ----------
Net realized and
unrealized gains
(losses) on
investments........ 68,380,911 12,919,648 2,709,279
----------- ----------- ----------
NET INCREASE IN NET
ASSETS RESULTING
FROM OPERATIONS.. $70,295,770 $14,538,972 $3,113,239
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
MIDCAP SPDR TRUST, SERIES 1
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A MIDCAP SPDR
<TABLE>
<CAPTION>
JANUARY 1, 1997 FOR THE YEAR APRIL 27, 1995
THROUGH ENDED (COMMENCEMENT OF
SEPTEMBER 30, DECEMBER 31, OPERATIONS) THROUGH
1997 1996 DECEMBER 31, 1995
--------------- ------------ -------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period...................... $ 49.79 $43.29 $ 36.91
Investment Operations:
Net investment income........ 0.35 0.72 0.40
Net realized and unrealized
gains on investments....... 14.97 7.30 6.51
-------- -------- -------
Total from Investment
Operations.................. 15.32 8.02 6.91
-------- -------- -------
Less Distributions from:
Net investment income........ (0.46) (0.64) (0.35)
Net realized gains........... 0.00 (0.88) (0.18)
-------- -------- -------
Total Distributions........... (0.46) (1.52) (0.53)
-------- -------- -------
Net Asset Value, End of
Period...................... $ 64.65 $49.79 $ 43.29
======== ======== =======
Total Investment Return....... 30.87%* 18.59% 18.77%*
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(000's)..................... $496,736 $150,738 $54,120
Ratio of expenses to average
net assets(1)............... 0.29%** 0.29% 0.26%**
Ratio of net investment income
to average net assets(1).... 1.07%** 1.76% 1.65%**
Portfolio turnover rate(2).... 20.18% 20.00% 10.45%
Average commission rate per
share....................... $ 0.0500 $ 0.0500 --
</TABLE>
The financial highlights summarize the impact of net investment income, gains
and losses and distributions on a single unit of the Trust for the period.
Additionally, important relationships between certain financial statement
items are expressed in ratio form.
* Not annualized
** Annualized
(1) Net of expenses reimbursed by the Sponsor. If the Trust had borne all
expenses, the net investment income and expenses to average net assets
ratios would have been 0.98% and 0.39% for the period from January 1,
1997 through September 30, 1997, 1.42% and 0.63% for the year ended
December 31, 1996, and 1.11% and .80% for the period from April 27, 1995
(commencement of operations) through December 31, 1995.
(2) Portfolio turnover excludes securities received or delivered from
processing creations or redemptions of MidCap SPDRs.
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
MIDCAP SPDR TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE 1--ORGANIZATION
MidCap SPDR Trust, Series 1 (the "Trust") is a unit investment trust created
under the laws of the state of New York and registered under the Investment
Company Act of 1940. The Trust was created to provide investors with the
opportunity to purchase a security representing a proportionate undivided
interest in a portfolio of securities consisting of substantially all of the
common stocks, in substantially the same weighting, which comprise the
Standard & Poor's Midcap 400 Composite Price Index (the "S&P MidCap Index").
Each unit of fractional undivided interest in the Trust is referred to as a
Standard & Poor's Depository Receipt ("MidCap SPDR"). The Trust commenced
operations on April 27, 1995 upon the initial issuance of 375,000 MidCap SPDRs
(equivalent to 15 "Creation Units"-- see Note 4) in exchange for a portfolio
of securities assembled to reflect the intended portfolio composition of the
Trust. Effective September 30, 1997 the fiscal year end of the Trust changed
from December 31 to September 30.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the Trust are prepared in accordance with
generally accepted accounting principles.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures. Actual results
could differ from those estimates.
Security Valuation--Portfolio securities are valued based on the closing
sale price on the exchange which is deemed to be the principal market for the
security. If no closing sale price is available, then the security is valued
at the mean between the closing bid and offer prices on the exchange which is
deemed to be the principal market for the security. If there are no closing
bid and offer prices available, valuation will be determined by the Trustee in
good faith based on available information.
Investment Transactions--Investment transactions are recorded on the trade
date. Realized gains and losses from the sale or disposition of securities are
recorded on a specific identification basis. Dividend income is recorded on
the ex-dividend date.
Distributions to Unitholders--The Trust intends to declare and distribute
dividends from net investment income quarterly. The Trust will distribute net
realized capital gains, if any, at least annually.
26
<PAGE>
Federal Income Tax--The Trust has qualified and intends to continue to
qualify for and elect treatment as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended. By so
qualifying the Trust is not subject to federal income taxes to the extent it
distributes its taxable income, including any net realized capital gains, for
each fiscal year. In addition, by distributing during each calendar year
substantially all of its net investment income and capital gains, if any, the
Trust is not subject to federal excise tax.
Organization Costs--The Trust incurred organization costs of $195,000 which
have been capitalized and are being charged to operations ratably over a
period of 60 months from the commencement of operations.
NOTE 3--TRANSACTIONS WITH THE TRUSTEE AND SPONSOR
In accordance with the Trust Agreement, The Bank of New York (the "Trustee")
maintains the Trust's accounting records, acts as custodian and transfer agent
to the Trust, and provides administrative services, including filing of all
required regulatory reports. The Trustee is also responsible for determining
the composition of the portfolio of securities which must be delivered in
exchange for the issuance of Creation Units of the Trust, and for adjusting
the composition of the Trust's portfolio from time to time to conform to
changes in the composition and/or weighting structure of the S&P Midcap Index.
For these services, the Trustee receives a fee at the following annual rates:
<TABLE>
<CAPTION>
NET ASSET VALUE OF
THE TRUST FEE AS A PERCENTAGE OF NET ASSET VALUE OF THE TRUST
- ------------------ ---------------------------------------------------
<S> <C>
$0-$500,000,000* 14/100 of 1% per annum
$500,000,001-
$1,000,000,000* 12/100 of 1% per annum
$1,000,000,001--and above* 10/100 of 1% per annum
</TABLE>
- -----------
* The fee indicated applies to that portion of the net asset value of the
Trust which falls in the size category indicated.
During the first two years of operation of the Trust, the Trustee's fee was
reduced to 12/100 of 1% annum.
For the period from January 1, 1997 through September 30, 1997, PDR Services
Corporation (the "Sponsor", a wholly-owned subsidiary of the American Stock
Exchange, Inc.) agreed to reimburse the Trust for, or assume, the ordinary
operating expenses of the Trust which exceeded 30/100 of 1% per annum of the
daily net asset value of the Trust as calculated by the Trustee.
27
<PAGE>
The expenses assumed by the Sponsor for the period from January 1, 1997
through September 30, 1997 were $170,457. The Sponsor retains the ability to
be repaid by the Trust for expenses so reimbursed or assumed to the extent
that expenses fall below the 30/100 of 1% per annum level on any given day
during the period.
NOTE 4--TRUST TRANSACTIONS IN MIDCAP SPDRS
TRANSACTIONS IN MIDCAP SPDRS WERE AS FOLLOWS:
<TABLE>
<CAPTION>
JANUARY 1, 1997
THROUGH SEPTEMBER 30, 1997
----------------------------
MIDCAP SPDRS AMOUNT
----------------------------
<S> <C> <C>
MidCap SPDRs sold................................. 4,650,000 $ 277,641,581
Dividend reinvestment MIDCAP SPDRs issued......... 5,724 300,685
----------- --------------
Net increase...................................... 4,655,724 $ 277,942,266
=========== ==============
</TABLE>
<TABLE>
<CAPTION>
APRIL 25, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH
YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ ---------------------
MIDCAP
MIDCAP SPDRS AMOUNT SPDRS AMOUNT
-------------- --------------- --------- -----------
<S> <C> <C> <C> <C>
MidCap SPDRs sold........ 2,775,000 $ 132,790,764 1,250,000 $51,569,121
Dividend reinvestment
MIDCAP SPDRs issued.... 2,546 115,579 219 8,895
MidCap SPDRs redeemed.... (1,000,000) (47,306,950) -- --
------------- --------------- --------- -----------
Net increase............. 1,777,546 $ 85,599,393 1,250,219 $51,578,016
============= =============== ========= ===========
</TABLE>
Except under the Trust's dividend reinvestment plan, MidCap SPDRs are issued
and redeemed by the Trust only in Creation Unit size aggregations of 25,000
MidCap SPDRs. Such transactions are only permitted on an in-kind basis, with a
separate cash payment which is equivalent to the undistributed net investment
income per MidCap SPDR and a balancing cash component to equate the
transaction to the net asset value per unit of the Trust on the transaction
date. Transaction fees at scheduled amounts ranging from $1,500 to $2,900 per
Creation Unit are charged to those persons creating or redeeming Creation
Units. Transaction fees are received by the Trustee and used to offset the
expense of processing orders. During the period from January 1, 1997 through
September 30, 1997, the Trustee earned $25,877 in transaction fees. The
Trustee, in its sole discretion, may voluntarily reduce or waive its fee, or
modify its transaction fee schedule, subject to certain limitations. There
were no such reductions or waivers for the period from January 1, 1997 through
September 30, 1997.
At September 30, 1997, the Trustee held 517,191 MidCap SPDRs, or 6.73% of
fractional undivided interest in the Trust.
28
<PAGE>
NOTE 5--INVESTMENT TRANSACTIONS
For the period from January 1, 1997 through September 30, 1997, the Trust
had purchases and sales of investment securities of $46,401,964 and
$48,038,041, respectively. At September 30, 1997, the cost of investments for
federal income tax purposes was substantially the same as the cost for
financial reporting purposes. Accordingly, gross unrealized appreciation was
$72,699,866 and gross unrealized depreciation was $5,213,796, resulting in net
unrealized appreciation of $67,486,070.
NOTE 6--OTHER INFORMATION
Effective December 1, 1997, ALPS Mutual Services, Inc. will replace PDR
Distributors, Inc. as the Distributor of the Trust. The Distributor is a
corporation organized under the laws of the State of Colorado and is located
at 370 17th Street, Suite 3100, Denver, CO 80202. The Distributor is a
registered broker-dealer and a member of the National Association of
Securities Dealers, Inc. The Sponsor pays the Distributor for its services a
flat annual fee. The Distributor will undertake all of the duties and
obligations of its predecessor as described in the prospectus.
On December 24, 1997, the Trustee declared a capital gain dividend of
$6,899,931, payable to Unitholders of record as of December 29, 1997.
29
<PAGE>
MIDCAP SPDR TRUST, SERIES 1
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Common Stock Shares Value
- -----------------------------------------------------
<S> <C> <C>
ADC TELECOMUNICATIONS, INC.* 74,233 $ 2,412,573
AFLAC, INC. 77,299 4,193,471
AGCO CORP. 35,287 1,118,157
AGL RESOURCES, INC. 31,855 603,254
AES CORP.* 98,427 4,306,181
AK STEEL HOLDING CORP. 15,128 644,831
APL LIMITED 14,009 451,790
ATL ULTRASOUND, INC.* 7,982 373,159
ACNIELSON CORP.* 32,354 776,496
ACUSON CORP.* 16,262 443,140
AIRBORNE FREIGHT CORP. 12,103 732,988
AIRGAS, INC.* 38,893 658,750
ALASKA AIR GROUP, INC.* 8,278 272,139
ALBANY INTERNATIONAL CORP. 17,432 437,979
ALBEMARLE CORP. 31,198 779,950
ALEXANDER & BALDWIN, INC. 25,554 661,210
ALIANT COMMUNICATION, INC. 20,494 496,980
ALLEGHENY POWER SYSTEMS, INC. 69,104 2,090,396
ALLEGIANCE CORP. 32,731 1,014,661
ALTERA CORP.* 50,079 2,566,549
ALUMAX, INC.* 31,077 1,270,272
AMBAC, INC. 39,379 1,602,233
AMERICA ONLINE CORP.* 55,229 4,166,338
AMERICAN FINANCIAL GROUP 33,262 1,480,159
AMERICAN POWER CONVERSION, INC.* 53,691 1,510,059
AMERICAN WATER WORKS CORP. 44,732 989,696
AMETEK, INC. 18,624 437,664
ANALOG DEVICES, INC.* 90,525 3,032,588
ANNTAYLOR STORES CORP.* 14,519 215,970
APRIA HEALTHCARE GROUP* 29,053 392,216
ARNOLD INDUSTRIES CORP. 14,658 342,631
ARROW ELECTRONICS, INC.* 27,648 1,603,584
ARVIN INDUSTRIES, INC. 13,935 546,949
ASA HOLDINGS, INC. 16,825 473,203
ATLANTIC ENERGY, INC. 29,634 531,560
ATMEL CORP.* 56,103 2,044,253
AVNET, INC. 23,789 1,512,088
B J SVCS CORP.* 21,689 1,610,408
</TABLE>
30
<PAGE>
MIDCAP SPDR TRUST, SERIES 1 SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Common Stock Shares Value
- --------------------------------------------------
<S> <C> <C>
BJ'S CLUB CORP.* 21,851 $ 637,776
BMC SOFTWARE, INC.* 57,366 3,714,449
BANTA CORP.* 16,812 468,635
BARNES & NOBLE CORP.* 37,610 1,062,483
BEAR STEARNS, INC. 66,429 2,922,876
BECKMAN INSTUMENTS, INC. 16,039 682,660
BED BATH & BEYOND, INC.* 38,755 1,361,269
AH BELLO CORP. 34,954 1,695,269
BERGEN BRUNSWIG CORP. 28,442 1,148,346
BEST BUY, INC.* 24,610 607,559
BETZDEARBORN, INC. 16,330 1,116,564
BIOGEN, INC.* 41,730 1,353,617
BLACK HILLS, INC. 8,233 241,330
BOB EVANS FARMS, INC. 23,468 445,892
BORG-WARNER AUTOMOTIVE, INC. 13,386 761,329
BOWATER, INC. 22,678 1,156,578
BRINKER INTERNATIONAL, INC.* 43,816 780,473
BRUSH WELLMAN, INC. 9,248 237,558
BUFFETS, INC.* 25,527 276,011
BURLINGTON INDUSTRIES, INC.* 33,488 468,832
CMS ENERGY CORP. 54,172 2,004,364
CPI CORP. 6,683 170,417
CNF TRANSPORTATION, INC. 26,096 1,136,807
CABOT CORP. 38,937 1,048,865
CADENCE DESIGN SYSTEMS, INC.* 57,335 3,067,423
CALENERGY CORP.* 35,935 1,194,839
CALGON CARBON CORP. 22,397 292,561
CALLAWAY GOLF CORP. 41,308 1,440,617
CALMAT CORP. 13,209 313,714
CAPITAL ONE FINANCIAL CORP. 37,544 1,717,638
CARLISLE COMPANIES, INC. 17,019 756,282
CARPENTER TECHNOLOGY CORP. 11,049 546,926
CARTER WALLACE, INC. 26,149 431,459
CENTOCOR, INC.* 39,389 1,873,439
CENTRAL FIDELITY BANKS 32,145 1,422,416
CENTRAL LA ELEC, INC. 12,749 351,394
CENTRAL MAINE POWER CORP. 18,311 239,187
</TABLE>
31
<PAGE>
MIDCAP SPDR TRUST, SERIES 1 SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Common Stock Shares Value
- --------------------------------------------------------
<S> <C> <C>
CENTURY TELEPHONE ENTERPRISE 34,134 $ 1,501,896
CHARTER ONE FINANCIAL, INC.* 26,087 1,542,394
CHESAPEAKE CORP. 13,292 481,835
CHIRON CORP.* 98,259 2,223,110
CHRIS CRAFT INDUSTRIES, INC.* 17,838 939,847
CHURCH & DWIGHT, INC. 10,969 318,101
CIRRUS LOGIC, INC.* 37,822 548,419
CINTAS CORP. 27,404 2,021,045
CIRCUS CIRCUS ENTERPRISE* 53,648 1,351,259
CITY NATIONAL CORP. 26,035 833,120
CLAIRES STORES, INC. 27,164 607,795
CLAYTON HOMES, INC. 66,836 1,240,643
CLEVELAND CLIFFS, INC. 6,457 281,687
COCA COLA ENTERPRISES, INC. 217,770 5,866,179
COMDISCO, INC. 41,937 1,365,574
COMPUSA, INC.* 51,498 1,802,430
COMPUWARE CORP.* 48,765 2,950,283
COMSAT CORP. 27,731 660,344
CONCENTRA MANAGED CARE, INC.* 21,711 766,670
CONSOLIDATED PAPER, INC. 25,340 1,406,370
CONSOLIDATED STORES CORP.* 47,501 1,989,115
CORRECTIONS CORP.* 45,086 1,961,241
COVANCE, INC.* 32,417 701,018
CRACKER BARREL OLD COUNTRY 34,427 1,114,574
CRESTAR FINANCIAL CORP. 62,480 2,928,750
CROMPTON KNOWLES CORP. 41,480 1,101,813
CYPRESS SEMICONDUCTER CORP.* 50,229 778,550
CYTEC INDUSTRIES* 25,312 1,211,812
DANAHER CORP. 32,976 1,912,608
DATASCOPE CORP.* 9,224 202,928
DEAN FOODS CORP. 22,705 1,050,106
DELMARVA POWER & LIGHT CORP. 34,661 654,226
DENTAL SUPPLY INTERNATIONAL, INC.* 15,316 857,696
DEXTER CORP. 13,116 525,460
DIAGNOSTIC PRODUCTS CORP. 7,723 233,138
DIAL CORP. 54,204 945,182
DIEBOLD, INC. 38,921 1,843,882
DOLE FOOD, INC. 33,845 1,529,371
</TABLE>
32
<PAGE>
MIDCAP SPDR TRUST, SERIES 1 SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Common Stock Shares Value
- -------------------------------------------------
<S> <C> <C>
DOLLAR GENERAL CORP. 64,522 2,197,781
DONALDSON, INC. 14,231 683,088
DREYERS GRAND ICE CREAM, INC. 7,630 396,760
ENSCO INTERNATIONAL, INC. 80,140 3,160,521
EDWARD A.G., INC. 35,929 1,845,852
EL PASO NAT GAS CORP. 33,493 2,028,420
ELECTRONIC ARTS CORP.* 32,743 1,264,698
ETHYL CORP. 47,165 439,224
EXABYTE CORP.* 12,656 139,216
FAMILY DOLLAR STORES, INC. 48,402 1,104,171
FASTENAL COMPANY 21,413 1,140,242
FEDERAL-MOGUL CORP. 20,010 742,871
FEDERAL SIGNAL CORP. 25,545 648,204
FERRO CORP. 14,520 554,483
FINGERHUT COS INC. 26,077 586,733
THE FINOVA GROUP, INC. 15,365 1,453,913
FIRST OF AMERICA BANK CORP. 49,762 2,671,597
FIRST BRAND CORP. 22,776 609,258
FIRST SECURITY CORP. 65,393 1,945,442
FIRST TENNESSEE NATIONAL CORP. 36,169 2,061,633
FIRST VIRGINIA BANKS, INC. 29,269 1,390,254
FIRSTAR CORP. 81,611 2,958,399
FISERV, INC.* 29,515 1,294,971
FLORIDA PROGRESS CORP. 54,782 1,807,806
FLOWERS INDUSTRIES, INC. 49,709 1,012,821
FLOWSERVE CORP. 22,835 682,196
FOREST LABORATORIES, INC.* 23,128 974,267
FOUNDATION HEALTH SYSTEMS* 68,438 2,190,016
FRANKLIN RESOURCES, INC. 71,150 6,625,844
FULLER (H.B.) CORP. 8,004 433,717
GATX CORP. 13,787 931,484
GENCORP, INC. 22,978 653,437
GENZYME CORP. GENERAL DIVISION* 43,206 1,285,379
GEORGIA GULF CORP. 18,917 579,333
GIBSON GREETINGS, INC.* 9,244 239,189
GLATFELTER PH & COMPANY 23,758 527,131
GLOBAL MARINE, INC.* 96,939 3,223,222
GRANITE CONSTRUCTION, INC. 10,310 238,419
GTECH HOLDINGS CORP.* 23,786 813,184
</TABLE>
33
<PAGE>
MIDCAP SPDR TRUST, SERIES 1 SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Common Stock Shares Value
- ------------------------------------------------------
<S> <C> <C>
HSB GROUP, INC. 11,405 $ 635,116
HANNA (M.A.) CORP. 28,770 764,203
HANNAFORD BROS CORP. 23,860 848,521
HARLEY DAVIDSON, INC. 85,664 2,500,318
HARSCO CORP. 27,570 1,250,989
HAWAIIAN ELECTRIC INDUSTRIES, INC. 17,551 657,066
HEALTHCARE COMPARE CORP.* 18,602 1,188,203
HEALTH MANAGEMENT ASSOCIATES* 61,166 1,934,375
HEALTH CARE & RETIREMENT* 25,138 934,819
HEILG-MEYERS CORP. 32,171 494,629
HIBERNIA BANCORP 72,934 1,239,878
HILLENBRAND INDUSTRIES, INC. 38,830 1,749,777
HON INDUSTRIES, INC. 16,758 971,964
HORIZON/CMS HEALTHCARE CORP.* 29,418 658,228
HORMEL (GEO A) & COMPANY 42,865 1,374,359
HOUGHTON MIFFIN COMPANY 16,985 641,184
HUBBELL, INC. 37,938 1,754,633
HUNT (JB) TRANSPORT SERVICES, INC. 20,576 320,214
IBP INC. 51,954 1,227,413
IMC GLOBAL INC. 53,040 1,869,660
IDAHO POWER COMPANY 21,229 670,040
ILLINOIS CENTRAL CORP 34,659 1,273,718
ILLINOVA CORP. 41,609 897,194
IMATION CORP.* 23,081 615,974
INDIANA ENERGY, INC. 12,745 379,164
INFORMIX CORP.* 85,608 599,256
INFORMATION RESORCES, INC.* 16,014 282,247
INTEGRATED DEVICE TECHNOLOGY.* 45,111 544,151
INTERNATIONAL DAIRY QUEEN* 12,386 291,264
INTERNATIONAL GAME TECHNOLOGY 65,196 1,483,209
INTERNATIONAL MULTIFOODS 10,224 303,525
INTERSTATE BAKERIES 20,702 1,419,381
IPALCO ENTERPRISES 25,229 864,093
IVAX CORP.* 68,574 805,745
JACOBS ENGINEERING GROUP, INC.* 14,536 445,165
JONES APPAREL GROUP* 29,525 1,594,350
KANSAS CITY POWER & LIGHT CORP. 34,938 1,026,304
KANSAS CITY SOUTHERN INDUSTRIES 60,485 2,082,952
</TABLE>
34
<PAGE>
MIDCAP SPDR TRUST, SERIES 1 SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Common Stock Shares Value
- ------------------------------------------------------
<S> <C> <C>
KAYDON CORP. 9,332 $ 559,920
KELLY SERVICES INC. 21,504 720,384
KENNAMETAL INC. 14,721 713,969
BROOKLYN UNION GAS CORP. 28,459 949,819
KOHL'S CORP.* 44,006 3,124,426
LCI INTERNATIONAL, INC.* 44,088 1,173,843
LG & E ENERGY INC. 37,525 832,586
LABORATORY CORP. OF AMERICA* 69,727 183,033
LANCASTER COLONY CORP. 16,543 878,847
LANCE INC. 16,875 350,156
LANDS' END INC.* 18,267 562,852
LAWSON PRODUCTS INC. 6,328 186,676
LAWTER INTERNATIONAL INC. 25,663 311,164
LEE ENTERPRISES INC. 26,189 743,113
LEGGETT & PLATT INC. 53,970 2,405,038
LEXMARK INTERNATIONAL GROUP, INC.* 40,672 1,342,176
LINEAR TECHNOLOGY CORP. 42,582 2,927,513
LITTON INDUSTRIES INC.* 25,983 1,412,826
LONE STAR* 23,151 483,277
LONGVIEW FIBRE CORP. 29,177 579,893
LUBRIZOL CORP. 32,561 1,367,562
LUKENS INC. 8,433 162,335
LYONDELL PETROCHEMICAL CORP. 45,153 1,182,444
MCN ENERGY GROUP INC. 44,002 1,408,064
MAC FRUGALS BARGAINS CLOSE CORP.* 14,045 428,373
MAGNETEK INC.* 14,670 328,241
MANPOWER INC. 46,222 1,825,769
MAPCO INCORPORATED 30,626 1,008,744
MARK IV INDUSTRIES, INC. 36,010 967,769
MARSHALL & ILSLEY CORP. 50,028 2,532,668
MARTIN MARIETTA MATERIALS 26,008 936,288
MAXIM INTEGRATED PRODUCTS* 36,412 2,601,182
MAXXAM INC.* 4,681 252,774
MC CORMICK & CO., INC. 42,452 1,021,501
MCKESSON CORP. 25,921 2,642,322
MEDAPHIS CORP.* 41,157 293,244
MEDIA GENERAL INC. 15,108 598,655
MENTOR GRAPHICS CORP.* 36,643 444,296
</TABLE>
35
<PAGE>
MIDCAP SPDR TRUST, SERIES 1 SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Common Stock Shares Value
- ---------------------------------------------------------
<S> <C> <C>
MERCANTILE BANCORPORATIO 48,969 $ 3,727,765
MERCANTILE BANKSHARES CORP. 40,380 1,312,350
MERITOR AUTOMOTIVE CORP. 39,285 913,376
FRED MEYER, INC.* 24,577 1,308,725
MICRO WAREHOUSE, INC.* 19,430 425,031
MIDAMERICAN ENERGY HOLDING, INC. 56,865 980,921
MILLER HERMAN INC. 25,980 1,389,930
MINERALS TECHNOLOGIES 12,733 567,414
MINNESOTA POWER AND LIGHT, INC. 18,730 677,792
MODINE MANUFACTURING CORP. 16,802 585,970
MOLEX INC. 70,761 3,140,030
MONTANA POWER COMPANY 30,841 821,142
MURPHY OIL CORPORATION 25,329 1,446,919
MYLAN LABS 68,842 1,544,642
NCH CORP. 4,074 289,254
NCR CORP.* 57,775 2,018,514
NIPSCO INDUSTRIES, INC. 35,414 1,491,815
NABORS INDUSTRIES, INC.* 56,796 2,211,494
NATIONAL FUEL GAS COMPANY 21,532 947,408
NATIONAL PRESTO INDUSTRIES, INC. 4,207 176,957
NEVADA POWER COMPANY 28,077 617,694
NEW CENTURY ENERGIES, INC.* 58,524 2,432,398
NEW ENGLAND ELECTRIC SYSTEMS 36,585 1,435,961
NEW YORK STATE ELECTRIC & GAS CORP. 38,099 1,023,911
NEWPORT NEWS SHIPBUILDING 19,764 465,689
NEXTEL COMMUNICATIONS, INC.* 145,516 4,201,775
NINE WEST GROUP* 20,220 794,899
NOBLE AFFILIATES INC. 32,099 1,436,430
NOBLE DRILLING CORP.* 74,240 2,394,240
NORDSON CORP. 9,745 571,301
NORTHEAST UTILITIES CORP. 73,209 704,637
NORTHERN TRUST CORP. 63,032 3,726,767
NOVACARE INC.* 34,372 592,917
OEA INC.* 11,674 401,294
OGE ENERGY CORP. 22,787 1,075,262
OFFICE DEPOT INC.* 89,085 1,798,403
OFFICEMAX INC.* 69,938 1,062,183
</TABLE>
36
<PAGE>
MIDCAP SPDR TRUST, SERIES 1 SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Common Stock Shares Value
- ---------------------------------------------------
<S> <C> <C>
OGDEN CORPORATION 28,214 $ 666,556
OLD KENT 26,860 1,732,470
OLD REPUBLIC INTERNATIONAL CORP. 49,040 1,912,560
OLIN CORP. 28,297 1,324,653
OLSTEN CORP. 45,849 851,072
OMNICARE, INC. 45,193 1,468,773
OMNICOM GROUP 45,946 3,342,572
OREGON STEEL MILLS, INC. 14,563 395,021
OUTBACK STEAKHOUSE, INC.* 26,844 741,566
OVERSEAS SHIPHOLDING GROUP 20,600 534,313
OXFORD HEALTH PLANS INC.* 44,371 3,322,279
THE PMI GROOUP, INC. 18,828 1,079,080
PACIFIC CENTURY FINANCIAL, CORP. 22,729 1,225,945
PACIFICARE HEALTH SYSTEM, INC.* 23,332 1,589,493
PAINE WEBBER GROUP 51,627 2,403,882
PARKER DRILLING CORP.* 42,931 652,015
PAYCHEX INC. 61,220 2,135,048
PAYLESS SHOE* 21,231 1,267,225
PENTAIR INC. 21,438 790,526
PERRIGO CORP.* 43,222 680,747
PINNACLE WEST CAPITAL CORP. 47,829 1,608,250
PIONEER NATURAL 41,246 1,727,176
PITTSTON BRINK'S GROUP 23,222 930,331
POLICY MANAGEMENT SYSTEM CORP.* 10,331 642,459
POTOMAC ELECTRIC POWER CORP. 66,883 1,521,588
PRECISION CASTPARTS CORP. 13,599 883,935
PREMARK INTERNATIONAL 35,265 1,128,480
T. ROWE, INC. 32,704 2,199,344
PROMUS HOTEL* 29,029 1,300,862
PROVIDENT COMPANIES, INC. 37,931 2,652,799
PUBLIC SERVICE CORP. NEW MEXICO 23,578 455,350
PUGET SOUND ENERGY, INC. 47,727 1,270,731
QUAKER STATE CORP. 19,843 338,571
QUANTUM CORP.* 74,630 2,859,262
QUESTAR CORPORATION 23,207 941,334
RPM, INC. 44,240 906,920
RANGER OIL LTD 55,860 523,688
RAYONIER INC. 16,278 787,448
</TABLE>
37
<PAGE>
MIDCAP SPDR TRUST, SERIES 1 SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Common Stock Shares Value
- ----------------------------------------------------
<S> <C> <C>
REGIONS FINANCIAL CORP. 77,171 $ 2,836,034
REYNOLDS & REYNOLDS COMPANY 44,721 869,264
ROBERT HALF INTERNATIONAL* 51,241 2,120,096
ROHR INC.* 14,278 441,726
ROLLINS, INC. 19,082 455,583
RUDDICK CORP. 26,288 423,894
SCI SYSTEMS INC.* 33,698 1,670,157
SAVANNAH FOODS & INDUSTRIES 14,872 280,709
SBARRO INC. 11,567 323,876
SCANA CORP. 60,451 1,515,053
SCHERER (R.P.)* 13,416 830,954
SCHOLASTIC CORP.* 9,204 363,558
SCHULMAN INC. 20,579 439,876
SEAGULL ENERGY CORP.* 35,657 909,254
SEALED AIR CORP.* 24,044 1,320,917
SENSORMATIC ELECTRONICS CORP. 41,881 591,569
SEQUA CORP.* 5,627 324,256
SEQUENT COMPUTER SYSTEMS, INC.* 22,532 559,075
SERVICE MERCHANDISE INC.* 56,335 232,382
SHAW INDUSTRIES INC. 76,029 955,114
SMITH INTERNATIONAL INC.* 22,739 1,766,536
J M SMUCKER CORP. 16,486 458,517
SOLECTRON CORP.* 64,181 2,856,055
SOLUTIA INC.* 66,779 1,335,580
SONOCO PRODUCTS CORP. 51,121 1,734,919
SOTHEBY'S HOLDINGS INC. 31,537 640,595
SOUTHDOWN INCORPORATED 13,999 764,695
SOUTHERN NEW ENGLAND TELECOM. 37,219 1,523,653
SOUTHTRUST CORP. 56,231 2,769,377
STANDARD REGISTER CORP. 16,145 537,830
STANHOME INC. 9,881 292,107
STAPLES INC.* 91,839 2,537,052
STARBUCKS CORP.* 44,524 1,861,660
STERLING COMMERCE INC.* 50,596 1,818,294
STEWART & STEVENSON 18,801 452,399
STEWART ENTERPRISES, INC. 26,753 1,170,444
STORAGE TECHNOLOGY* 34,789 1,663,349
STRATUS COMPUTER* 12,995 628,633
</TABLE>
38
<PAGE>
MIDCAP SPDR TRUST, SERIES 1 SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Common Stock Shares Value
- --------------------------------------------------------
<S> <C> <C>
STRUCTURAL DYNAMIC* 18,649 $ 477,881
STRYKER CORP. 54,186 2,367,251
SUMMIT BANCORP 98,955 4,397,313
SUNDSTRAND CORP. 33,810 1,948,301
SUNGARD DATA * 48,678 1,180,442
SUPERIOR INDUSTRIES 15,878 439,622
SYBRON INTERNATIONAL CORP.* 26,831 1,152,056
SYMANTEC CORP.* 31,415 714,691
SYMBOL TECHNOLOGI 22,181 974,556
TCA CABLE TV 14,021 546,819
TECO ENERGY 73,784 1,807,708
TECUMSEH PRODUCT 12,400 690,525
TELEFLEX 20,640 714,660
TELEPHONE & DATA 33,586 1,511,370
TERADYNE, INC.* 46,972 2,527,681
THIOKOL CORP. 10,339 889,154
360 DEGREE COMMUNICATIONS* 68,766 1,435,490
TIDEWATER INC. 34,085 2,019,536
TIFFANY & CO. 19,655 835,338
TOSCO CORP. 88,124 3,067,817
TRANSATLANTIC HOLDINGS 19,500 1,396,688
TRANSOCEAN OFFSHORE INC. 57,188 2,741,450
TRINITY INDUSTRIES 24,324 1,173,633
TYSON FOODS 121,617 2,850,398
UCAR INTERNATIONAL, INC.* 25,923 1,237,823
USA WASTE SERVICE* 114,192 4,553,406
ULTRAMAR DIAMOND SHAMROCK 49,344 1,594,428
UNIFI, INC. 34,888 1,428,228
UNION PLANTERS CORP. 37,863 2,082,573
UNISOURCE WORLDWIDE INC. 37,863 719,397
U.S. FILTER CORP.* 46,366 1,953,573
OFIS* 41,273 1,454,873
UNIVERSAL CORP. 19,803 717,859
UNIVERSAL FOODS 14,480 582,820
UTILICORP UNITED 30,439 916,975
VALERO REFUNDING & MARKETING CORP. 30,379 996,811
VANGUARD CELLULAR* 22,735 358,076
</TABLE>
39
<PAGE>
MIDCAP SPDR TRUST, SERIES 1 SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Common Stock Shares Value
- -----------------------------------------------------------
<S> <C> <C>
VARCO INTERNATIONAL* 18,005 $ 873,243
VARIAN ASSOCIATES 17,126 1,063,953
VENCOR INC.* 39,131 1,614,154
VIAD CORP. 54,529 1,039,459
VIKING OFFICE PRODUCTS* 47,275 1,028,231
VISHAY INTERTECHNOLOGY* 36,339 960,712
VULCAN MATERIAL CORP. 19,161 1,667,007
WPL HOLDINGS 17,378 497,445
WALLACE COMPUTER 24,357 898,164
WARNACO GROUP, INC. 29,431 934,434
WASHINGTON GAS LIGHT 24,665 632,041
WASHINGTON POST 6,111 2,738,492
WATSON PHARMACEUTICALS* 24,616 1,470,806
WATTS INDUSTRIES 15,303 424,658
WAUSAU PAPER MILL 20,610 504,945
WEATHERFORD ENTERRA, INC.* 30,734 1,638,506
WELLMAN, INC. 17,561 407,196
WILMINGTON TRUST CORP. 19,086 1,042,573
WISCONSIN ENERGY Total 63,702 1,656,252
WITCO CORP. 32,351 1,476,014
XILINX, INC.* 41,521 2,102,001
YORK INTERNATIONAL 24,227 1,084,158
------------
Total Investments (Cost $429,275,228) $496,761,298
============
</TABLE>
* Designates a security on which no dividends were declared during the year
ended September 30, 1997.
40
<PAGE>
THE TRUST
The Trust is a unit investment trust created under the laws of the State of
New York pursuant to the Trust Agreement*. The Securities held by the Trust
consist of a portfolio of common stocks or, in the case of securities not yet
delivered in connection with purchases made by the Trust or Portfolio
Deposits, confirmations of contracts to purchase such securities
(collectively, the "Portfolio").
CREATION OF CREATION UNITS
Portfolio Deposits may be deposited with the Trustee through the clearing
processes of NSCC, following placement with the Distributor of orders to
create MidCap SPDRs. The Distributor shall reject any order that is not
submitted in proper form. Investors may deposit Portfolio Deposits through the
MidCap SPDR Clearing Process or directly with the Trustee outside the MidCap
SPDR Clearing Process. The Transaction Fee will be charged at the time of
creation of a Creation Unit Size aggregation of MidCap SPDRs, and an
additional amount not to exceed three (3) times the Transaction Fee applicable
for one Creation Unit will be charged per Creation Unit to a creator creating
outside the MidCap SPDR Clearing Process by depositing directly with the
Trustee through DTC, in part due to the increased expense associated with
settlement outside the MidCap SPDR Clearing Process. See "Prospectus Summary--
Transaction Fee" for a detailed description of the amount of the Transaction
Fee and the additional amounts and reductions, limitations and waivers
applicable thereto, if any.
The Trustee, at the direction of the Sponsor in its sole discretion, from
time to time and for such periods as may be determined by the Sponsor in its
sole discretion, will increase** or reduce the amount and/or waive the
imposition altogether of the Transaction Fee (and/or the additional amounts
charged in connection with creations and/or redemptions outside the MidCap
SPDR Clearing Process) for certain lot-size creations and/or redemptions of
MidCap SPDRs, whether applied solely to creations and/or redemptions made
through the MidCap SPDR Clearing Process (see "Procedures for Creation of
Creation Units"), solely to creations and/or redemptions made outside the
MidCap SPDR Clearing Process, or to both methods of creation and/or
redemption. The Sponsor also reserves the right, from time to time, to vary
the lot-size of the creations and/or redemptions of MidCap SPDRs subject to
such an increase and/or entitled to such a reduction or waiver of the
Transaction Fee and the additional amounts charged in connection with
creations and/or redemptions outside the MidCap SPDR Clearing Process. The
existence of such increase, reduction or waiver of the Transaction Fee (as
well as any additional amounts, if applicable) and
- -----------
* Reference is hereby made to said Trust Agreement, and any statements
contained herein are qualified in their entirety by the provisions of said
Trust Agreement.
** Such increase is subject to the 20 Basis Point Limit discussed above under
"Prospectus Summary--Transaction Fee."
41
<PAGE>
the lot-size of Creation Units affected shall be disclosed in the current
MidCap SPDR Prospectus (see "Prospectus Summary--Transaction Fee"). As of the
date hereof, the Sponsor does not contemplate the reduction, variation by lot-
size or waiver of Transaction Fees in connection with the creation or
redemption of MidCap SPDRs or of the additional amounts charged in connection
with the creation or redemption of MidCap SPDRs outside the MidCap SPDR
Clearing Process beyond that which is discussed herein under the caption
"Prospectus Summary--Transaction Fee".
The shares of common stock of the Index Securities in a Portfolio Deposit on
any date of deposit will reflect the composition and relative weightings of
the Index Securities on such day. The portfolio of Index Securities that is
the basis for a Portfolio Deposit varies as changes are made in the
composition and weighting of the Index Securities (see "The Portfolio--
Adjustments to the Portfolio Deposit"). The Trustee will make available to
NSCC* prior to the commencement of trading on each Business Day a list of the
names and required number of shares of each of the Index Securities in the
current Portfolio Deposit as well as the amount of the Dividend Equivalent
Payment for the previous Business Day. Under certain extraordinary
circumstances which may make it impossible for the Trustee to provide such
information to NSCC on a given Business Day, NSCC shall use the information
regarding the identity and weightings of the Index Securities of the Portfolio
Deposit on the previous Business Day. The identity and number of shares of
each of the Index Securities required for a Portfolio Deposit, as in effect
September 30, 1997, is set forth in the above Schedule of Investments. The
Sponsor makes available (a) on each Business Day, the Dividend Equivalent
Payment effective through and including the previous Business Day, per
outstanding MidCap SPDR, and (b) every 15 seconds throughout the day at the
Exchange a number representing, on a per MidCap SPDR basis, the sum of the
Dividend Equivalent Payment effective through and including the previous
Business Day, plus the current value of the securities portion of a Portfolio
Deposit as in effect on such day (which value will occasionally include a cash
in lieu amount to compensate for the omission of a particular Index Security
from such Portfolio Deposit--see below and also "The Portfolio--Adjustments to
the Portfolio Deposit"). Such information is calculated based upon the best
information available to the Sponsor and may be calculated by other persons
designated to do so by the Sponsor. The inability of the Sponsor to provide
such information will not in itself result in a halt in the trading of MidCap
SPDRs on the Exchange. Investors interested in creating MidCap SPDRs or
purchasing MidCap SPDRs in the secondary market should not rely solely on such
information in making investment decisions but should also consider other
market information and relevant economic and other factors
- -----------
* As of December 31, 1997, the American Stock Exchange Clearing Corporation,
a wholly-owned subsidiary of the Exchange, owned 33% of the issued and
outstanding shares of common stock of NSCC.
42
<PAGE>
(including, without limitation, information regarding the S&P MidCap 400
Index, the Index Securities and financial instruments based on the S&P MidCap
400 Index).
In the event that an Index Security is not eligible for transfer through the
MidCap SPDR Clearing Process, the Trustee shall include the cash equivalent
value of such Index Security determined in accordance with the procedures
listed under "Valuation" as a part of the Cash Component in lieu of the
inclusion of such Index Security in the securities portion of the Portfolio
Deposit.
From time to time, the Trustee may determine, in its discretion, that one or
more of the Index Securities comprising a Portfolio Deposit is likely to be
unavailable for delivery or available in insufficient quantity for delivery to
the Trust upon the creation of MidCap SPDRs for the following Business Day or
for any period thereafter. In such cases, the Trustee shall have the right in
its discretion to permit the cash equivalent value of such Index Security or
Index Securities, based on the market value of such Index Security or Index
Securities as determined in accordance with the procedures listed under
"Valuation", as a part of the Cash Component in lieu of the inclusion of such
Index Security or Index Securities in the securities portion of the Portfolio
Deposit. In the event that such a determination is made, the Portfolio Deposit
so constituted shall dictate the Index Security or Index Securities to be
delivered in connection with the creation or redemption of MidCap SPDRs for
all purposes until such time as the securities portion of the Portfolio
Deposit is subsequently adjusted or the Index Security at issue becomes
available.
In connection with the creation of MidCap SPDRs, if an investor is
restricted by regulation or otherwise from investing or engaging in a
transaction in one or more Index Securities, the Trustee shall have the right
in its discretion to permit the cash equivalent value of such Index Security
or Index Securities based on the market value of such Index Security or Index
Securities as of the Evaluation Time on the date such creation order is deemed
received by the Distributor (see "Placement of Creation Orders Outside the
MidCap SPDR Clearing Process") in the Portfolio Deposit as a part of the Cash
Component in lieu of the inclusion of such Index Security or Index Securities
in the securities portion of the Portfolio Deposit for the particular affected
investor. The amount of such cash equivalent payment shall be used by the
Trustee in accordance with the guidelines regarding allowable Misweightings
and permitted amounts of cash (see "The Portfolio--Adjustments to the
Portfolio") which may require the Trustee to purchase the appropriate number
of shares of the Index Security that such investor was unable to purchase. In
any such case such investor will pay the Trustee the standard Transaction Fee,
plus an additional amount per Creation Unit not to exceed three (3) times the
Transaction Fee applicable for one Creation Unit.
Brokerage commissions incurred in connection with the acquisition by the
Trustee of any Index Security with cash deposited in lieu of such Index
Security will be an expense of the Trust and hence will affect the value of
all MidCap SPDRs.
43
<PAGE>
Upon receipt of a Portfolio Deposit or Deposits, following placement with
the Distributor of an order to create MidCap SPDRs, the Trustee will deliver
MidCap SPDRs in Creation Unit size aggregations to the Depository. In turn,
the MidCap SPDR position will be removed from the Trustee's account at the
Depository and will be allocated to the account of the DTC Participant acting
on behalf of the depositor creating Creation Unit(s) (see "The Trust--
Procedures for Creation of Creation Units" and "The Trust--Book-Entry-Only
System"). Each MidCap SPDR represents a fractional undivided interest in the
Trust in an amount equal to one (1) divided by the total number of MidCap
SPDRs outstanding. The Trustee may reject a request to create Creation Units
made by any depositor or group of depositors if such depositor(s), upon the
acceptance by the Trustee of such request and the issuance to such
depositor(s) of MidCap SPDRs, would own eighty percent (80%) or more of the
outstanding MidCap SPDRs (see "Tax Status of the Trust"). The Trustee also may
reject any Portfolio Deposit or any component thereof under certain other
circumstances (see "The Trust--Procedures for Creation of Creation Units").
Additional MidCap SPDRs in Creation Unit size aggregations will be created
upon receipt of the appropriate Portfolio Deposits from creators. As
additional MidCap SPDRs in Creation Unit size aggregations are created, the
aggregate value of the Portfolio will be increased and the fractional
undivided interest in the Trust represented by each MidCap SPDR will be
decreased. As discussed above, under certain circumstances (1) a portion of
the securities portion of a Portfolio Deposit may consist of contracts to
purchase certain Index Securities or (2) a portion of the Cash Component may
consist of cash in an amount to enable the Trustee to purchase such Index
Securities. In the event there is a failure to deliver the Index Securities
which are the subject of such contracts to purchase, the Trustee will be
instructed pursuant to the Agreement to acquire such Index Securities in an
expeditious manner. To the extent the price of any such Index Security
increases or decreases between the time of creation and the time any such
Index Security is purchased and delivered, MidCap SPDRs will represent fewer
or more shares of such Index Security and more or fewer of the other Index
Securities in the Trust. Hence, price fluctuations during the period from the
time the cash is received by the Trustee to the time the requisite Index
Securities are purchased and delivered will affect the value of all MidCap
SPDRs.
The identity and number of shares of the Index Securities required for a
Portfolio Deposit are determined in the manner described herein. Due to
changes in the composition and weighting of the Index Securities, the
composition and weighting of the Securities and the prescribed Portfolio
Deposit will also change from time to time (see "The Portfolio--Adjustments to
the Portfolio" and "The Portfolio-- Adjustments to the Portfolio Deposit").
The identity and weightings of the Index Securities to be delivered as part of
a Portfolio Deposit are determined daily and reflect the relative weighting of
the current S&P MidCap 400 Index and, together with
44
<PAGE>
the Cash Component, have a value equal to the net asset value of the Trust on
a per Creation Unit basis at the close of business on the day of request for
creation. The composition of the Portfolio is also adjusted from time to time
to conform to the changes to the S&P MidCap 400 Index as described herein and
as set forth in the Trust Agreement. As the weightings and identities of the
Index Securities change, substantially identical changes to the composition of
the required Portfolio Deposit are made contemporaneously. Corresponding
adjustments to the composition or weighting of the Portfolio, however, are not
necessarily made contemporaneously with adjustments to the required Portfolio
Deposit, but are made in accordance with the specifications set forth herein
and in the Trust Agreement (see "The Portfolio--Adjustments to the
Portfolio"). Although the composition of the securities portion of a Portfolio
Deposit changes from time to time, the interests of Beneficial Owners will not
be adversely affected because the composition of such securities and the
aggregate value thereof, together with the Cash Component, will be calculated
based upon the proportionate net asset value of the Trust (see "The
Portfolio--Adjustments to the Portfolio").
PROCEDURES FOR CREATION OF CREATION UNITS
To be eligible to place orders with the Distributor to create MidCap SPDRs
in Creation Unit size aggregations, an entity or person must be (1) a
Participating Party, with respect to creations through the MidCap SPDR
Clearing Process, or (2) a DTC Participant, with respect to creations outside
the MidCap SPDR Clearing Process. All MidCap SPDRs, however created, will be
entered on the records of the Depository in the name of Cede & Co. for the
account of a DTC Participant (see "The Trust--Book Entry Only System").
All orders to create MidCap SPDRs must be placed in multiples of 25,000
MidCap SPDRs (Creation Unit size). All orders to create MidCap SPDRs, whether
through the MidCap SPDR Clearing Process or outside the MidCap SPDR Clearing
Process must be received by the Distributor by no later than the closing time
of the regular trading session on the New York Stock Exchange, Inc. ("Closing
Time") (ordinarily 4:00 p.m. New York time), in each case on the date such
order is placed in order for creation of MidCap SPDRs to be effected based on
the net asset value of the Trust as determined on such date. The date on which
a creation order (or order to redeem as discussed below) is placed is herein
referred to as the "Transmittal Date". Orders must be transmitted by telephone
or other transmission method acceptable to the Distributor and Trustee,
pursuant to procedures set forth in the Participant Agreement, as described
below (see "Placement of Creation Orders Using MidCap SPDR Clearing Process"
and "Placement of Creation Orders Outside MidCap SPDR Clearing Process").
Severe economic or market disruptions or changes, or telephone or other
communication failure, may impede the ability to reach the Distributor, the
Trustee, a Participating Party or a DTC Participant.
45
<PAGE>
Orders to create Creation Unit sized aggregations of MidCap SPDRs shall be
placed with a Participating Party or DTC Participant, as applicable, in the
form required by such Participating Party or DTC Participant. Investors should
be aware that their particular broker may not have executed a Participant
Agreement, and that, therefore, orders to create Creation Unit sized
aggregations of MidCap SPDRs may have to be placed by the investor's broker
through a Participating Party or a DTC Participant who 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 to create MidCap SPDRs through the MidCap SPDR 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 MidCap SPDR Clearing
Process are likely to require transmittal by the DTC Participant earlier on
the Transmittal Date than orders effected using the MidCap SPDR Clearing
Process. Those persons placing orders outside the MidCap SPDR 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 securities and Cash
Component. The DTC Participant notified of an order to create MidCap SPDRs
outside the MidCap SPDR Clearing Process shall be required to effect a
transfer of (1) the requisite Index Securities through DTC by 11:00 a.m. on
the next Business Day immediately following the Transmittal Date in such a way
as to replicate the Portfolio Deposit established on the Transmittal Date by
the Trustee in calculating the net asset value of the Trust and (2) the Cash
Component through the Federal Reserve wire transfer system so as to be
received by the Trustee by 1:00 p.m. on the next Business Day immediately
following the Transmittal Date. If the Trustee does NOT receive both the Index
Securities by 11:00 a.m. and the Cash Component by 1:00 p.m. on the Business
Day immediately following Transmittal Date, such order shall be cancelled.
Upon written notice to the Distributor, such cancelled order may be
resubmitted the following Business Day using a Portfolio Deposit as newly
constituted to reflect the current net asset value of the Trust.
All questions as to the number of shares of each of the Index Securities,
the amount of the Cash Component and the validity, form, eligibility
(including time of receipt) and acceptance for deposit of any Index Securities
to be delivered shall be determined by the Trustee, whose determination shall
be final and binding. The Trustee reserves the absolute right to reject a
creation order transmitted to it by the Distributor in respect of any
Portfolio Deposit or any component thereof if (a) the depositor or group of
depositors, upon obtaining the MidCap SPDRs ordered, would own 80% or more of
the current outstanding MidCap SPDRs, (b) the Portfolio Deposit is not in
proper form; (c) acceptance of the Portfolio Deposit would have certain
adverse tax consequences (see "Tax Status of the Trust"); (d) the acceptance
of the Portfolio Deposit would, in the opinion of counsel, be unlawful; (e)
the acceptance of
46
<PAGE>
the Portfolio Deposit would otherwise, in the discretion of the Trustee, have
an adverse effect on the Trust or the rights of Beneficial Owners; or (f) in
the event that circumstances outside the control of the Trustee make it for
all practical purposes impossible to process creations of MidCap SPDRs. The
Trustee and the Sponsor are under no duty to give notification of any defects
or irregularities in the delivery of Portfolio Deposits or any component
thereof nor shall either of them incur any liability for the failure to give
any such notification.
A list of the Participating Parties or DTC Participants that have executed a
Participant Agreement (as hereinafter defined) is available at the office of
the Trustee at 101 Barclay Street, New York, New York 10286 and the office of
the Distributor at 370 17th Street, Suite 3100, Denver, CO 80202 during normal
business hours.
PLACEMENT OF CREATION ORDERS USING MIDCAP SPDR CLEARING PROCESS
Portfolio Deposits created through the MidCap SPDR Clearing Process must be
delivered through a Participating Party (see "Prospectus Summary--Portfolio
Deposits") that has executed a Participant Agreement with the Distributor and
with the Trustee (as the same may be from time to time amended in accordance
with its terms, the "Participant Agreement"). The Participant Agreement
authorizes the Trustee to transmit 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 from the Trustee
to NSCC, the Participating Party agrees to transfer the requisite Index
Securities (or contracts to purchase such Index Securities that are expected
to be delivered in a "regular way" manner by the third (3rd) NSCC Business
Day) and the Cash Component to the Trustee, together with such additional
information as may be required by the Trustee. An order to create MidCap SPDRs
through the MidCap SPDR 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.
Effective April 1, 1998, MidCap SPDRs may be created in advance of the
receipt by the Trustee of all or a portion of the Portfolio Deposit relating
to such MidCap SPDRs. In such cases, the Participating Party will remain
liable for the full deposit of the missing portion(s) of the Portfolio Deposit
and will be required to post collateral with the Trustee consisting of cash at
least equal to 115% of the marked-to-market value of such missing portion(s).
The Trustee will hold such collateral in an account separate and apart from
the Trust. Information concerning the procedures for such cash
collateralization will be available from the Distributor prior to the
effective date of these provisions. The Participant Agreement for any
Participating Party intending to follow such procedures will contain terms and
conditions permitting the Trust to use such collateral to buy the missing
portion(s) of the Portfolio Deposit at any time and will subject such
Participating Party to liability for any shortfall between the cost to the
Trust of purchasing such securities and the value of such collateral. The
Trust will have no liability for any such shortfall. The Trustee will return
any unused portion of the collateral to the Participating Party once the
entire Portfolio Deposit has been properly received by the Trustee and
deposited into the Trust.
47
<PAGE>
PLACEMENT OF CREATION ORDERS OUTSIDE MIDCAP SPDR CLEARING PROCESS
Portfolio Deposits created outside the MidCap SPDR Clearing Process must be
delivered through a DTC Participant that has executed a Participant Agreement
with the Distributor and with the Trustee. A DTC Participant who wishes to
place an order creating MidCap SPDRs to be effected outside the MidCap SPDR
Clearing Process need not be a Participating Party, but such orders must state
that the DTC Participant is not using the MidCap SPDR Clearing Process and
that creation of MidCap SPDRs will instead be effected through a transfer of
securities and cash. The Portfolio Deposit transfer must be ordered by the DTC
Participant in a timely fashion so as to ensure the delivery of the requisite
number of Index Securities through DTC to the account of the Trustee by no
later than 11:00 a.m. of the next Business Day immediately following the
Transmittal Date. All questions as to the number of Index 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 Trustee,
whose determination shall be final and binding. The cash equal to the Cash
Component must be transferred directly to the Trustee through the Federal
Reserve wire system in a timely manner so as to be received by the Trustee no
later than 1:00 p.m. on the next Business Day immediately following the
Transmittal Date. An order to create MidCap SPDRs outside the MidCap SPDR
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. However, if the Trustee does not
receive both the requisite Index Securities and the Cash Component in a timely
fashion 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
Portfolio Deposit as newly constituted to reflect the current net asset value
of the Trust. The delivery of MidCap SPDRs so created will occur no later than
the third (3rd) Business Day, as applicable, following the day on which the
creation order is deemed received by the Distributor. Under the current
schedule, the total fee charged in connection with the creation of one
Creation Unit outside the MidCap SPDR Clearing Process would not exceed
$12,000 (see "Prospectus Summary--Transaction Fee").
BOOK-ENTRY-ONLY SYSTEM
The Depository acts as securities depository for MidCap SPDRs. MidCap SPDRs
are represented by a single global security (the "Global Security"), which is
registered in the name of Cede & Co., as nominee for the Depository and
deposited with, or on behalf of, the Depository. Certificates will not be
issued for MidCap SPDRs.
The Depository has advised the Sponsor and the Trustee as follows: The
Depository is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation"
48
<PAGE>
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. The Depository 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 the
Depository.* Access to the Depository 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"). The Depository agrees with and represents to
its participants that it will administer its book-entry system in accordance
with its rules and by-laws and requirements of law.
Upon the settlement date of any creation, transfer or redemption of MidCap
SPDRs, the Depository will credit or debit, on its book-entry registration and
transfer system, the amount of MidCap SPDRs so created, transferred or
redeemed to the accounts of the appropriate DTC Participants. The accounts to
be credited and charged shall be designated by the Trustee to NSCC, in the
case of a creation or redemption through the MidCap SPDR Clearing Process, or
by the Trustee and the DTC Participant, in the case of a creation or
redemption transacted outside of the MidCap SPDR Clearing Process (see "The
Trust--Procedures for Creation of Creation Units" and "Redemption of MidCap
SPDRs"). Beneficial ownership of MidCap SPDRs is limited to DTC Participants,
Indirect Participants and persons holding interests through DTC Participants
and Indirect Participants. Ownership of beneficial interests in MidCap SPDRs
(owners of such beneficial interests are referred to herein as "Beneficial
Owners") will be shown on, and the transfer of ownership will be effected only
through, records maintained by the Depository (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 are expected to receive from or through the DTC Participant a written
confirmation relating to their purchase of MidCap SPDRs. The laws of some
jurisdictions may require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such laws may impair the
ability of certain investors to acquire beneficial interests in MidCap SPDRs.
- -----------
* As of December 31, 1997, the Exchange owned 4.68347% of the issued and
outstanding shares of common stock of the Depository and an affiliate of
the Exchange, AMEX Clearing Corp., owned 0.00188% of the issued and
outstanding shares of common stock of the Depository. Also as of such
date, the Trustee owned 2.31948% of the issued and outstanding shares of
common stock of the Depository.
49
<PAGE>
So long as Cede & Co., as nominee of the Depository, is the registered owner
of MidCap SPDRs, references herein to the registered or record owners of
MidCap SPDRs shall mean Cede & Co. and shall not mean the Beneficial Owners of
MidCap SPDRs. Beneficial Owners of MidCap SPDRs will not be entitled to have
MidCap SPDRs registered in their names, will not receive or be entitled to
receive physical delivery of certificates in definitive form and will not be
considered the record or registered holder thereof under the Trust Agreement.
Accordingly, each Beneficial Owner must rely on the procedures of the
Depository, the DTC Participant and any indirect Participant through which
such Beneficial Owner holds its interests, to exercise any rights of a holder
of MidCap SPDRs under the Trust Agreement. The Trustee and the Sponsor
understand that under existing industry practice, in the event the Trustee
requests any action of MidCap SPDR holders, or a Beneficial Owner desires to
take any action that the Depository, as the record owner of all outstanding
MidCap SPDRs, is entitled to take, the Depository would authorize the DTC
Participants to take such action and that the DTC Participants would authorize
the indirect Participants and Beneficial Owners acting through such DTC
Participants to take such action or would otherwise act upon the instructions
of Beneficial Owners owning through them.
As described above, the Trustee recognizes the Depository or its nominee as
the owner of all MidCap SPDRs for all purposes except as expressly set forth
in the Trust Agreement. Conveyance of all notices, statements and other
communications to Beneficial Owners is effected as follows. Pursuant to the
agreement between the Trustee and the Depository (as the same may be from time
to time amended in accordance with its terms, the "Depository Agreement"), the
Depository is required to make available to the Trustee upon request and for a
fee to be charged to the Trust a listing of the MidCap SPDR holdings of each
DTC Participant. The Trustee shall inquire of each such DTC Participant as to
the number of Beneficial Owners holding MidCap SPDRs, directly or indirectly,
through such DTC Participant. The Trustee 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 the expenses
attendant to such transmittal, all subject to applicable statutory and
regulatory requirements.
MidCap SPDR distributions shall be made to the Depository or its nominee,
Cede & Co., as the registered owner of all MidCap SPDRs. The Trustee and the
Sponsor expect that the Depository or its nominee, upon receipt of any payment
of distributions in respect of MidCap SPDRs, shall credit immediately DTC
Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in MidCap SPDRs as shown on the records of the
Depository or its nominee. The
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<PAGE>
Trustee and the Sponsor also expect that payments by DTC Participants to
indirect Participants and Beneficial Owners of MidCap SPDRs 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. Neither the Trustee nor the Sponsor
has or will have any 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 MidCap SPDRs, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests or for any other aspect of the relationship between the Depository
and the DTC Participants or the relationship between such DTC Participants and
the indirect Participants and Beneficial Owners owning through such DTC
Participants.
Beneficial Owners may elect to have their distributions reinvested in
additional MidCap SPDRs (see "Dividend Reinvestment Service").
The Depository may determine to discontinue providing its service with
respect to MidCap SPDRs at any time by giving notice to the Trustee and the
Sponsor and discharging its responsibilities with respect thereto under
applicable law. Under such circumstances, the Trustee and the Sponsor shall
take action either to find a replacement for the Depository to perform its
functions at a comparable cost or, if such a replacement is unavailable, to
terminate the Trust (see "Termination of the Trust").
THE PORTFOLIO
Because the objective of the Trust is to provide investment results that
correspond substantially to the price and yield performance of the S&P MidCap
400 Index, the Portfolio will at any time consist of as many of the Index
Securities as is practicable. It is anticipated that cash or cash items (other
than dividends held for distribution) normally would not be a substantial part
of the Trust's net assets. Although the Trust may at any time fail to own
certain of the Index Securities, the Trust will be substantially invested in
Index Securities and the Sponsor believes that such investment should result
in a close correspondence between the investment performance of the S&P MidCap
400 Index and that derived from ownership of MidCap SPDRs.
ADJUSTMENTS TO THE PORTFOLIO
The S&P MidCap 400 Index is a capitalization-weighted index of 400
securities calculated under the auspices of the S&P Committee of Standard and
Poor's. At any moment in time, the value of the Index equals the aggregate
market value of the total shares outstanding in each of the component 400
Index Securities, evaluated at their respective last sale prices on the NYSE,
AMEX, or NASDAQ, divided by a scaling factor (the "divisor") which yields a
resulting index value in the reported magnitude.
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Periodically (typically, several times per quarter), Standard & Poor's may
determine that total shares outstanding have changed in one or more component
Index Securities due to secondary offerings, repurchases, conversions or other
corporate actions. Additionally, the S&P Committee may periodically
(ordinarily, several times per quarter) replace one or more component
securities in the S&P MidCap 400 Index due to mergers, acquisitions,
bankruptcies or other market conditions, or if the issuers of such component
securities fail to meet the criteria for inclusion in the S&P MidCap 400
Index. In 1997, there were 54 company changes to the MidCap Index. Ordinarily,
whenever there is a change in shares outstanding or a change in a component
security included in the S&P MidCap 400 Index, Standard & Poor's adjusts the
divisor to assure that there is no discontinuity in the value of the S&P
MidCap 400 Index which might otherwise be caused by any such change.
Because the investment objective of the Trust is to provide investment
results that generally correspond to the price and yield performance of the
S&P MidCap 400 Index, such share, name, and divisor changes to the S&P MidCap
400 Index create the need for the Trust to make corresponding portfolio
adjustments as described below.
The Trustee adjusts the composition of the Portfolio from time to time to
conform to changes in the composition and/or weighting structure of the Index
Securities. The Trustee aggregates certain of these adjustments and makes
conforming changes to the Trust's portfolio at least monthly; however,
adjustments are made more frequently in the case of changes to the S&P MidCap
400 Index that are significant. Specifically, the Trustee is required to
adjust the composition of the Portfolio at any time that there is a change in
the identity of any Index Security (i.e., a substitution of one security in
replacement of another), which adjustment is to be made within three (3)
Business Days before or after the day on which the change in the identity of
such Index Security is scheduled to take effect at the close of the market.
Although the investment objective of the Trust is to provide investment
results which resemble the performance of the S&P MidCap 400 Index, it is not
always efficient to replicate identically the share composition of the S&P
MidCap 400 Index if the transaction costs incurred by the Trust in so
adjusting the Portfolio would exceed the expected misweighting that would
ensue by failing to replicate identically minor and insignificant share
changes to the Index. Accordingly, to further the investment objective of the
Trust, minor misweightings are generally permitted within the guidelines set
forth below. The Trustee is required to adjust the composition of the
Portfolio at any time that the weighting of any Security varies in excess of
one hundred and fifty percent (150%) of a specified percentage, which
percentage varies from 25/100 of 1% to 2/100 of 1%, depending on the net asset
value of the Trust (in each case, the "Misweighting Amount"), from the
weighting of such Security in the S&P MidCap 400 Index (a "Misweighting").
The Trustee shall examine each Security in the Portfolio on each Business
Day, comparing the weighting of each such Security in the Portfolio to the
weighting of the
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<PAGE>
corresponding Index Security in the S&P MidCap 400 Index, based on prices at
the close of the market on the preceding Business Day (a "Weighting
Analysis"). In the event that there is a Misweighting in any Security in
excess of one hundred and fifty percent (150%) of the applicable Misweighting
Amount, the Trustee shall calculate an adjustment to the Portfolio in order to
bring the Misweighting of such Security within the Misweighting Amount, based
on prices at the close of the market on the day on which such Misweighting
occurs. Also, on a monthly basis, the Trustee shall perform a Weighting
Analysis for each Security in the Portfolio, and in any case where there
exists a Misweighting exceeding one hundred percent (100%) of the applicable
Misweighting Amount, the Trustee shall calculate an adjustment to the
Portfolio in order to bring the Misweighting of such Security within the
applicable Misweighting Amount, based on prices at the close of the market on
the day on which such Misweighting occurs. In the case of any adjustment to
the Portfolio due to a Misweighting as described herein, the purchase or sale
of securities necessitated by such adjustment shall be made within three (3)
Business Days of the day on which such Misweighting is determined. In addition
to the foregoing adjustments, the Trustee reserves the right to make
additional adjustments periodically to Securities that may be misweighted by
an amount within the applicable Misweighting Amount in order to reduce the
overall Misweighting of the Portfolio.
The foregoing guidelines with respect to Misweightings shall also apply to
any Index Security that (1) is likely to be unavailable for delivery or
available in insufficient quantity for delivery, (2) cannot be delivered to
the Trustee due to restrictions prohibiting a creator from engaging in a
transaction involving such Index Security or (3) is not eligible to be
processed through the MidCap SPDR Clearing Process. (From time to time, an
Index Security may not be eligible for transfer through the MidCap SPDR
Clearing Process because such Security is not eligible for transfer through
the systems of the Depository.) Upon receipt of an order for a Creation Unit
that will involve such an Index Security, the Trustee shall determine whether
the substitution of cash for such Index Security will cause a Misweighting in
the Trust's Portfolio with respect to such Index Security. If a Misweighting
results, the Trustee shall purchase the required number of shares of such
Index Security on the opening of the market on the following Business Day. If
a Misweighting does not result and the Trustee would not hold cash in excess
of the permitted amounts described herein, the Trustee may hold such cash or,
if such an excess would result, make the required adjustments to the Portfolio
in accordance with the procedures described herein.
Pursuant to these guidelines the Trustee shall calculate the required
adjustments and shall purchase and sell the appropriate securities. As a
result of the purchase and sale of securities in accordance with these
requirements, or the creation of Creation Units, the Trust may hold some
amount of residual cash (other than cash held temporarily due to timing
differences between the sale and purchase of securities or cash delivered in
lieu of Index Securities or undistributed income or undistributed
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<PAGE>
capital gains) as a result of such transactions, which amount shall not exceed
for more than five (5) consecutive Business Days 5/10th of 1 percent of the
aggregate value of the Securities. In the event that the Trustee has made all
required adjustments and is left with cash in excess of 5/10th of 1 percent of
the aggregate value of the Securities, the Trustee shall use such cash to
purchase additional Index Securities that are under-weighted in the Portfolio
as compared to their relative weightings in the S&P MidCap 400 Index, although
the Misweighting of such Index Securities may not be in excess of the
applicable Misweighting Amount.
All adjustments to the Portfolio held by the Trustee shall be made by the
Trustee pursuant to the foregoing specifications and as set forth in the Trust
Agreement and shall be non-discretionary. All portfolio adjustments will be
made as described herein unless such adjustments would cause the Trust to lose
its status as a "regulated investment company" under Subchapter M of the
Internal Revenue Code. Additionally, the Trustee is required to adjust the
composition of the Portfolio at any time if it is necessary to insure the
continued qualification of the Trust as a regulated investment company (see
"Tax Status of the Trust"). The adjustments provided herein are intended to
conform the composition and weightings of the Portfolio, to the extent
practicable, to the composition and weightings of the Index Securities. Such
adjustments are based upon the S&P MidCap 400 Index as it is currently
determined by Standard & Poor's. To the extent that the method of determining
the S&P MidCap 400 Index is changed by Standard & Poor's in a manner that
would affect the adjustments provided for herein, the Trustee and the Sponsor
shall have the right to amend the Trust Agreement, without the consent of the
Depository or Beneficial Owners, to conform the adjustments provided herein
and in the Trust Agreement to such changes so that the objective of tracking
the S&P MidCap 400 Index is maintained.
In making the adjustments described herein, the Trustee shall rely on
industry sources for information as to the composition and weightings of the
Index Securities. If the Trustee becomes incapable of obtaining or processing
such information or NSCC is unable to receive such information from the
Trustee on any Business Day, then the Trustee shall use the composition and
weightings of the Index Securities for the most recently effective Portfolio
Deposit for the purposes of all adjustments and determinations described
herein (including, without limitation, determination of the securities portion
of the Portfolio Deposit) until the earlier of (a) such time as current
information with respect to the Index Securities is available or (b) three (3)
consecutive Business Days have elapsed. If such current information is not
available and three (3) consecutive Business Days have elapsed, the
composition and weightings of the Securities (as opposed to the Index
Securities) shall be used for the purposes of all adjustments and
determinations herein (including, without limitation, determination of the
securities portion of the Portfolio Deposit) until current information with
respect to the Index Securities is available.
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<PAGE>
At such time as the Trustee gives written notice of the termination of the
Trust (see "Administration of the Trust--Termination"), from and after the
date of such notice the Trustee shall use the composition and weightings of
the Securities as of such notice date for the purpose and determination of all
redemptions or other required uses of the basket.
From time to time Standard & Poor's may make adjustments to the composition
of the S&P MidCap 400 Index as a result of a merger or acquisition involving
one or more of the Index Securities. In such cases, the Trust, as shareholder
of securities of an issuer that is the object of such merger or acquisition
activity, may receive various offers from would-be acquirors of the issuer.
The Trustee is not permitted to accept any such offers until such time as it
has been determined that the securities of the issuer will be removed from the
S&P MidCap 400 Index. Since securities of an issuer are often removed from the
S&P MidCap 400 Index only after the consummation of a merger or acquisition of
such issuer, in selling the securities of such issuer the Trust may receive,
to the extent that market prices do not provide a more attractive alternative,
whatever consideration is being offered to the shareholders of such issuer
that have not tendered their shares prior to such time. Any cash received in
such transactions will be reinvested in Index Securities in accordance with
the criteria set forth above. Any securities received as a part of the
consideration that are not Index Securities will be sold as soon as
practicable and the cash proceeds of such sale will be reinvested in
accordance with the criteria set forth above.
Purchases and sales of Securities resulting from the adjustments described
above will be made in the share amounts dictated by the foregoing
specifications, whether round lot or odd lot. Certain Index Securities,
however, may at times not be available in the quantities that the foregoing
calculations require. For this and other reasons, precise duplication of the
proportionate relationship between the Portfolio and the Index Securities may
not ever be possible but nevertheless will continue to be the objective in
connection with all acquisitions and dispositions of Securities.
The Trust is a unit investment trust registered under the 1940 Act and is
not a managed fund. Traditional methods of investment management for a managed
fund typically involve frequent changes to a portfolio of securities on the
basis of economic, financial and market analyses. The Portfolio held by the
Trust, however, is not managed. Instead, the only purchases and sales that are
made with respect to the Portfolio will be those necessary to create, to the
extent feasible, a portfolio that is designed to replicate the S&P MidCap 400
Index to the extent practicable, taking into consideration the adjustments
referred to above. Since no attempt is made to "manage" the Trust in the
traditional sense, the adverse financial condition of an issuer will not be
the basis for the sale of its securities from the Portfolio unless the issuer
is removed from the S&P MidCap 400 Index.
The Trust will be liquidated on the fixed Mandatory Termination Date unless
terminated sooner under certain circumstances (see "Administration of the
Trust--
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Termination"). In addition, Beneficial Owners of MidCap SPDRs in Creation Unit
size aggregations will have the right to redeem in kind (see "Redemption of
MidCap SPDRs").
ADJUSTMENTS TO THE PORTFOLIO DEPOSIT
On each Business Day (each such day an "Adjustment Day"), the number of
shares and/or identity of each of the Index Securities in a Portfolio Deposit
is adjusted in accordance with the following procedure. At the close of the
market on each Adjustment Day, the Trustee calculates the net asset value of
the Trust (see "Valuation"). The net asset value is divided by the number of
outstanding MidCap SPDRs multiplied by 25,000 MidCap SPDRs in one Creation
Unit aggregation, resulting in a net asset value per Creation Unit (the "NAV
Amount"). The Trustee then calculates the number of shares (without rounding)
of each of the component stocks of the S&P MidCap 400 Index in a Portfolio
Deposit for the following Business Day (the "Request Day"), such that (1) the
market value at the close of the market on Adjustment Day of the securities to
be included in the Portfolio Deposit on Request Day, together with the
Dividend Equivalent Payment effective for requests to create or redeem on
Adjustment Day, equals the NAV Amount and (2) the identity and weighting of
each of the securities in a Portfolio Deposit mirrors proportionately the
identity and weightings of the securities in the S&P MidCap 400 Index, each as
in effect on Request Day. For each security, the number resulting from such
calculation is rounded to the nearest whole share, with a fraction of 0.50
being rounded up. The identities and weightings of the securities so
calculated constitute the securities portion of the Portfolio Deposit
effective on Request Day and thereafter until the next subsequent Adjustment
Day, as well as the Securities to be delivered by the Trustee in the event of
request for redemption of MidCap SPDRs in Creation Unit size aggregations on
Request Day and thereafter until the following Adjustment Day (see "Redemption
of MidCap SPDRs"). In addition to the foregoing adjustments, in the event that
there shall occur a stock split, stock dividend or reverse split with respect
to any Index Security that does not result in an adjustment to the S&P MidCap
400 Index divisor, the Portfolio Deposit shall be adjusted to take account of
such stock split, stock dividend or reverse split by applying the stock split,
stock dividend or reverse stock split multiple (e.g., in the event of a two-
for-one stock split of an Index Security, by doubling the number of shares of
such Index Security in the prescribed Portfolio Deposit), in each case rounded
to the nearest whole share.
On Request Day and on each day that a request for the creation or redemption
of MidCap SPDRs in Creation Unit size aggregations is deemed received, the
Trustee calculates the market value of the securities portion of the Portfolio
Deposit as in effect on Request Day as of the close of the market and adds to
that amount the Dividend Equivalent Payment effective for requests to create
or redeem on Request Day (such market value and Dividend Equivalent Payment
are collectively referred to herein as the "Portfolio Deposit Amount"). The
Trustee then calculates the NAV Amount, based on the close of the market on
Request Day. The difference between
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the NAV Amount so calculated and the Portfolio Deposit Amount is the
"Balancing Amount". The Balancing Amount serves the function of compensating
for any differences between the value of the Portfolio Deposit Amount and the
NAV Amount at the close of trading on Request Day due to, for example, (1)
differences in the market value of the securities in the Portfolio Deposit and
the market value of the Securities on Request Day and (2) any variances from
the proper composition of the Portfolio Deposit.
Notwithstanding the foregoing, on any Adjustment Day on which (a) no change
in the identity and/or share weighting of any Index Security is scheduled to
take effect that would cause the S&P MidCap 400 Index divisor to be adjusted
after the close of the market on such Business Day,* and (b) no stock split,
stock dividend or reverse stock split with respect to any Index Security has
been declared to take effect on the corresponding Request Day, the Trustee
reserves the right to forego making any adjustment to the Securities portion
of the Portfolio Deposit and to use the composition and weightings of the
Index Securities for the most recently effective Portfolio Deposit for the
Request Day following such Adjustment Day. In addition, the Trustee further
reserves the right to calculate the adjustment to the number of shares and/or
identity of the Index Securities in a Portfolio Deposit as described above
except that such calculation would be employed two (2) Business Days rather
than one (1) Business Day prior to Request Day.
As previously discussed, the Dividend Equivalent Payment and the Balancing
Amount in effect at the close of business on Request Date are collectively
referred to as the Cash Component or the Cash Redemption Payment (see
"Prospectus Summary--Portfolio Deposits" and "Prospectus Summary--
Redemption"). If the Balancing Amount is a positive number (i.e., if the NAV
Amount exceeds the Portfolio Deposit Amount) then, with respect to the
creation of MidCap SPDRs, the Balancing Amount shall increase the Cash
Component of the then effective Portfolio Deposit transferred to the Trustee
by a creator, and with respect to redemptions of MidCap SPDRs in Creation Unit
size aggregations, the Balancing Amount shall be added to the cash transferred
to a redeemer by the Trustee. If the Balancing Amount is a negative number
(i.e., if the NAV Amount is less than the Portfolio Deposit Amount) then, with
respect to the creation of MidCap SPDRs such amount shall decrease the Cash
Component of the then effective Portfolio Deposit to be transferred to the
Trustee by the creator or, if such cash portion is less than the Balancing
Amount, the difference shall be paid by the Trustee to the creator, and with
respect to redemptions of MidCap SPDRs in Creation Unit size aggregations, the
Balancing Amount shall be deducted from the cash transferred to the redeemer
or, if such cash is less than the Balancing Amount, the difference shall be
paid by the redeemer to the Trustee.
- ---------------------------
* Standard & Poor's publicly announces changes in the identity and/or the
weighting of the S&P MidCap 400 Index up to five business days in advance
of the actual change. The announcements are made after the close of
trading on such day.
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In the event that the Trustee has included the cash equivalent value of one
or more Index Securities in the Portfolio Deposit because the Trustee has
determined that such Index Securities are likely to be unavailable or
available in insufficient quantity for delivery, the Portfolio Deposit so
constituted shall dictate the Index Securities to be delivered in connection
with the creation of MidCap SPDRs in Creation Unit size aggregations and upon
the redemption of MidCap SPDRs in Creation Unit size aggregations for all
purposes hereunder until such time as the securities portion of the Portfolio
Deposit is subsequently adjusted. Brokerage commissions incurred by the
Trustee in connection with the acquisition of any such Index Securities will
be at the expense of the Trust and will affect the value of all MidCap SPDRs.
SELECTION AND ACQUISITION OF SECURITIES
In prescribing the method described above for selecting the Index Securities
that constitute the prescribed Portfolio Deposit from time to time, the
Sponsor intends to duplicate, to the extent practicable, the composition and
weighting of the Index Securities as of the relevant date.
The yield and price of common stocks deposited in the Trust are dependent on
a variety of factors, including money market conditions and general conditions
of the corporate equity markets. The Schedule of Investments set forth above
contains information as of the date set forth therein with respect to the
number of shares of each of the Index Securities in the Portfolio Deposit as
of such date. The proportionate relationship among such Securities
approximated (although it did not exactly duplicate) the proportionate
relationships of the Index Securities.
Because certain of the Securities from time to time may be sold or their
relative percentages changed under certain circumstances as described herein,
no assurance can be given that the Trust will retain for any length of time
its present size and composition (see "The Portfolio--Adjustments to the
Portfolio"). Also, the deposit of additional Portfolio Deposits and the
redemption of MidCap SPDRs in Creation Unit size aggregations will affect the
size and composition of the Trust. Neither the Sponsor nor the Trustee shall
be liable in any way for any default, failure or defect in any of the
Securities.
THE S&P MIDCAP 400 INDEX
The Sponsor selected the S&P MidCap 400 Index as the basis for the selection
of the securities held by the Trust because, in the opinion of the Sponsor,
the S&P MidCap 400 Index constitutes a broadly diversified representative
segment of the market for middle capitalization companies whose stock is
publicly traded in the United States and is an index which has achieved wide
acceptance by both investors and market professionals. The S&P MidCap 400
Index is composed of 400 selected common stocks, all of which are listed on
the AMEX, the NYSE or NASDAQ, and
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spans a broad range of major industry groups. The 400 common stocks comprising
the S&P MidCap 400 Index represented, as of December 31, 1997, approximately
9% of the market value of all domestic common stocks. As of December 31, 1997,
the five largest industry segments comprising the S&P MidCap 400 Index were:
Banks (10.89%), electric utilities (8.18%), oil and gas (3.72%) computer
software (2.90%), and specialty chemicals (2.63%). Current information
regarding the market value of the S&P MidCap 400 Index is available from
market information services. The S&P MidCap 400 Index is determined, comprised
and calculated without regard to the Trust.
The Sponsor has been granted a license to use the S&P MidCap 400 Index as a
basis for determining the composition of the Trust and to use certain
trademarks of S&P in connection with the Trust (see "License Agreement"). S&P
is not responsible for and shall not participate in the creation or sale of
MidCap SPDRs or in the determination of the timing of, prices at, or
quantities and proportions in which purchases or sales of Index Securities or
Securities shall be made. The information in this Prospectus concerning S&P
and the S&P MidCap Index has been obtained from sources that the Sponsor
believes to be reliable, but the Sponsor takes no responsibility for the
accuracy of such information.
The following table shows the actual performance of the S&P MidCap 400 Index
for the years 1991 through 1997. Stock prices fluctuated widely during this
period and were higher at the end than at the beginning. The results shown
should not be considered as a representation of the income yield or capital
gain or loss that may be generated by the S&P MidCap 400 Index in the future,
nor should the results be considered as a representation of the performance of
the Trust.
<TABLE>
<CAPTION>
CALENDAR
YEAR-END CHANGE IN CALENDAR
INDEX VALUE* INDEX FOR YEAR-END
YEAR DECEMBER 31, 1990 = 100 CALENDAR YEAR YIELD**
- ---- ----------------------- ------------- --------
<S> <C> <C> <C>
1990............................. 100.00 -- 3.16%
1991............................. 146.59 +46.59% 2.03
1992............................. 160.56 +9.53 1.96
1993............................. 179.33 +11.72 1.85
1994............................. 169.44 -5.54 2.10
1995............................. 217.84 +28.56 1.65
1996............................. 255.58 +17.32 1.62
1997............................. 333.37 +30.44 1.38
</TABLE>
- -----------
* Source: Standard & Poor's. Year-end index values shown do not reflect
reinvestment of dividends nor costs, such as brokerage charges and
transaction costs.
** Source: Standard & Poor's. Yields are obtained by dividing the aggregate
cash dividends for the year by the aggregate market value of the stocks in
the S&P MidCap 400 Index at year-end.
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It is the understanding of the Sponsor that Standard & Poor's weights the
Index Securities primarily based on each stock's relative total market value;
that is, its market price per share times the number of shares outstanding.
Accordingly, each Index Security's influence on the value of the S&P MidCap
400 Index is directly proportionate to its market value. The percentage of the
Trust's assets invested in each of the Securities is calculated to approximate
the percentage each Index Security represents in the S&P MidCap 400 Index.
LICENSE AGREEMENT
Under the terms of a license agreement with Standard & Poor's (the "License
Agreement"), the Sponsor has been granted a license to use the S&P MidCap 400
Index as a basis for determining the composition of the Trust and to use
certain trade names and trademarks of Standard & Poor's in connection with the
Trust. The License Agreement may be amended by the parties thereto without the
consent of any of the Beneficial Owners of MidCap SPDRs. Currently, the
License Agreement is scheduled to expire on April 27, 2020, in accordance with
its terms. The parties thereto may extend the term of the License Agreement
beyond such date without the consent of any of the Beneficial Owners of MidCap
SPDRs.
None of the Trust, the Trustee, the Distributor, the Depository or any
Beneficial Owner of MidCap SPDRs is entitled to any rights whatsoever under
the foregoing licensing arrangements or to use the trademarks "S&P MidCap
400", "S&P", "Standard & Poor's" or "Standard & Poor's MidCap 400" or to use
the S&P MidCap 400 Index except as specifically described herein or as may be
specified in the Trust Agreement.
The Trust is not sponsored, endorsed, sold or promoted by Standard & Poor's
and Standard & Poor's makes no representation or warranty, express or implied,
to the Trust, the Trustee, the Distributor, the Depository or Beneficial
Owners of MidCap SPDRs regarding the advisability of investing in Index
Securities or unit investment trusts generally or in the Trust particularly or
the ability of the S&P MidCap 400 Index to track general stock market
performance. Standard & Poor's only relationship to the Trust is the licensing
of certain trademarks and trade names of Standard & Poor's and of the S&P
MidCap 400 Index which is determined, comprised and calculated by Standard &
Poor's without regard to the Trust or the Beneficial Owners of MidCap SPDRs.
Standard & Poor's has no obligation to take the needs of the Trust or the
Beneficial Owners of MidCap SPDRs into consideration in determining,
comprising or calculating the S&P MidCap 400 Index. Standard & Poor's is not
responsible for and has not participated in any determination or calculation
made with respect to issuance or redemption of MidCap SPDRs. Standard & Poor's
has no obligation or liability in connection with the administration,
marketing or trading of MidCap SPDRs.
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STANDARD & POOR'S DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF
THE S&P MIDCAP 400 INDEX OR ANY DATA INCLUDED THEREIN. STANDARD & POOR'S MAKES
NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE SPONSOR,
THE TRUST, BENEFICIAL OWNERS OF MIDCAP SPDRS OR ANY OTHER PERSON OR ENTITY
FROM THE USE OF THE S&P MIDCAP 400 INDEX OR ANY DATA INCLUDED THEREIN IN
CONNECTION WITH THE USE LICENSED UNDER THE LICENSE AGREEMENT, OR FOR ANY OTHER
USE. STANDARD & POOR'S MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY
DISCLAIMS ALL SUCH WARRANTIES, INCLUDING WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE S&P MIDCAP 400 INDEX OR
ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT
SHALL STANDARD & POOR'S HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT
OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
EXCHANGE LISTING
As described above, MidCap SPDRs are listed on the Exchange. Transactions
involving MidCap SPDRs in the public trading market are subject to customary
brokerage charges and commissions.
The Sponsor's aim in designing MidCap SPDRs was to provide investors with a
security whose market value would approximate one-fifth ( 1/5th) the value of
the S&P MidCap 400 Index. Thus, for example, if the S&P MidCap 400 Index were
at 300, investors might expect a MidCap SPDR to trade at approximately $60.
Note, however, that the market price of a MidCap SPDR should also reflect its
share of the dividends accumulated on the Securities (see "Administration of
the Trust--Distributions to Beneficial Owners") and may also be affected by
supply and demand, market volatility, sentiment and other factors.
There can be no assurance that MidCap SPDRs will always be listed on the
Exchange. The Exchange will consider the suspension of trading in or removal
from listing of MidCap SPDRs:
(a) if the Trust has more than 60 days remaining until termination and
there are fewer than 50 record and/or beneficial holders of MidCap SPDRs
for 30 or more consecutive trading days;
(b) if the S&P MidCap 400 Index is no longer calculated or available; or
(c) if such other event shall occur or condition exists which, in the
opinion of the Exchange, makes further dealings on the Exchange
inadvisable.
The Trust is not required to pay a listing fee to the Exchange.
The Trust will be terminated in the event that MidCap SPDRs are delisted
(see "Administration of the Trust--Termination").
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TAX STATUS OF THE TRUST
Effective September 30, 1997, the Trust changed from a calendar year ending
each December 31 to a fiscal year ending each September 30. For the period
ended September 30, 1997, the Trust believes that it qualified for tax
treatment as a "regulated investment company" under Subchapter M of the Code.
The Trust intends to continue to so qualify. To qualify as a regulated
investment company, the Trust must, among other things, (a) derive in each
taxable year at least 90% of its gross income from dividends, interest, gains
from the sale or other disposition of stock, securities or foreign currencies,
or certain other sources, (b) meet certain diversification tests, and (c)
distribute in each year at least 90% of its investment company taxable income.
If the Trust qualifies as a regulated investment company, subject to certain
conditions and requirements, the Trust will not be subject to federal income
tax to the extent its income is distributed in a timely manner. Any
undistributed income may be subject to tax, including a four percent (4%)
excise tax imposed by section 4982 of the Code on certain undistributed income
of a regulated investment company that does not distribute to shareholders in
a timely manner at least ninety-eight percent (98%) of its taxable income
(including capital gains).
TAX CONSEQUENCES TO BENEFICIAL OWNERS
Dividends paid by the Trust from its investment company taxable income
(which includes dividends, interest and the excess of net short-term capital
gains over net long-term capital losses) will be taxable to Beneficial Owners
as ordinary income. A dividend paid in January will be considered for federal
income tax purposes to have been paid by the Trust and received by Beneficial
Owners on the preceding December 31 if the dividend was declared in the
preceding October, November or December to Beneficial Owners of record as
shown on the records of the Depository and the DTC Participants (see "The
Trust--Book-Entry-Only System") on a date in one of those months.
Distributions paid by the Trust from the excess of net long-term capital
gains over net short-term capital losses are considered "capital gains
dividends" regardless of the length of time an investor has owned MidCap
SPDRs. Any loss on the sale or exchange of a share held for six months or less
may be treated as a long-term capital loss to the extent of any capital gain
dividends received by the Beneficial Owner. For corporate investors, dividends
from net investment income (but not return of capital distributions or capital
gain dividends) generally will qualify for the corporate dividends-received
deduction to the extent of qualifying dividend income received by the Trust,
subject to the limitations contained in the Code. Investors should note that
the regular quarterly dividends paid by the Trust will not be based on the
Trust's investment company taxable income and net capital gain, but rather
will be based on the dividends paid with respect to the Securities. As a
result, a portion of the distributions of the Trust may be treated as a return
of capital or a capital gain
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dividend for federal income tax purposes or the Trust may make additional
distributions in excess of the yield performance of the Securities in order to
distribute all of its investment company taxable income and net capital gain.
Distributions in excess of the Trust's current or accumulated earnings and
profits (as specially computed) generally will be treated as a return of
capital for federal income tax purposes and will reduce a Beneficial Owner's
tax basis in MidCap SPDRs. Return of capital distributions may result, for
example, if a portion of the dividends declared represents cash amounts
deposited in connection with Portfolio Deposits rather than dividends actually
received by the Trust. Under certain circumstances, a significant portion of
the Trust's regular quarterly dividends could be treated as return of capital
distributions. Such circumstances may be more likely to occur in periods
during which the number of outstanding MidCap SPDRs fluctuates significantly,
as may occur during the initial years of the Trust. Beneficial Owners will
receive annually notification from the Trustee through the DTC Participants as
to the tax status of the Trust's distributions (see "The Trust--Book-Entry-
Only System"). A distribution paid shortly after a purchase or creation of
MidCap SPDRs may be taxable even though in effect it may represent a return of
capital. Under the Taxpayer Relief Act of 1997, capital gains realized on the
sale of property held for more than one year but not more than eighteen months
are considered "mid-term gains." In the case of individuals, mid-term gains
are taxed at lower rates than ordinary income, but not as favorably as capital
gains on property held for more than eighteen months. The Trustee will
identify in the annual tax information statement provided to Beneficial Owners
the breakdown of capital gain distributions between mid-term gains and long-
term gains.
Distributions reinvested in additional MidCap SPDRs through the means of the
Service (see "Dividend Reinvestment Service") will nevertheless be taxable
dividends to Beneficial Owners acquiring such additional MidCap SPDRs to the
same extent as if such dividends had been received in cash.
The sale of MidCap SPDRs by a Beneficial Owner is a taxable event, and may
result in a gain or loss, which generally should be a capital gain or loss for
Beneficial Owners that are not dealers in securities.
Under the Code, an in-kind redemption of MidCap SPDRs will not result in the
recognition of taxable gain or loss by the Trust but generally will constitute
a taxable event for the redeeming shareholder. Upon redemption, a Beneficial
Owner generally will recognize gain or loss measured by the difference on the
date of redemption between the aggregate value of the cash and securities
received and its tax basis in the MidCap SPDRs redeemed. Securities received
upon redemption (which will be comprised of the securities portion of the
Portfolio Deposit in effect on the date of redemption) generally will have an
initial tax basis equal to their respective market values on the date of
redemption. The Internal Revenue Service ("IRS") may assert
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that any resulting loss may not be deducted by a Beneficial Owner on the basis
that there has been no material change in such Beneficial Owner's economic
position or that the transaction has no significant economic or business
utility apart from the anticipated tax consequences. Beneficial Owners of
MidCap SPDRs in Creation Unit size aggregations should consult their own tax
advisors as to the consequences to them of the redemption of MidCap SPDRs.
Dividend distributions, capital gains distributions, and capital gains from
sales or redemptions may also be subject to state, local and foreign taxes.
Deposit of a Portfolio Deposit with the Trustee in exchange for MidCap SPDRs
in Creation Unit size aggregations will not result in the recognition of
taxable gain or loss by the Trust but generally will constitute a taxable
event to the depositor under the Code, and a depositor generally will
recognize gain or loss with respect to each security deposited equal to the
difference between the amount realized in respect of the security and the
depositor's tax basis therein. The amount realized with respect to a security
deposited should be determined by allocating the value on the date of deposit
of the MidCap SPDRs received (less any cash paid to the Trust, or plus any
cash received from the Trust, in connection with the deposit) among the
securities deposited on the basis of their respective fair market values at
that time. The IRS may assert that any resulting losses may not be deducted by
a depositor on the basis that there has been no material change in the
depositor's economic position or that the transaction has no significant
economic or business utility or purpose apart from the anticipated tax
consequences. Depositors should consult their own tax advisors as to the tax
consequences to them of a deposit to the Trust.
The Trustee has the right to reject the order to create Creation Units
transmitted to it by the Distributor if the depositor or group of depositors,
upon obtaining the MidCap SPDRs ordered, would own eighty percent (80%) or
more of the outstanding MidCap SPDRs, and if pursuant to section 351 of the
Code such a circumstance would result in the Trust having a basis in the
securities deposited different from the market value of such securities on the
date of deposit. The Trustee has the right to require information regarding
MidCap SPDR ownership pursuant to the Participant Agreement and from the
Depository and to rely thereon to the extent necessary to make the foregoing
determination as a condition to the acceptance of a Portfolio Deposit.
Ordinary income dividends received via the Depository by Beneficial Owners
who are non-resident aliens will be subject to a thirty percent (30%) United
States withholding tax unless a reduced rate of withholding or a withholding
exemption is provided under applicable tax treaties. Non-resident shareholders
are urged to consult their own tax advisors concerning the applicability of
United States withholding tax.
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Backup withholding at a rate of 31% will apply to dividends, capital gain
distributions, redemptions and sales of MidCap SPDRs unless (a) the Beneficial
Owner is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact, or (b) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. The amount of any backup withholding from a payment to a
Beneficial Owner will be allowed as a credit against the holder's U.S. federal
income tax liability and may entitle such holder to a refund from the U.S.
Internal Revenue Service, provided that the required information is furnished
to the U.S. Internal Revenue Service.
The tax discussion set forth above is included for general information only.
Prospective investors should consult their own tax advisors concerning the
federal, state, local and foreign tax consequences to them of an investment in
the Trust, including the effect of possible legislative charges.
CONTINUOUS OFFERING OF MIDCAP SPDRS
MidCap SPDRs in Creation Unit size aggregations are offered continuously to
the public by the Trust through the Distributor and are delivered upon the
deposit of a Portfolio Deposit (see "The Trust -- Procedure for Creation of
Creation Units"). A list of the identity and number of shares of each of the
Index Securities in the current Portfolio Deposit and the amount of the
Dividend Equivalent Payment effective through and including the previous
Business Day is made available by the Trustee to NSCC on each Business Day.
Under certain extraordinary circumstances which may make it impossible for the
Trustee to provide such information to NSCC on a given Business Day, NSCC
shall use the composition and weighting of the Index Securities for the most
recently effective Portfolio Deposit. The minimum number of MidCap SPDRs that
may be created as described herein is 25,000 or one Creation Unit. Persons
making Portfolio Deposits and creating Creation Unit aggregations of MidCap
SPDRs will receive no fees, commissions or other form of compensation or
inducement of any kind from the Sponsor or the Distributor, nor will any such
person have any obligation or responsibility to the Sponsor or Distributor to
effect any sale or resale of MidCap SPDRs.
Because new MidCap SPDRs can be created and issued on an ongoing basis, at
any point during the life of the Trust a "distribution", as such term is used
in the Securities Act of 1933, may be occurring. 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
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may be deemed a statutory underwriter if it takes Creation Units after placing
a creation order with the Distributor, breaks them down into the constituent
MidCap SPDRs and sells the MidCap SPDRs directly to its customers; or if it
chooses to couple the creation of a supply of new MidCap SPDRs with an active
selling effort involving solicitation of secondary market demand for MidCap
SPDRs. A determination of whether one is an underwriter 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 categorization as an underwriter.
Dealers who are not "underwriters" but are participating in a distribution
(as contrasted to ordinary secondary trading transactions), and thus dealing
with MidCap SPDRs that are part of an "unsold allotment" within the meaning of
Section 4(3)(C) of the Securities Act, would be unable to take advantage of
the prospectus-delivery exemption provided by Section 4(3) of the Securities
Act. Firms that do incur a prospectus-delivery obligation with respect to
MidCap SPDRs are reminded that under Securities Act rule 153, a prospectus-
delivery obligation under Section 5(b)(2) of the Act owed to an Exchange
member in connection with a sale on the Exchange is satisfied by the fact that
MidCap SPDR prospectuses will be available at the Exchange upon request. Of
course, the prospectus-delivery mechanism provided in rule 153 is only
available with respect to transactions on an exchange.
The Sponsor intends to qualify MidCap SPDRs in states selected by the
Sponsor and through broker-dealers who are members of the National Association
of Securities Dealers, Inc. Investors intending to create or redeem Creation
Unit size aggregations of MidCap SPDRs in transactions not involving a broker-
dealer registered in such investor's state of domicile or residence should
consult counsel regarding applicable broker-dealer or securities regulatory
requirements under such state securities laws prior to such creation or
redemption.
EXPENSES OF THE TRUST
Until further notice, the Sponsor has undertaken that on each day during the
fiscal year ending September 30, 1998, the ordinary operating expenses of the
Trust as calculated by the Trustee will not be permitted to exceed an amount
which is 30/100 of 1% per annum of the daily net asset value of the Trust. To
the extent during such period the ordinary operating expenses of the Trust do
exceed such 30/100 of 1% amount, the Sponsor will reimburse the Trust for or
assume such excess ordinary operating expenses. The Sponsor retains the
ability to be repaid by the Trust for expenses so reimbursed or assumed to the
extent that subsequently during the year expenses fall below the 30/100 of 1%
per annum level on any given day. For purposes
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of this undertaking by the Sponsor, ordinary operating expenses of the Trust
shall not include taxes, brokerage commissions and, of course, such
extraordinary non-recurring expenses as may arise, including, without
limitation, the cost of any litigation to which the Trust or Trustee may be a
party. After September 30, 1998 the Sponsor may discontinue this undertaking
or renew it for an additional period of time, or may choose to reimburse or
assume certain Trust expenses in later periods in order to keep Trust expenses
at a level it believes to be attractive to investors, but is not obligated to
do so. In any event, it is possible that, on any day and during any period
over the life of the Trust, total fees and expenses of the Trust may exceed
30/100 of 1% per annum.
Subject to any applicable cap, the Sponsor reserves the right to charge the
Trust a special sponsor fee from time to time in reimbursement for certain
services it may provide to the Trust which would otherwise be provided by the
Trustee in an amount not to exceed the actual cost of providing such services.
The Sponsor or the Trustee from time to time may voluntarily assume some
expenses or reimburse the Trust so that total expenses of the Trust are
reduced, although neither the Sponsor nor the Trustee is obligated to do so
and either one or both parties may discontinue such voluntary assumption of
expenses or reimbursement at any time without notice.
The following charges are or may be accrued and paid by the Trust: (a) the
Trustee's fee as discussed more fully below; (b) fees payable to transfer
agents for the provision of transfer agency services; (c) fees of the Trustee
for extraordinary services performed under the Trust Agreement; (d) various
governmental charges; (e) any taxes, fees and charges payable by the Trustee
with respect to MidCap SPDRs (whether in Creation Unit size aggregations or
otherwise); (f) expenses and costs of any action taken by the Trustee or the
Sponsor to protect the Trust and the rights and interests of Beneficial Owners
of MidCap SPDRs (whether in Creation Unit size aggregations or otherwise); (g)
indemnification of the Trustee or the Sponsor for any losses, liabilities or
expenses incurred by it in the administration of the Trust without gross
negligence, bad faith, wilful misconduct or wilful malfeasance on its part or
reckless disregard of its obligations and duties; (h) expenses incurred in
contacting Beneficial Owners of MidCap SPDRs during the life of the Trust and
upon termination of the Trust; (i) brokerage commissions incurred by the
Trustee when acquiring or selling Index Securities pursuant to the provisions
of the Trust Agreement and (j) other out-of-pocket expenses of the Trust
incurred pursuant to actions permitted or required under the Trust Agreement.
In addition to the specific expenses discussed in the previous paragraph,
the following expenses are or may be charged to the Trust: (a) reimbursement
to the Sponsor of amounts paid by it to S&P in respect of annual licensing
fees pursuant to the License Agreement (see "License Agreement"), (b) federal
and state annual registration fees for the issuance of MidCap SPDRs, and (c)
expenses of the Sponsor
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relating to the printing and distribution of marketing materials describing
MidCap SPDRs and the Trust (including, but not limited to, associated legal,
consulting, advertising and marketing costs and other out-of-pocket expenses
such as printing). In addition, initial fees and expenses totaling
approximately $195,000, in connection with the organization of the Trust, were
capitalized and are being amortized over five years from the start of the
Trust's operations on a straight-line basis and charged to the Trust. Pursuant
to the provisions of an exemptive order, the expenses set forth in this
paragraph may be charged to the Trust by the Trustee in an amount equal to the
actual costs incurred, but in no case shall such charges exceed 30/100 of 1%
(0.30%) per annum of the daily net asset value of the Trust.
If the income received by the Trust in the form of dividends and other
distributions on the Securities is insufficient to cover Trust expenses, the
Trustee may make advances to the Trust to cover such expenses; otherwise the
Trustee may sell Securities in an amount sufficient to pay such expenses. The
Trustee may reimburse itself in the amount of any such advance, plus any
amounts required by the Federal Reserve Board which are related to such
advances, together with interest thereon at a percentage rate equal to the
then current overnight federal funds rate, by deducting such amounts from (1)
dividend payments or other income of the Trust when such payments or other
income is received, (2) the amounts earned or benefits derived by the Trustee
on cash held by the Trustee for the benefit of the Trust, and (3) the sale of
Securities. Notwithstanding the foregoing, in the event that any advance
remains outstanding for more than forty-five (45) Business Days, the Trustee
may sell Securities to reimburse itself for the amount of such advance and any
accrued interest thereon. Such advances will be secured by a lien on the
assets of the Trust in favor of the Trustee. The expenses of the Trust are
reflected in the net asset value of the Trust (see "Valuation").
For services performed under the Trust Agreement, the Trustee will be paid
by the Trust a fee at an annual rate of 10/100 of 1% to 14/100 of 1% of the
net asset value of the Trust, as shown below, such percentage amount to vary
depending on the net asset value of the Trust. Such compensation will be
computed on each Business Day on the basis of the net asset value of the Trust
on such day, and the amount thereof shall be accrued daily and paid monthly.
During the first two years of the operation of the Trust, the Trustee's fee
will be 12/100 of 1% per annum, regardless of the net asset value of the
Trust. The Trustee, in its discretion, may also waive all or a portion of such
fee.
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TRUSTEE FEE SCALE
<TABLE>
<CAPTION>
NET ASSET VALUE FEE AS A PERCENTAGE OF NET
OF THE TRUST ASSET VALUE OF THE TRUST
--------------- --------------------------
<S> <C>
0-$500,000,000*...................................... 14/100 of 1% per annum
$500,000,001-$1,000,000,000*......................... 12/100 of 1% per annum
$1,000,000,001-and above*............................ 10/100 of 1% per annum
</TABLE>
As of September 30, 1997 and as of December 31, 1997, the net asset value of
the Trust was $496,736,434 and $690,407,322, respectively. No representation
is made as to the actual net asset value of the Trust on any future date, as
it is subject to change at any time due to fluctuations in the market value of
Securities, or to creations or redemptions made in the future.
- -----------
* The fee indicated applies to that portion of the net asset value of the
Trust which falls in the size category indicated.
REDEMPTION OF MIDCAP SPDRS
MidCap SPDRs in Creation Unit size aggregations are redeemable in kind only
and are not redeemable for cash. MidCap SPDRs in Creation Unit size
aggregations may be redeemed by submitting a request for redemption, the
requisite number of MidCap SPDRs and the Excess Cash Amount (as defined
below), if applicable, to the Trustee in the manner specified below.
Beneficial Owners of MidCap SPDRs may sell MidCap SPDRs in the secondary
market, but must accumulate enough MidCap SPDRs to constitute a Creation Unit
(i.e., 25,000 MidCap SPDRs) in order to redeem through the Trust. MidCap SPDRs
can be redeemed only when Creation Unit size aggregations are owned by a
Beneficial Owner and held in the account of a single Participating Party (with
respect to redemptions through the MidCap SPDR Clearing Process) or a single
DTC Participant (with respect to redemptions outside the MidCap SPDR Clearing
Process). MidCap SPDRs will remain outstanding until redeemed or until the
termination of the Trust.
PROCEDURE FOR REDEMPTION OF MIDCAP SPDRS
Requests for redemptions of Creation Units may be made on any Business Day
through the MidCap SPDR Clearing Process to the Trustee at its trust office at
101 Barclay Street, New York, New York 10286 or at such other office as may be
designated by the Trustee. Requests for redemptions of Creation Units may also
be made directly to the Trustee outside the MidCap SPDR Clearing Process.
Requests for redemption shall not be made to the Distributor. In the case of
redemptions made through the MidCap SPDR Clearing Process, the Transaction Fee
will be deducted from the amount delivered to the redeemer. In case of
redemptions tendered directly to the Trustee outside the MidCap SPDR Clearing
Process, a total fee will be charged
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on a per Creation Unit basis per day. Such fee will be equal to the
Transaction Fee plus an additional amount not to exceed three (3) times the
Transaction Fee applicable for one Creation Unit per Creation Unit redeemed
(due in part to the increased expense associated with delivery outside the
MidCap SPDR Clearing Process) and such amount will be deducted from the amount
delivered to the redeemer (see "Prospectus Summary--Transaction Fee"). In all
cases, both the tender of MidCap SPDRs for redemption and distributions to the
redeemer in respect of MidCap SPDRs redeemed will be effected through the
Depository and the relevant DTC Participant(s) to the Beneficial Owner thereof
as recorded on the book-entry system of the Depository or the relevant DTC
Participant, as the case may be (see "The Trust--Book-Entry-Only System").
The Trustee will transfer to the redeeming Beneficial Owner via the
Depository and the relevant DTC Participant(s) a portfolio of Securities for
each Creation Unit size aggregation of MidCap SPDRs delivered, identical in
weighting and composition to the securities portion of a Portfolio Deposit as
in effect (1) on the date a request for redemption is deemed received by the
Trustee as described below, in the case of redemptions made either through the
MidCap SPDR Clearing Process or outside the MidCap SPDR Clearing Process or
(2) on the date that notice of the termination of the Trust is given, in the
case of the termination of the Trust (see "Administration of the Trust--
Termination" and "The Portfolio--Adjustments to the Portfolio"). The Trustee
will also transfer via the relevant DTC Participant(s) to the redeeming
Beneficial Owner in cash the "Cash Redemption Payment", which on any given
Business Day is an amount identical to the amount of the Cash Component and is
equal to a proportional amount of the following: dividends on all the
Securities for the period through the date of redemption, net of expenses and
liabilities for such period, including, without limitation, (x) taxes or other
governmental charges against the Trust not previously deducted, if any, and
(y) accrued fees of the Trustee and other expenses of the Trust (including
legal and auditing expenses) and other expenses not previously deducted (see
"Expenses of the Trust"), as if all the Securities had been held for the
entire accumulation period for such distribution, plus or minus the Balancing
Amount. To the extent that any amounts payable to the Trust by the redeeming
Beneficial Owner exceed the amount of the Cash Redemption Payment ("Excess
Cash Amounts"), such Beneficial Owner shall be required to deliver payment
thereof to the Trustee. In the case of redemptions made through the MidCap
SPDR Clearing Process, the Trustee will effect a transfer of the Cash
Redemption Payment and the Securities to the redeeming Beneficial Owner by the
third (3rd) NSCC Business Day following the date on which the request for
redemption is deemed received. In the case of redemptions made outside the
MidCap SPDR Clearing Process, the Trustee will transfer the Cash Redemption
Payment and the Securities to the redeeming Beneficial Owner by the third
(3rd) Business Day, as applicable, following the date on which the request for
redemption is deemed received. The Trustee will cancel all MidCap SPDRs
delivered upon redemption.
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In the event that the Trustee determines in its discretion that an Index
Security is likely to be unavailable or available in insufficient quantity for
delivery by the Trust upon the redemption of MidCap SPDRs in Creation Unit
size aggregations, then the Trustee shall have the right in its discretion to
deliver the cash equivalent value of such Index Security or Index Securities,
based on the market value of such Index Security or Index Securities as of the
Evaluation Time on the date such redemption order is deemed received by the
Trustee (see "Placement of Redemption Orders Using MidCap SPDR Clearing
Process") as a part of the Cash Redemption Payment in lieu of delivering such
Index Security or Index Securities to the redeemer. If an Index Security is
not eligible for transfer through the MidCap SPDR Clearing Process, the
Trustee shall deliver the cash equivalent value of such Index Security as a
part of the Cash Redemption Payment to the redeemer in the manner discussed in
the preceding sentence.
In connection with the redemption of MidCap SPDRs, if a redeemer is
restricted by regulation or otherwise from investing or engaging in a
transaction in one or more Index Securities, the Trustee shall have the right
in its discretion to deliver the cash equivalent value of such Index Security
or Index Securities based on the market value of such Index Security or Index
Securities as of the Evaluation Time on the date such redemption order is
deemed received by the Trustee (see "Placement of Redemption Orders Outside
MidCap SPDR Clearing Process") as a part of the Cash Redemption Payment in
lieu of delivering such Index Security or Index Securities to the redeemer. In
such case, such investor will pay the Trustee the standard Transaction Fee,
plus an additional amount per Creation Unit equal to the actual amounts
incurred in connection with such transaction(s) but in any case not to exceed
three (3) times the Transaction Fee applicable for one Creation Unit (see
"Prospectus Summary--Transaction Fee").
If the Trustee sells Securities to obtain sufficient cash proceeds to
deliver to the redeeming Beneficial Owner, brokerage commissions incurred in
connection with such a sale of Securities will be an expense of the Trust and
will affect the value of all MidCap SPDRs. To the extent cash proceeds are
received by the Trustee in excess of the amount required to be provided to the
redeeming Beneficial Owner, such cash amounts shall be held by the Trustee and
shall be applied in accordance with the guidelines applicable to Misweightings
(see "The Portfolio--Adjustments to the Portfolio").
If the income received by the Trust in the form of dividends and other
distributions on the Securities is insufficient to allow distribution of the
Cash Redemption Payment, the Trustee may advance out of its own funds any
amounts necessary in respect of redemptions of MidCap SPDRs; otherwise, the
Trustee may sell Securities in an amount sufficient to effect such
redemptions. The Trustee may reimburse itself in the amount of any such
advance, plus any amounts required by the Federal Reserve Board which are
related to such advances, together with interest thereon at a percentage rate
equal to the then current overnight federal funds rate, by
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deducting such amounts from (1) dividend payments or other income of the Trust
when such payments or other income is received, (2) the amounts earned or
benefits derived by the Trustee on cash held by the Trustee for the benefit of
the Trust, and (3) the sale of Securities. Notwithstanding the foregoing, in
the event that any advance remains outstanding for more than forty-five (45)
Business Days, the Trustee shall sell Securities to reimburse itself for such
advance and any accrued interest thereon. Such advances will be secured by a
lien on the assets of the Trust in favor of the Trustee.
The Trustee may, in its discretion, and will when so directed by the
Sponsor, suspend the right of redemption, or postpone the date of payment of
the net asset value for more than five (5) Business Days following the date on
which the request for redemption is deemed received by the Trustee, for any
period during which the New York Stock Exchange is closed; for any period
during which an emergency exists as a result of which disposal or evaluation
of the Securities is not reasonably practicable; or for such other period as
the Commission may by order permit for the protection of Beneficial Owners.
Neither the Sponsor nor the Trustee is liable to any person or in any way for
any loss or damages which may result from any such suspension or postponement.
To be eligible to place orders with the Trustee to redeem MidCap SPDRs in
Creation Unit size aggregations, an entity or person must be (1) a
Participating Party, with respect to redemptions through the MidCap SPDR
Clearing Process, or (2) a DTC Participant, with respect to redemptions
outside the MidCap SPDR Clearing Process.
All orders to redeem MidCap SPDRs must be placed in multiples of 25,000
MidCap SPDRs (Creation Unit size). Orders must be transmitted to the Trustee
by telephone or other transmission method acceptable to the Trustee so as to
be received by the Trustee not later than the Closing Time on the Transmittal
Date pursuant to procedures set forth in the Participant Agreement. Severe
economic or market disruption or changes, or telephone or other communication
failure, may impede the ability to reach the Trustee, a Participating Party or
a DTC Participant.
Orders to redeem Creation Unit size aggregations of MidCap SPDRs shall be
placed with a Participating Party or DTC Participant, as applicable, in the
form required by such Participating Party or DTC Participant. Investors should
be aware that their particular broker may not have executed a Participant
Agreement, and that, therefore, orders to redeem Creation Unit size
aggregations of MidCap SPDRs may have to be placed by the investor's broker
through a Participating Party or a DTC Participant who 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 to redeem MidCap SPDRs should afford sufficient time to permit (1)
proper submission of the order by a Participating Party or DTC Participant to
the Trustee and (2) the receipt of the MidCap SPDRs to be redeemed
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and the Excess Cash Amounts, if any, by the Trustee in a timely manner, as
described below. Orders for redemption that are effected outside the MidCap
SPDR Clearing Process are likely to require transmittal by the DTC Participant
earlier on the Transmittal Date than orders effected using the MidCap SPDR
Clearing Process. Those persons placing orders outside the MidCap SPDR
Clearing Process should ascertain the deadlines applicable to DTC and the
Federal Reserve Bank wire transfer system by contacting the operations
department of the broker or depository institution effectuating such transfer
of MidCap SPDRs and Cash Redemption Payment. These deadlines will vary by
institution. The Participant notified of an order to redeem outside the MidCap
SPDR Clearing Process will be required to transfer MidCap SPDRs through DTC
and the Excess Cash Amounts, if any, through the Federal Reserve Bank wire
transfer system in a timely manner (see "Placement of Redemption Orders
Outside the MidCap SPDR Clearing Process").
PLACEMENT OF REDEMPTION ORDERS USING MIDCAP SPDR CLEARING PROCESS
Orders to redeem MidCap SPDRs in Creation Unit size aggregations through the
MidCap SPDR Clearing Process must be delivered through a Participating Party
(see "Portfolio Deposit") that has executed the Participant Agreement with the
Distributor and with the Trustee (as the same may be from time to time amended
in accordance with its terms). An order to redeem MidCap SPDRs using the
MidCap SPDR Clearing Process is deemed received by the Trustee on the
Transmittal Date if (i) such order is received by the Trustee not later than
the Closing 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 Trust as determined as of the
Evaluation Time on the Transmittal Date. An order to redeem MidCap SPDRs using
the MidCap SPDR Clearing Process made in proper form but received by the
Trustee after the Closing Time will be deemed received on the next Business
Day immediately following the Transmittal Date. The Participant Agreement
authorizes the Trustee to transmit to NSCC on behalf of the Participating
Party such trade instructions as are necessary to effect the Participating
Party's redemption order. Pursuant to such trade instructions from the Trustee
to NSCC, the Trustee will transfer the requisite Securities (or contracts to
purchase such Securities which are expected to be delivered in a "regular way"
manner) by the third (3rd) NSCC Business Day following the date on which such
request for redemption is deemed received, and the Cash Redemption Payment.
The calculation of the value of the Securities and the Cash Redemption Payment
to be delivered by the Trustee to the redeeming Beneficial Owner will be made
according to the procedures set forth under "Valuation", computed as of the
Evaluation Time on the Business Day on which a redemption order is deemed
received by the Trustee.
PLACEMENT OF REDEMPTION ORDERS OUTSIDE MIDCAP SPDR CLEARING PROCESS
Orders to redeem MidCap SPDRs outside the MidCap SPDR Clearing Process must
be delivered through a DTC Participant that has executed the Participant
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Agreement with the Distributor and with the Trustee. A DTC Participant who
wishes to place an order for redemption of MidCap SPDRs to be effected outside
the MidCap SPDR Clearing Process need not be a Participating Party, but such
orders must state that the DTC Participant is not using the MidCap SPDR
Clearing Process and that redemption of MidCap SPDRs will instead be effected
through transfer of MidCap SPDRs directly through DTC. An order to redeem
MidCap SPDRs outside the MidCap SPDRs Clearing Process is deemed received by
the Trustee on the Transmittal Date if (i) such order is received by the
Trustee not later than the Closing Time on such Transmittal Date, (ii) such
order is preceded or accompanied by the requisite number of MidCap SPDRs
specified in such order, which delivery must be made through DTC to the
Trustee no later than 11:00 a.m. on such Transmittal Date (the "DTC Cut-Off
Time") and (iii) all other procedures set forth in the Participant Agreement
are properly followed. The Excess Cash Amounts owed by the Beneficial Owner,
if any, must be delivered no later than 1:00 p.m. on the Business Day
immediately following the Transmittal Date.
After the Trustee has deemed an order for redemption outside the MidCap SPDR
Clearing Process received, the Trustee will initiate procedures to transfer
the requisite Securities (or contracts to purchase such Securities which are
expected to be delivered within three (3) Business Days) and the Cash
Redemption Payment to the redeeming Beneficial Owner by the third (3) Business
Day following the Transmittal Date on which such redemption order is deemed
received by the Trustee.
The calculation of the value of the Securities and the Cash Redemption
Payment to be delivered to the redeeming Beneficial Owner will be made by the
Trustee according to the procedures set forth under "Valuation", computed as
of the Evaluation Time on the Business Day on which a redemption order is
deemed received by the Trustee. Therefore, if a redemption order in proper
form is submitted to the Trustee by a DTC Participant not later than the
Closing Time on the Transmittal Date, and the requisite MidCap SPDRs are
delivered to the Trustee prior to the DTC Cut-Off Time on such Transmittal
Date, then the value of the Securities and the Cash Redemption Payment to be
delivered to the Beneficial Owner will be determined by the Trustee as of the
Evaluation Time on such Transmittal Date. If, however, a redemption order is
submitted to the Trustee by a DTC Participant not later than Closing Time on a
Transmittal Date but either (1) the requisite MidCap SPDRs are NOT delivered
by the DTC Cut-Off Time on such Transmittal Date or (2) the redemption order
is not submitted in proper form, then the redemption order will NOT be deemed
received as of such Transmittal Date. In such case, the value of the
Securities and the Cash Redemption Payment to be delivered to the Beneficial
Owner will be computed as of the Evaluation Time on the Business Day that such
order is deemed received by the Trustee, i.e., the Business Day on which the
MidCap SPDRs are delivered through DTC to the Trustee by the DTC Cut-Off Time
on such Business Day pursuant to a properly submitted redemption order.
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VALUATION
The net asset value of the Trust is computed as of the Evaluation Time shown
under "Essential Information" on each Business Day. The net asset value of the
Trust on a per MidCap SPDR basis is determined by subtracting all liabilities
(including accrued expenses and dividends payable) from the total value of the
Trust's investments and other assets and dividing the result by the total
number of outstanding MidCap SPDRs.
The aggregate value of the Securities shall be determined by the Trustee in
good faith in the following manner: If the Securities are listed on one or
more national securities exchanges, such evaluation shall generally be based
on the closing sale price on that day (unless the Trustee deems such price
inappropriate as a basis for evaluation) on the exchange which is deemed to be
the principal market therefor (the New York or American Stock Exchange if the
securities are listed thereon) or, if there is no such appropriate closing
sale price on such exchange, at the closing bid price (unless the Trustee
deems such price inappropriate as a basis for evaluation). If the Securities
are not so listed or, if so listed and the principal market therefor is other
than on such exchange or there is no such closing bid price available, such
evaluation shall generally be made by the Trustee in good faith based on the
closing price on the over-the-counter market (unless the Trustee deems such
price inappropriate as a basis for evaluation) or if there is no such
appropriate closing price, (a) on current bid prices, (b) if bid prices are
not available, on the basis of current bid prices for comparable securities,
(c) by the Trustee's appraising the value of the securities in good faith on
the bid side of the market, or (d) by any combination thereof.
ADMINISTRATION OF THE TRUST
RECORDS
The Trustee maintains records of the transactions of the Trust, including a
current list of the identity and number of shares of each of the Securities in
the Portfolio. Records of the creation of MidCap SPDRs in Creation Unit size
aggregations are also maintained by the Distributor. Record of ownership of
MidCap SPDRs is maintained by the Depository and by DTC Participants as
described above (see "The Trust--Book-Entry-Only System").
A complete copy of the Trust Agreement is maintained by the Trustee. A copy
of the Trust Agreement is available to Beneficial Owners at the corporate
trust office of the Trustee at 101 Barclay Street, New York, New York 10286
during normal business hours.
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VOTING
The Trustee has the right to vote all of the voting stocks in the Trust. The
Trustee votes the voting stocks of each issuer in the same proportionate
relationship as all other shares of each such issuer are voted to the extent
permissible and, if not permitted, abstains from voting.
DISTRIBUTIONS TO BENEFICIAL OWNERS
The regular quarterly ex-dividend date for MidCap SPDRs is the third Friday
in each of March, June, September and December, unless such day is not a
Business Day, in which case the ex-dividend date is the immediately preceding
Business Day (the "Ex-Dividend Date"). Beneficial Owners as reflected on the
records of the Depository and the DTC Participants on the second Business Day
following the Ex-Dividend Date (the "Record Date") are entitled to receive an
amount representing dividends accumulated on the Securities through the
quarterly dividend period which ends on the Business Day preceding such Ex-
Dividend Date (including Securities with ex-dividend dates falling within such
quarterly dividend period), net of fees and expenses, accrued daily for such
period. For the purposes of all dividend distributions, dividends per MidCap
SPDR are calculated at least to the nearest 1/100th of $0.01. The payment of
dividends is made on the last Business Day in the calendar month following
each Ex-Dividend Date (the "Dividend Payment Date"). Dividend payments will be
made through the Depository and the DTC Participants to Beneficial Owners then
of record with funds received from the Trustee. MidCap SPDRs are registered in
book entry-only, which records are kept by the Depository (see "The Trust--
Book-Entry-Only System").
Dividends payable to the Trust in respect of the Securities are credited by
the Trustee to a non-interest bearing account as of the date on which the
Trust receives such dividends. Other moneys received by the Trustee in respect
of the Securities, including but not limited to the Cash Component, the Cash
Redemption Payment, all moneys realized by the Trustee from the sale of
options, warrants or other similar rights received or distributed in respect
of the Securities as dividends or distributions and capital gains resulting
from the sale of Securities are also credited by the Trustee to a non-interest
bearing account. All funds collected or received are held by the Trustee
without interest until distributed in accordance with the provisions of the
Trust Agreement. To the extent the amounts credited to such accounts generate
interest income or an equivalent benefit to the Trustee, such interest income
or benefit is used to reduce any charges made in connection with advances made
by the Trustee on behalf of the Trust to cover Trust expenses in those cases
when the Trust income is insufficient to pay such expenses when due (see
"Expenses of the Trust").
The Trust intends to qualify as a regulated investment company for federal
income tax purposes. A regulated investment company is not subject to federal
income
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tax on its net investment income and capital gains that it distributes to
shareholders, so long as it meets certain overall distribution and
diversification requirements and other conditions under Subchapter M of the
Code. The Trust intends to satisfy these overall distribution and
diversification requirements and to otherwise satisfy any required conditions.
The Trustee intends to make additional distributions to the minimum extent
necessary (i) to distribute the entire annual investment company taxable
income of the Trust, plus any net capital gains (from sales of securities in
connection with adjustments to the Portfolio or to generate cash for such
distributions), and (ii) to avoid imposition of the excise tax imposed by
section 4982 of the Code (see "Tax Status of the Trust"). The additional
distributions, if needed, would consist of (a) an increase in the distribution
scheduled for January to include any amount by which estimated Trust
investment company taxable income and net capital gains for a year exceeds the
amount of Trust taxable income previously distributed with respect to such
year or, if greater, the minimum amount required to avoid imposition of such
excise tax, and (b) a distribution soon after actual annual investment company
taxable income and net capital gains of the Trust have been computed of the
amount, if any, by which such actual income exceeds the distributions already
made. The net asset value of the Trust will be reduced in direct proportion to
the amount of such additional distributions. The magnitude of the additional
distributions, if any, will depend upon a number of factors, including the
level of redemption activity experienced by the Trust. Because substantially
all proceeds from the sale of securities in connection with adjustments to the
Portfolio will have been used to purchase shares of Index Securities, the
Trust may have no cash or insufficient cash with which to pay such additional
distributions. In that case, the Trustee will have to sell shares of the
Securities sufficient to produce the cash required to make such additional
distributions. In selecting the Securities to be sold to produce cash for such
distributions, the Trustee will choose among the Securities that are over-
weighted in the Portfolio relative to their weightings in the S&P MidCap 400
Index first and then from among all other Securities in a manner so as to
maintain the weightings of the Securities within the applicable Misweighting
Amount (see "The Portfolio--Adjustments to the Portfolio").
The Trustee further reserves the right to declare special dividends if, in
its reasonable discretion, such action is necessary or advisable to preserve
the status of the Trust as a regulated investment company or to avoid
imposition of income or excise taxes on undistributed income.
The Trustee further reserves the right to vary the frequency with which
periodic distributions are made (e.g., from quarterly to monthly) if it is
determined by the Sponsor and the Trustee, in their discretion, that such a
variance would be advisable to facilitate compliance with the rules and
regulations applicable to regulated investment companies or would otherwise be
advantageous to the Trust. In addition, the Trustee reserves the right to
change the regular ex-dividend date for MidCap
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SPDRs to another date within the month or quarter if it is determined by the
Sponsor and the Trustee, in their discretion, that such a change would be
advantageous to the Trust. Notice of any such variance or change (which notice
shall include changes to the Record Date, the Ex-Dividend Date, the Dividend
Payment Date, and the accumulation period resulting from such variance) shall
be provided to Beneficial Owners via the Depository and the DTC Participants
(see "The Trust--Book-Entry-Only System").
The Trustee may, in its discretion, advance out of its own funds any amounts
necessary to permit distributions via the Depository to Beneficial Owners. The
Trustee may reimburse itself in the amount of such advance, plus Federal
Reserve Board requirements, together with interest thereon at a percentage
rate equal to then current overnight federal funds rate, by deducting such
amounts from (1) dividend payments or other income of the Trust when such
payments or other income is received, (2) the amounts earned or benefits
derived by the Trustee on cash held by the Trustee for the benefit of the
Trust, and (3) the sale of Securities. Notwithstanding the foregoing, in the
event that any advance remains outstanding for more than forty-five (45)
Business Days, the Trustee shall sell Securities to reimburse itself for such
advance and any accrued interest thereon. Such advances will be secured by a
lien on the assets of the Trust in favor of the Trustee.
In addition, as soon as practicable after notice of termination of the
Trust, the Trustee will distribute via the Depository and the DTC Participants
to each Beneficial Owner redeeming MidCap SPDRs in Creation Unit size
aggregations prior to the termination date specified in such notice a portion
of the Securities and cash as described above (see "Redemption of MidCap
SPDRs" and "Administration of the Trust--Termination"). Otherwise, the Trustee
will distribute to each Beneficial Owner (whether in Creation Unit size
aggregations or otherwise), as soon as practical after termination of the
Trust, such Beneficial Owner's pro rata share of the net asset value of the
Trust (see "Administration of the Trust--Termination").
All distributions are made by the Trustee through the Depository and the DTC
Participants to Beneficial Owners as recorded on the book-entry system of the
Depository and the DTC Participants (see "The Trust--Book-Entry-Only System").
The settlement date for the creation of MidCap SPDRs in Creation Unit size
aggregations or the purchase of MidCap SPDRs in the secondary market must
occur on or prior to the Record Date in order for such creator or purchaser to
receive a distribution on the next Dividend Payment Date. If the settlement
date for such creation or secondary market purchase occurs after the Record
Date, the distribution will be made to the prior securityholder or Beneficial
Owner as of such Record Date.
Any Beneficial Owner interested in acquiring additional MidCap SPDRs with
proceeds received from distributions described above may elect dividend
reinvestment
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through DTC Participants by means of the DTC Dividend Reinvestment Service,
described herein (see "Dividend Reinvestment Service"), if such service is
available through such Beneficial Owner's broker.
TRUST SUPERVISION
The Trust's Portfolio Securities are not managed and therefore the adverse
financial condition of an issuer of securities in the Trust does not, in
itself, require the sale of Securities from the Portfolio. The Trustee shall,
on a non-discretionary basis, make changes to the Portfolio as described above
(see "The Portfolio--Adjustments to the Portfolio").
The Trustee will direct its securities transactions only to brokers or
dealers, which may include affiliates of the Trustee, from whom it expects to
obtain the most favorable prices or execution of orders.
STATEMENTS TO BENEFICIAL OWNERS
With each distribution, the Trustee will furnish for distribution to
Beneficial Owners (see "The Trust--Book-Entry-Only System") a statement
setting forth the amount being distributed expressed as a dollar amount per
MidCap SPDR.
Promptly after the end of each fiscal year, the Trustee will furnish to the
DTC Participants for distribution to each person who was a Beneficial Owner of
MidCap SPDRs at the end of such fiscal year an annual report of the Trust
containing financial statements audited by independent accountants of
nationally recognized standing and such other information as may be required
by applicable laws, rules and regulations.
REGISTER OF OWNERSHIP AND TRANSFER
The Trustee maintains a record of the creation and redemption of MidCap
SPDRs in Creation Unit size aggregations. The Depository maintains a record on
its book-entry system of the DTC Participant ownership of MidCap SPDRs and the
number of MidCap SPDRs owned (see "The Trust--Book-Entry-Only System").
Certificates are not issued for MidCap SPDRs, whether in Creation Unit size
denominations or otherwise. Beneficial Owners have the rights accorded to
holders of "book-entry" securities under applicable law. Beneficial Owners may
transfer MidCap SPDRs through the Depository by instructing the DTC
Participant holding the MidCap SPDRs for such Beneficial Owner in accordance
with standard securities industry procedures.
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RIGHTS OF BENEFICIAL OWNERS
MidCap SPDRs in Creation Unit size aggregations (i.e., 25,000 MidCap SPDRs)
may be tendered to the Trustee for redemption (see "Redemption of MidCap
SPDRs"). Beneficial Owners may sell MidCap SPDRs in the secondary market, but
must accumulate enough MidCap SPDRs (i.e., 25,000 MidCap SPDRs) to constitute
a full Creation Unit in order to redeem through the Trust. The death or
incapacity of any Beneficial Owner will not operate to terminate the Trust nor
entitle such Beneficial Owner's legal representatives or heirs to claim an
accounting or to take any action or proceeding in any court for a partition or
winding up of the Trust.
Beneficial Owners shall not have the right to vote concerning the Trust,
except as described below with respect to termination and as otherwise
expressly set forth in the Trust Agreement, or in any manner control the
operation and management of the Trust, nor shall any Beneficial Owner be
liable to any other person by reason of any action taken by the Sponsor or the
Trustee.
AMENDMENT
The Trust Agreement may be amended from time to time by the Trustee and the
Sponsor without the consent of any Beneficial Owners (a) to cure any ambiguity
or to correct or supplement any provision thereof which may be defective or
inconsistent or to make such other provisions in regard to matters or
questions arising thereunder as will not adversely affect the interests of
Beneficial Owners; (b) to change any provision thereof as may be required by
the Commission; (c) to add or change any provision as may be necessary or
advisable for the continuing qualification of the Trust as a "regulated
investment company" under the Code; (d) to add or change any provision thereof
as may be necessary to implement a dividend reinvestment plan or service; (e)
to add or change any provision thereof as may be necessary or advisable in the
event that NSCC or the Depository is unable or unwilling to continue to
perform its functions as set forth therein; (f) to add or change any provision
thereof to conform the adjustments to the Portfolio and the Portfolio Deposit
to changes, if any, made by Standard & Poor's in its method of determining the
S&P MidCap 400 Index; and (g) to make changes to the Transaction Fee and to
other amounts charged in connection with creations and redemptions of MidCap
SPDRs within the original parameters set forth in the Trust Agreement. The
Trust Agreement may also be amended from time to time by the Sponsor and the
Trustee with the consent of the Beneficial Owners of 51% of the outstanding
MidCap SPDRs to add provisions to or change or eliminate any of the provisions
of the Trust Agreement or to modify the rights of Beneficial Owners; provided,
however, that the Trust Agreement may not be amended without the consent of
the Beneficial Owners of all outstanding MidCap SPDRs if such amendment would
(1) permit, except in accordance with the terms and conditions of the Trust
Agreement, the acquisition of any securities other than those acquired in
accordance with the terms and conditions of the Trust Agreement; (2) reduce
the interest of any Beneficial Owner in the Trust; or (3) reduce the
percentage of Beneficial Owners required to consent to any such amendment.
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Promptly after the execution of any such amendment, the Trustee shall
receive from the Depository, pursuant to the terms of the Depository
Agreement, a list of all DTC Participants holding MidCap SPDRs. The Trustee
shall inquire of each such DTC Participant as to the number of Beneficial
Owners for whom such DTC Participant holds MidCap SPDRs, and provide each such
DTC Participant with sufficient copies of a written notice of the substance of
such amendment for transmittal by each such DTC Participant to such Beneficial
Owners (see "The Trust--Book-Entry-Only System").
TERMINATION
The Trust Agreement provides that the Sponsor has the discretionary right to
direct the Trustee to terminate the Trust if at any time after six months
following and prior to three years following the Initial Date of Deposit the
net asset value of the Trust shall fall below $25,000,000 or if at any time
after three years following the Initial Date of Deposit such value is less
than $100,000,000, as such dollar amount shall be adjusted for inflation in
accordance with the CPI-U, such adjustment to take effect at the end of the
fourth year following the Initial Date of Deposit and at the end of each year
thereafter and to be made so as to reflect the percentage increase in consumer
prices as set forth in the CPI-U for the twelve-month period ending in the
last month of the preceding fiscal year. The Trust Agreement also provides
that the Trustee shall, at the direction of the Sponsor, terminate the Trust
if, within 90 days from the Initial Date of Deposit, the net asset value of
the Trust is less than $100,000.
The Trust will terminate in the event that MidCap SPDRs are delisted from
the Exchange. The Exchange will consider the suspension of trading in or the
delisting of MidCap SPDRs as discussed above (see "Exchange Listing").
The Trust may also be terminated (a) by the agreement of the Beneficial
Owners of 66-2/3% of outstanding MidCap SPDRs; (b) if the Depository is unable
or unwilling to continue to perform its functions as set forth under the Trust
Agreement and a comparable replacement is unavailable; (c) if NSCC no longer
provides clearance services with respect to MidCap SPDRs, or if the Trustee is
no longer a participant in NSCC; (d) if Standard & Poor's ceases publishing
the S&P MidCap 400 Index; or (e) if the License Agreement is terminated.
Currently, the License Agreement is scheduled to expire on April 27, 2020 in
accordance with its terms. The parties thereto may extend the term of the
License Agreement beyond such date without the consent of any of the
Beneficial Owners of MidCap SPDRs. The Trust will also terminate by its terms
on the Termination Date.
If either the Sponsor or the Trustee shall resign or be removed and a
successor is not appointed, the Trust will terminate (see "Resignation,
Removal and Liability--
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The Trustee" and "Resignation, Removal and Liability--The Sponsor"). The
dissolution of the Sponsor or its ceasing to exist as a legal entity for any
cause whatsoever, however, will not cause the termination of the Trust
Agreement or the Trust unless the Trustee deems termination to be in the best
interests of Beneficial Owners.
Prior written notice of the termination of the Trust will be given at least
twenty (20) days prior to termination of the Trust to all Beneficial Owners in
the manner described above (see "The Trust--Book-Entry-Only System"). The
notice will set forth the date on which the Trust will be terminated (the
"Termination Date"), the period during which the assets of the Trust will be
liquidated, the date on which Beneficial Owners of MidCap SPDRs (whether in
Creation Unit size aggregations or otherwise) will receive in cash the net
asset value of the MidCap SPDRs held and the date determined by the Trustee
upon which the books of the Trust shall be closed. Such notice shall further
state that, as of the date thereof and thereafter, neither requests to create
additional Creation Units nor Portfolio Deposits will be accepted, that no
additional MidCap SPDRs will be created for the purpose of reinvesting
dividend distributions and that, as of the date thereof and thereafter, the
portfolio of Securities delivered upon redemption shall be identical in
composition and weighting to the Securities held in the Trust as of such date
rather than the securities portion of the Portfolio Deposit as in effect on
the date the request for redemption is deemed received. Beneficial Owners of
MidCap SPDRs in Creation Unit size aggregations may, in advance of the
Termination Date, redeem in kind directly from the Trust (see "Redemption of
MidCap SPDRs").
Within a reasonable period of time after the Termination Date, the Trustee
shall, subject to any applicable provisions of law, use its best efforts to
sell all of the Securities not already distributed to redeeming Beneficial
Owners of Creation Units. The Trustee shall not be liable for or responsible
in any way for depreciation or loss incurred by reason of any such sale or
sales. The Trustee may suspend such sales upon the occurrence of unusual or
unforeseen circumstances, including but not limited to a suspension in trading
of a Security, the closing or restriction of trading on a stock exchange, the
outbreak of hostilities or the collapse of the economy. Upon receipt of
proceeds from the sale of the last Security, the Trustee shall deduct
therefrom its fees and all other expenses (see "Expenses of the Trust"). The
remaining amount shall be transmitted to the Depository for distribution via
the DTC Participants, together with a final statement setting forth the
computation of the gross amount distributed. MidCap SPDRs not redeemed prior
to termination of the Trust will be redeemed in cash at net asset value based
on the proceeds of the sale of the Securities. Such redemptions in cash at net
asset value shall be available to all Beneficial Owners, with no minimum
aggregation of MidCap SPDRs required (see "Administration of the Trust--
Distributions to MidCap SPDR Beneficial Owners").
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RESIGNATION, REMOVAL AND LIABILITY
THE TRUSTEE
Under the Trust Agreement, the Trustee may resign and be discharged of the
Trust created by the Trust Agreement by executing a notice of resignation in
writing and filing such notice with the Sponsor and mailing a copy of the
notice of resignation to all DTC Participants that are reflected on the
records of the Depository as owning MidCap SPDRs for distribution to
Beneficial Owners as provided above (see "The Trust -- Book-Entry-Only
System") not less than sixty (60) days before the date such resignation is to
take effect. Such resignation will become effective upon the appointment of
and the acceptance of the Trust by a successor Trustee or, if no successor is
appointed within sixty (60) days after the date such notice of resignation is
given, the Trust shall terminate (see "Administration of the Trust--
Termination"). The Sponsor, upon receiving notice of such resignation, is
obligated to use its best efforts to appoint a successor Trustee promptly.
In case the Trustee becomes incapable of acting as such or is adjudged a
bankrupt or is taken over by any public authority, the Sponsor may discharge
the Trustee and appoint a successor Trustee as provided in the Trust
Agreement. Notice of such discharge and appointment shall be mailed via the
DTC Participants to Beneficial Owners by the Sponsor.
Upon a successor Trustee's execution of a written acceptance of an
appointment as Trustee for the Trust, such successor Trustee will become
vested with all the rights, powers, duties and obligations of the original
Trustee.
A successor Trustee is required to be a trust company, corporation or
national banking association organized and doing business under the laws of
the United States or any state thereof; to be authorized under such laws to
exercise corporate trust powers; and to have at all times an aggregate
capital, surplus and undivided profit of not less than $50,000,000.
Beneficial Owners of 51% of the then outstanding MidCap SPDRs may at any
time remove the Trustee by written instrument(s) delivered to the Trustee and
the Sponsor. The Sponsor shall thereupon use its best efforts to appoint a
successor Trustee in the manner specified above and in the Trust Agreement.
The Trust Agreement provides that the Trustee is not liable for any action
taken in reasonable reliance on properly executed documents or for the
disposition of monies or Securities or for the evaluations required to be made
thereunder, except by reason of its own gross negligence, bad faith, wilful
malfeasance, wilful misconduct, or reckless disregard of its duties and
obligations, nor is the Trustee liable or responsible in any way for
depreciation or loss incurred by reason of the sale by the
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Trustee of any Securities in the Trust. In the event of the failure of the
Sponsor to act, the Trustee may act and is not liable for any such action
taken by it in good faith. The Trustee is not personally liable for any taxes
or other governmental charges imposed upon or in respect of the Securities or
upon the interest thereon or upon it as Trustee or upon or in respect of the
Trust which the Trustee may be required to pay under any present or future law
of the United States of America or of any other taxing authority having
jurisdiction. In addition, the Trust Agreement contains other customary
provisions limiting the liability of the Trustee. The Trustee and its
directors, subsidiaries, shareholders, officers, employees and affiliates
under common control with the Trustee (each a "Trustee Indemnified Party")
will be indemnified from the assets of the Trust and held harmless against any
loss, liability or expense incurred without gross negligence, bad faith,
wilful misconduct, wilful malfeasance on the part of such Trustee Indemnified
Party or reckless disregard of its duties and obligations, arising out of, or
in connection with, its acceptance or administration of the Trust, including
the costs and expenses (including counsel fees) of defending against any claim
or liability.
THE SPONSOR
If at any time the Sponsor shall fail to undertake or perform or become
incapable of undertaking or performing any of the duties which by the terms of
the Trust Agreement are required of it to be undertaken or performed, or shall
resign, or shall become bankrupt or its affairs shall be taken over by public
authorities, the Trustee may appoint a successor Sponsor as shall be
satisfactory to the Trustee, agree to act as Sponsor itself, or may terminate
the Trust Agreement and liquidate the Trust (see "Termination"). Notice of the
resignation or removal of the Sponsor and the appointment of a successor shall
be mailed by the Trustee to the Depository and the DTC Participants for
distribution to Beneficial Owners (see "The Trust--Book-Entry-Only System").
Upon a successor Sponsor's execution of a written acceptance of such
appointment as Sponsor of the Trust, such successor Sponsor shall become
vested with all of the rights, powers, duties and obligations of the original
Sponsor. Any successor Sponsor may be compensated at rates deemed by the
Trustee to be reasonable.
The Sponsor may resign by executing and delivering to the Trustee an
instrument of resignation. Such resignation shall become effective upon the
appointment of a successor Sponsor and the acceptance of such appointment by
the successor Sponsor, unless the Trustee either agrees to act as Sponsor or
terminates the Trust Agreement and liquidates the Trust, which the Trustee
shall do if no successor Sponsor is appointed (see "Termination").
The dissolution of the Sponsor or its ceasing to exist as a legal entity for
any cause whatsoever will not cause the termination of the Trust Agreement or
the Trust unless the Trustee deems termination to be in the best interests of
the Beneficial Owners of MidCap SPDRs.
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The Trust Agreement provides that the Sponsor is not liable to the Trustee,
the Trust or to the Beneficial Owners of MidCap SPDRs for taking any action or
for refraining from taking any action made in good faith or for errors in
judgment, but is liable only for its own gross negligence, bad faith, wilful
misconduct or wilful malfeasance in the performance of its duties or its
reckless disregard of its obligations and duties under the Trust Agreement.
The Sponsor is not liable or responsible in any way for depreciation or loss
incurred by the Trust by reason of the sale of any Securities of the Trust.
The Trust Agreement further provides that the Sponsor and its directors,
subsidiaries, shareholders, officers, employees, and affiliates under common
control with the Sponsor (each a "Sponsor Indemnified Party") shall be
indemnified from the assets of the Trust and held harmless against any loss,
liability or expense incurred without gross negligence, bad faith, wilful
misconduct or wilful malfeasance on the part of any Sponsor Indemnified Party
in the performance of its duties or reckless disregard of its obligations and
duties under the Trust Agreement, including the payment of the costs and
expenses of defending against any claim or liability.
SPONSOR
The Sponsor of the Trust is PDR Services Corporation, a Delaware corporation
incorporated on June 15, 1990 with offices c/o the Exchange, 86 Trinity Place,
New York, New York 10006. The Sponsor's Internal Revenue Service Employer
Identification Number is 13-3574560. The Exchange owns all of the Sponsor's
outstanding shares of common stock. The Exchange is a "control person" of the
Sponsor as such term is defined in the Securities Act of 1933.
The Sponsor, at its own expense, may from time to time provide additional
promotional incentives to brokers who sell MidCap SPDRs to the public. In
certain instances, these incentives may be provided only to those brokers who
meet certain threshold requirements for participation in a given incentive
program, such as selling a significant number of MidCap SPDRs within a
specified time period.
TRUSTEE
The Trustee is the Bank of New York, a corporation organized under the laws
of New York with the powers of a trust company under the New York Banking law
with a trust office at 101 Barclay Street, New York, New York 10286. The
Trustee's Internal Revenue Service Employer Identification Number is 135-
160382. The Trustee is subject to supervision and examination by the Federal
Reserve Bank of New York, the Federal Deposit Insurance Corporation and the
New York State Banking Department.
DEPOSITORY
The Depository Trust Company, New York, New York, a limited purpose trust
company and member of the Federal Reserve System, acts as Depository for
MidCap SPDRs. The Depository receives customary fees for its services.
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LEGAL OPINION
The legality of the MidCap SPDRs offered hereby has been passed upon by
Carter, Ledyard & Milburn, New York, New York, as counsel for the Sponsor.
Winston & Strawn acts as counsel for the Trustee.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
The financial statements as of September 30, 1997 and for the period from
January 1, 1997 to September 30, 1997, the year ended December 31, 1996 and
for the period from April 27, 1995 (inception) to December 31, 1995 included
in this Prospectus have been so included in reliance upon the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
INFORMATION AND COMPARISONS RELATING TO TRUST, SECONDARY MARKET TRADING, NET
ASSET SIZE, PERFORMANCE AND TAX TREATMENT
Information regarding various aspects of the Trust, including the net asset
size thereof, as well as the secondary market trading, the performance and the
tax treatment of MidCap SPDRs, may be included from time to time in
advertisements, sales literature and other communications, as well as in
reports to current or prospective Beneficial Owners.
Information may be provided to prospective investors to help such investors
assess their specific investment goals and to aid in their understanding of
various financial strategies. Such information may present current economic
and political trends and conditions and may describe general principles of
investing such as asset allocation, diversification and risk tolerance, as
well as specific investment techniques such as indexing and hedging. In
addition, information may be presented to prospective or current Beneficial
Owners regarding the purchase of MidCap SPDRs in the secondary market, such as
margin requirements, types of orders that may be entered, and information
concerning short sales. Similarly, market data symbols, trading fractions,
other trading information and the CUSIP number relating to MidCap SPDRs may be
included in such information. Comparisons with other investment vehicles, such
as mutual funds, may be made with respect to the application of such
requirements; costs of fund management and administration; cost and advantages
of intraday trading; and rules applicable to short sales.
Information regarding the Trust's net asset size may be stated in
communications to prospective or current Beneficial Owners for one or more
time periods, including annual, year-to-date or daily periods. Such
information may also be expressed in terms
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of the total number of MidCap SPDRs outstanding as of one or more time
periods. Factors integral to the size of the Trust's net assets, such as
creation volume and activity, may also be discussed, and may be specified from
time to time or with respect to various periods of time. Comparisons of such
information during various periods may also be made, and may be expressed by
means of percentages.
Information may be provided to investors regarding the ability to engage in
short sales of MidCap SPDRs, including reference to the exemption from the
"tick test" provision of the SEC short sale rule (Rule 10a-1 under the
Securities Exchange Act of 1934), to permit short sales on "minus" or "zero-
minus" ticks. Selling short refers to the sale of securities which the seller
does not own, but which the seller arranges to borrow prior to effecting the
sale. Institutional investors may be advised that lending their MidCap SPDR
shares to short sellers may generate stock loan credits which may supplement
the return they can earn from an investment in MidCap SPDRs. These stock loan
credits may provide a useful source of additional income for certain
institutional investors who can arrange to lend MidCap SPDRs. Potential short
sellers may be advised that a short rebate (functionally equivalent to partial
use of proceeds of the short sale) may reduce their cost of selling short.
Information may be provided to investors regarding capital gains
distributions by the Trust, including historical information relating to such
distributions. Comparisons between the Trust and other investment vehicles
such as mutual funds may be made regarding such capital gains distributions,
as well as relative tax efficiencies between the Trust and such other
investment vehicles (e.g. realization of capital gains or losses to the Trust
and to such other investment vehicles in connection with redemption of their
respective securities). (See "Tax Status of the Trust" for discussion of tax
consequences to Beneficial Owners of MidCap SPDRs in connection with the sale
or redemption of MidCap SPDRs.) Based on projected differences between MidCap
SPDRs and conventional mutual funds with regard to capital gains
distributions, projections may be made regarding comparative capital gains
distributions and tax rates for taxable investors holding MidCap SPDRs over a
long period of time. Comparisons may also be provided regarding the probable
tax impact resulting from rebalancing of the Trust portfolio (see "The
Portfolio--Adjustments to the Portfolio") and adjustments to the portfolio of
an actively managed investment vehicle.
Information regarding the secondary market trading activity of MidCap SPDRs
also may be presented over one or more stated time periods, such as for daily,
monthly, quarterly or annual periods. MidCap SPDR secondary market trading
volume information may be compared with similar information relating to other
issues trading on the Exchange during the same reporting period. Average daily
secondary market trading volume of MidCap SPDRs may also be reported from time
to time. Comparisons of such information during various periods may also be
made and may be expressed by means of percentages.
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Information may also be provided in communications to prospective or current
Beneficial Owners comparing and contrasting the relative advantages of
investing in MidCap SPDRs as compared to other investment vehicles, such as
mutual funds, both on an individual and a group basis (e.g., stock index
mutual funds). Such information may include comparisons of costs and expense
ratios, expressed either in dollars or basis points, stock lending activities,
permitted investments and hedging activities (e.g., engaging in options or
futures transactions), and portfolio turnover data and analyses. In addition,
such information may quote, reprint or include portions of financial,
scholarly or business publications or periodicals, including model allocation
schedules or portfolios, as the foregoing relate to the comparison of MidCap
SPDRs to other investment vehicles, current economic, financial and political
conditions, investment philosophy or techniques, or the desirability of owning
MidCap SPDRs.
In addition, information on the performance of MidCap SPDRs on the basis of
changes in price per MidCap SPDR with or without reinvesting all dividends
and/or any distributions of capital in additional MidCap SPDRs may be included
from time to time in such information. Total return measures the percentage
growth in the total dollar value of an investment in MidCap SPDRs (reflecting
dividends and capital appreciation but without provision for any income taxes
payable). Average annualized performance will be stated for various periods.
Total return figures may also be stated for a period from the Initial Date of
Deposit, a date at least twelve months prior to the end of the reporting
period or for annual periods for the life of the Trust. Information on the S&P
MidCap 400 Index contained in this Prospectus, as updated from time to time,
may also be included from time to time in such material. The performance of
the Trust, of the S&P MidCap 400 Index (provided information is also given
reflecting the performance of the Trust in comparison to that Index) or both
may also be compared to the performance of money managers as reported in
market surveys such as SEI Fund Evaluation Survey (a leading data base of tax-
exempt funds) or mutual funds such as those reported by Lipper Analytical
Services Inc., Money Magazine Fund Watch, Wiesenberger Investment Companies
Service, Morningstar Incorporated and Value Line Investment Survey, each of
which measures performance following their own specific and well-defined
calculation measures, or of the New York Stock Exchange Composite Index, the
American Stock Exchange Index (indices of stocks traded on the New York and
American Stock Exchanges, respectively), the Dow Jones Industrial Average (an
index of 30 widely traded common stocks) or the NASDAQ Composite Index (an
unmanaged index of over-the-counter stocks) or similar measurement standards
during the same period of time. In addition to all other sources of
comparative information, comparative performance figures published by other
funds or money managers may be included from time to time. Information may
also be included regarding the aggregate amount of assets committed to index
investing generally by various types of investors, such as pension funds and
other institutional investors, which currently exceeds $300 billion.
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Information on the relative price performance of MidCap SPDRs in relation to
other securities and/or indices may be represented in the form of
"correlation." Correlation is a standard measure of the degree of linear
association between two price series, and ranges from minus one hundred
percent (-100%) (i.e. perfect negative linear association) to positive one
hundred percent (100%) (i.e., perfect linear association).
Information relating to the relative price performance of MidCap SPDRs may
be compared against a wide variety of investment categories and asset classes,
including common stocks, small capitalization stocks, long and intermediate
term corporate and government bonds, Treasury bills, the rate of inflation in
the United States (based on the Consumer Price Index ("CPI") and combinations
of various capital markets. Historical returns of these and other capital
markets in the United States may be provided by independent statistical
studies and sources, such as those provided by Ibbotson Associates of Chicago,
Illinois. The performance of these capital markets is based on the returns of
different indices. Information may be presented using the performance of these
and other capital markets to demonstrate general investment strategies. So,
for example, performance of MidCap SPDRs may be compared to the performance of
selected asset classes such as short-term U.S. Treasury bills, long-term U.S.
Treasury bonds, long-term corporate bonds, mid-capitalization stocks, foreign
stocks and small capitalization stocks and may also be measured against the
rate of inflation as set forth in well-known indices (such as the CPI).
Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. Performance of MidCap SPDRs may
also be compared to that of other indices or compilations that may be
developed and made available to the investing public in the future. Of course,
such comparisons will only reflect past performance of MidCap SPDRs and the
investment categories, indices or compilations chosen and no guarantees can be
made of future results regarding the performance of either MidCap SPDRs or the
asset classes chosen for such comparisons.
DIVIDEND REINVESTMENT SERVICE
The Trust has made the DTC book-entry Dividend Reinvestment Service (the
"Service") available for use by Beneficial Owners through DTC Participants for
reinvestment of their cash proceeds. Note that some DTC Participants may not
elect to utilize the Service; therefore, after the Service is made available
for MidCap SPDRs, an interested MidCap SPDR investor may wish to contact such
investor's broker to ascertain the availability of the Service through such
broker. Interested Beneficial Owners should also note that each broker may
require investors to adhere to specific procedures and timetables in order to
participate in the Service and such investors should ascertain from their
broker such necessary details. MidCap SPDRs acquired pursuant to the Service
will be held by the Beneficial Owners in the same manner, and subject to the
same terms and conditions, as for original ownership of MidCap SPDRs.
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Distributions reinvested in additional MidCap SPDRs through the Service will
nevertheless be taxable dividends to Beneficial Owners to the same extent as
if received in cash.
The Trustee will utilize the cash proceeds of dividends received from all
Beneficial Owners participating in the Service to obtain Index Securities
necessary to create the requisite number of MidCap SPDRs at the close of
business on each MidCap SPDR distribution date. Any cash balance remaining
after the requisite number of MidCap SPDRs has been created will be
distributed, on a pro rata basis, to all Beneficial Owners who participated in
the Service. Note that brokerage commissions, if any, incurred in obtaining
the Index Securities necessary to create additional MidCap SPDRs with the cash
from the distributions will be an expense of the Trust.*
ADDITIONAL INFORMATION
This Prospectus does not include all of the information with respect to the
Trust set forth in its registration statement and the exhibits thereto filed
with the Commission, under the Securities Act of 1933, and the 1940 Act, to
which reference is hereby made. Copies of such documents may be inspected
without charge at the Commission's offices at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of all or any part thereof may be obtained
from such office after payment of the fees prescribed by the Commission. Such
information is also available at the offices of the Sponsor at 86 Trinity
Place, New York, New York 10006.
- ---------------------------
* It is difficult to estimate the annual dollar amount of brokerage
commissions that might be incurred in connection with the Dividend
Reinvestment Service during any fiscal year. The Trustee estimates that
during fiscal period ended September 30, 1997, the approximate amount of
annual brokerage commissions incurred in implementing the Service was less
than $.02 per MidCap SPDR. There can be no guarantee that either the size
of the Trust or the number of outstanding MidCap SPDRs will remain
constant, or that dividend payments, the cost of brokerage commissions
incurred to purchase Index Securities or Beneficial Owner participation
will remain the same as it was during fiscal period ended September 30,
1997.
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GLOSSARY OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"Adjustment Day"........................................................... 56
"Balancing Amount"......................................................... 57
"Beneficial Owners"........................................................ 49
"Business Day"............................................................. 9
"Cash Component"........................................................... 5
"Cash Redemption Payment".................................................. 70
"Closing Time"............................................................. 45
"Code"..................................................................... 10
"Commission"............................................................... 5
"Creation Unit"............................................................ 1
"Depository Agreement"..................................................... 50
"Depository"............................................................... 9
"Distributor".............................................................. 14
"Dividend Equivalent Payment".............................................. 5
"Dividend Payment Date".................................................... 76
"DTC Cut-Off Time"......................................................... 74
"DTC Participants"......................................................... 49
"Evaluation Time".......................................................... 2
"Ex-Dividend Date"......................................................... 76
"Excess Cash Amounts"...................................................... 70
"Exchange"................................................................. 1
"Global Security".......................................................... 48
"Index Securities"......................................................... 4
"Indirect Participants".................................................... 49
"Initial Date of Deposit".................................................. 3
"License Agreement"........................................................ 60
"MidCap SPDR Clearing Process"............................................. 7
"MidCap SPDR".............................................................. 1
"Misweighting Amount"...................................................... 52
"Misweighting"............................................................. 52
"NAV Amount"............................................................... 56
"NSCC Business Day"........................................................ 18
"NSCC"..................................................................... 5
"Participant Agreement".................................................... 47
"Participating Party"...................................................... 5
"Portfolio Deposit Amount"................................................. 56
"Portfolio Deposit"........................................................ 6
"Portfolio"................................................................ 41
"Record Date".............................................................. 76
"Request Day".............................................................. 56
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"S&P MidCap 400 Index"..................................................... 1
"S&P"...................................................................... 9
"Securities"............................................................... 1
"Service".................................................................. 12
"Sponsor".................................................................. 1
"Standard & Poor's"........................................................ 9
"Termination Date"......................................................... 14
"Transaction Fee".......................................................... 7
"Transmittal Date"......................................................... 45
"Trust Agreement".......................................................... 4
"Trust".................................................................... 1
"Trustee".................................................................. 4
"Weighting Analysis"....................................................... 53
</TABLE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND ANY
INFORMATION OR REPRESENTATIONS NOT STATED IN IT, OR IN THE REGISTRATION
STATEMENT AND EXHIBITS OF WHICH IT IS A PART, MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE TRUST, THE SPONSOR OR THE TRUSTEE. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, ANY
SECURITY OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN OFFER
TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, SECURITIES IN ANY JURISDICTION
WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION IN IT IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE. HOWEVER, IF ANY MATERIAL CHANGE OCCURS
WHILE THIS PROSPECTUS IS REQUIRED TO BE DELIVERED, THIS PROSPECTUS WILL BE
AMENDED OR SUPPLEMENTED ACCORDINGLY.
THE TRUST IS REGISTERED AS A UNIT INVESTMENT TRUST UNDER THE INVESTMENT
COMPANY ACT OF 1940. REGISTRATION DOES NOT IMPLY THAT THE TRUST OR MIDCAP SPDRS
HAVE BEEN GUARANTEED, SPONSORED, RECOMMENDED OR APPROVED BY THE UNITED STATES
OR ANY STATE OR ANY AGENCY OR OFFICER THEREOF.
--------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ESSENTIAL INFORMATION..................................................... 2
PROSPECTUS SUMMARY........................................................ 4
SPECIAL CONSIDERATIONS AND RISK FACTORS................................... 16
REPORT OF INDEPENDENT ACCOUNTANTS......................................... 21
STATEMENT OF FINANCIAL CONDITION.......................................... 22
SCHEDULE OF INVESTMENTS................................................... 30
THE TRUST................................................................. 41
THE PORTFOLIO............................................................. 51
THE S&P MIDCAP 400 INDEX.................................................. 58
LICENSE AGREEMENT......................................................... 60
EXCHANGE LISTING.......................................................... 61
TAX STATUS OF THE TRUST................................................... 62
CONTINUOUS OFFERING OF MIDCAP SPDRs....................................... 65
EXPENSES OF THE TRUST..................................................... 66
REDEMPTION OF MIDCAP SPDRS................................................ 69
VALUATION................................................................. 75
ADMINISTRATION OF THE TRUST............................................... 75
RESIGNATION, REMOVAL AND LIABILITY........................................ 83
SPONSOR................................................................... 85
TRUSTEE................................................................... 85
DEPOSITORY................................................................ 85
LEGAL OPINION............................................................. 86
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS.......................... 86
INFORMATION AND COMPARISONS RELATING TO TRUST, SECONDARY MARKET TRADING,
NET ASSET SIZE, PERFORMANCE AND TAX TREATMENT........................... 86
DIVIDEND REINVESTMENT SERVICE............................................. 89
ADDITIONAL INFORMATION.................................................... 90
GLOSSARY OF DEFINED TERMS................................................. 91
</TABLE>
STANDARD & POOR'S
MIDCAP 400 DEPOSITARY
RECEIPTS (TM)
("MIDCAP SPDRS") (TM)
MIDCAP SPDR TRUST, SERIES 1
--------------------
PROSPECTUS
--------------------
SPONSOR
PDR SERVICES CORPORATION
--------------------
JANUARY 27, 1998
MIDCAP
SPDR(TM)
[LOGO]
