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.
Note 2 - Summary of Significant Accounting Policies
The financial statements of the Trust are prepared in accordance with accounting principles generally accepted in the United States of America.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates. The following is a summary of significant accounting policies followed by the Trust.
Security Valuation - Portfolio securities are valued based on the closing sale price on the exchange 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 deemed to be the principal market for the security. Portfolio securities traded on NASDAQ are valued at the NASDAQ official closing price on the day of valuation. 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.
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Federal Income Tax - The Trust has qualified and intends to continue to qualify for and elect treatment as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended. By so qualifying and electing, the Trust 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.
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:
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Net Asset Value of the Trust
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|
Fee as a Percentage of
Net Asset Value of the Trust
|
|
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$0-$500,000,000*
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14/100 of 1% per annum
|
|
|
$500,000,001-$1,000,000,000*
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12/100 of 1% per annum
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|
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$1,000,000,001 and above*
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10/100 of 1% per annum
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* The fee indicated applies to that portion of the net asset value of the Trust, which falls in the size category indicated.
The Trustee voluntarily agreed to reduce its fee for the years ended September 30, 2007, 2006 and 2005 as disclosed in the Statements of Operations. The amount of the reduction equals the Federal Funds Rate, as published in the Wall Street Journal multiplied by each day's daily cash balance in the Trust's cash account, reduced by the amount of reserves for that account required by the Federal Reserve Board of Governors. The Trustee reserves the right to discontinue this voluntary fee reduction in the future.
PDR Services LLC (the "Sponsor", a wholly-owned subsidiary of the American Stock Exchange LLC) agreed to reimburse the Trust for, or assume, the ordinary operating expenses of the Trust, which exceeded 30/100 of 1% per annum of the daily net asset value of the Trust as calculated by the Trustee. There were no expenses assumed by the Sponsor for the years ended September 30, 2007, 2006 and 2005.
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 expense limitation described above on any given day during the year. There is no outstanding amount subject to recoupment by the Sponsor of expenses so reimbursed in subsequent
periods.
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Note 4 - Trust Transactions in Midcap SPDRs
Transactions in MidCap SPDRs were as follows:
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|
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Year Ended September 30, 2007
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Year Ended September 30, 2006
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|
|
|
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MidCap SPDRs
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Amount
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|
MidCap SPDRs
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|
Amount
|
|
|
MidCap SPDRs sold
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|
|
77,325,000
|
|
|
$
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12,039,027,297
|
|
|
|
51,850,000
|
|
|
$
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7,167,944,824
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|
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Dividend reinvestment
MIDCAP SPDRs issued
|
|
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6,707
|
|
|
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1,026,976
|
|
|
|
5,517
|
|
|
|
762,797
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|
|
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MidCap SPDRs redeemed
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|
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(75,950,000
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)
|
|
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(11,712,693,191
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)
|
|
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(54,825,000
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)
|
|
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(7,558,100,034
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)
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|
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Net increase/decrease
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|
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(1,381,707
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)
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$
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(327,361,082
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)
|
|
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(2,969,483
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)
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$
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(389,392,413
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)
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|
|
|
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Year Ended September 30, 2005
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|
|
|
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MidCap SPDRs
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Amount
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MidCap SPDRs sold
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|
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37,275,000
|
|
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$
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4,666,255,578
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|
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Dividend reinvestment
MIDCAP SPDRs issued
|
|
|
5,077
|
|
|
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614,841
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|
|
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MidCap SPDRs redeemed
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|
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(33,825,000
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)
|
|
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(4,223,112,006
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)
|
|
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Net increase/decrease
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|
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3,455,077
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|
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$
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443,758,413
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|
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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, in the amount of the lesser of 20/100 of 1% of current market value of 1 Creation Unit or $3,000, are charged to those persons creating or redeeming Creation Units. Transaction fees are received by the Trustee directly from the authorized participants and used to offset the expense of processing orders. During the year ended September 30, 2007, the Trustee earned $660,000 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 reductions or waivers of such fees for the year ended September 30, 2007.
At September 30, 2007, the Trustee and its affiliates held 6,005,200 MidCap SPDRs, or 9.29% of fractional undivided interest in the Trust.
Note 5 - Investment Transactions
For the year ended September 30, 2007 the Trust had net in-kind contributions, net in-kind redemptions, purchases and sales of investment securities of $12,039,027,297, $11,712,693,191, $1,958,810,053 and $1,958,352,023, respectively.
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Note 6 - Federal Income Tax Status
The following details the tax basis distributions and components of distributable earnings as of September 30, 2007. The tax basis components of distributable earnings differ from the amounts reflected in the Statement of Assets and Liabilities by temporary book/tax differences primarily arising from wash sales and amortization of license fees.
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Cost of investments for federal income tax purposes
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$
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10,962,502,397
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|
|
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Gross unrealized appreciation
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$
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417,286,090
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|
|
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Gross unrealized depreciation
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|
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(1,400,197,326
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)
|
|
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Net unrealized depreciation
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$
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(982,911,236
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)
|
|
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Distributable earnings, ordinary income
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$
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8,405,052
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|
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Capital loss carryforwards expiring:
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9
/30/10
|
|
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(31,566,493
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)
|
|
|
9
/30/11
|
|
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(109,279,926
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)
|
|
|
9
/30/12
|
|
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(80,183,853
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)
|
|
|
|
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$
|
(221,030,272
|
)
|
|
For the year ended September 30, 2007, the Trust utilized $108,420,813 of capital loss carryforwards.
To the extent that capital losses are used to offset future capital gains, it is probable that gains so offset will not be distributed to shareholders.
At September 30, 2007 the Trust deferred $54,724,645 of capital losses arising subsequent to October 31, 2006. For tax purposes, such losses will be reflected in the year ending September 30, 2008.
The tax composition of dividends paid during the years ending September 30, 2007, September 30, 2006 and September 30, 2005 were from ordinary income.
As of September 30, 2007, the Trust had permanent book/tax differences primarily attributable to gains or losses from in-kind redemptions and distributions received from real estate investment trusts. To reflect reclassifications arising from these differences, accumulated net realized loss on investments was decreased by $1,208,674,924, additional paid in capital was increased by $1,217,738,866, and undistributed net investment income was decreased by $9,063,942.
Note 7 - Representations and Indemnifications
In the normal course of business the Trust enters into contracts that contain a variety of representations and warranties which provide general indemnifications. The Trust's maximum exposure under these arrangements in unknown as this would involve future claims that maybe made against the Trust that have not yet occurred. However, based on experience, the Trust expects the risk of loss to be remote.
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Note 8 - Recent Accounting Pronouncements
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN
48). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Trust's tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At this time, management is evaluating the implications of FIN 48 and its impact in the financial statements has not yet been determined.
On September 15, 2006, the FASB released Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS 157") which provides enhanced guidance for measuring fair value. The standard requires companies to provide expanded information about the assets and liabilities measured at fair value and the potential effect of these fair valuations on an entity's financial performance. The standard does not expand the use of fair value in any new circumstances, but provides clarification on acceptable fair valuation methods and applications. Adoption of FAS 157 is required for fiscal years beginning after November 15, 2007. At this time, management is evaluating the implications of FAS 157 and its impact in the financial statements has not yet been determined.
Note 9 - Related Party Transactions
During the fiscal year ended September 30, 2007, 2006 and 2005 the Trust paid $3,125,040, $2,582,136 and $2,588,069 respectively, in commissions on trades to a related party, BNY ConvergEx. BNY ConvergEx is a subsidiary of The Bank of New York, the parent company of the Trustee. The standing instructions with the BNY ConvergEx require all trades to be executed at the close of business on any exchange that the securities are traded.
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