PROSPECTUS
MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND
ONE FINANCIAL CENTER . BOSTON, MASSACHUSETTS 02111-2646
FOR GENERAL INFORMATION AND PURCHASES CALL 617-357-1460 OR TOLL FREE
800-225-1576
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Merrill Lynch Institutional Intermediate Fund (the "Fund") is a diversified,
open-end management investment company which seeks current income. The Fund
intends to invest only in those assets (including assets subject to repurchase
agreements) which will permit shares of the Fund to qualify both as "liquid
assets" under the regulations of the Office of Thrift Supervision in the
Department of the Treasury ("OTS") and as an investment permitted by the
regulations of the National Credit Union Administration. See "Investment
Policies" for a description of such investments.
The Investment Adviser of the Fund is Merrill Lynch Asset Management
("MLAM"). The Distributor of the Fund is Merrill Lynch Funds Distributor, Inc.
("MLFD"), a subsidiary of MLAM.
The Fund is designed primarily as an economical and convenient means for the
investment of funds by federal savings and loan associations and federal credit
unions. The Fund may also be an appropriate vehicle for other entities such as
corporations, investment bankers and brokers, insurance companies, investment
counselors, pension funds, employee benefit plans, law firms, trusts, estates,
and educational, religious and charitable institutions. The net asset value of
the Fund's shares will fluctuate. Fund shares are sold and redeemed on each
business day at net asset value without any sales or redemption charge. However,
the Fund pays the Distributor a distribution fee for providing certain services
in connection with the distribution of the Fund's shares. All net investment
income is declared as dividends daily. Dividends are paid monthly and
automatically reinvested in additional shares or, at the option of the
shareholder, paid in cash. Purchase orders where payment is to be made by
Federal Funds wire must be submitted to MLFD, Boston, by telephone and payment
must be remitted by Federal Funds wire directly to State Street Bank and Trust
Company. While other forms of payment will also be accepted, purchase of shares
will not be effected until Federal Funds are available. The minimum initial
purchase is $25,000 per investor and the minimum subsequent purchase is $1,000.
See "Purchase of Shares," page 11.
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This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be retained
for future reference. A statement containing additional information about the
Fund, dated February 27, 1995 (the "Statement of Additional Information"), has
been filed with the Securities and Exchange Commission and can be obtained,
without charge, by calling or by writing the Fund at the above telephone numbers
or address. The Statement of Additional Information is hereby incorporated by
reference into this Prospectus.
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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.
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MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
The date of this Prospectus is February 27, 1995.
<PAGE>
FEE TABLE
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases................................ None
Deferred Sales Charge.................................................... None
Sales Charge Imposed on Dividend Reinvestments........................... None
Redemption Fees.......................................................... None
Exchange Fee............................................................. None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees................................................. 0.40%
12b-1 Fees............................................................... 0.15
Other Expenses
Custodian Fees....................................................... 0.02%
Shareholder Servicing Fees........................................... 0.04
Other Fees........................................................... 0.22
-----
Total Other Expenses............................................. 0.28%
-----
TOTAL FUND OPERATING EXPENSES................................................ 0.83%
-----
-----
</TABLE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE
PERIOD OF:
----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment assuming (1) an operating expense ratio of
0.83%, (2) a 5% annual return throughout the period and
(3) redemption at the end of the period:.................. $8 $26 $46 $103
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. For a more detailed description of such costs and expenses, see
"Investment Adviser," "Redemption of Shares" and "Purchase of Shares."
The Example set forth above assumes reinvestment of all dividends and
distributions and utilizes a five percent annual rate of return as mandated by
Securities and Exchange Commission regulations. The Example should not be
considered a representation of past or future expenses, and actual expenses or
annual rates of return may be more or less than those assumed for purposes of
the Example.
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<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, Independent Auditors. Financial Statements for the year ended
October 31, 1994 and the Independent Auditors' report thereon are included in
the Statement of Additional Information.
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987+
------- -------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 10.31 $ 10.06 $ 9.76 $ 9.35 $ 9.42 $ 9.44 $ 9.57 $ 10.00
------- -------- ------- -------- -------- -------- -------- --------
Investment income--net....... .55 .54 .62 .72 .77 .83 .80 .73
Realized and unrealized gain
(loss) on
investments--net............. (.71) .25 .30 .41 (.07) (.02) (.13) (.43)
------- -------- ------- -------- -------- -------- -------- --------
Total from investment
operations................... (.16) .79 .92 1.13 .70 .81 .67 .30
------- -------- ------- -------- -------- -------- -------- --------
Less dividends:
Investment income--net...... (.55) (.54) (.62) (.72) (.77) (.83) (.80) (.73)
------- -------- ------- -------- -------- -------- -------- --------
Net asset value, end of
period....................... $ 9.60 $ 10.31 $ 10.06 $ 9.76 $ 9.35 $ 9.42 $ 9.44 $ 9.57
------- -------- ------- -------- -------- -------- -------- --------
------- -------- ------- -------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:
Based on net asset value per
share........................ (1.54%) 8.07% 9.66% 12.62% 7.75% 9.12% 7.29% 3.18%++
------- -------- ------- -------- -------- -------- -------- --------
------- -------- ------- -------- -------- -------- -------- --------
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding
distributions fees........... .68% .65% .67% .66% .60% .55% .50% .44%*
------- -------- ------- -------- -------- -------- -------- --------
------- -------- ------- -------- -------- -------- -------- --------
Expenses..................... .83% .80% .82% .81% .75% .70% .65% .59%*
------- -------- ------- -------- -------- -------- -------- --------
------- -------- ------- -------- -------- -------- -------- --------
Investment income--net....... 5.55% 5.34% 6.24% 7.66% 8.24% 8.96% 8.36% 7.66%*
------- -------- ------- -------- -------- -------- -------- --------
------- -------- ------- -------- -------- -------- -------- --------
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)................... $81,407 $122,283 $94,798 $125,888 $151,891 $211,528 $303,530 $426,712
------- -------- ------- -------- -------- -------- -------- --------
------- -------- ------- -------- -------- -------- -------- --------
Portfolio turnover........... 172.51% 204.80% 156.12% 202.11% 68.74% 306.69% 262.56% 406.66%
------- -------- ------- -------- -------- -------- -------- --------
------- -------- ------- -------- -------- -------- -------- --------
</TABLE>
- ------------
* Annualized
+ The Fund commenced operations on November 6, 1986.
++ Aggregate total investment return.
Further information about the Fund's performance is contained in the Fund's
Annual Report, which can be obtained, without charge, upon request.
3
<PAGE>
INVESTMENT OBJECTIVE
The Fund's objective is to seek current income. The Fund intends to invest
only in assets (including assets subject to repurchase agreements) that qualify
both as "liquid assets" under the regulations of OTS and as investments
permitted by the Federal Credit Union Act and the regulations of the National
Credit Union Administration ("Permitted Investments"), as such regulations may
be in effect from time to time. Accordingly, the Fund will invest in a security
which constitutes a "liquid asset" only if it also constitutes a Permitted
Investment and will invest in a security which constitutes a Permitted
Investment only if it also constitutes a "liquid asset." Moreover, "Eligible
Investments" for the Fund will consist of securities which constitute both
"liquid assets" and Permitted Investments and which, in accordance with such
regulations, also may be included in the portfolio of an open-end management
investment company the shares of which qualify as "liquid assets" or as
Permitted Investments. The Appendix (page 21) hereto contains those provisions
of the statutes and regulations in effect on the date hereof describing assets
in which investment companies, the shares of which qualify as "liquid assets" or
Permitted Investments, may invest. The Fund may invest in any assets which
become Eligible Investments, and will sell any assets which lose their status as
Eligible Investments within the time required by the regulation which rescinds
that status. The investment objective of the Fund described in this paragraph is
a fundamental policy of the Fund and may not be changed without the approval of
the holders of a majority of the Fund's outstanding shares. There can be no
assurance that the objective will be realized.
The Investment Adviser intends to actively manage the Fund's portfolio to
seek to take advantage of market opportunities and to reduce the adverse effect
of price volatility. This portfolio strategy is not a fundamental policy and may
be modified by the Board of Trustees of the Fund without the approval of the
Fund's shareholders.
The net asset value of the Fund's shares will fluctuate. An increase in
interest rates will generally reduce the value of the Fund's investments and a
decline in interest rates will generally increase their value. If there are
unusually heavy redemption requests because of changes in interest rates or for
any other reason, the Fund may have to sell a portion of its investment
portfolio at a time when it may be disadvantageous to do so. However, in these
circumstances the Fund is permitted to borrow from banks amounts up to 10% of
the value of its net assets and believes that such borrowings would help
mitigate any adverse effects and would make such a sale of its portfolio
securities unlikely. The Fund will not purchase portfolio securities while any
borrowings are outstanding. See "Investment Restrictions" in the Statement of
Additional Information.
INVESTMENT POLICIES
Shares of open-end management investment companies registered with the
Securities and Exchange Commission under the Investment Company Act of 1940
("registered investment companies") whose entire portfolios are restricted by
their investment policy, changeable only by shareholder vote, to certain assets
that would qualify as liquid investments if owned directly by savings
associations, may be used by savings associations to meet their liquidity
requirements. The Fund has been informed by the Federal Home Loan Bank Board
(predecessor of the OTS), that savings associations, in reliance
4
<PAGE>
on an opinion of counsel, could treat Fund shares as "liquid assets" and could
invest in Fund shares without percentage of assets limitations. Section 401(h)
of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, P.
L. 101-73 ("FIRREA") provides that all orders, resolutions, determinations and
regulations which had been issued by the Federal Home Loan Bank Board and were
in effect on the date FIRREA took effect (August 9, 1989), shall continue in
effect until modified, terminated, set aside or superseded by the director of
the OTS. The determination of the Federal Home Loan Bank Board with respect to
the treatment of Fund shares as "liquid assets" was in effect on August 9, 1989
and has not been modified, terminated, set aside or superseded. Thus,
investments in shares of the Fund can be utilized to satisfy the liquidity
requirements of the OTS regulations. In addition, the National Credit Union
Administration has taken the position that federal credit unions may invest
indirectly in investments in which they may invest directly by purchasing shares
of registered investment companies which invest solely in Permitted Investments.
The Fund has received an opinion of counsel to the effect that shares of the
Fund qualify as an investment permitted by Sections 107(7) and (8) of the
Federal Credit Union Act.
Under the regulations described above, the Fund presently may invest in such
assets as obligations issued or fully guaranteed as to interest and principal by
the U.S. government maturing in five years or less; obligations maturing in five
years or less issued or fully guaranteed as to interest and principal by certain
U.S. government agencies; bankers' acceptances maturing in nine months or less
issued by a bank the deposits of which are insured by the Federal Deposit
Insurance Corporation ("FDIC"); negotiable certificates of deposit maturing in
one year or less issued by a bank or savings association the deposits of which
are insured by the FDIC; and obligations of state and local governments maturing
in two years or less. Included among such obligations maturing in five years or
less will be obligations the Fund commits to purchase on a when-issued basis,
with the commitment being made in excess of five years prior to the maturity
date of the obligation.
Under normal circumstances, at least 65% of the value of the Fund's total
assets will be invested in securities that have a dollar weighted average
maturity of between three and five years. The balance of the Fund's assets will
be invested in Eligible Investments with shorter maturities. Under unusual
market or economic conditions, however, the Fund for temporary defensive
purposes may invest up to 100% of its assets in Eligible Investments with
shorter maturities, or the Fund may hold its assets in cash.
The following is a description of certain securities in which the Fund may
invest:
Government Securities: Certain government securities, including U.S.
Treasury bills, notes and bonds and securities of the Government National
Mortgage Association and the Federal Housing Administration, are issued or
guaranteed by the U.S. Government and supported by the full faith and credit of
the United States. Other U.S. Government securities are issued or guaranteed by
Federal agencies or government-sponsored enterprises and are not direct
obligations of the United States but involve sponsorship or guarantees by
Government agencies or enterprises. These obligations include securities that
are supported by the right of the issuer to borrow from the Treasury, such as
obligations of Federal Home Loan Banks, and securities that are supported only
by the credit of the instrumentality, such as Federal National Mortgage
Association bonds. Because the U.S. Government is not obligated to provide
support to its instrumentalities, the Fund will invest in obligations issued by
these instrumentalities where the Investment Adviser is satisfied that the
credit risk with respect to the issuers is minimal.
5
<PAGE>
Bank Obligations: The Fund may invest in certificates of deposit and
bankers' acceptances of the 50 largest commercial banks in the United States
(measured by total assets as shown by their most recent annual financial
statements) and, with respect to up to 5% of its net assets, certificates of
deposit issued by other commercial banks and by savings associations if the
deposits of that commercial bank or savings association are insured by the FDIC;
provided that the Fund may invest only in certificates of deposit and bankers'
acceptances issued by institutions whose outstanding securities are rated in the
top three categories by a nationally recognized rating agency. The Fund may
invest in certificates of deposit issued by and other time deposits in foreign
branches of FDIC insured banks. Investment in such deposits involves somewhat
different risks from those affecting deposits in United States branches of such
banks. These risks, which might adversely affect the payment of principal and
interest on such deposits, include future political and economic developments,
the possibility that a foreign jurisdiction might impose withholding taxes on
interest income payable on such deposits, the possible seizure or
nationalization of foreign deposits or the possible adoption of foreign
governmental restrictions, such as exchange controls.
Obligations of State and Local Governments: The Fund may invest in
obligations of state and local governments rated in one of the four highest
rating categories by a nationally recognized rating agency. Obligations in the
lowest of those categories are considered to have some speculative
characteristics.
Repurchase Agreements; Purchase and Sale Contracts: The Fund may invest in
Eligible Investments subject to repurchase agreements, and in Treasury
obligations subject to purchase and sale contracts, with any member bank of the
Federal Reserve System or primary dealer in U.S. Government securities. Under
such instruments, the purchaser (i.e., the Fund) acquires ownership of the
obligation (debt security) and the seller agrees, at the time of the sale, to
repurchase the obligation at the mutually agreed upon time and price, thereby
determining the yield during the purchaser's holding period. This results in a
fixed rate of return insulated from market fluctuations during such period. In
the case of repurchase agreements, the prices at which the trades are conducted
do not reflect accrued interest on the underlying obligations, whereas, in the
case of purchase and sale contracts, the prices take into account accrued
interest. Such agreements cover short periods, such as under one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, the Fund will require the seller to
provide additional collateral if the market value of the securities falls below
the repurchase price at any time during the term of repurchase agreement; the
Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund will be
dependent on intervening fluctuations of the market value of such security and
the accrued interest on the security. In such event, the Fund would have rights
against the seller for breach of contract with respect to any losses arising
from market fluctuations following the failure of the seller to perform. There
is no limit on the amount of the Fund's
6
<PAGE>
assets that may be subject to repurchase agreements or purchase and sale
contracts, except as described below under "Investment Restrictions."
Reverse Repurchase Agreements: The Fund may enter into reverse repurchase
agreements, which involve the sale of Eligible Investments with an agreement to
repurchase the securities at an agreed upon price, date and interest payment.
The Fund will utilize reverse repurchase agreements to provide liquidity to meet
redemption requests when the sale of portfolio securities is considered to be
disadvantageous. A separate account of the Fund will be established with its
custodian bank consisting of cash or U.S. Government securities having a market
value at all times at least equal in value to the proceeds received on any sale
subject to repurchase plus accrued interest. Entry into reverse repurchase
agreements is considered to be a form of borrowing subject to the limitations
described under "Investment Restrictions" below. The Fund does not presently
expect to enter into reverse repurchase agreements.
Forward Commitments: To the extent permitted by the regulations, the Fund
may purchase or sell securities on a when-issued or forward commitment basis at
fixed purchase or sale terms with periods of up to 45 days between commitment
and settlement date. These transactions occur when securities are purchased or
sold by the Fund with payment and delivery taking place in the future to secure
what is considered an advantageous yield and price at the time of entering into
the transaction. The value of the security on the delivery date may be more or
less than its purchase price. The Fund will maintain a separate account at its
custodian bank consisting of cash or U.S. Government securities (valued on a
daily basis) equal at all times to the amount of the forward commitment. As of
the date of this Prospectus, the Fund is not permitted under the OTS regulations
to purchase or sell securities on a forward commitment basis. The Fund may,
however, purchase securities issued by the U.S. Government, its agencies and
instrumentalities on a when-issued basis, provided that the period between the
date on which the when-issued transaction is entered into and the date on which
the securities being purchased are to be issued is less than 30 days.
Lending Portfolio Securities: The Fund may lend its portfolio securities
with a value not exceeding 33 1/3% of its total assets to banks, brokers and
other financial institutions and receive collateral in cash or securities issued
or guaranteed by the U.S. Government which qualify as permitted portfolio
securities as described above. The collateral will be maintained at all times in
an amount equal to at least 102% of the current market value of the loaded
securities. During the period of the loans, the Fund receives the income on the
loaned securities and either receives the income on the collateral or other
compensation, i.e., a negotiated loan premium or fee, for entering into the
loan, thereby increasing its yield. In the event that the borrower defaults on
its obligation to return borrowed securities, because of insolvency or
otherwise, the Fund could experience delays and costs in gaining access to the
collateral and could suffer a loss to the extent that the value of the
collateral falls below the market value of the borrowed securities.
Investment Restrictions: The Fund has adopted a number of restrictions and
policies relating to the investment of its assets and its activities, which are
fundamental policies and may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities. Among the more
significant restrictions, the Fund may not (1) invest more than 25% of its total
assets in the securities of issuers in any particular industry (other than U.S.
Government securities or Government
7
<PAGE>
agency securities); (2) purchase the securities of any one issuer, other than
the U.S. Government or Government agencies, if immediately after such purchase
more than 5% of the value of its total assets would be invested in such issuer;
(3) purchase more than 10% of the outstanding voting securities of an issuer;
(4) enter into repurchase agreements or purchase and sale contracts, or purchase
non-negotiable time deposits, with more than seven days to maturity, or purchase
any security with legal or contractual restrictions on resale or for which no
readily available market exists, if it would result in the investment of more
than 10% of the value of the Fund's net assets in such instruments; or (5) issue
senior securities, borrow money or pledge its assets, except that the Fund may
borrow from a bank or enter into reverse repurchase agreements as a temporary
measure for extraordinary or emergency purposes or to meet redemptions in
amounts not exceeding 10% (taken at the market value) of its total assets and
pledge its assets to secure such borrowings (the Fund will not purchase
portfolio securities when any such borrowings are outstanding).
INVESTMENT ADVISER
Merrill Lynch Asset Management ("MLAM") , an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc., is the investment adviser for the Fund.
The principal address of the Investment Adviser is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536 (mailing address: P.O. Box 9011, Princeton, New
Jersey 08543-9011). The Investment Adviser or its affiliate, Fund Asset
Management, L.P. ("FAM"), acts as the investment adviser for over 130 other
registered investment companies. MLAM also offers portfolio management and
portfolio analysis services to individuals and institutions. In the aggregate,
as of January 31, 1995, MLAM and FAM had a total of approximately $166.5 billion
in investment company and other portfolio assets under management.
Subject to the general supervision of the Board of Trustees of the Fund, the
Investment Adviser renders investment advice and is responsible for the overall
management of the Fund's business affairs.
The Fund pays the Investment Adviser a monthly fee at the annual rate of
0.40% of the average daily net assets of the Fund. In addition, the Investment
Advisory Agreement obligates the Fund to pay certain expenses incurred in its
operations including, among other things, the investment advisory fee, legal and
audit fees, registration fees, unaffiliated trustees' fees and expenses,
custodian and transfer agency fees, accounting costs, the costs of issuing and
redeeming shares and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information.
The Investment Adviser has agreed that, in the event the operating expenses
of the Fund (including the fees payable to the Investment Adviser but excluding
taxes, interest, brokerage and extraordinary expenses) for any fiscal year
exceed the expense limitations applicable to the Fund imposed by state
securities laws or any published regulations thereunder, it will reduce its fee
by the extent of such excess and, if required pursuant to any such laws or
regulations, will annually reimburse the Fund in the amount of such excess.
MLAM received $431,597, or 0.40% of the Fund's average net assets, in
investment advisory fees from the Fund during the Fund's fiscal year ended
October 31, 1994. For the same period, total expenses of the Fund were $894,795,
or 0.83% of average net assets.
8
<PAGE>
Jay C. Harbeck has served as the Fund's Portfolio Manager since January 1,
1992, and is primarily responsible for the Fund's day-to-day management. He has
served as Vice President of MLAM since 1986.
DISTRIBUTOR
The principal underwriter and distributor of shares in the Fund is Merrill
Lynch Funds Distributor, Inc. (the "Distributor"), a wholly-owned subsidiary of
the Investment Adviser. The principal business address of the Distributor is One
Financial Center, Fifteenth Floor, Boston, MA 02111-2646. The Distributor makes
a continuous offering of the Fund's shares.
The Fund has adopted a Distribution and Shareholder Servicing Plan (the
"Plan") in compliance with Rule 12b-1 under the Investment Company Act of 1940,
pursuant to which the Fund pays the Distributor a monthly fee at the annual rate
of 0.15% of the Fund's average daily net assets in order to compensate the
Distributor for services it provides and expenses it bears. Under its
Distribution Agreement with the Fund, the Distributor bears certain
distribution-related expenses of the Fund, including payments to securities
dealers with whom the Distributor has entered into selected dealer agreements
("Selected Dealers"), including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Broadcort Capital, Inc., an affiliate of
Merrill Lynch. Such payments are intended to compensate Selected Dealers for
their services in connection with the distribution of the Fund's shares, which
consist in part of providing compensation to financial consultants for selling
shares of the Fund. In addition, the Distributor pays the cost and expenses of
printing and distributing any copies of any prospectuses, statements of
additional information and annual and interim reports of the Fund (after such
items have been prepared and set in type) which are used in connection with the
offering of shares to Selected Dealers or investors, and the cost and expenses
of preparing, printing and distributing any other literature used by the
Distributor or furnished by it for use by Selected Dealers in connection with
the offering of the shares for sale to the public. The Plan is designed, in
part, to permit the investor to purchase shares through Selected Dealers without
assessment of a front-end sales load and at the same time to permit a Selected
Dealer to pay its financial consultants a commission on sale of the shares.
During the year ended October 31, 1994, the distribution fee paid by the Fund
under the Plan totalled $161,849, all of which was paid to Merrill Lynch for
providing distribution-related services in connection with Fund shares.
Information with respect to the distribution-related revenues and expenses
is presented to the trustees for their consideration in connection with their
deliberations as to the continuance of the Distribution Plan. This information
is presented annually as of December 31 of each year on a "fully allocated
accrual" basis and quarterly on a "direct expense and revenue/cash" basis. On
the fully allocated accrual basis, revenues consist of the distribution fees and
certain other related revenues and expenses consist of financial consultant
compensation, branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the distribution fees and the expenses
consist of financial consultant compensation. As of December 31, 1993, the last
date for which fully allocated accrual data is available, the fully allocated
accrual expenses incurred by the Distributor and Merrill Lynch since the Fund
commenced operations on November 6, 1986 exceeded revenues for such period by
$1,432,000 (1.25% of net assets at that date). As of December 31, 1994, direct
cash revenues for the period since the commencement of operations exceeded
direct expenses by $578,499 (0.85% of net assets at that date).
9
<PAGE>
The Fund has no obligation with respect to unreimbursed distribution
expenses incurred by the Distributor and there is no assurance that the trustees
of the Fund will approve the continuance of the Plan from year to year. However,
the Distributor intends to seek annual continuance of the Plan.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The Board of Trustees of the Fund consists of seven individuals, five of
whom are not interested persons of the Fund as defined in the Investment Company
Act of 1940. The trustees of the Fund are responsible for the overall
supervision of the operations of the Fund and perform the various duties imposed
on directors of investment companies by the Investment Company Act of 1940. The
Board of Trustees elects officers annually.
The trustees of the Fund are:
ROBERT W. CROOK,* Senior Vice President of the Investment Adviser and of the
Distributor.
DAVID ALMY, President of McCall & Almy, Inc.
A. BRUCE BRACKENRIDGE, Retired Group Executive of J.P. Morgan & Co., Inc.,
and Morgan Guaranty Trust Company; Director of Parsons School of Design.
CHARLES C. CABOT, JR., Partner in the law firm of Sullivan & Worcester.
TERRY K. GLENN,* Executive Vice President of the Investment Adviser,
President and Director of the Distributor and Executive Vice President of FAM.
TODD GOODWIN, General Partner of Gibbons, Goodwin, van Amerongen.
GEORGE W. HOLBROOK, JR., Managing Partner of Bradley Resources Company.
- ------------
* Interested person of the Fund, as defined in the Investment Company Act of
1940.
As described under the caption "Investment Adviser," the Investment Adviser
has assumed responsibility for the actual management of the business affairs of
the Fund, subject to the general supervision of the Fund's Board of Trustees.
The responsibility for making decisions to buy, sell or hold a particular
security rests with the Investment Adviser. The Investment Adviser performs
certain of the other administrative services and provides all the office space,
facilities, equipment and necessary personnel for portfolio management of the
Fund. Each trustee who is not an officer or employee of Merrill Lynch & Co.,
Inc. or its subsidiaries will be paid $6,000 annually in his capacity as trustee
and all trustees will be reimbursed for any expenses incurred in attending
meetings of the Fund's Board of Trustees or any committee thereof. No officer or
employee of Merrill Lynch & Co., Inc. or its
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<PAGE>
subsidiaries will receive any compensation from the Fund for acting as a trustee
or officer of the Fund. The Fund will require no employees other than its
officers, all of whom will be compensated by the Investment Adviser or the
Distributor.
CODE OF ETHICS
The Board of Trustees of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act of 1940 which incorporates the Code of
Ethics of the Investment Adviser (together, the "Codes"). The Codes
significantly restrict the personal investing activities of all employees of the
Investment Adviser and, as described below, impose additional, more onerous,
restrictions on fund investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as Government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
PURCHASE OF SHARES
Shares will be offered continuously for sale by the Distributor. The price
per share is the net asset value per share, with no sales charge being imposed
at the time of purchase (for distribution charges, see "Distributor"). The Fund
will effect orders to purchase its shares on each day that the New York Stock
Exchange and State Street Bank and Trust Company ("State Street Bank") are open
for business. The offering price of purchase orders received prior to the
regular close of the New York Stock Exchange (generally, 4:00 P.M., Boston time)
will be based on the net asset value determined as of the close of the New York
Stock Exchange on the day the order is placed with the Distributor. Purchase
orders received by the Distributor after such time will be effected at the close
of trading on the next business day. A purchase order does not become effective
until Federal Funds are received by State Street Bank or other forms of payment
are converted by State Street Bank (at no charge to the investor) into Federal
Funds. The minimum initial purchase is $25,000. No minimum balance need be
maintained and the subsequent purchases must be at least $1,000. The Fund or the
Distributor may at any time suspend the continuous offering of the Fund's shares
to the general public and may thereafter resume such offering from time to time.
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<PAGE>
THE FUND STRONGLY RECOMMENDS THE USE OF FEDERAL FUNDS TO PURCHASE SHARES
BECAUSE, WHILE THE OTHER FORMS OF PAYMENT DESCRIBED BELOW WILL ALSO BE ACCEPTED,
PURCHASE ORDERS DO NOT BECOME EFFECTIVE UNTIL FEDERAL FUNDS ARE AVAILABLE.
PURCHASES OF FUND SHARES MAY BE MADE IN ANY ONE OF THE FOLLOWING MANNERS:
PURCHASE BY FEDERAL FUNDS WIRE
Federal Funds are monies credited to a bank's account with a Federal Reserve
Bank. To purchase shares of the Fund by wiring Federal Funds, the investor must
first telephone the Distributor in Boston (toll free 800-225-1576) to receive a
wire order number. On the telephone the following information will be requested
by the Distributor: name of investor, address, tax identification number,
dividend distribution election, amount being wired and wiring bank. Instructions
should then be given by the investor to its bank to wire transfer Federal Funds
to State Street Bank and Trust Company--Boston, Attention: Merrill Group, Credit
Merrill Lynch Institutional Intermediate Fund, Wire Order Number: (Assigned by
Fund), and the investor's name and account number.
The Fund has a procedure designed to facilitate the purchase of shares by
Federal Funds wire. If a purchase order for shares is received prior to 12:00
Noon, Boston time, and payment in Federal Funds is received by State Street Bank
by the close of the Federal Funds wire on the day the purchase order is
received, the order will be effected that day as of 4:00 P.M., Boston time.
Dividends will accrue starting on the day the order is effected.
If a purchase order is received after 12:00 Noon, Boston time, and payment
in Federal Funds is received by State Street Bank by the close of the Federal
Funds wire on the day the purchase order is received, the order will be effected
that day as of 4:00 P.M., Boston time, but dividends will not accrue until the
following business day. Consequently, the Fund strongly recommends that you
place your order before 12:00 Noon, Boston time.
PURCHASE BY CHECK OR FEDERAL RESERVE DRAFT
Purchase orders for which remittance is to be made by check or Federal
Reserve Draft must be submitted directly by mail to State Street Bank and Trust
Company, P.O. Box 8500, Boston, Massachusetts 02266-8500, together with payment
for the purchase price of such shares and, in the case of a new account, a
completed Account Application (see page 30). Such orders will become effective
on the day the remittance is converted into Federal Funds, and shares will be
purchased at the net asset value next determined after such conversion. CHECKS
AND FEDERAL RESERVE DRAFTS SHOULD BE MADE PAYABLE TO MERRILL LYNCH INSTITUTIONAL
INTERMEDIATE FUND. Money transmitted by check normally will be converted into
Federal Funds within two business days following receipt. Certified checks are
not necessary, but checks are accepted subject to collection at full face value
in United States funds and must be drawn on a United States bank. In the event
that the purchase price for shares is paid by Federal Funds in the form of a
Federal Reserve Draft, Federal Funds will be available to the Fund on
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<PAGE>
the next business day and the investor's order will be effected on such day.
During the period of time prior to the conversion into Federal Funds, an
investor's money will not be invested and, therefore, will not be earning
dividends.
GENERAL
All funds will be fully invested in full and fractional shares. To minimize
recordkeeping by banks and other institutions purchasing shares on behalf of
separate accounts, arrangements can be made through the Distributor to have
State Street Bank provide subaccounting services. Institutions wishing to open
multiple or subaccounts may obtain additional Account Application forms by
telephoning the Distributor in Boston.
The issuance of shares is recorded on the books of the Fund, and, to avoid
additional operating costs and for investors' convenience, certificates will not
be issued unless expressly requested in writing by a shareholder. Certificates
will not be issued for fractional shares. State Street Bank, the transfer agent,
will send to each shareholder of record a monthly statement and a statement of
shares of the Fund owned after each purchase or redemption relating to such
shareholder.
State Street Bank is closed on certain holidays on which the New York Stock
Exchange is open. These holidays are Martin Luther King Day (the third Monday in
January), Columbus Day (the second Monday in October) and Veterans Day (November
11). Investors are not able to purchase shares by wiring Federal Funds on such
holidays because State Street Bank is not open to receive such funds on behalf
of the Fund. Investors whose checks are received one business day prior to a
holiday will have the proceeds of the check invested in shares of the Fund on
the next day on which State Street Bank is open for business. Also, investors
will not be able to have redemption proceeds wired to their banks on these days.
The Fund's offices will be open on these days, however, and all phones will be
operative. The Fund's staff will be available to process redemption orders and
take orders for next business day purchases.
THE FUND RESERVES THE RIGHT TO REJECT ANY PURCHASE ORDER FOR FUND SHARES.
-------------------------------------------------------------------------
REDEMPTION OF SHARES
Upon receipt by State Street Bank of a proper redemption request (indicating
the name and account number of the shareholder and the dollar amount or number
of shares to be redeemed), the Fund will redeem shares at their next determined
net asset value, without charge. The value of shares at the time of redemption
may be more or less than the shareholder's cost, depending on the market values
of the securities held by the Fund at that time. See "Net Asset Value."
Shareholders may use either the ordinary or, if they elect, the expedited
redemption procedure described below. If in utilizing either of the redemption
procedures the shareholder redeems all shares owned, dividends accrued for the
month to date will be simultaneously remitted by check.
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<PAGE>
EXPEDITED REDEMPTION PROCEDURE
Shareholders meeting the requirements stated below may initiate redemptions
by submitting their redemption requests to State Street Bank by telephone (toll
free 800-225-5150; in Massachusetts 800-972-5555) or by mail (P.O. Box 8500,
Boston, Massachusetts 02266-8500) (without signature guarantee (as described in
Rule 17Ad-15 of the Securities Exchange Act of 1934)) and have the proceeds sent
by a Federal Funds wire to a previously designated bank or trust company
account. The minimum amount to be wired is $1,000. A proper redemption request
which is received by State Street Bank prior to 4:00 P.M., Boston time, will be
effected immediately after 4:00 P.M., Boston time, on that day. The redemption
proceeds will be wired on the next business day following receipt of the
redemption request that State Street Bank and the New York Stock Exchange are
open for business.
In order to utilize the expedited redemption procedure, all shares must be
held in non-certificated form in the shareholder's account. In addition, an
Account Application (page 30) with the expedited payment authorization section
properly completed must be on file with State Street Bank before an expedited
redemption request is submitted. This form requires a shareholder to designate
the bank or trust company account to which its redemption proceeds should be
sent. Any change in the bank or trust company account designated to receive the
proceeds must be submitted in proper form on a new Account Application with
signature guaranteed. In making a telephone redemption request, a shareholder
must provide the shareholder's name and account number, the dollar amount of the
redemption requested, and the name of the bank to which the redemption proceeds
should be sent. If the information provided by the shareholder does not
correspond to the information on the application, the transaction will not be
approved. Shares purchased other than by Federal Funds wire may not be redeemed
by the expedited procedure until 15 calendar days after the purchase of such
shares but may be redeemed pursuant to the ordinary redemption procedure during
such period.
ORDINARY REDEMPTION PROCEDURE
If this method of redemption is used, the shareholder may submit his
redemption request in writing to State Street Bank and Trust Company, P.O. Box
8500, Boston, Massachusetts 02266-8500. The Fund will make payment for shares
redeemed pursuant to the ordinary redemption procedure by check sent to the
shareholder at the address on such shareholder's Account Application. Such
checks will normally be sent out within one business day, but in no event more
than seven days after receipt of the redemption request in proper form. If
certificates have been issued representing the shares to be redeemed, prior to
effecting a redemption with respect to such shares, State Street Bank must have
received such certificates. A shareholder's signature must be guaranteed by an
"eligible guarantor institution" as such term is defined by Rule 17Ad-15 of the
Securities Exchange Act of 1934, the existence and validity of which may be
verified by State Street Bank through the use of industry publications. A notary
public is not an acceptable guarantor. In certain instances, State Street Bank
may request additional documentation which it believes necessary to insure
proper authorization such as, but not limited to, trust instruments, death
certificates, appointment of executor or administrator, or certificates of
corporate authority. Shareholders having questions regarding proper
documentation should contact State Street Bank.
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<PAGE>
DIVIDENDS
It is the Fund's intention to distribute all its net investment income.
Dividends from such net investment income are declared daily and paid monthly.
The Fund's net investment income for dividend purposes is determined immediately
prior to 4:00 P.M., Boston time. Immediately after each such determination, and
prior to 4:00 P.M., Boston time, the Fund will declare a dividend to qualified
shareholders of record of its net investment income payable to shareholders of
record as of 4:00 P.M., Boston time (see "Purchase of Shares"). Therefore, a
qualified shareholder will receive the dividend declared on the day its purchase
order is effected and all shareholders will receive the dividend declared on the
day their redemption order is effected. All net realized long- or short-term
capital gains, if any, will be distributed to shareholders annually after the
close of the Fund's fiscal year. Dividends and distributions are automatically
reinvested in additional Fund shares at net asset value and credited to the
shareholder's account or, at the shareholder's option, paid in cash.
Shareholders may receive their dividends in cash monthly by completing the
appropriate section of the Account Application (page 30). Such cash dividends
will be paid by check within seven days after the end of each month. The
election to receive cash dividends may be made at the time of purchase of Fund
shares or at any time subsequent thereto by giving written notice to State
Street Bank. To be effective with respect to a particular monthly dividend, such
written notice must be received by State Street Bank at least seven days prior
to the end of the month. Dividends and distributions are taxable to shareholders
whether distributed in cash or reinvested in additional shares. See "Taxes"
below.
NET ASSET VALUE
The net asset value per share of the Fund is determined at the regular close
of the New York Stock Exchange (generally, 4:00 p.m., Boston time) on days on
which the New York Stock Exchange is open for business. The New York Stock
Exchange is closed on national holidays (other than Martin Luther King Day,
Columbus Day and Veterans Day) and Good Friday. The net asset value per share is
determined by adding the value of all securities and other assets in the
portfolio, deducting its liabilities and dividing by the number of shares
outstanding. The value of the Fund's portfolio securities will be determined on
the basis of fair value as determined in good faith by or under the direction of
the Fund's Board of Trustees. In determining fair value, securities for which
market quotations are readily available are valued at market value. The value of
the Fund's portfolio securities traded in the over-the-counter markets will be
valued at the most recent bid price or yield equivalent as obtained from dealers
who make a market in the securities. Securities with remaining maturities of 60
days or less are valued by use of the amortized cost method of valuation. As
described under "Purchase of Shares," State Street Bank, the Fund's transfer
agent, is closed on certain days the New York Stock Exchange is open. On such
days purchase orders will not be processed.
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<PAGE>
TAXES
The Fund has qualified for the special tax treatment afforded regulated
investment companies ("RICs") under the Internal Revenue Code of 1986, as
amended (the "Code"), and intends to continue to qualify for such treatment. If
it so qualifies, in any year in which it distributes at least 90% of its
investment company taxable income, the Fund (but not its shareholders) will be
relieved of Federal income tax on the amount it distributes to shareholders. The
Fund contemplates declaring as dividends 100% of its taxable net investment
income. See "Dividends." If in any taxable year the Fund does not qualify as a
RIC, all of its taxable income will be taxed to the Fund at corporate rates.
Dividends paid by the Fund from its investment income and distributions of the
Fund's net realized short-term capital gains are taxable to shareholders as
ordinary income. Distributions made from net realized long-term capital gains
are taxable to shareholders as long-term capital gains. Dividends and
distributions will be taxable to shareholders as ordinary income or capital
gains, whether received in cash or reinvested in additional shares of the Fund.
State Street Bank, the Fund's transfer agent, will send each shareholder a
monthly dividend statement which will include the amount of dividends paid and
identify whether such dividends represent ordinary income or capital gains.
Some shareholders may be subject to 31% withholding on reportable dividends,
capital gains distributions and redemption payments ("backup withholding").
Generally, shareholders subject to backup withholding will be those for whom a
certified taxpayer identification number is not on file with the Fund or who, to
the Fund's knowledge, have furnished an incorrect number. An investor, when
establishing an account, must certify under penalty of perjury that such number
is correct and that he is not otherwise subject to backup withholding.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and these Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
The Statement of Additional Information describes in greater detail the
effects of these and other provisions of the Code on the Fund and its
shareholders.
Certain states exempt from state income taxation dividends paid by RICs
which are derived in whole or in part from interest on U.S. Government
obligations. State law varies as to whether dividend income attributable to U.S.
Government obligations is exempt from state income tax. The Fund intends to
provide shareholders annually with information relating to the Fund's income and
assets necessary to permit shareholders to determine whether and to what extent
their dividend income from the Fund is exempt from their state's income tax.
Shareholders are urged to consult their tax advisors as to whether any
portion of the dividends they receive from the Fund are exempt from state income
taxes and as to any other specific questions as to Federal, foreign, state or
local taxes. Foreign investors should also consider applicable foreign taxes in
their evaluation of an investment in the Fund.
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<PAGE>
PORTFOLIO TRANSACTIONS
The Fund has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject to policy
established by the trustees of the Fund, the Investment Adviser is primarily
responsible for the Fund's portfolio decisions and placing of the Fund's
portfolio transactions. In placing orders, it is the policy of the Fund to
obtain the best net results taking into account such factors as price (including
the applicable dealer spread), the size, type and difficulty of the transaction
involved, the firm's general execution and operational facilities, the firm's
risk in positioning the securities involved and the provision of supplemental
investment research by the firm. Although the Investment Adviser generally seeks
reasonably competitive spreads or commissions, the Fund will not necessarily be
paying the lowest spread or commission available.
The Eligible Investments which the Fund purchases are traded primarily in
the over-the-counter market. Where possible, the Fund will deal directly with
the dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. Such
dealers usually are acting as principal for their own account. On occasion,
securities may be purchased directly from the issuer. Eligible Investments are
generally traded on a net basis and do not normally involve either brokerage
commissions or transfer taxes. The cost of executing portfolio securities
transactions of the Fund will primarily consist of dealer spreads and
underwriting commissions. Affiliated persons of the Fund may serve as its broker
in over-the-counter transactions conducted on an agency basis. The Fund may
purchase securities from any underwriting syndicate of which Merrill Lynch is a
member under certain conditions in accordance with the provisions of a rule
adopted under the Investment Company Act of 1940. Of the securities in which the
Fund invests, generally only U.S. Government agency securities and securities
issued by any State, territory or possession or political subdivision are sold
in underwritings.
EXCHANGE PRIVILEGE
Shareholders of the Fund may exchange their shares for shares of any one of
four portfolios of Merrill Lynch Funds For Institutions Series--Merrill Lynch
Treasury Fund, Merrill Lynch Government Fund, Merrill Lynch Institutional Fund
or Merrill Lynch Institutional Tax-Exempt Fund (collectively referred to as the
"funds")--on the basis described below. In order to qualify for the Exchange
Privilege, a shareholder must exchange shares with a current value of at least
$1,000. Under the Exchange Privilege, each of the funds offers to exchange its
shares for shares of the Fund, on the basis of relative net asset value per
share. If in utilizing the exchange privilege the shareholder exchanges all his
shares of the Fund, all dividends accrued on such shares for the month to date
will be automatically reinvested in the new fund. Before effecting an exchange,
shareholders of the Fund should obtain the currently effective prospectus of the
fund for which shares are being exchanged. The investment objectives of Merrill
Lynch Treasury Fund are to seek current income consistent with liquidity and
security of principal from investment in direct obligations of the U.S.
Treasury. The investment objectives of Merrill Lynch Government Fund are to seek
current income consistent with liquidity and security of principal from
investment in securities issued by the U.S. Government, its
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<PAGE>
agencies and instrumentalities, and in repurchase agreements secured by such
obligations. The investment objectives of Merrill Lynch Institutional Fund are
to seek maximum current income consistent with liquidity and the maintenance of
a portfolio of high quality, short-term "money market" instruments. The
investment objectives of Merrill Lynch Institutional Tax-Exempt Fund are to seek
current income exempt from Federal income taxes, preservation of capital and
liquidity available from investing in a diversified portfolio of short-term,
high quality municipal bonds. An exchange between funds pursuant to the Exchange
Privilege is treated as a sale for Federal income tax purposes and, depending
upon the circumstances, a short or long-term capital gain or loss may be
realized. This Exchange Privilege may be modified or terminated at any time.
To exercise the Exchange Privilege, shareholders should contact the
Distributor in Boston. A shareholder may make exchanges by telephone, provided
that (i) it has elected the telephone exchange option on the Account
Application, (ii) the registration of the account for the new fund will be the
same as for the Fund, and (iii) the shares to be registered are not in
certificate form. To make exchanges by telephone, a shareholder should call the
Distributor toll free at 800-225-1576. The shareholder should identify himself
by name and account number and give the name of the fund into which it wishes to
make the exchange and the number of shares it wishes to exchange. The
shareholder also may write to State Street Bank requesting that the exchange be
effected. Such letter must be signed exactly as the account is registered with
signature(s) guaranteed by a commercial bank which is a member of the FDIC or by
a trust company or a member firm of a domestic securities exchange. The Fund
reserves the right to require a properly completed Exchange Application.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return
and yield are computed in accordance with formulas specified by the Securities
and Exchange Commission.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during the
period by (b) the average daily number of shares outstanding during the period
that were entitled to receive dividends multiplied by the net asset value per
share on the last day of the period. The standardized yield for the 30-day
period ended October 31, 1994 was 5.57%.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return. Actual annual or annualized total return data
generally will be lower than average annual total return data since the average
annual rates of return reflect compounding; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time. The
Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate such total return on a hypothetical $1,000
investment in the Fund at the beginning of each specified period.
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<PAGE>
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The value
of an investment in the Fund will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to performance data
published by Morningstar Publications, Inc., Lipper Analytical Services, Inc.,
Money Magazine, U.S. News & World Report, Business Week, CDA Investment
Technology, Inc., Forbes Magazine and Fortune Magazine. From time to time, the
Fund may include the Fund's Morningstar risk-adjusted performance ratings in
advertisements or supplemental sales literature. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES
Under the Declaration of Trust, the trustees are authorized to issue an
unlimited number of full and fractional shares of a single class with a par
value of $.10 per share and to divide or combine such shares into a greater or
lesser number of shares. All shares have equal voting rights, and each issued
and outstanding share is entitled to one vote and to participate equally in
dividends and distributions declared by the Fund and in net assets of the Fund
upon liquidation or dissolution remaining after satisfaction of outstanding
liabilities. The shares of the Fund, when issued, will be fully paid and non-
assessable, have no preference, preemptive, conversion or similar rights, and be
freely transferable. There will normally be no meetings of shareholders for the
purpose of electing trustees unless and until such time as less than a majority
of the trustees holding office have been elected by shareholders, at which time
the trustees then in office will call a shareholders' meeting for the election
of trustees. Shareholders may, in accordance with the Declaration of Trust,
cause a meeting of shareholders to be held for the purpose of voting on the
removal of trustees. Meetings of the shareholders will be called upon written
request of shareholders holding in the aggregate not less than 10% of the
outstanding shares having voting rights. Except as set forth above, the trustees
will continue to hold office and appoint successor trustees. Shares do not have
cumulative voting rights and the holders of more than 50% of the shares of the
Fund voting for the election of trustees can elect all of the trustees of the
Fund if they choose to do so and in such event the holders of the remaining
shares would not be able to elect any trustees. Holders of shares of the Fund
are entitled to redeem their shares as set forth under "Redemption of Shares."
No amendment may be made to the Declaration of Trust without the affirmative
vote of a majority of the outstanding shares of the Fund.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, P.O. Box 8500, Boston, Massachusetts
02266-8500, is the Fund's custodian, transfer agent and dividend disbursing
agent.
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COUNSEL AND INDEPENDENT AUDITORS
Rogers & Wells, counsel to the Fund, passes upon legal matters for the Fund
in connection with the shares offered by this Prospectus. Deloitte & Touche LLP
are the independent auditors of the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund issues
to its shareholders semi-annual reports containing unaudited financial
statements and annual reports containing financial statements which are audited
by the independent auditors.
ADDITIONAL INFORMATION
This Prospectus does not contain all the information included in the
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act of 1933 with respect to the securities offered hereby,
certain portions of which have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The Statement of
Additional Information, dated February 27, 1995, which forms a part of the
Registration Statement, is incorporated by reference into this Prospectus. The
Statement of Additional Information may be obtained without charge as provided
on the cover page of this Prospectus. The Registration Statement including the
exhibits filed therewith may be examined at the office of the Securities and
Exchange Commission in Washington, D.C.
-------------------
The Fund was organized as an unincorporated business trust under the laws of
Massachusetts on September 10, 1986. Its executive offices are located at One
Financial Center, Boston, Massachusetts 02111-2646 (telephone toll free
800-225-1576).
The Declaration of Trust establishing the Fund, dated September 10, 1986, a
copy of which, together with all amendments thereto (the "Declaration"), is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Merrill Lynch Institutional Intermediate Fund" refers to
the trustees under the Declaration collectively as trustees, but not as
individuals or personally; and no trustee, shareholder, officer, employee or
agent of the Fund may be held to any personal liability, nor may resort be had
to their private property for the satisfaction of any obligation or claim
otherwise in connection with the affairs of the Fund but the Fund's property
only shall be liable.
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APPENDIX
OFFICE OF THRIFT SUPERVISION REGULATIONS
The regulations adopted by the Office of Thrift Supervision, as currently in
effect, define "liquid assets" to include shares in any open-end management
investment company registered with the Securities and Exchange Commission under
the Investment Company Act of 1940, while the portfolio of such company is
restricted by its investment policy, changeable only by vote of the
shareholders, to investments (including such investments held pursuant to
repurchase agreements) described below:
(1) Time deposits in a Federal Home Loan Bank, the Bank for Savings and
Loan Associations, Chicago, Illinois, or the Savings Banks Trust Company,
New York, New York;
(2) Except as the Office may otherwise direct in a specific case,
obligations of the United States maturing in 5 years or less;
(3) Obligations with 5 years or less remaining until maturity, issued,
or fully guaranteed as to principal and interest, by:
(i) A Federal Home Loan Bank(s);
(ii) The Federal National Mortgage Association;
(iii) The Government National Mortgage Association;
(iv) A Bank(s) for Cooperatives, including the National Bank for
Cooperatives or the United Bank for Cooperatives;
(v) A Farm Credit Bank(s);
(vi) The Tennessee Valley Authority;
(vii) The Export-Import Bank of the United States;
(viii) The Commodity Credit Corporation;
(ix) The Federal Financing Bank;
(x) The Student Loan Marketing Association;
(xi) The Federal Home Loan Mortgage Corporation; or
(xii) The National Credit Union Administration;
(4) Savings accounts of an insured financial institution, including
loans of unsecured day(s) funds to an insured financial institution (i.e.,
Federal funds or similar unsecured loans), if:
(i) Except for loans of unsecured day(s) funds, such accounts are (A)
negotiable and will mature in one year or less, (B) not negotiable and
will mature in 90 days or less, or (C) not withdrawable without notice
and the notice periods do not exceed 90 days;
(ii) Loans of unsecured day(s) funds will mature in 6 months or less;
and
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(iii) The priority of claims of a lender of unsecured day(s) funds is
not subordinate to claims of depositors in the borrower thereof;
(5) Bankers' acceptances of an insured financial institution if:
(i) The total of all such acceptances of the same financial
institution held by the same savings association does not exceed
one-fourth of 1 percent of total deposits of such financial institution
(as shown by its last published statement of condition preceding the date
of acceptance);
(ii) Such acceptances will mature in 9 months or less;
(6) Obligations of or obligations issued by (other than gold-related
obligations) any state, territory or possession of the United States or
political subdivision thereof, including any agency, corporation or
instrumentality of a state, territory, possession or political subdivision:
Provided, That:
(i) Such obligations continue to meet the requirements of Sec.
545.72(a) of this chapter; and
(ii) Such obligations will mature in 2 years or less;
(7) Promissory notes issued to and made to the order of an insured
financial institution by the Savings Association Insurance Fund or the Bank
Insurance Fund; and
(8) Corporate debt obligations and commercial paper denominated in
dollars, Provided, That:
(i) Such corporate debt obligations (A) continue to be rated in one
of the four highest categories by the most recently published rating of
such obligations by a nationally recognized investment rating service,
(B) are marketable as defined by Sec. 541.7 of this part, (C) will mature
in three years or less, and (D) are not convertible to common stock;
(ii) Such commercial paper (A) continues to be rated in one of the
two highest categories by the most recently published rating of such
paper by two nationally recognized investment rating services, or, if
unrated, is guaranteed by a company having outstanding paper that is so
rated, (B) will mature in 270 days or less; and
Provided, That an amount not in excess of one percent of such
institution's assets invested in eligible corporate debt obligations or
commercial paper of a single issuer shall be counted as a liquid asset.
FEDERAL CREDIT UNIONS-PERMITTED INVESTMENTS
A Federal Credit Union may invest:
(1) in loans exclusively to members;
(2) in obligations of the United States of America, or securities fully
guaranteed as to principal and interest thereby;
22
<PAGE>
(3) in accordance with rules and regulations prescribed by the Board, in
loans to other credit unions in the total amount not exceeding 25 per centum
of its paid in and unimpaired capital and surplus;
(4) in shares or accounts of savings and loan associations or mutual
savings banks, the accounts of which are insured by the Federal Savings and
Loan Insurance Corporation or the Federal Deposit Insurance Corporation;
(5) in obligations issued by banks for cooperatives, Federal land banks,
Federal intermediate credit banks, Federal home loan banks, the Federal Home
Loan Bank Board, or any corporation designated in section 9101(3) of Title
31 as a wholly owned Government corporation; or in obligations,
participations, or other instruments of or issued by, or fully guaranteed as
to principal and interest by, the Federal National Mortgage Association or
the Government National Mortgage Association; or in mortgages, obligations,
or other securities which are or ever have been sold by the Federal Home
Loan Mortgage Corporation pursuant to section 1454 or section 1455 of this
title; or in obligations or other instruments or securities of the Student
Loan Marketing Association; or in obligations, participations, securities,
or other instruments of, or issued by, or fully guaranteed as to principal
and interest by any other agency of the United States and a Federal credit
union may issue and sell securities which are guaranteed pursuant to section
1721(g) of this title;
(6) in participation certificates evidencing beneficial interests in
obligations, or in the right to receive interest and principal collections
therefrom, which obligations have been subjected by one or more Government
agencies to a trust or trusts for which any executive department, agency, or
instrumentality of the United States (or the head thereof) has been named to
act as trustee;
(7) in shares or deposits of any central credit union in which such
investments are specifically authorized by the board of directors of the
Federal credit union making the investment;
(8) in shares, share certificates, or share deposits of federally
insured credit unions;
(9) in the shares, stocks, or obligations of any other organization,
providing services which are associated with the routine operations of
credit unions, up to 1 per centum of the total paid in and unimpaired
capital and surplus of the credit union with the approval of the Board:
Provided, however, That such authority does not include the power to acquire
control directly or indirectly, of another financial institution, nor invest
in shares, stocks or obligations of an insurance company, trade association,
liquidity facility or any other similar organization, corporation, or
association, except as otherwise expressly provided by this chapter;
(10) in the capital stock of the National Credit Union Central Liquidity
Facility;
(11) investments in obligations of, or issued by, any State or political
subdivision thereof (including any agency, corporation, or instrumentality
of a State or political subdivision), except that no credit union may invest
more than 10 per centum of its unimpaired capital and surplus in the
obligations of any one issuer (exclusive of general obligations of the
issuer);
(12) in deposits in national banks and in State banks, trust companies,
and mutual savings banks operating in accordance with the laws of the State
in which the Federal credit union does
23
<PAGE>
business, or in banks or institutions the accounts of which are insured by
the Federal Deposit Insurance Corporation or the Federal Savings and Loan
Insurance Corporation, and for Federal credit unions or credit unions
authorized by the Department of Defense operating suboffices on American
military installations in foreign countries or trust territories of the
United States to maintain demand deposit accounts in banks located in those
countries or trust territories, subject to such regulations as may be issued
by the Board and provided such banks are correspondents of banks described
in this paragraph; and
(13) in securities that are offered and sold pursuant to section 77d(5)
of Title 15; or that are mortgage related securities (as that term is
defined in section 78c(a)(41) of Title 15), subject to such regulations as
the Board may prescribe, including regulations prescribing minimum size of
the issue (at the time of initial distribution) or minimum aggregate sales
prices, or both.
The regulations reproduced below govern the investment powers of Federal
Credit Unions:
12 C.F.R. SEC. 703.2 DEFINITIONS.
Adjusted trading means any method or transaction used to defer a loss
whereby a federal credit union sells a security to a vendor at a price above its
current market price and simultaneously purchases or commits to purchase from
the vendor another security at a price above its current market price.
Average life means the weighted average time to principal repayment with the
amount of the principal paydowns (both scheduled and unscheduled) as the
weights.
Bailment for hire contract means a contract whereby a third party, bank or
other financial institution, for a fee, agrees to exercise ordinary care in
protecting the securities held in safekeeping for its customers.
Bankers' Acceptance means a time draft that is drawn on and accepted by a
bank, and that represents an irrevocable obligation of the bank.
Cash forward agreement means an agreement to purchase or sell a security
with delivery and acceptance being mandatory and at a future date in excess of
thirty (30) days from the trade date.
Collateralized Mortgage Obligation (CMO) means a multi-class bond issue
collateralized by whole loan mortgages or mortgage-backed securities (MBS). CMOs
usually consist of four or more classes of bonds which are commonly referred to
as "tranches".
Corporate credit union means a credit union that conforms to the definition
of "corporate credit union" as contained in part 704 of this chapter.
Eurodollar deposit means a deposit in a foreign branch of a United States
depository institution.
Facility means the home office of a federal credit union or any suboffice
thereof including, but not necessarily limited to, a wire service, telephonic
station, or mechanical teller station.
Federal funds transaction means a short-term or open-ended transfer of funds
to a section 107(8) institution.
24
<PAGE>
Futures contract means a contract for the future delivery of commodities,
including certain government securities, sold on commodities exchanges.
Immediate family member means a spouse or other family members living in the
same household.
Market price means the last established price at which a security is sold.
Maturity date means the date on which a security matures, and shall not mean
the call date or the average life of the security.
Real Estate Mortgage Investment Conduit (REMIC) means a nontaxable entity
formed for the sole purpose of holding a fixed pool of mortgages secured by an
interest in real property and issuing multiple classes of interests in the
underlying mortgages.
Repurchase transaction means a transaction in which a federal credit union
agrees to purchase a security from a vendor and to resell the same or any
identical security to that vendor at a later date. A repurchase transaction may
be of three types:
(1) Investment-type repurchase transaction means a repurchase
transaction where the federal credit union purchasing the security takes
physical possession of the security, or receives written confirmation of the
purchase and a custodial or safekeeping receipt from a third party under a
written bailment for hire contract, or is recorded as the owner of the
security through the Federal Reserve Book-Entry System;
(2) Financial institution-type repurchase transaction means a repurchase
transaction with a section 107(8) institution; and
(3) Loan-type repurchase transaction means any repurchase transaction
that does not qualify as an investment-type or financial institution-type
repurchase transaction.
Residual interest means the remainder cash flows from a CMO or REMIC
transaction after payments due bondholders and trust administrative expenses
have been satisfied.
Reverse repurchase transaction means a transaction whereby a federal credit
union agrees to sell a security to a purchaser and to repurchase the same or any
identical security from that purchaser at a future date and at a specified
price.
Section 107(8) institution means an institution in which a federal credit
union is authorized to make deposits pursuant to section 107(8) of the Federal
Credit Union Act (12 U.S.C. 1757(8)), i.e., an institution that is insured by
the Federal Deposit Insurance Corporation or is a state bank, trust company or
mutual savings bank operating in accordance with the laws of a state in which
the federal credit union maintains a facility.
Security means any security, obligation, account, deposit, or other item
authorized for investment by a federal credit union pursuant to section 107(7),
107(8), or 107(15)(B) of the Federal Credit Union Act (12 U.S.C. 1757(7),
1757(8), 1757(15)(B)), other than loans to members.
Senior management employee means the credit union's chief executive officer
(typically this individual holds the title of President or Treasurer/Manager),
any assistant chief executive officers
25
<PAGE>
(e.g., Assistant President, Vice President or Assistant Treasurer/Manager) and
the chief financial officer (Comptroller).
Settlement date means the date originally agreed to by a federal credit
union and a vendor for settlement of the purchase or sale of a security.
Short sale means the sale of a security not owned by the seller.
Standby commitment means a commitment to either buy or sell a security, on
or before a future date, at a predetermined price. The seller of the commitment
is the party receiving payment for assuming the risk associated with committing
either to purchase a security in the future at a predetermined price, or to sell
a security in the future at a predetermined price. The seller of the commitment
is required to either accept delivery of a security (in the case of a commitment
to buy) or make delivery of a security (in the case of a commitment to sell), in
either case at the option of the buyer of the commitment.
Stripped Mortgage-Backed Securities (SMBS) means securities that represent
unequal proportions of the cash flows of an underlying pool of mortgages. In
their purest form, SMBS represent mortgage-backed securities (MBS) that have
been converted into interest only (IO) securities, where holders receive 100
percent of the interest cash flows, and principal only (PO) securities, where
holders receive 100 percent of the principal cash flows.
Trade date means the date a federal credit union originally agrees, whether
orally or in writing, to enter into the purchase or sale of a security.
Yankee Dollar deposit means a deposit in a United States branch of a foreign
bank licensed to do business in the state in which it is located, or a deposit
in a state-chartered, foreign controlled bank.
Zero coupon bond means a debt obligation that makes no periodic interest
payments but instead is sold at a discount from its face value. The holder of a
zero coupon bond realizes the rate of return through the gradual appreciation of
the security, which is redeemed at face value on a specified maturity date.
12 C.F.R. SEC. 703.4 AUTHORIZED ACTIVITIES.
(a) General authority. A federal credit union may contract for the purchase
or sale of a security provided that:
(1) The delivery of the security is to be made within thirty (30) days
from the trade date; and
(2) The price of the security at the time of purchase is the market
price.
(b) Cash forward agreements. A federal credit union may enter into a cash
forward agreement to purchase or sell a security, provided that:
(1) The period from the trade date to the settlement date does not
exceed one hundred and twenty (120) days;
(2) If the credit union is the purchaser, it has written cash flow
projections evidencing its ability to purchase the security;
26
<PAGE>
(3) If the credit union is the seller, it owns the security on the trade
date; and
(4) The cash forward agreement is settled on a cash basis at the
settlement date.
(c) Loans, shares and deposits--other financial institutions. A federal
credit union may invest in the following accounts of other financial
institutions as specified in sections 107(7) and 107(8) of the Federal Credit
Union Act (12 U.S.C. 1757(7), 1757(8)): Loans to nonmember credit unions in an
aggregate amount not exceeding 25 percent of the lending credit union's
unimpaired capital and surplus; shares, share certificates or share deposits of
federally insured credit unions; shares or deposits of any central credit union
specifically authorized by the board of directors; and deposits of any section
107(8) institution, provided that where any such deposit, or any portion of it,
is not federally insured, a credit union shall analyze the credit quality of the
issuing institution prior to making the deposit. Where the deposit, or any
portion of it is not federally insured, a federal credit union shall also record
its credit decision respecting the investment in the records of the credit
union.
(d) Repurchase transactions. A federal credit union may enter into an
investment-type repurchase transaction or a financial institution-type
repurchase transaction provided the purchase price of the security obtained in
the transaction is at or below the market price. A repurchase transaction not
qualifying as either an investment-type or financial institution-type repurchase
transaction will be considered a loan-type repurchase transaction subject to
section 107 of the Federal Credit Union Act (12 U.S.C. 1757), which generally
limits federal credit unions to making loans only to members.
(e) Reverse repurchase transactions. A federal credit union may enter into a
reverse repurchase transaction, provided that either any securities purchased
with the funds obtained from the transaction or the securities collateralizing
the transaction have a maturity date not later than the settlement date for the
reverse repurchase transaction. A reverse repurchase transaction is a borrowing
transaction subject to section 107(9) of the Federal Credit Union Act (12 U.S.C.
1757(9)), which limits a federal credit union's aggregate borrowing to 50
percent of its unimpaired capital and surplus.
(f) Federal funds. A federal credit union may sell Federal funds to a
section 107(8) institution, provided that the interest or other consideration
received from the financial institution is at the market rate for Federal funds
transaction and that the transaction has a maturity of 1 or more business days
or the credit union is able to require repayment at any time.
(g) Yankee Dollars. A federal credit union may invest in Yankee Dollar
deposits in a section 107(8) institution.
(h) Eurodollars. A federal credit union may invest in Eurodollar deposits in
a branch of a section 107(8) institution.
(i) Banker's acceptances. A federal credit union may invest in banker's
acceptances issued by a section 107(8) institution.
(j) Mutual funds. A federal credit union may invest in a mutual fund if the
investments and investment transactions of the fund are legally permissible for
federal credit unions under the Federal Credit Union Act and NCUA Rules and
Regulations.
27
<PAGE>
12 C.F.R. SEC. 703.5 PROHIBITED ACTIVITIES.
The prohibitions contained in paragraphs (f), (h) and (k) of this section
shall not apply to securities purchased prior to December 2, 1991. The
prohibition contained in paragraph (g) of this section shall not apply to
securities purchased prior to July 30, 1993.
(a) Except as provided in Sec. 701.21(i), a federal credit union may not
purchase or sell a standby commitment.
(b) A federal credit union may not buy or sell a futures contract.
(c) A federal credit union may not engage in adjusted trading.
(d) A federal credit union may not engage in a short sale.
(e) A federal credit union may not purchase shares or deposits in, or
otherwise transact business with a corporate credit union that does not operate
in compliance with part 704 of this chapter in significant respects, or is not
examined by NCUA.
(f) Except as provided in paragraph (i) of this section, a federal credit
union may not purchase a Stripped Mortgage-Backed Security (SMBS).
(g) (1) Except as provided in paragraph (i) of this section, a federal
credit union may not purchase a CMO or REMIC which meets any of the following
three tests:
(i) Average Life Test. The CMO or REMIC has an expected average life
greater than 10 years.
(ii) Average Life Sensitivity Test. The average life of the CMO or
REMIC: (A) Extends by more than 4 years, assuming an immediate and sustained
parallel shift in the yield curve of plus 300 basis points, or (B) Shortens
by more than 6 years, assuming an immediate and sustained parallel shift in
the yield curve of minus 300 basis points.
(iii) Price Sensitivity Test. The estimated change in the price of the
CMO or REMIC is more than 17 percent, due to an immediate and sustained
parallel shift in the yield curve of plus or minus 300 basis points.
(2) The three tests contained in this paragraph (g) shall apply at the time
of purchase and on any subsequent re-testing date, assuming market interest
rates and prepayment speeds at the time that the tests are applied.
(h) Except as provided in paragraph (i) of this section, a federal credit
union may not purchase a residual interest in a CMO or REMIC transaction.
(i) The prohibitions contained in paragraphs (f), (g) and (h) of this
section shall not apply where an investment is made solely to reduce interest
rate risk and where:
(1) A monitoring and reporting system is in place that provides the
documentation necessary to evaluate the expected and actual performance of
the investment under different interest rate scenarios;
28
<PAGE>
(2) The monitoring and reporting system is used to conduct and document
an analysis that shows, prior to purchase, that the proposed investment will
reduce the credit union's interest rate risk;
(3) The investment, subsequent to purchase, is evaluated at least
quarterly, to determine whether or not the investment has actually reduced
the credit union's interest rate risk;
(4) The investment is reported as a trading asset at market value or as
a held-for-sale asset at the lower of cost or market value until its
disposition.
(j) The average life and average life sensitivity tests contained in
paragraph (g) of this section shall not apply to a floating or adjustable rate
CMO/REMIC that has all of the following characteristics at the time of purchase
or on a subsequent testing date, irrespective of whether or not it has been
purchased to reduce interest-rate risk:
(1) The interest rate is reset at least annually.
(2) The interest rate of the instrument, at the time of purchase or at a
subsequent testing date, is below the contractual cap of the instrument.
(3) The index upon which the interest rate is based is a conventional
widely-used market interest rate such as the London Interbank Offered Rate
(LIBOR).
(4) The interest rate of the instrument varies directly (not inversely)
with the index upon which it is based and is not reset as a multiple of the
change in the related index.
(k) A federal credit union may not purchase a zero coupon security with a
maturity date that is more than 10 years from the settlement date for purchase
of the security.
(l) A federal credit union's directors, officials, committee members and
senior management employees, and immediate family members of such individuals,
may not receive pecuniary consideration in connection with the making of an
investment or deposit by the federal credit union. The prohibition contained in
this subsection also applies to any employee not otherwise covered if the
employee is directly involved in investments or deposits unless the board of
directors determines that the employee's involvement does not present a conflict
of interest.
(m) All transactions with business associates or family members not
specifically prohibited by paragraph (1) of this section must be conducted at
arm's length and in the interest of the credit union.
29
<PAGE>
MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND ACCOUNT APPLICATION Mail to: STATE
STREET BANK AND TRUST COMPANY, P.O. Box 8500, Boston, Massachusetts 02266-8500
<TABLE>
<S> <C>
REGISTRATION: The account should be registered as follows: INITIAL INVESTMENT:--Minimum $25,000
/ / The account has been opened by wire on ___________
Name of Account (Date) and the account no.assigned is ____________.
/ / Please establish an account with the enclosed check for
$______________ payable to the Merrill Lynch Institu-
tional Intermediate Fund.
- - *
Street Soc. Sec. No. or Tax ID No.
-
Merrill Lynch Brokerage Account No. (if applicable)
City State Zip Code
Merrill Lynch Financial Consultant No. (if applicable)
Occupation (____)____________________________________________________
Area code Telephone
Name of Employer Citizen of
/ / U.S.
/ / Other (please specify) _______________________________
Street -----------------
* Under the Federal income tax law, you are subject to
certain penalties as well as withholding of tax at a
City State Zip Code 31% rate if you do not provide a correct number.
</TABLE>
<TABLE>
<S> <C>
DISTRIBUTIONS
/ / Check this box if distributions are to be paid in cash. Otherwise distributions will
be reinvested automatically in additional shares of the Fund.
</TABLE>
TELEPHONE EXCHANGE PRIVILEGE (SEE PAGE 17)
<TABLE>
<S> <C>
YES NO I (We) hereby authorize telephone instructions to withdraw amounts from my (our) account in the Fund and
/ / / / exchange for shares of Merrill Lynch Treasury Fund, Merrill Lynch Government Fund, Merrill Lynch Institutional
Fund, and/or Merrill Lynch Institutional Tax-Exempt Fund.
</TABLE>
<TABLE>
<S> <C>
EXPEDITED REDEMPTION PAYMENTS Redemption proceeds will be sent to the bank or trust company listed below, for credit
to the investor's account. If the investor wishes to send redemption proceeds to
(SEE PAGE 14) more than one such institution, an additional application must be submitted for each institu-
tion. The investor hereby authorizes State Street Bank to honor telephone or written
If desired check box instructions, without a signature guarantee, for redemption of Fund shares. State
Street Bank's records of such instructions will be binding on all parties and State Street
/ / Bank and the Fund will not be liable for any loss, expense or cost arising out of such
transactions unless the Fund or State Street Bank fail to employ reasonable procedures
and complete the rest of to confirm that instructions communicated by telephone are genuine.
this section
</TABLE>
<TABLE>
<S> <C>
Enclose a specimen copy of your check or deposit slip (marked "VOID"), if applicable, for the bank account listed below. TO
FACILITATE THE WIRING OF YOUR REDEMPTION PROCEEDS THE INDICATED BANK SHOULD BE A COMMERCIAL BANK.
Name of Bank: _______________________________________ Bank Account No.: ________________________
Address of Bank: _________________________________________________________________________________
Street City State Zip
Name of Account: ___________________________________________________________________________________
</TABLE>
CERTIFICATION: By the execution of this Application, the investor represents
and warrants that the investor has full right, power and authority to invest
in the Fund, and the person or persons signing on behalf of the investor
represent and warrant that they are duly authorized to sign this Application
and to purchase or redeem shares of the Fund on behalf of the investor. The
investor hereby affirms that he has received a current Fund Prospectus.
The undersigned hereby certifies under penalty of perjury that (1) the
above Social Security Number or Taxpayer Identification Number is correct
and that (2) he is not subject to backup withholding, because (a) he is
exempt from backup withholding, OR (b) he has not been notified by the
Internal Revenue Service that he is subject to backup withholding as a
result of a failure to report all interest or dividends, OR (c) the IRS has
notified him that he is no longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS--YOU MUST CROSS OUT ITEM 2 ABOVE IF YOU HAVE BEEN
NOTIFIED BY THE IRS THAT YOU ARE CURRENTLY SUBJECT TO BACKUP WITHHOLDING DUE
TO UNDERREPORTING OF INTEREST OR DIVIDENDS. THE UNDERSIGNED AUTHORIZES THE
FURNISHING OF THIS CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL
FUNDS.
................................. .................................
Signature Title (Corporate Account only)
................................. .................................
Signature Title (Corporate Account only)
30
<PAGE>
MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
One Financial Center
Boston, Massachusetts 02111-2646
MANAGER
Merrill Lynch Asset Management
P.O. Box 9011
Princeton, New Jersey 08543-9011
CUSTODIAN & TRANSFER AGENT
State Street Bank and Trust Company
P.O. Box 8500
Boston, Massachusetts 02266-8500
LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS,
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
FUND OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY THE FUND OR
BY THE DISTRIBUTOR IN ANY STATE IN WHICH SUCH
OFFER TO SELL OR SOLICITATION OF ANY OFFER TO
BUY MAY NOT LAWFULLY BE MADE.
-------------------
TABLE OF CONTENTS
PAGE
----
Fee Table............................... 2
Financial Highlights.................... 3
Investment Objective.................... 4
Investment Policies..................... 4
Investment Adviser...................... 8
Distributor............................. 9
Management of the Fund.................. 10
Purchase of Shares...................... 11
Redemption of Shares.................... 13
Dividends............................... 15
Net Asset Value......................... 15
Taxes................................... 16
Portfolio Transactions.................. 17
Exchange Privilege...................... 17
Performance Data........................ 18
Additional Information.................. 19
Appendix................................ 21
Account Application..................... 30
Code 10431-0295
Prospectus
[PHOTO]
- ---------------------------------------------
MERRILL LYNCH
INSTITUTIONAL
INTERMEDIATE FUND
February 27, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND
ONE FINANCIAL CENTER FOR GENERAL INFORMATION
BOSTON, MASSACHUSETTS 02111-2646 AND PURCHASES CALL
617-357-1460 OR TOLL FREE
800-225-1576
-------------------
Merrill Lynch Institutional Intermediate Fund (the "Fund") is a diversified,
open-end management investment company which seeks current income. The Fund
intends to invest only in those assets (including assets subject to repurchase
agreements) which will permit shares of the Fund to qualify both as "liquid
assets" under regulations of the Office of Thrift Supervision ("OTS") and as an
investment permitted by the regulations of the National Credit Union
Administration.
-------------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the Prospectus of the Fund dated February 27,
1995 ("Prospectus") which has been filed with the Securities and Exchange
Commission and is available upon oral or written request without charge. Copies
of the Prospectus can be obtained by calling or by writing the Fund at the above
telephone numbers or address. This Statement of Additional Information has been
incorporated by reference into the Prospectus.
-------------------
The date of this Statement of Additional Information and the Prospectus is
February 27, 1995.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Reference is made to "Investment Objective" and "Investment Policies"
contained in the Prospectus for a discussion of the investment objective and
policies of the Fund. The Fund's investment objective and the investment
restrictions described below cannot be modified without shareholder approval.
REPURCHASE AGREEMENTS; PURCHASE AND SALE CONTRACTS
The Fund may invest in Eligible Investments subject to repurchase
agreements, and in Treasury obligations subject to purchase and sale contracts,
with any member bank of the Federal Reserve System or primary dealer in U.S.
Government securities. Under such instruments, the purchaser (i.e., the Fund)
acquires ownership of the obligation (debt security) and the seller agrees, at
the time of the sale, to repurchase the obligation at the mutually agreed upon
time and price, thereby determining the yield during the purchaser's holding
period. This results in a fixed rate of return insulated from market
fluctuations during such period. In the case of repurchase agreements, the
prices at which the trades are conducted do not reflect accrued interest on the
underlying obligations; whereas, in the case of purchase and sale contracts, the
prices take into account accrued interest. Such agreements usually cover short
periods, such as under one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In the case of a repurchase agreement, the Fund
will require the seller to provide additional collateral if the market value of
the securities falls below the repurchase price any time during the term of the
repurchase agreement; the Fund does not have the right to seek additional
collateral in the case of purchase and sale contracts. In the event of default
by the seller under a repurchase agreement construed to be a collateralized
loan, the underlying securities are not owned by the Fund but only constitute
collateral for the seller's obligation to pay the repurchase price. Therefore,
the Fund may suffer time delays and incur costs or possible losses in connection
with the disposition of collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of default under such a
repurchase agreement or purchase and sale contract, instead of the contractual
fixed rate of return, the rate of return to the Fund shall be dependent upon
intervening fluctuations of the market value of such securities and the accrued
interest on the securities. In such event, the Fund would have the rights
against the seller for breach of contract with respect to any losses arising
from market fluctuations following the failure of the seller to perform. While
the substance of purchase and sale contracts is similar to repurchase
agreements, because of the different treatment with respect to accrued interest
and additional collateral, management believes that purchase and sale contracts
are not repurchase agreements as such are understood in the banking and
brokerage community.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Fund has adopted the following investment restrictions, none of which may be
changed without the approval of a majority of the Fund's outstanding shares
(which for this purpose and under the Investment Company Act of 1940 means the
vote of (i) 67% or more of the Fund's shares present at a meeting, if the
holders of more than
2
<PAGE>
50% of the outstanding shares of the Fund are present or represented by proxy,
or (ii) more than 50% of the Fund's outstanding shares, whichever is less). The
Fund may not:
(1) Make investments for the purpose of exercising control or
management.
(2) Purchase or sell real estate; provided that to the extent permitted
by the regulations of the OTS and the National Credit Union Administration
(the "Regulations"), the Fund may invest in securities secured by real
estate or interests therein or issued by companies which invest in real
estate or interests therein.
(3) Purchase any securities on margin (except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities), or make short sales of securities or
maintain a short position.
(4) Make loans to other persons (except as provided in (11) below);
provided that for purposes of this restriction the acquisition of a portion
of an issue of publicly distributed bonds, debentures, or other corporate
debt securities and investment in governmental and supranational
obligations, short-term commercial paper, certificates of deposit, bankers'
acceptances and repurchase agreements shall not be deemed to be the making
of a loan.
(5) Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
(6) Purchase or sell interests in oil, gas or other mineral exploration
or development programs.
(7) Purchase or sell commodities or commodity contracts, except that the
Fund may purchase interest rate futures and related options to the extent
permitted by the Regulations (such transactions currently are not permitted
by the Regulations).
Additional investment restrictions which may be changed by the trustees, but
only if such changes would comply with the Regulations, provide that the Fund
may not:
(8) Invest in securities of issuers (other than U.S. Government agencies
or instrumentalities) having a record, together with predecessors, of less
than three years of continuous operation if more than 5% of the Fund's total
assets, taken at market value at the time of investment, would be invested
in such securities.
(9) Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization.
(10) Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof.
(11) Lend its portfolio securities, except that the Fund may lend
portfolio securities with an aggregate value up to 33 1/3 percent of its
total assets, taken at market value, in accordance with the guidelines set
forth below.
Subject to investment restriction (11) above, the Fund may from time to time
lend securities from its portfolio to brokers, dealers and financial
institutions and receive collateral in cash (or cash equivalents consisting of
securities issued or guaranteed by the U.S. Government which may be held as
3
<PAGE>
portfolio securities pursuant to the Fund's investment policies) which will be
maintained in an amount equal to at least 102% of the current market value of
the loaned securities. During the period of the loan, the Fund receives income
on the loaned securities and a loan fee and thereby increases the current income
of the Fund. Such loans will be terminable at any time. The Fund will have the
right to regain record ownership of loaned securities to exercise beneficial
rights such as voting rights, subscription rights and rights to dividends,
interest or other distributions. The Fund may pay reasonable fees to persons
unaffiliated with the Fund for services in arranging such loans.
The trustees have established the policy that the Fund will not purchase or
retain the securities of any issuer, if those individual officers and trustees
or directors of the Fund, the Investment Adviser or the Distributor for the Fund
each owning beneficially more than one-half of 1% of the securities of such
issuer own in the aggregate more than 5% of the securities of such issuer.
Portfolio securities of the Fund generally may not be purchased from, sold or
loaned to the Investment Adviser or its affiliates or any of their directors,
officers or employees, acting as principal, unless pursuant to a rule or
exemptive order under the Investment Company Act of 1940.
Because of the affiliation of the Investment Adviser with the Fund, the Fund
is prohibited from engaging in certain transactions involving the Investment
Adviser's affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), or its affiliates except for brokerage transactions permitted
under the Investment Company Act of 1940 involving only usual and customary
commissions or transactions pursuant to an exemptive order under the Investment
Company Act of 1940. See "Portfolio Transactions." Without such an exemptive
order, the Fund is prohibited from engaging in portfolio transactions with
Merrill Lynch or its affiliates acting as principal and from purchasing
securities in public offerings which are not registered under the Securities Act
of 1933 in which such firms or any of their affiliates participate as an
underwriter or dealer.
MANAGEMENT OF THE FUND
The trustees and executive officers of the Fund, their ages and their
principal occupations for the past five years are set forth below. Unless
otherwise noted, the address of each trustee and executive officer is One
Financial Center, Boston, Massachusetts 02111-2646.
ROBERT W. CROOK (58)--President and Trustee(1)(2)--Senior Vice President of
Merrill Lynch Asset Management ("MLAM"), and of Merrill Lynch Funds Distributor,
Inc. ("MLFD") since 1990 and Vice President of MLAM and MLFD prior thereto.
DAVID ALMY (53)--Trustee(2)--One Post Office Square, Boston, Massachusetts
02109. President of McCall & Almy, Inc. (real estate advisor) since 1990 and
President of Leggat McCall/Grubb & Ellis, Inc. prior thereto.
A. BRUCE BRACKENRIDGE (64)--Trustee(2)--9 Elm Lane, Bronxville, New York
10708. Group Executive of J.P. Morgan & Co., Inc. and Morgan Guaranty Trust
Company from 1979 to 1991 and an employee of J.P. Morgan in various capacities
from 1952 to 1991; Director of Parsons School of Design since 1988.
CHARLES C. CABOT, JR. (64)--Trustee(2)--One Post Office Square, Boston,
Massachusetts 02110. Partner of Sullivan & Worcester and associated with that
firm since 1966.
4
<PAGE>
TERRY K. GLENN (54)--Trustee(1) (2)--Box P.O. 9011, Princeton, New Jersey
08543-9011. Executive Vice President of MLAM and Fund Asset Management, L.P.
("FAM") since 1983; Executive Vice President of Princeton Services, Inc. since
1993; President of MLFD since 1986 and Director thereof since 1991; President of
Princeton Administrators, Inc. since 1988 and Director of Financial Data
Services, Inc. since 1985.
TODD GOODWIN (63)--Trustee(2)--600 Madison Avenue, New York, New York 10022.
General Partner of Gibbons, Goodwin, van Amerongen (investment banking firm)
since 1984; Director of Ladish Co., Inc. (large metal forgings), Wells Aluminum
Co. (aluminum products manufacturer), Rival Manufacturing Co. (electrical
appliance manufacturer), Robert Half International (temporary and permanent
accounting personnel), Horace Mann Educators Corp. (insurance company) and
Schult Homes Inc. (producer and seller of manufactured homes).
GEORGE W. HOLBROOK, JR. (63)--Trustee(2)--107 John Street, Southport,
Connecticut 06490. Managing Partner of Bradley Resources Company (private
investment company) and associated with that firm and its predecessor since
1953; Director of Canyon Resources Corporation (mineral exploration company).
WILLIAM E. ALDRICH (61)--Executive Vice President(2)--Vice President of MLAM
since 1993; Senior Vice President of MLFD since 1990; Vice President of MLFD
prior thereto and a Vice President of FAM since 1981.
MICHAEL J. BRADY (35)--Senior Vice President(2)--Vice President of MLAM
since 1993; Vice President of MLFD since 1990 and an employee of MLFD prior
thereto.
JAMES J. FATSEAS (38)--Senior Vice President(2)--Vice President of MLAM
since 1993; Vice President of MLFD since 1990 and Assistant Vice President of
MLFD prior thereto.
STANLEY GRACZYK (48)--Senior Vice President(2)--Vice President of MLAM since
1993; Vice President of MLFD since 1990 and Assistant Vice President of MLFD
prior thereto.
N. JOHN HEWITT (60)--Senior Vice President(2)--Senior Vice President of
Princeton Services, Inc. since 1993; P.O. Box 9011, Princeton, New Jersey
08543-9011. Senior Vice President of MLAM and FAM since 1980.
WILLIAM WASEL (36)--Senior Vice President(2)--Vice President of MLAM since
1993; Vice President of MLFD since 1990 and Assistant Vice President of MLFD
prior thereto.
KAREN D. BARBATO (30)--Vice President(2)--Employee of MLFD since 1982.
ANN CATLIN (34)--Vice President(2)--Employee of MLFD since 1986.
CHARLES O. DALY (60)--Vice President(2)--Employee of MLFD since 1981.
MARA G. FIORE (30)--Vice President(2)--Employee of MLFD since 1982.
DIANA FRANKLAND (59)--Vice President(2)--Employee of MLFD since 1979.
JAY C. HARBECK (60)--Vice President(2)--Box P.O. 9011, Princeton, New Jersey
08543-9011. Vice President of MLAM since 1986.
5
<PAGE>
MARK E. MAGUIRE (35)--Vice President(2)--Assistant Vice President of MLFD
since 1990 and an employee of MLFD since 1986.
PATRICIA A. SCHENA (37)--Vice President(2)--Employee of MLFD since 1980.
BARRY F. X. SMITH (29)--Vice President(2)--Employee of MLFD since 1987.
DIANNE F. TINNEY (33)--Vice President(2)--Employee of MLFD since 1983.
GERALD M. RICHARD (45)--Treasurer(2)--P.O. Box 9011, Princeton, New Jersey
08543-9011. Senior Vice President and Treasurer of MLAM and FAM since 1984; Vice
President of MLFD since 1981; Treasurer of MLFD since 1984 and Senior Vice
President and Treasurer of Princeton Administrators, Inc. since 1988; Senior
Vice President of Princeton Services, Inc..
JERRY WEISS (37)--Secretary(1)--P.O. Box 9011, Princeton, New Jersey
08543-9011. Vice President of MLAM since 1990 and an attorney in private
practice prior thereto.
At February 1, 1995, the officers and trustees of the Fund as a group (25)
owned an aggregate of less than 1/4 of 1% of the outstanding shares of common
stock of Merrill Lynch & Co., Inc. and owned an aggregate of less than 1% of the
outstanding shares of the Fund.
- ------------
(1) These trustees may be deemed to be "interested persons" of the Fund as that
term is defined in the Investment Company Act of 1940. Mr. Crook and Mr.
Glenn are officers of MLFD and MLAM.
(2) Director/trustee or officer of certain other investment companies for which
FAM or MLAM acts as investment adviser.
The trustees have an Audit and Nominating Committee, the members of which
are Messrs. Almy, Brackenridge, Cabot, Goodwin and Holbrook.
Set forth below is a chart showing the aggregate compensation paid by the
Fund to each of its trustees, as well as the total compensation paid to each
trustee of the Fund by the Fund and by other investment companies advised by the
Investment Adviser or FAM (collectively, the "Fund Complex") for their services
as directors or trustees of such investment companies for the fiscal year ended
October 31, 1994.
<TABLE>
<CAPTION>
PENSIONS OR
RETIREMENT BENEFITS TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION ACCRUED AS PART OF FUND AND FUND COMPLEX
NAME OF DIRECTOR FROM THE FUND FUND EXPENSES PAID TO TRUSTEES
- --------------------------------- ---------------------- ------------------- -----------------------
<S> <C> <C> <C>
David Almy(1).................... $6,000 None $30,000
A. Bruce Brackenridge(1)......... 6,000 None 30,000
Charles C. Cabot, Jr.(1)......... 6,000 None 30,000
Todd Goodwin(1).................. 6,000 None 30,000
George W. Holbrook(1)............ 6,000 None 30,000
</TABLE>
- ------------
(1) The trustees serve on the boards of other FAM/MLAM advised funds as follows:
David Almy, (1 board), A. Bruce Brackenridge (1 board), Charles C. Cabot,
Jr. (1 board), Todd Goodwin (1 board) and George W. Holbrook (1 board).
Each trustee who is not an officer or employee of Merrill Lynch & Co., Inc.
or its subsidiaries will be paid $6,000 annually in his capacity as trustee. All
trustees will be reimbursed for any expenses incurred in attending meetings of
the Board of Trustees of the Fund or of any committee thereof. No
6
<PAGE>
officer or employee of Merrill Lynch & Co., Inc. or its subsidiaries will
receive any compensation from the Fund for acting as a trustee or officer of the
Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund" in the Prospectus for certain
information concerning the management and advisory arrangements of the Fund.
Pursuant to the terms of the Investment Advisory Agreement, the Investment
Adviser, subject to the general supervision of the trustees of the Fund and in
conformance with the stated policies of the Fund, renders investment supervisory
and administrative services to the Fund. In this regard, it is the
responsibility of the Investment Adviser to make investment decisions for the
Fund and to place the purchase and sale orders for the portfolio transactions of
the Fund. In addition the Investment Adviser performs, or supervises the
performance of, administrative services in connection with the Fund, including
(i) supervision of all aspects of the Fund's administration and operations,
including processing services related to the purchase and redemption of Fund
shares, the general handling of shareholder relations, and portfolio management;
(ii) providing the Fund, at the Investment Adviser's expense, with the services
of persons competent to perform such administrative and clerical functions as
are necessary in order to provide effective administration of the Fund; and
(iii) providing the Fund, at the Investment Adviser's expense, with adequate
office space and related services. The Investment Adviser may arrange for the
provision of these administrative services and functions by MLFD or another
affiliate of Merrill Lynch & Co., Inc.
The Investment Advisory Agreement obligates the Investment Adviser to pay
all compensation of and furnish office space for officers and employees of the
Fund connected with investment and economic research, trading and investment
management of the Fund, as well as compensation of all trustees of the Fund who
are affiliated persons of Merrill Lynch & Co., Inc. or any of its subsidiaries.
The Fund pays all other expenses incurred in the operation of the Fund
including, among other things, taxes, expenses for legal and auditing services,
costs of printing proxies, stock certificates, shareholder reports, prospectuses
and statements of additional information (except to the extent paid by the
Distributor), charges of the custodian and the transfer agent, expenses of
redemption of shares, Securities and Exchange Commission fees, expenses of
registering the shares under Federal and state securities laws, fees and
expenses of unaffiliated trustees, accounting and pricing costs (including the
daily calculation of net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other expenses
properly payable by the Fund. Accounting services are provided for the Fund by
the Investment Adviser, and the Fund reimburses the Investment Adviser for its
costs in connection with those services. MLFD pays certain of the expenses of
the Fund in connection with the continuous offering of Fund shares. See
"Purchase of Shares" in the Prospectus. Certain distribution expenses will be
financed by the Fund pursuant to the Distribution Plan in compliance with Rule
12b-1 under the Investment Company Act of 1940. See "Distributor."
As compensation for the services rendered under the Investment Advisory
Agreement, the Fund pays the Investment Adviser a fee, payable monthly, at an
annual rate of 0.40% of the Fund's average daily net assets. The Investment
Adviser has agreed that, in the event the operating expenses of the Fund
(including the fees payable to the Investment Adviser but excluding taxes,
interest, brokerage and
7
<PAGE>
extraordinary expenses), for any fiscal year ending on a date on which the
Investment Advisory Agreement is in effect, exceed the expense limitations
applicable to the Fund imposed by state securities laws or any published
regulations thereunder, it will reduce its fee by the extent of such excess and,
if required pursuant to any such laws or regulations, will reimburse the Fund in
the amount of such excess. At the date of this Statement of Additional
Information, the most restrictive expense limitations require that the
Investment Adviser reimburse the Fund in an amount necessary to prevent the
Fund's aggregate ordinary operating expenses (excluding interest, taxes,
brokerage fees and commissions and extraordinary charges such as litigation
costs) from exceeding in any fiscal year 2.5% of the Fund's first $30 million of
average net assets, 2.0% of the Fund's next $70 million of average net assets
and 1.5% of the Fund's average net assets in excess of $100 million. No fee
payment will be made to the Investment Adviser during any fiscal year which will
cause such expenses to exceed the pro rata expense limitation at the time of
such payment. For the fiscal years ended October 31, 1992, 1993 and 1994, the
Fund paid investment advisory fees of $439,822, $429,133 and $431,597,
respectively.
The Investment Advisory Agreement is effective as of October 31, 1986 and,
unless earlier terminated as described below, will continue in effect from year
to year if approved annually (a) by the Board of Trustees of the Fund or by a
majority of the outstanding shares of the Fund, and (b) by a majority of the
trustees who are not parties to that contract or interested persons (as defined
in the Investment Company Act of 1940) of any such party. The Investment
Advisory Agreement will terminate automatically upon its assignment and is
terminable at any time without penalty by the trustees of the Fund or by a vote
of a majority of the Fund's outstanding shares (as defined under "Investment
Restrictions" herein) or by the Investment Adviser on 60 days' written notice to
the other party. The Investment Advisory Agreement was last renewed by the
Fund's Board of Trustees on December 12, 1994.
The investment advisory services of the Investment Adviser to the Fund are
not exclusive under the terms of the Investment Advisory Agreement and the
Investment Adviser is also free to, and does, render such services to others.
PORTFOLIO TRANSACTIONS
Reference is made to "Portfolio Transactions" in the Prospectus.
The obligations in which the Fund invests are traded primarily in the
over-the-counter market but may be traded on an exchange. Where possible, the
Fund will deal directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere. Such dealers usually are acting as principal for their own
account. On occasion, securities may be purchased directly from the issuer. The
cost of executing portfolio transactions of the Fund will primarily consist of
dealer spreads and underwriting commissions.
Under the Investment Company Act of 1940, persons affiliated with the Fund
are prohibited from dealing with the Fund as a principal in the purchase and
sale of securities unless a permissive order allowing such transactions is
obtained from the Securities and Exchange Commission. Affiliated persons of the
Fund may serve as its broker in over-the-counter transactions conducted on an
agency basis. The Fund may not generally purchase securities from any
underwriting syndicate of which Merrill Lynch is a member.
8
<PAGE>
The trustees of the Fund have considered the possibility of recapturing for
the benefit of the Fund brokerage commissions, dealer spreads and other expenses
of possible portfolio transactions, such as underwriting commissions, by
conducting such portfolio transactions through affiliated entities, including
Merrill Lynch. For example, brokerage commissions received by Merrill Lynch
could be offset against the management fee paid by the Fund to the Investment
Adviser. After considering all factors deemed relevant, the trustees made a
determination not to seek such recapture. The trustees will consider this matter
from time to time.
In placing orders, it is the policy of the Fund to obtain the best net
results taking into account such factors as price (including the applicable
dealer spread), the size, type and difficulty of the transaction involved, the
firm's general execution and operational facilities, the firm's risk in
positioning the securities involved and the firm's provision of supplemental
investment research (such as economic data and market forecasts). Information so
received will be in addition to and not in lieu of the services required to be
performed by the Investment Adviser under its Investment Advisory Agreement, and
the expenses of the Investment Adviser will not necessarily be reduced as a
result of the receipt of such supplemental information. In some cases, the
Investment Adviser may use such supplemental research in providing investment
advice to its other investment advisory accounts. While the Investment Adviser
generally seeks reasonably competitive spreads or commissions, the Fund will not
necessarily be paying the lowest spread or commission available. The Fund's
policy of investing in securities with short maturities will result in high
portfolio turnover.
Securities held by the Fund may also be held by or be appropriate
investments for other funds for which the Investment Adviser or its affiliates
act as an adviser or by investment advisory clients of the Investment Adviser.
Because of different objectives or other factors, a particular security may be
bought for one or more clients when one or more clients are selling the same
security. If purchases or sales of securities for the Fund or other funds for
which they act as investment adviser or for their advisory clients arise for
consideration at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of the Investment Adviser or its affiliates during the same period
may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
PORTFOLIO TURNOVER
The Investment Adviser effects portfolio transactions without regard to
holding period if, in its judgment, such transactions are advisable in light of
a change in circumstances in general market, economic or financial conditions.
As a result of its investment policies, the Fund may engage in a substantial
number of portfolio transactions. The portfolio turnover rate is calculated by
dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year. High portfolio turnover
involves correspondingly greater transaction costs in the form of dealer spreads
and brokerage commissions, which are borne directly by the Fund, and may
increase the percentage of the Fund's distributions which are taxable to
shareholders as ordinary income. For the fiscal years ended October 31, 1993 and
October 31, 1994, the Fund's portfolio turnover rates were 204.80% and 172.51%,
respectively. See "Dividends, Distributions and Taxes."
9
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus. The right to
redeem shares or to receive payment with respect to any redemption may be
suspended for more than seven days only for periods during which trading on the
New York Stock Exchange is restricted as determined by the Securities and
Exchange Commission or such Exchange is closed (other than customary weekend and
holiday closings), for any period during which an emergency exists as a result
of which disposal of portfolio securities or determination of net asset value is
not reasonably practicable, and for such other periods as the Securities and
Exchange Commission may by order permit for the protection of shareholders of
the Fund.
The value of the shares at the time of redemption may be more or less than
the shareholder's cost, depending on the market value of the securities held by
the Fund at such time.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Reference is made to "Dividends" and "Taxes" in the Prospectus. It is the
Fund's intention to distribute all of its net investment income. Dividends from
such net investment income will be declared daily prior to the determination of
net asset value on that day and will be paid monthly. Net investment income for
dividend purposes consists of interest earned less expenses of the Fund accrued
for that dividend period. Shares will accrue dividends as long as they are
issued and outstanding. Shares are issued and outstanding as of the settlement
date of a purchase order to the settlement date of a redemption order. All net
realized long- or short-term capital gains, if any, will be distributed to the
Fund's shareholders annually after the close of the Fund's fiscal year.
FEDERAL INCOME TAXES
The Fund has qualified and intends to continue to qualify as a regulated
investment company under certain provisions of the Internal Revenue Code of
1986, as amended (the "Code"). Under such provisions, the Fund will not be
subject to federal income tax on such part of its ordinary income and net
realized capital gains which it distributes to shareholders. To qualify for
treatment as a regulated investment company, the Fund must, among other
requirements, derive in each taxable year at least 90% of its gross income from
dividends, interest and gains from the sale or other disposition of securities
and derive less than 30% of its gross income each taxable year from gains
(without deduction for losses) from the sale or other disposition of stocks and
securities and certain options, futures and forward contracts held for less than
three months. If in any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income will be taxed to the Fund at
corporate rates.
Dividends will be taxable to shareholders as ordinary income, except for (a)
such portion as may exceed a shareholder's ratable share of the Fund's earnings
and profits as determined for tax purposes (which may differ from net income for
book purposes), which excess will be applied against and reduce the
shareholder's cost or other tax basis for his shares and (b) amounts
representing distributions of realized net long-term capital gains, if any. If
the amount described in (a) above were to exceed the shareholder's tax basis for
his shares, the excess over basis would be treated as gain from the sale or
10
<PAGE>
exchange of such shares. The excess of any net long-term capital gains over net
short-term capital losses realized by the Fund will, to the extent distributed
by the Fund, be taxable to shareholders as long-term capital gains regardless of
the length of time a particular shareholder may have held his shares in the
Fund. Dividends and distributions are taxable as described above, whether
received in cash or reinvested in additional shares of the Fund.
At October 31, 1994, the Fund had a net capital loss carry-forward of
approximately $39,104,000 ($17,071,000 expiring in 1995, $8,336,000 expiring in
1996, $5,830,000 expiring in 1997, $4,643,000 expiring in 1998, and $3,224,000
expiring in 2002), which will be available to offset a like amount of any future
capital gains.
Dividends to shareholders who are non-resident aliens, trusts, estates,
partnerships or corporations may be subject to a 30% United States withholding
tax unless a reduced rate of withholding is provided for under an applicable
treaty. Shareholders who are non-resident aliens or foreign entities are urged
to consult their own tax advisors concerning the applicability of United States
withholding tax.
Some shareholders may be subject to 31% withholding on reportable dividends,
capital gains distributions and redemption payments ("backup withholding").
Generally, shareholders subject to backup withholding will be those for whom a
certified taxpayer identification number is not on file with the Fund or who, to
the Fund's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalties of perjury that such number is
correct and that he is not otherwise subject to backup withholding.
The Code imposes a 4% nondeductible excise tax on regulated investment
companies, such as the Fund, if they do not distribute to their shareholders
during a calendar year an amount equal to 98% of their investment company
taxable income, with certain adjustments, for such calendar year, plus 98% of
their net capital gains for the 12-month period ending October 31 of such
calendar year. In addition, an amount equal to 100% of any undistributed
investment company taxable income or capital gain net income from the previous
calendar year must also be distributed to avoid the excise tax. The excise tax
is imposed on the amount by which the regulated investment company falls below
the foregoing distribution requirements.
Any dividend declared by the Fund in October, November or December of any
year and made payable to shareholders of record in such a month will be deemed
to be received on December 31 of such year if actually paid during the following
January. Accordingly, these dividends will be taxable to shareholders in the
year declared, and not in the year in which shareholders actually receive the
dividend.
STATE AND LOCAL TAXES
Depending upon the extent of the Fund's activities in those states and
localities in which its offices are maintained or in which its agents or
independent contractors are located, the Fund may be subject to tax in such
states or localities. In addition, in those states and localities which have
income tax laws, the treatment of the Fund's shareholders under such laws may
differ from their treatment under the Federal income tax laws. Under state or
local law, distributions of net investment income may be taxable to shareholders
as dividend income even though a portion of such distributions may be derived
from interest on U.S. Government obligations which, if realized directly, would
be exempt from such
11
<PAGE>
income taxes. Shareholders are advised to consult their tax advisors concerning
the application of state and local taxes.
DISTRIBUTOR
DISTRIBUTION AGREEMENT
The Fund has entered into a Distribution Agreement (the "Distribution
Agreement") with Merrill Lynch Funds Distributor, Inc., a wholly-owned
subsidiary of the Investment Adviser. The principal business address of MLFD is
One Financial Center, Fifteenth Floor, Boston, MA 02111-2646. Pursuant to the
Distribution Agreement, MLFD serves as the principal underwriter and distributor
of the Fund's shares, and in that capacity makes a continuous offering of the
Fund's shares and bears the costs and expenses of printing and distributing any
copies of any prospectuses and annual and interim reports of the Fund (after
such items have been prepared and set in type) which are used in connection with
the offering of shares to selected dealers or investors, and the cost and
expenses of preparing, printing and distributing any other literature used by
MLFD or furnished by it for use by selected dealers in connection with the
offering of shares for sale to the public. There will be no fee payable by the
Fund pursuant to the Distribution Agreement and there is no sales or redemption
charge. The continuance of the Distribution Agreement must be approved in the
same manner as the Investment Advisory Agreement and will terminate
automatically if assigned by either party thereto and is terminable at any time
without penalty by the Board of Trustees of the Fund or MLFD or by vote of a
majority of the Fund's outstanding shares on 60 days' written notice. The
Distribution Agreement was last renewed by the Board of Trustees of the Fund on
December 12, 1994.
DISTRIBUTION PLAN
The Fund has adopted a Distribution and Shareholder Servicing Plan and
Agreement (the "Plan") in compliance with Rule 12b-1 under the Investment
Company Act of 1940. Pursuant to the Plan, the Fund is authorized to pay MLFD a
fee at the annual rate of 0.15% of the Fund's average daily net assets in order
to compensate MLFD for services it provides and the expenses it bears, including
payments to selected dealers for their services in connection with the
distribution of Fund shares. As authorized by the Plan, MLFD has entered into an
agreement with Merrill Lynch which provides for the compensation of Merrill
Lynch for providing distribution-related services to the Fund. Such services
relate to the sale, promotion and marketing of the shares of the Fund. For the
fiscal year ended October 31, 1994, payments to MLFD pursuant to the Plan
totalled $161,849, all of which was paid to Merrill Lynch pursuant to the
Agreement. The trustees believe that the Fund's expenditures under the Plan
benefit the Fund and its shareholders by providing better shareholder services
and by affecting positively the sale and distribution of Fund shares.
Among other things, the Plan provides that MLFD shall provide and the
trustees of the Fund shall review quarterly reports of the expenditures made by
MLFD pursuant to the Plan. In their consideration of the Plan, the trustees must
consider all factors they deem relevant, including information as to the
benefits of the Plan to the Fund and its shareholders. The Plan further provides
that, so long as the Plan remains in effect, the selection and nomination of
trustees of the Fund who are not "interested persons" of the Fund as defined in
the Investment Company Act of 1940 (the "Independent Trustees") shall be
committed to the discretion of the Independent Trustees then in office.
12
<PAGE>
The terms of the Plan were approved on February 19, 1988 by a vote of a
majority of the shareholders of the Fund at a meeting called for the purpose of
voting on such approval. The Plan will continue from year to year, provided such
continuance is approved at least annually by a vote of the trustees, including a
majority vote of the Independent Trustees, cast in person at a meeting called
for the purpose of voting on such continuance. The Plan was last renewed by the
Board of Trustees of the Fund on December 12, 1994. The Plan can be terminated
at any time, without penalty, by the vote of a majority of the Independent
Trustees or by the vote of the holders of a majority of the outstanding voting
securities of the Fund. Finally, the Plan cannot be amended to increase
materially the amount to be spent by the Fund thereunder without shareholder
approval, and all material amendments are required to be approved by vote of the
trustees of the Fund, including a majority of the Independent Trustees, cast in
person at a meeting called for that purpose. The Plan further requires the Fund
to preserve copies of the Plan and any report made pursuant to the Plan for a
period not less than six years, and for two years in an easily accessible place.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield, in advertisements or information
furnished to present or prospective shareholders. Total return and yield figures
are based on the Fund's historical performance and are not intended to indicate
future performance. Average annual total return and yield are determined in
accordance with formulas specified by the Securities and Exchange Commission and
take into account the maximum sales charge.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge.
The Fund also may quote annual, average and annualized total return and
aggregate total return performance data, both as a percentage and as a dollar
amount based on a hypothetical $1,000 investment, for various periods other than
those noted below. Such data will be computed as described above, except that
the rates of return calculated will not be average annual rates but rather
actual annual, annualized or aggregate rates of return. Actual annual or
annualized total return data generally will be lower than average annual total
return data since the average rates of return reflect compounding of return;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time.
13
<PAGE>
Set forth below is total return information.
<TABLE>
<CAPTION>
REDEEMABLE VALUE OF
EXPRESSED AS A A HYPOTHETICAL
PERCENTAGE BASED ON A $1,000 INVESTMENT
HYPOTHETICAL $1,000 AT THE END OF
PERIOD INVESTMENT THE PERIOD
------ --------------------- -------------------
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C>
One Year Ended October 31, 1994....................... (1.54%) $ 984.60
Five Years Ended October 31, 1994..................... 7.20 1,415.90
November 6, 1986 to October 31, 1994.................. 6.95 1,710.40
PERIOD
------
ANNUAL TOTAL RETURN
One Year Ended October 31, 1994....................... (1.54%) $ 984.60
One Year Ended October 31, 1993....................... 8.07 1,080.70
One Year Ended October 31, 1992....................... 9.66 1,096.60
One Year Ended October 31, 1991....................... 12.62 1,126.20
One Year Ended October 31, 1990....................... 7.75 1,077.50
One Year Ended October 31, 1989....................... 9.12 1,091.20
One Year Ended October 31, 1988....................... 7.29 1,072.90
November 6, 1986 through October 31, 1987............. 3.18 1,031.80
<CAPTION>
AGGREGATE TOTAL RETURN
November 6, 1986 to October 31, 1994.................. 71.04% $1,710.40
</TABLE>
GENERAL INFORMATION
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, P.O. Box 8500, Boston, Massachusetts
02266-8500, acts as Custodian of the Fund's assets and as its Transfer Agent.
The Custodian is responsible for safeguarding and controlling the Fund's cash
and securities, handling the delivery of securities and collecting interest on
the Fund's investments. The Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening, maintenance and servicing of
shareholder accounts.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, Independent Auditors, 117 Campus Drive, Princeton,
New Jersey 08540, has been selected as the independent auditors of the Fund and
is responsible for auditing the annual financial statements of the Fund.
LEGAL COUNSEL
Rogers & Wells, New York, New York, is counsel for the Fund.
14
<PAGE>
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements audited
by independent auditors, is sent to shareholders each year.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act of 1940, to which reference is hereby made.
To the knowledge of the Fund no entities owned beneficially more than 5% of
the Fund's outstanding shares as of February 14, 1995, other than Merrill Lynch
Trust Company of America, Trustee FB0 Central Illinois Light Company, Attn:
Rhonda Sherwin, P.O. Box 30532, New Brunswick, New Jersey 08989-0532, which
owned 589,835 shares, representing 8.3% of such outstanding shares and Kingsbury
Capital Partners L.P., Attn: Tim Wollaeger, 3655 Noble Drive, Suite 490, San
Diego, California 92122-1005, which owned 527,164 shares, representing 7.4% of
such outstanding shares.
The Declaration of Trust establishing the Fund, dated September 10, 1986, a
copy of which, together with all amendments thereto (the "Declaration"), is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Merrill Lynch Institutional Intermediate Fund" refers to
the trustees under the Declaration collectively as trustees, but not as
individuals or personally; and no trustee, shareholder, officer, employee or
agent of the Fund may be held to any personal liability, nor may resort be had
to their private property for the satisfaction of any obligation or claim or
otherwise in connection with the affairs of the Fund but the Fund's property
only shall be liable.
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Institutional Intermediate Fund as
of October 31, 1994, the related statements of operations for the year then
ended and of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-year
period then ended. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Institutional Intermediate Fund as of October 31, 1994, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 5, 1994
16
<PAGE>
Merrill Lynch Institutional Intermediate Fund
Schedule of Investments
As of October 31, 1994
<TABLE>
<CAPTION>
Interest Maturity Value
Issue Face Amount Rate Date (Note 1a)
<S> <C> <C> <C> <C>
US Government & Agency Obligations--93.6%
US Treasury Notes $ 7,000,000 8.00% 1/15/97 $ 7,153,720
9,000,000 8.50 4/15/97 9,304,470
11,500,000 8.50 5/15/97 11,894,450
10,000,000 8.875 11/15/97 10,464,100
13,000,000 8.125 2/15/98 13,338,260
2,000,000 8.875 2/15/99 2,107,980
Federal National Mortgage
Association 4,000,000 7.00 8/11/99 3,895,640
Student Loan Marketing
Association 18,000,000 5.35 5/14/96 18,005,760
Total US Government & Agency Obligations (Cost--$79,748,890) 76,164,380
</TABLE>
<TABLE>
<CAPTION>
Face Amount Repurchase Agreement*--5.2%
<S> <C> <C>
$4,275,000 HSBC Holdings, Inc., purchased on 10/31/1994 to yield 4.77% to 11/01/1994 4,275,000
Total Repurchase Agreement (Cost--$4,275,000) 4,275,000
Total Investments (Cost--$84,023,890)--98.8% 80,439,380
Other Assets Less Liabilities--1.2% 968,023
Net Assets--100.0% $81,407,403
<FN>
*Repurchase Agreements are fully collateralized by US Government Obligations.
</FN>
</TABLE>
See Notes to Financial Statements
17
<PAGE>
Merrill Lynch Institutional Intermediate Fund
Statement of Assets and Liabilities
As of October 31, 1994
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (identified cost--$84,023,890) (Notes 1a & 1b) $ 80,439,380
Cash 967
Receivables:
Securities sold $2,091,766
Interest 1,583,224
Loaned securities 15,542 3,690,532
Prepaid registration fees and other assets (Note 1e) 33,783
Total assets 84,164,662
Liabilities:
Payables:
Beneficial interest redeemed 2,235,800
Dividends to shareholders (Note 1f) 410,793
Investment adviser (Note 2) 27,842
Distributor (Note 2) 10,441 2,684,876
Accrued expenses and other liabilities 72,383
Total liabilities 2,757,259
Net Assets $ 81,407,403
Net Assets Consist of:
Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized $ 848,183
Paid-in capital in excess of par 123,247,669
Accumulated realized capital losses--net (Note 5) (39,103,939)
Unrealized depreciation on investments--net (3,584,510)
Net Assets--Equivalent to $9.60 per share based on 8,481,830
shares of beneficial interest outstanding $ 81,407,403
</TABLE>
See Notes to Financial Statements
18
<PAGE>
Merrill Lynch Institutional Intermediate Fund
Statement of Operations
For the Year Ended October 31, 1994
<TABLE>
<S> <C> <C>
Investment Income (Note 1d):
Interest and amortization of premium and discount earned $6,868,057
Other 12,265
Total income $ 6,880,322
Expenses:
Investment advisory fees (Note 2) 431,597
Distribution fees (Note 2) 161,849
Professional fees 76,314
Accounting services (Note 2) 58,629
Transfer agent fees (Note 2) 43,308
Registration fees (Note 1e) 38,944
Trustees' fees and expenses 31,000
Printing and shareholder reports 29,519
Custodian fees 18,694
Insurance 4,107
Other 834
Total expenses 894,795
Investment income--net 5,985,527
Realized & Unrealized Loss on Investments--Net
(Notes 1d & 3):
Realized loss on investments--net (3,224,103)
Change in unrealized appreciation/depreciation on investments--net (4,828,530)
Net Decrease in Net Assets Resulting from Operations $(2,067,106)
</TABLE>
See Notes to Financial Statements
19
<PAGE>
Merrill Lynch Institutional Intermediate Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year
Ended October 31,
1994 1993
<S> <C> <C>
Increase (Decrease) in Net Assets:
Operations:
Investment income--net $ 5,985,527 $ 5,725,561
Realized gain (loss) on investments--net (3,224,103) 2,081,594
Change in unrealized appreciation/depreciation on investments--net (4,828,530) 209,820
Net increase (decrease) in net assets resulting from operations (2,067,106) 8,016,975
Dividends to Shareholders (Note 1f):
Investment income--net (5,985,527) (5,725,561)
Net decrease in net assets resulting from dividends to shareholders (5,985,527) (5,725,561)
Beneficial Interest Transactions (Note 4):
Net increase (decrease) in net assets derived from beneficial
interest transactions (32,823,135) 25,194,108
Net Assets:
Total increase (decrease) in net assets (40,875,768) 27,485,522
Beginning of year 122,283,171 94,797,649
End of year $ 81,407,403 $122,283,171
</TABLE>
See Notes to Financial Statements
20
<PAGE>
Merrill Lynch Institutional Intermediate Fund
Financial Highlights
The following per share data and ratios have
been derived from information provided
in the financial statements.
Increase (Decrease) in Net Asset Value:
<TABLE>
<CAPTION>
For the Year Ended October 31,
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $ 10.31 $ 10.06 $ 9.76 $ 9.35 $ 9.42
Investment income--net .55 .54 .62 .72 .77
Realized and unrealized gain (loss) on
investments--net (.71) .25 .30 .41 (.07)
Total from investment operations (.16) .79 .92 1.13 .70
Less dividends:
Investment income--net (.55) (.54) (.62) (.72) (.77)
Net asset value, end of year $ 9.60 $ 10.31 $ 10.06 $ 9.76 $ 9.35
Total Investment Return:
Based on net asset value per share (1.54%) 8.07% 9.66% 12.62% 7.75%
Ratios to Average Net Assets:
Expenses, excluding distribution fees .68% .65% .67% .66% .60%
Expenses .83% .80% .82% .81% .75%
Investment income--net 5.55% 5.34% 6.24% 7.66% 8.24%
Supplemental Data:
Net assets, end of year (in thousands) $81,407 $122,283 $94,798 $125,888 $151,891
Portfolio turnover 172.51% 204.80% 156.12% 202.11% 68.74%
</TABLE>
See Notes to Financial Statements
21
<PAGE>
Merrill Lynch Institutional Intermediate Fund
Notes to Financial Statements
October 31, 1994
1. Significant Accounting Policies:
Merrill Lynch Institutional Intermediate Fund (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities traded in the
over-the-counter markets are valued at the last available bid price or yield
equivalent as obtained from dealers who make a market in the securities. US
Government securities and securities issued by Federal agencies are traded in
the over-the-counter market. Securities with remaining maturities of sixty
days or less are valued at amortized cost, which approximates market value.
(b) Repurchase agreements--The Fund invests in US Government securities
pursuant to repurchase agreements with a member bank of the Federal Reserve
System or a primary dealer in US Government securities. Under such
agreements, the bank or primary dealer agrees to repurchase the security at a
mutually agreed upon time and price. The Fund takes possession of the
underlying securities, marks to market such securities and, if necessary,
receives additions to such securities daily to ensure that the contract is
fully collateralized.
(c) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no
Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of discount and premium) is
recognized on the accrual basis. Realized gains and losses on security
transactions are determined on the identified cost basis.
(e) Prepaid registration fees--Prepaid registration fees are charged to
expense as the related shares are issued.
(f) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded
on the ex-dividend dates.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). Effective January 1, 1994, the investment
advisory business of MLAM was reorganized from a corporation to a limited
partnership. Both prior to and after the reorganization, ultimate control
of MLAM was vested with Merrill Lynch & Co., Inc. ("ML & Co."). The general
partner of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of ML & Co. The limited partners are ML & Co. and Merrill Lynch
Investment Management, Inc. ("MLIM"), which is also an indirect wholly-owned
subsidiary of ML & Co. The Fund has also entered into a Distribution Agreement
and a Distribution Plan with Merrill Lynch Funds Distributor, Inc. ("MLFD" or
"Distributor"), a wholly-owned subsidiary of MLIM.
MLAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at the annual rate of 0.40% of the average daily net assets of
the Fund. The Investment Advisory Agreement obligates MLAM to reimburse the
Fund to the extent the Fund's expenses (excluding interest, taxes,
distribution fees, brokerage fees and commissions, and extraordinary items)
exceed 2.5% of the Fund's first $30 million of average daily net assets, 2.0%
of the Fund's next $70 million of average daily net assets, and 1.5% of the
average daily net assets in excess thereof.
22
<PAGE>
Merrill Lynch Institutional Intermediate Fund
Notes to Financial Statements (concluded)
October 31, 1994
The Fund has adopted a Distribution Plan (the "Plan") in accordance with Rule
12b-1 under the Investment Company Act of 1940 pursuant to which MLFD
receives a fee from the Fund at the end of each month at the annual rate of
0.15% of the average daily net assets of the Fund.
This fee is to compensate MLFD for the services it provides and the expenses
borne by MLFD under the Distribution Agreement. As authorized by the Plan,
MLFD has entered into an agreement with Merrill Lynch, Pierce, Fenner & Smith
Inc. ("MLPF&S"), which provides for the compensation of MLPF&S for providing
distribution-related services to the Fund. Such services relate to the sale,
promotion, and marketing of the shares of the Fund. For the year ended
October 31, 1994, MLFD earned $161,849 under the Plan, all of which was paid
to MLPF&S pursuant to the agreement.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
MLAM, MLIM, MLFD, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1994 were $173,345,421 and $205,023,048, respectively.
Net realized and unrealized losses as of October 31, 1994 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $(3,224,103) $(3,584,510)
Total $(3,224,103) $(3,584,510)
As of October 31, 1994, net unrealized depreciation for Federal income tax
purposes aggregated $3,584,510, all of which related to depreciated
securities. The aggregate cost of investments at October 31, 1994 for Federal
income tax purposes was $84,023,890.
4. Transactions in Shares of Beneficial
Interest:
Transactions in shares of beneficial interest were as follows:
For the Year Ended Dollar
October 31, 1994 Shares Amount
Shares sold 5,913,743 $ 59,626,089
Shares issued to
shareholders in reinvestment
of dividends 463,849 4,617,973
Total issued 6,377,592 64,244,062
Shares redeemed (9,756,363) (97,067,197)
Net decrease (3,378,771) $(32,823,135)
For the Year Ended Dollar
October 31, 1993 Shares Amount
Shares sold 12,060,223 $ 123,470,232
Shares issued to
shareholders in reinvestment
of dividends 397,889 4,063,233
Total issued 12,458,112 127,533,465
Shares redeemed (10,016,625) (102,339,357)
Net increase 2,441,487 $ 25,194,108
5. Capital Loss Carryforward:
At October 31, 1994, the Fund had a net capital loss carryforward of
approximately $39,104,000, ($17,071,000 expiring in 1995, $8,336,000 expiring
in 1996, $5,830,000 expiring in 1997, $4,643,000 expiring in 1998, and
$3,224,000 expiring in 2002). This amount will be available to offset like
amounts of any future taxable gains.
23
<PAGE>
MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
One Financial Center, Fifteenth Floor
Boston, Massachusetts 02111-2646
MANAGER
Merrill Lynch Asset Management
P.O. Box 9011
Princeton, New Jersey 08543-9011
CUSTODIAN & TRANSFER AGENT
State Street Bank and Trust Company
P.O. Box 8500
Boston, Massachusetts 02266-8500
LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
<PAGE>
TABLE OF CONTENTS
PAGE
----
Investment Objective and Policies....... 2
Investment Restrictions................. 2
Management of the Fund.................. 4
Management and Advisory Arrangements.... 7
Portfolio Transactions.................. 8
Redemption of Shares.................... 10
Dividends, Distributions and Taxes...... 10
Distributor............................. 12
Performance Data........................ 13
General Information..................... 14
Independent Auditors' Report............ 16
Financial Statements.................... 17
Code 10432-0295
Statement of
Additional Information
[INSERT ART HERE]
- ---------------------------------------------
MERRILL LYNCH
INSTITUTIONAL
INTERMEDIATE FUND
February 27, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
