MERRILL LYNCH INSTITUTIONAL INTERMEDIATE FUND
[COMPASS GRAPHIC]
Annual Report
October 31, 1996
<PAGE>
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Dear Shareholder:
We are pleased to provide you with this Annual Report for Merrill Lynch
Institutional Intermediate Fund. For the year ended October 31, 1996, the Fund's
total investment return was +4.87%, based on a change in per share net asset
value from $9.82 to $9.68, and assuming reinvestment of $0.602 per share income
dividends. Based on the month-end per share net asset value of $9.68 for the
same period, these dividends represented a net annualized yield of 6.21%.
For the quarter ended October 31, 1996, the Fund's total investment return
was +2.52%, based on a change in per share net asset value from $9.59 to $9.68,
and assuming reinvestment of $0.149 per share income dividends. Based on the
month-end net asset value of $9.68 per share for the same period, these
dividends represented a net annualized yield of 6.12%. The Fund's standardized
30-day yield as of October 31, 1996 was 5.50%. (Additional performance
information, including average annual total returns, can be found on page 3 of
this letter to shareholders.)
Fiscal Year in Review
We continued to remain defensive in this environment by shortening the
average duration of the Fund from 2.41 years in January to as low as 1.97 years
in July. We accomplished this strategy by trading down the yield curve, and by
exchanging into shorter maturities. As the tone of the market improved in the
fall, we extended maturity again and maintained the portfolio's mix of Federal
agency issues and Treaury securities. At October 31, 1996 we had a duration of
2.44 years. The Fund's total return benefited by our extending duration as a
result of the steepness of the yield curve in the intermediate term.
Shareholder Vote
As this report to shareholders went to press, shareholders were expected to
vote on the following proposals at a meeting scheduled to be held December 23,
1996:
(bullet) Amending the investment objective of the Fund to seeking the highest
possible current income consistent with the protection of capital
afforded by investing in intermediate-term debt securities issued or
guaranteed by the US Government, its agencies or instrumentalities with
a maximum maturity not to exceed 15 years.
(bullet) Changing the Fund's name.
(bullet) Amending the fundamental investment restrictions of the Fund.
(bullet) Enabling the Fund to issue four classes of shares, Class A, Class B,
Class C and Class D, whereby the Fund's existing shares would be
reclassified as Class D Shares, and holders of reclassified shares
would be permitted to purchase additional Class D Shares without sales
charge but would be subject to an ongoing 0.10% annual account
maintenance fee as compared to the 0.15% annual distribution fee
currently imposed.
If approved by the Fund's shareholders, it is likely that these proposals will
be implemented on or about December 31, 1996.
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In Conclusion
We thank you for your continued investment in Merrill Lynch Institutional
Intermediate Fund, and we look forward to discussing our outlook and strategy
with you in our upcoming quarterly report to shareholders.
Sincerely,
/s/ Robert W. Crook
- -------------------
Robert W. Crook
President and Trustee
/s/ Jay C. Harbeck
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Jay C. Harbeck
Vice President and Portfolio Manager
November 26, 1996
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TRUSTEES, OFFICERS AND PORTFOLIO MANAGER
Robert W. Crook*
President & Trustee
Senior Vice President,
Merrill Lynch Asset Management, L.P.
A. Bruce Brackenridge
Trustee
Retired Group Executive,
J.P. Morgan & Co. Inc.
Charles C. Cabot, Jr.
Trustee
Partner, Sullivan & Worcester
James T. Flynn
Trustee
Retired Chief Financial Officer,
J.P. Morgan & Co., Inc.
Terry K. Glenn*
Trustee
Executive Vice President,
Merrill Lynch Asset Management, L.P.
George W. Holbrook, Jr.
Trustee
Managing Partner,
Bradley Resources Company
W. Carl Kester
Trustee
MBA Class of 1958 Professor of Business
Administration,
Harvard University Graduate School of
Business Administration
William E. Aldrich
Executive Vice President
Michael J. Brady
Senior Vice President
William M. Breen
Senior Vice President
James J. Fatseas
Senior Vice President
N. John Hewitt
Senior Vice President
William Wasel
Senior Vice President
Karen D. Barbato
Vice President
Ann Catlin
Vice President
Charles O. Daly
Vice President
Diana Frankland
Vice President
Jay C. Harbeck
Vice President and Portfolio Manager
Mark E. Maguire
Vice President
Dianne F. McDonough
Vice President
Patricia A. Schena
Vice President
Barry F. X. Smith
Vice President
Gerald M. Richard
Treasurer
Jerry Weiss
Secretary
* May be deemed to be an "interested person" of the Fund as such term is defined
in the Investment Company Act of 1940.
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Merrill Lynch Institutional Intermediate Fund
Total Return Based on a $10,000 Investment
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[TABULAR REPRESENTATION OF LINE CHART]
ML Institutional ML Government U.S. Treasury
Intermediate Fund Intermediate-Term Bond Index++
11/06/86** 10,000 10,000
10/87 10,318 10,318
10/88 11,070 11,239
10/89 12,080 12,393
10/90 13,016 13,373
10/91 14,659 15,274
10/92 16,074 16,930
10/93 17,371 18,615
10/94 17,104 18,140
10/95 18,643 20,476
10/96 19,551 21,611
* Assuming transaction costs and other operating expenses, including advisory
fees.
** Commencement of operations.
+ ML Institutional Intermediate Fund intends to invest only in those assets
(including assets subject to repurchase agreements) which will permit shares
of the Fund to qualify as both "liquid assets" under the regulations of the
Office of Thrift Supervision in the Department of the Treasury and as an
investment permitted by the regulations of the National Credit Union
Administration.
+++This unmanaged Index is comprised of 39 US Treasury securities maturing in
from three to five years.
Past performance is not predictive of future performance.
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Average Annual Total Returns % Return
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Year Ended 9/30/96 +4.32%
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Five Years Ended 9/30/96 +5.90
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Inception (November 6, 1986) through 9/30/96 +6.86
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Merrill Lynch Institutional Intermediate Fund
Schedule of Investments
As of October 31, 1996
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<TABLE>
<CAPTION>
Interest Maturity Value
Issue Face Amount Rate Date (Note 1a)
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US Government & Agency Obligations--99.5%
<S> <C> <C> <C> <C>
============================================================================================
US Treasury Notes $ 9,500,000 8.125% 2/15/98 $ 9,786,520
1,000,000 8.875 2/15/99 1,064,370
2,000,000 6.875 7/31/99 2,048,740
3,000,000 7.75 1/31/00 3,156,090
4,000,000 7.125 2/29/00 4,137,480
2,000,000 6.75 4/30/00 2,047,500
1,000,000 6.25 8/31/00 1,007,660
4,000,000 6.375 3/31/01 4,046,240
6,000,000 6.25 4/30/01 6,040,320
2,000,000 6.625 7/31/01 2,042,180
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Federal Home Loan Mortgage Corporation 2,422,000 5.55 11/01/96 2,422,000
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Federal National Mortgage Association 4,000,000 7.00 8/11/99 4,031,880
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Student Loan Marketing Association 5,000,000 7.50 3/08/00 5,207,800
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Total US Government & Agency Obligations (Cost--$47,231,818) 47,038,780
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Total Investments (Cost--$47,231,818)--99.5% 47,038,780
Other Assets Less Liabilities--0.5% 242,440
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Net Assets--100.0% $47,281,220
===========
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</TABLE>
See Notes to Financial Statements.
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Merrill Lynch Institutional Intermediate Fund
Statement of Assets and Liabilities
As of October 31, 1996
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<TABLE>
<CAPTION>
<S> <C> <C>
Assets:
Investments, at value (identified cost--$47,231,818) (Notes 1a & 1b) $ 47,038,780
Cash 1,186
Interest receivable 511,079
Prepaid registration fees and other assets (Note 1e) 87,053
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Total assets 47,638,098
------------
Liabilities:
Payables:
Dividends to shareholders (Note 1f) $239,539
Beneficial interest redeemed 30,000
Investment adviser (Note 2) 16,719
Distributor (Note 2) 6,270 292,528
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Accrued expenses and other liabilities 64,350
------------
Total liabilities 356,878
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Net Assets $ 47,281,220
============
Net Assets Consist of:
Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized $ 488,342
Paid-in capital in excess of par 63,654,950
Accumulated realized capital losses on investments -- net (Note 5) (16,669,034)
Unrealized depreciation on investments -- net (193,038)
------------
Net Assets--Equivalent to $9.68 per share based on 4,883,424
shares of beneficial interest outstanding $ 47,281,220
============
</TABLE>
See Notes to Financial Statements.
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Merrill Lynch Institutional Intermediate Fund
Statement of Operations
For the Year Ended October 31, 1996
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<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income (Note 1d):
Interest and amortization of premium and discount earned $4,155,917
Expenses:
Investment advisory fees (Note 2) $231,551
Distribution fees (Note 2) 86,832
Professional fees 67,343
Registration fees (Note 1e) 41,891
Accounting services (Note 2) 32,660
Trustees' fees and expenses 30,000
Transfer agent fees (Note 2) 28,798
Printing and shareholder reports 27,362
Custodian fees 13,429
Insurance 3,303
Pricing fees 631
Other 839
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Total expenses 564,639
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Investment income--net 3,591,278
Realized & Unrealized Loss on Investments--Net (Notes 1d & 3):
Realized loss on investments--net (976,648)
Change in unrealized depreciation on investments--net (2,927)
----------
Net Increase in Net Assets Resulting from Operations $2,611,703
==========
</TABLE>
See Notes to Financial Statements.
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Merrill Lynch Institutional Intermediate Fund
Statements of Changes in Net Assets
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<TABLE>
<CAPTION>
For the Year Ended
October 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
Operations:
Investment income--net $ 3,591,278 $ 4,325,960
Realized loss on investments--net (976,648) (1,995,513)
Change in unrealized appreciation/depreciation on
investments--net (2,927) 3,394,399
------------ ------------
Net increase in net assets resulting from operations 2,611,703 5,724,846
------------ ------------
Dividends to Shareholders (Note 1f):
Investment income--net (3,591,278) (4,325,960)
------------ ------------
Net decrease in net assets resulting from dividends
to shareholders (3,591,278) (4,325,960)
------------ ------------
Beneficial Interest Transactions (Note 4):
Net decrease in net assets derived from beneficial interest
transactions (16,877,924) (17,667,570)
------------ ------------
Net Assets:
Total decrease in net assets (17,857,499) (16,268,684)
Beginning of year 65,138,719 81,407,403
------------ ------------
End of year $ 47,281,220 $ 65,138,719
============ ============
</TABLE>
See Notes to Financial Statements.
<PAGE>
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Merrill Lynch Institutional Intermediate Fund
Financial Highlights
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The following per share data and ratios have
been derived from information provided in
the financial statements.
<TABLE>
<CAPTION>
Increase (Decrease) in Net Asset Value: For the Year Ended October 31,
----------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $9.82 $9.60 $10.31 $10.06 $ 9.76
------- ------- ------- ------- -------
Investment income--net .61 .62 .55 .54 .62
Realized and unrealized gain (loss) on
investments--net (.14) .22 (.71) .25 .30
------- ------- ------- ------- -------
Total from investment operations .47 .84 (.16) .79 .92
------- ------- ------- ------- -------
Less dividends from investment
income--net (.61) (.62) (.55) (.54) (.62)
------- ------- ------- ------- -------
Net asset value, end of year $9.68 $9.82 $ 9.60 $10.31 $10.06
======= ======= ======= ======== =======
Total Investment Return:
Based on net asset value per share 4.87% 9.00% (1.54%) 8.07% 9.66%
======= ======= ======= ======== =======
Ratios to Average Net Assets:
Expenses .97% .96% .83% .80% .82%
======= ======= ======= ======== =======
Investment income--net 6.19% 6.38% 5.55% 5.34% 6.24%
======= ======= ======= ======== =======
Supplemental Data:
Net assets, end of year (in thousands) $47,281 $65,139 $81,407 $122,283 $94,798
======= ======= ======= ======== =======
Portfolio turnover 51.44% 47.90% 172.51% 204.80% 156.12%
======= ======= ======= ======== =======
</TABLE>
See Notes to Financial Statements.
<PAGE>
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Merrill Lynch Institutional Intermediate Fund
Notes to Financial Statements
October 31, 1996
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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 substantially 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"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch
& Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also
entered into a Distribution Agreement and Distribution Plan with Merrill
Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
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 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
<PAGE>
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Merrill Lynch Institutional Intermediate Fund
Notes to Financial Statements (concluded)
October 31, 1996
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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, 1996, MLFD earned $86,832 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, PSI, MLFD, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1996 were $28,097,734 and $44,532,305, respectively.
Net realized and unrealized losses as of October 31, 1996 were as follows:
- ---------------------------------------------------
Realized Unrealized
Losses Losses
- ---------------------------------------------------
Long-term investments $(976,648) $(193,038)
--------- ---------
Total $(976,648) $(193,038)
========= =========
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As of October 31, 1996, net unrealized depreciation for Federal income tax
purposes aggregated $193,038, of which $547,831 related to appreciated
securities and $740,869 related to depreciated securities. The aggregate cost of
investments at October 31, 1996 for Federal income tax purposes was $47,231,818.
4. Transactions in Shares of Beneficial Interest:
Transactions in shares of beneficial interest were as follows:
- -------------------------------------------------
For the Year Ended Dollar
October 31, 1996 Shares Amount
- -------------------------------------------------
Shares sold 3,906,826 $ 37,917,545
Shares issued to
shareholders in
reinvestment of
dividends 310,652 3,023,342
---------- ------------
Total issued 4,217,478 40,940,887
Shares redeemed (5,964,956) (57,818,811)
---------- ------------
Net decrease (1,747,478) $(16,877,924)
========== ============
- -------------------------------------------------
- -------------------------------------------------
For the Year Ended Dollar
October 31, 1995 Shares Amount
- -------------------------------------------------
Shares sold 2,117,377 $ 20,392,534
Shares issued to
shareholders in
reinvestment of
dividends 344,636 3,329,426
---------- ------------
Total issued 2,462,013 23,721,960
Shares redeemed (4,312,941) (41,389,530)
---------- ------------
Net decrease (1,850,928) $(17,667,570)
========== ============
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5. Capital Loss Carryforward:
At October 31, 1996, the Fund had a net capital loss carryforward of
approximately $16,669,000, of which $5,830,000 expires in 1997, $4,643,000
expires in 1998, $3,224,000 expires in 2002, $1,995,000 expires in 2003, and
$977,000 expires in 2004. This amount will be available to offset like amounts
of any future taxable gains. Expired capital loss carryforward in the amount of
$8,336,446 has been reclassified to paid-in capital in excess of par.
6. Shareholder Meeting:
A shareholder meeting is scheduled to take place on December 23, 1996. At this
meeting, shareholders will vote on proposals to amend the investment objective
and fundamental investment restrictions of the Fund, change the Fund's name and
enable the Fund to issue four classes of shares under the Merrill Lynch Select
Pricing(SM) System.
<PAGE>
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Independent Auditors' Report
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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, 1996, the related statements of operations for the year then
ended and 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, 1996 by correspondence with the custodian. 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, 1996, 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 6, 1996
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Important Tax Information (unaudited)
- -------------------------------------------------------------------------------
None of the ordinary income distributions paid monthly by Merrill Lynch
Institutional Intermediate Fund during its fiscal year ended October 31, 1996
qualify for the dividends received deduction for corporations. Additionally,
there were no long-term capital gains distributions paid during the year.
The law varies in each state as to whether and what percentage of dividend
income attributable to Federal obligations is exempt from state income tax. We
recommend that you consult your tax adviser to determine if any portion of the
dividends you received is exempt from state income tax.
Listed in the table at right are the percentages of total assets of the Fund
invested in Federal obligations as of the end of each quarter of the fiscal
year:
- -----------------------------------------
Percentage of
Quarter Ended Federal Obligations*
----------------- ----------------------
January 31, 1996 84.18%
April 30, 1996 84.54%
July 31, 1996 80.42%
October 31, 1996 85.19%
- -----------------------------------------
Of the Fund's ordinary income dividends paid monthly during its fiscal year
ended October 31, 1996, 89.87% was attributable to Federal obligations. In
calculating the foregoing percentage, expenses of the Fund have been allocated
on a pro-rata basis.
Please retain this information for your records.
*For purposes of this calculation, Federal obligations include US Treasury
Notes, US Treasury Bills, and US Treasury Bonds. Also included are obligations
issued by the following agencies: Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Land Banks, Federal Home Loan Banks, and the Student Loan
Marketing Association. Repurchase agreements are not included in this
calculation.
<PAGE>
Distributor
Merrill Lynch Funds Distributor, Inc.
One Financial Center, 23rd Floor
Boston, Massachusetts 02111
Manager
Merrill Lynch Asset Management, L.P.
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
This report is not authorized for use as an offer of sale or a solicitation to
buy shares of the Fund unless accompanied or preceded by the Fund's current
prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may
be worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch Institutional
Intermediate Fund
One Financial Center, 23rd Floor
Boston, Massachusetts 02111
