Merrill Lynch
U.S.A. Government
Reserves
FUND LOGO
Annual Report August 31, 1994
Officers and Trustees
Arthur Zeikel--President and Trustee
Donald Cecil--Trustee
M. Colyer Crum--Trustee
Edward H. Meyer--Trustee
Jack B. Sunderland--Trustee
J. Thomas Touchton--Trustee
Terry K. Glenn--Executive Vice President
Joseph T. Monagle, Jr.--Executive Vice President
Donald C. Burke--Vice President
Linda B. Costanzo--Vice President
Gerald M. Richard--Treasurer
Mark B. Goldfus--Secretary
Custodian
The Bank of New York
110 Washington Street
New York, New York 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 221-7210
<PAGE>
This report is not authorized for use as an offer of sale or a
solicitation of an offer 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, which will fluctuate. The Fund
seeks to maintain a consistent $1.00 net asset value per share,
although this cannot be assured. An investment in the Fund is
neither insured nor guaranteed by the US Government.
Merrill Lynch
U.S.A. Government Reserves
Box 9011
Princeton, NJ 08543-9011
Dear Shareholder:
For the year ended August 31, 1994, Merrill Lynch U.S.A. Government
Reserves paid shareholders a net annualized dividend of 2.84%*. For
the six-month period ended August 31, 1994, the fund's net
annualized dividend was 3.13%*. The fund's 7-day yield as of August
31, 1994 was 3.78% (including gains and losses) and 3.77% (excluding
gains and losses).
The Environment
Concerns of increasing inflationary pressures continued to prompt
volatility in the US stock and bond markets during the March--August
period. In addition, the weakness of the US dollar in foreign
exchange markets prolonged stock and bond market declines during
July. While the immediate concerns regarding the US dollar had
diminished by late July, the possibility of continued tightening by
the Federal Reserve Board resurfaced after Chairman Alan Greenspan
gave his most recent Congressional testimony. However, a lower-than-
expected rate of growth reported for the US economy during the
second calendar quarter allayed inflationary concerns to some
degree, despite the fifth increase in short-term interest rates so
far this year made by the central bank in mid-August.
While the economic recovery is continuing, data suggest that it is
losing some momentum. Consumer spending is increasing, but at a
relatively slow pace, and existing home sales may have peaked. In
the industrial sector, capital goods spending is still on the rise,
but the gain for the second quarter was revised downward to 6.5%. On
balance, growth in US industry is progressing at a steady, modest
rate.
<PAGE>
[FN]
*Based on a constant investment throughout the period, with
dividends compounded daily, and reflecting a net return to the
investor after all expenses.
Despite evidence of a moderating trend in the US economy, Chairman
Greenspan indicated in his July Humphrey-Hawkins testimony that the
central bank would prefer to err on the side of too much monetary
tightening rather than too little. In the weeks ahead, investors
will continue to assess economic data and inflationary trends in
order to gauge whether further increases in short-term interest
rates are imminent. Continued indications of moderate and sus-
tainable levels of economic growth would be positive for the US
capital markets.
Portfolio Matters
The six-month period ended August 31, 1994 marked a dramatic shift
in market outlook as fixed-income markets endured a continuous rise
in interest rates. The fund was well positioned during this
difficult time as we maintained a large position in repurchase
agreements. The portfolio therefore was able to experience an
immediate benefit from the rapid rise in the Federal Funds rate by
receiving increased income resulting from the frequent rolling of
maturing repurchase agreements. From the end of February to the end
of July, the fund's position in repurchase agreements ranged between
80%--86% of net assets.
As the Federal Funds rate has risen, interest rates on US Treasury
bills have risen correspondingly, to the point of anticipating
future interest rate increases. We have selectively added to the
portfolio's holdings of Treasury bills at times when yields on three-
month Treasury bills have exceeded yields on repurchase agreements.
The continuous anticipation of interest rate hikes has kept the
yield curve steep between three-month and six-month Treasury bills.
Accordingly, the fund moved into six-month Treasury bills when
interest rates offered the advantage of quickly "rolling down" the
yield curve. At the end of August, Treasury bills accounted for 19%
of the portfolio's net assets, up from 11% at the beginning of July.
The average life of the portfolio ranged from 32 days to 46 days
during the six-month period ended August 31, 1994. At this point,
the preemptive strikes against inflation administered thus far by
the Federal Reserve Board may be enough to allow for a period of
price stability in the credit market. Perceptions of slower economic
growth and fewer interest rate hikes in the future could prompt us
to adopt a more optimistic assessment of the market.
<PAGE>
In Conclusion
We appreciate your ongoing support of Merrill Lynch U.S.A.
Government Reserves, and we look forward to sharing our investment
outlook and strategy with you in our upcoming semi-annual report to
shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Linda B. Costanzo)
Linda B. Costanzo
Vice President and Portfolio Manager
September 29, 1994
Important Tax Information
None of the ordinary income distributions paid daily by Merrill
Lynch U.S.A. Government Reserves during the fiscal year ended August
31, 1994 qualify for the dividends received deduction for
corporations. Additionally, there were no long-term capital gains
distributed 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 below are the percentages of total assets of the Fund
invested in Federal obligations as of the end of each quarter of the
fiscal year:
<PAGE>
For the Percentage of
Quarter Ended Federal Obligations*
November 30, 1993 25.01%
February 28, 1994 18.65
May 31, 1994 13.19
August 31, 1994 25.05
Of the Fund's dividends paid daily to shareholders from ordinary
income during the fiscal year ended August 31, 1994, 24.21% was
attributable to Federal obligations. In calculating the foregoing
percentage, Fund expenses have been allocated on a pro-rata basis.
Please retain this information for your records.
[FN]
*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.
Merrill Lynch U.S.A. Government Reserves
Schedule of Investments as of August 31, 1994 (in Thousands)
Face Interest Maturity Value
Issue Amount Rate Date (Note 1a)
US Government Obligations--27.2%
US Treasury Bills* $ 25,000 4.28 % 10/20/94 $ 24,847
20,000 4.42 10/20/94 19,877
20,000 4.575 12/01/94 19,768
20,000 4.92 2/09/95 19,567
20,000 4.91 3/02/95 19,505
US Treasury Notes 20,000 3.875 2/28/95 19,881
10,000 4.125 6/30/95 9,898
10,000 4.25 7/31/95 9,889
5,000 3.875 8/31/95 4,920
Total US Government Obligations
(Cost--$148,625) 148,152
<PAGE>
Face
Amount Issue
Repurchase Agreements**--81.4%
$27,000 BT Securities Inc., purchased
on 8/26/94 to yield 4.63% to 9/02/94 27,000
27,000 Bear Stearns & Co. Inc., purchased
on 8/31/94 to yield 4.68% to 9/07/94 27,000
27,000 CS First Boston Corp., purchased
on 8/29/94 to yield 4.65% to 9/06/94 27,000
27,000 Chemical Securities, Inc., purchased
on 8/29/94 to yield 4.67% to 9/06/94 27,000
27,000 Citicorp Securities Inc., purchased on
8/31/94 to yield 4.70% to 9/07/94 27,000
27,000 Daiwa Securities America, Inc., NY,
purchased on 8/25/94 to yield 4.60% to
9/01/94 27,000
27,000 Dean Witter Reynolds, Inc., purchased on
8/26/94 to yield 4.63% to 9/02/94 27,000
Face Value
Amount Issue (Note 1a)
Repurchase Agreements** (concluded)
$10,996 First Chicago Capital Markets Inc.,
purchased on 8/31/94 to yield 4.80% to
9/01/94 $ 10,996
27,000 Fuji Securities, Inc., purchased
on 8/25/94 to yield 4.625% to 9/01/94 27,000
27,000 Goldman Sachs & Co., purchased
on 8/30/94 to yield 4.65% to 9/06/94 27,000
27,000 Morgan (J.P.) Securities, Inc., purchased
on 8/30/94 to yield 4.65% to 9/06/94 27,000
27,000 Nomura Securities International, Inc.,
purchased on 8/31/94 to yield 4.67% to
9/07/94 27,000
27,000 PaineWebber Inc., purchased on 8/31/94
to yield 4.68% to 9/07/94 27,000
27,000 Prudential Securities, Inc.,
purchased on 8/30/94 to yield 4.65%
to 9/06/94 27,000
27,000 SBC Government Securities Inc., purchased
on 8/26/94 to yield 4.625% to 9/02/94 27,000
27,000 Sanwa Securities USA Co., L.P., purchased
on 8/25/94 to yield 4.60% to 9/01/94 27,000
27,000 Smith Barney, Inc., purchased
on 8/29/94 to yield 4.68% to 9/06/94 27,000
<PAGE>
Total Repurchase Agreements
(Cost--$442,996) 442,996
Total Investments (Cost--$591,621)--108.6% 591,148
Liabilities in Excess of Other Assets--(8.6%) (46,974)
--------
Net Assets--100.0% $544,174
========
[FN]
*US Treasury Bills are traded on a discount basis; the interest
rates shown are the discount rates paid at the time of purchase by
the Fund.
**Repurchase Agreements are fully collateralized by US Government &
Agency Obligations.
See Notes to Financial Statements.
<TABLE>
Merrill Lynch U.S.A. Government Reserves
Statement of Assets and Liabilities as of August 31, 1994
<S> <C> <C>
Assets:
Investments, at value (identified cost--$591,621,454*) (Note 1a) $ 591,147,615
Cash 3,996
Receivables:
Interest $ 251,043
Beneficial interest sold 15,715 266,758
-------------
Prepaid registration fees and other assets (Note 1d) 67,934
--------------
Total assets 591,486,303
--------------
Liabilities:
Payables:
Securities purchased 39,271,747
Beneficial interest redeemed 7,506,369
Investment adviser (Note 2) 229,822
Distributor (Note 2) 134,019 47,141,957
-------------
Accrued expenses and other liabilities 170,045
--------------
Total liabilities 47,312,002
--------------
Net assets $ 544,174,301
==============
Net Assets Consist of:
Shares of beneficial interest, $0.10 par value, unlimited number of shares authorized $ 54,464,814
Paid-in capital in excess of par 490,183,326
Unrealized depreciation on investments--net* (473,839)
--------------
Net Assets--Equivalent to $1.00 per share, based on 544,648,140 shares of beneficial
interest outstanding $ 544,174,301
==============
<PAGE>
<FN>
*Cost for Federal income tax purposes. As of August 31, 1994, net unrealized
depreciation for Federal income tax purposes amounted to $473,839, of which $11,417
related to appreciated securities and $485,256 related to depreciated securities.
</TABLE>
<TABLE>
Merrill Lynch U.S.A. Government Reserves
Statement of Operations for the Year Ended August 31, 1994
<S> <C> <C>
Investment Income (Note 1c):
Interest and amortization of premium and discount earned $ 20,730,366
Expenses:
Investment advisory fees (Note 2) $ 2,581,756
Transfer agent fees (Note 2) 882,238
Distribution fees (Note 2) 681,261
Registration fees (Note 1d) 210,056
Professional fees 73,651
Accounting services (Note 2) 70,723
Printing and shareholder reports 67,053
Trustees' fees and expenses 43,900
Custodian fees 40,651
Other 10,225
-------------
Total expenses 4,661,514
--------------
Investment income--net 16,068,852
Realized Gain on Investments--Net (Note 1c) 99,437
Change in Unrealized Appreciation/Depreciation on Investments--Net (542,027)
--------------
Net Increase in Net Assets Resulting from Operations $ 15,626,262
==============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch U.S.A. Government Reserves For the Year Ended August 31,
Statements of Changes in Net Assets 1994 1993
<S> <C> <C>
Increase (Decrease) in Net Assets:
Operations:
Investment income--net $ 16,068,852 $ 15,010,689
Realized gain on investments--net 99,437 808,358
Change in unrealized appreciation/depreciation on investments--net (542,027) (388,973)
-------------- --------------
Net increase in net assets resulting from operations 15,626,262 15,430,074
-------------- --------------
Dividends & Distributions to Shareholders (Note 1f):
Investment income--net (16,068,852) (15,010,689)
Realized gain on investments--net (99,437) (808,358)
-------------- --------------
Net decrease in net assets resulting from dividends and distributions to
shareholders (16,168,289) (15,819,047)
-------------- --------------
Beneficial Interest Transactions (Note 3):
Net proceeds from sale of shares 1,560,756,479 1,541,281,030
Net asset value of shares issued to shareholders in reinvestment of
dividends (Note 1f) 16,149,544 15,804,764
-------------- --------------
1,576,906,023 1,557,085,794
Cost of shares redeemed (1,607,233,265) (1,565,720,173)
-------------- --------------
Net decrease in net assets derived from beneficial
interest transactions (30,327,242) (8,634,379)
-------------- --------------
Net Assets:
Total decrease in net assets (30,869,269) (9,023,352)
Beginning of year 575,043,570 584,066,922
-------------- --------------
End of year $ 544,174,301 $ 575,043,570
============== ==============
</TABLE>
<PAGE>
<TABLE>
Merrill Lynch U.S.A. Government Reserves
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment income--net .0280 .0248 .0365 .0602 .0755
Realized and unrealized gain (loss) on
investments--net (.0007) .0007 .0046 .0013 .0004
-------- -------- -------- -------- --------
Total from investment operations .0273 .0255 .0411 .0615 .0759
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.0280) (.0248) (.0365) (.0602) (.0755)
Realized gain on investments--net (.0002) (.0013) (.0038) (.0013)* (.0004)*
-------- -------- -------- -------- --------
Total dividends and distributions (.0282) (.0261) (.0403) (.0615) (.0759)
-------- -------- -------- -------- --------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Investment Return 2.84% 2.64% 4.15% 6.37% 7.89%
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses, excluding distribution fees .69% .63% .63% .61% .67%
======== ======== ======== ======== ========
Expenses .81% .75% .75% .73% .81%
======== ======== ======== ======== ========
Investment income and realized gain on
investments--net 2.82% 2.61% 4.10% 6.07%* 7.57%*
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of year (in thousands) $544,174 $575,044 $584,067 $658,207 $438,829
======== ======== ======== ======== ========
<FN>
*Includes unrealized gain (loss).
See Notes to Financial Statements.
</TABLE>
<PAGE>
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch U.S.A. Government Reserves (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
investment management company. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Investments maturing more than sixty
days after the valuation date are valued at the most recent bid
price or yield equivalent as obtained from dealers that make markets
in such securities. When securities are valued with sixty days or
less to maturity, the difference between the valuation existing on
the sixty-first day before maturity and maturity value is amortized
on a straight-line basis to maturity. Investments maturing within
sixty days from their date of acquisition are valued at amortized
cost, which approximates market. For purposes of valuation, the
maturity of a variable rate security is deemed to be the next coupon
date on which the interest rate is to be adjusted. Assets for which
market quotations are not readily available are valued at fair value
as determined in good faith by or under the direction of the
trustees of the Fund.
(b) 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.
(c) 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
premium or discount) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are
charged to expense as the related shares are issued.
(e) 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 additional
securities daily to ensure that the contract is fully
collateralized.
<PAGE>
(f) Dividends to shareholders--The Fund declares dividends daily
and reinvests daily such dividends (net of non-resident alien tax
and backup withholding tax withheld) in additional fund shares at
net asset value. Dividends are declared from the total of net
investment income and net realized gain or loss on investments.
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. For such services, the
Fund pays a monthly fee equal to an annual rate of 0.45% 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 next $70 million of average daily net
assets, and 1.5% of the average daily net assets in excess thereof.
No fee payment will be made to the Investment Adviser during the
year which will cause such expenses to exceed the expense limitation
at the time of such payment.
The Fund has a Distribution and Shareholder Servicing Plan in
accordance with Rule 12b-1 under the Investment Company Act of 1940,
pursuant to which Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S") receives a distribution fee under the Distribution
Agreement from the Fund at the end of each month at the annual rate
of 0.125% of average daily net assets of the accounts of Fund
shareholders who maintain their accounts through MLPF&S. The
distribution fee is to compensate MLPF&S financial consultants and
other directly involved branch office personnel for selling shares
of the Fund and providing direct personal services to shareholders.
The distribution fee is not compensation for the administrative and
operational services rendered to the Fund by MLPF&S in processing
share orders and administering sharebuilder accounts.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or trustees of the Fund are also officers
and/or directors of MLIM, FDS, PSI, MLAM, MLPF&S, and/or ML & Co.
<PAGE>
3. Shares of Beneficial Interest:
The number of shares sold and redeemed during the periods
corresponds to the amounts included in the Statements of Changes in
Net Assets with respect to net proceeds from sale of shares and cost
of shares redeemed, respectively, since shares are recorded at $1.00
per share.
<AUDIT-REPORT>
Independent Auditors' Report
The Board of Trustees and Shareholders,
Merrill Lynch U.S.A. Government Reserves:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Merrill Lynch
U.S.A. Government Reserves as of August 31, 1994, the related
statements of operations for the year then ended, 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 August
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 U.S.A. Government Reserves as of August 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
September 30, 1994
</AUDIT-REPORT>
