MERRILL LYNCH
U.S.A. GOVERNMENT
RESERVES
FUND LOGO
Annual Report
August 31, 1995
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
<PAGE>
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 221-7210
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
<PAGE>
DEAR SHAREHOLDER
For the year ended August 31, 1995, Merrill Lynch U.S.A. Government
Reserves paid shareholders a net annualized dividend of 4.89%*. For
the six-month period ended August 31, 1995, the fund's net
annualized dividend was 5.27%*. The fund's 7-day yield as of August
31, 1995 was 4.97% (including gains and losses) and 4.97% (excluding
gains and losses).
The Environment
During the six months ended August 31, 1995, US economic indicators
continued to suggest that economic growth is moderate and that the
rate of inflation remains low. Gross domestic product (GDP) growth
for the three months ended June 30 was revised to show that the
economy expanded at a 1.1% pace, rather than the 0.5% rate that was
originally reported. However, although the employment report for
August exceeded consensus expectations, most of the new jobs created
were in the service sector, reflecting the ongoing sluggishness in
manufacturing. In addition, total hours worked and hourly wages
declined in August. Other lackluster economic indicators included
disappointing durable goods orders in July and continued poor retail
sales results.
Throughout most of the six-month period, the US dollar was
persistently weak in foreign exchange markets. However, as the
period drew to a close, the US dollar strengthened relative to the
yen and the Deutschemark. Improving interest rate differentials
favoring the US currency, combined with coordinated central bank
intervention and more positive investor sentiment, have helped to
bolster the dollar in foreign exchange markets. Other factors that
appear to be improving the US dollar's outlook in the near term are
a pick-up in capital flows to the United States and the prospect of
increased capital outflows from Japan. However, it remains to be
seen if the US dollar's strengthening trend can continue without
significant improvements in the US budget and trade deficits.
[FN]
*Based on a constant investment throughout the period, with
dividends compounded daily, and reflecting a net return to the
investor after all expenses.
<PAGE>
In the weeks ahead, investor interest will continue to focus on US
economic activity. Clear signs of a moderate, non-inflationary
expansion would further benefit the US stock and bond markets. In
addition, should the current Federal budget deficit reduction
efforts now underway in Washington prove successful, the
implications would likely be positive for the US financial
markets.
Portfolio Matters
During the six-month period ended August 31, 1995, as market
conditions improved, we became progressively more constructive in
our strategy. The average life of the fund ranged between 37 days
(in March) and 83 days (in July), finishing the six-month period at
70 days.
Developments in the foreign exchange markets greatly influenced the
structure of short-term interest rates during the six months ended
August 31, 1995. Central banks, flush with US dollars from currency
support operations, invested heavily in the short end of the US
Treasury market, especially in Treasury bills.
Beginning in March, the Treasury bill curve began to flatten, giving
us less incentive to invest there. Concurrently, spreads between
Treasury bills and Treasury notes of comparable maturities widened,
making Treasury notes with maturities of one year and under more
attractive. We added positions in these securities in March,
exercising caution as the direction of future monetary policy was
unclear.
Short-term interest rates trended lower in April and May although
rates on repurchase agreements remained stable at around 5.90%.
Expectations regarding the course of monetary policy changed as
economic growth languished in the second quarter. Technical
conditions persisted and ultimately contributed to driving interest
rates lower. During this time, the fund was actively trading in
six-month and one-year Treasury bills.
As yields on Treasury bills declined further in June and July, we
swapped out of nearly all bill positions, moving into higher-
yielding Treasury coupon issues and repurchase agreements. We
executed extension swaps from issues with maturities under one year
to issues maturing in 13 months--18 months for a yield enhancement
and limited risk, especially after the Federal Reserve Board lowered
interest rates on July 6, 1995. Strong economic indicators in August
contributed to higher volatility, prompting additional purchases in
Treasury notes to extend duration. Although economic activity seems
to be more robust at this time (compared to early July when the
Federal Reserve Board eased), it is generally expected that the
Federal Funds target rate may be lowered again prior to year-end.
Under the current scenario of low inflationary pressures and
moderate GDP growth, monetary policy can be considered mildly
restrictive.
<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 27, 1995
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, 1995 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, 1994 32.80%
February 28, 1995 28.00
May 31, 1995 24.40
August 31, 1995 22.80
Of the fund's dividends paid daily to shareholders from ordinary
income during the fiscal year ended August 31, 1995, 28.28% 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.
SCHEDULE OF INVESTMENTS (in Thousands)
Face Interest Maturity Value
Issue Amount Rate Date (Note 1a)
US Government Obligations--23.1%
US Treasury Bills* $15,000 5.60 % 10/12/95 $ 14,905
20,000 5.835 10/12/95 19,873
7,000 5.605 5/02/96 6,743
US Treasury Notes 8,000 5.50 4/30/96 7,989
10,000 7.375 5/15/96 10,109
30,000 6.125 7/31/96 30,103
17,000 6.875 10/31/96 17,207
12,000 7.50 1/31/97 12,274
10,000 5.625 6/30/97 9,960
Total US Government Obligations
(Cost--$129,117) 129,163
<PAGE>
Face
Amount Issue
Repurchase Agreements**--77.9%
$26,000 CS First Boston Corp., purchased on
8/31/95 to yield 5.73% to 9/07/95 26,000
26,000 Chemical Securities, Inc., purchased on
8/31/95 to yield 5.80% to 9/01/95 26,000
26,000 Citicorp Securities Inc., purchased on 8/28/95
to yield 5.70% to 9/01/95 26,000
26,000 Dean Witter Reynolds, Inc., purchased on
8/30/95 to yield 5.70% to 9/06/95 26,000
26,000 First Chicago Capital Markets Inc., purchased
on 8/31/95 to yield 5.82% to 9/01/95 26,000
26,000 Fuji Securities, Inc., purchased on 8/25/95 to
yield 5.67% to 9/01/95 26,000
26,000 Goldman Sachs & Co., purchased on 8/30/95
to yield 5.69% to 9/06/95 26,000
Face Value
Amount Issue (Note 1a)
Repurchase Agreements** (concluded)
$19,183 HSBC Securities, Inc., purchased on 8/31/95
to yield 5.77% to 9/01/95 $ 19,183
26,000 Morgan (J.P.) Securities, Inc., purchased on
8/28/95 to yield 5.73% to 9/01/95 26,000
26,000 Morgan Stanley & Co., Inc., purchased on
8/28/95 to yield 5.74% to 9/01/95 26,000
26,000 Nikko Securities International Inc., purchased
on 8/31/95 to yield 5.72% to 9/07/95 26,000
26,000 Nomura Securities International, Inc.,
purchased on 8/29/95 to yield 5.72% to 9/05/95 26,000
26,000 PaineWebber Inc., purchased on 8/25/95 to
yield 5.67% to 9/01/95 26,000
26,000 SBC Capital Markets Inc., purchased on
8/25/95 to yield 5.68% to 9/01/95 26,000
26,000 Sanwa Securities USA Co., L.P., purchased
on 8/31/95 to yield 5.80% to 9/01/95 26,000
26,000 Smith Barney, Inc., purchased on 8/31/95 to
yield 5.73% due 9/08/95 26,000
26,000 UBS Securities, Inc., purchased on 8/31/95
to yield 5.83% to 9/01/95 26,000
Total Repurchase Agreements
(Cost--$435,183) 435,183
Total Investments (Cost--$564,300)--101.0% 564,346
Liabilities in Excess of Other Assets--(1.0%) (5,417)
--------
Net Assets--100.0% $558,929
========
<PAGE>
[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>
FINANCIAL INFORMATION
<CAPTION>
Statement of Assets and Liabilities as of August 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$564,299,936*) (Note 1a) $ 564,346,018
Cash 57
Receivables:
Interest $ 1,206,964
Beneficial interest sold 71,627 1,278,591
-------------
Prepaid registration fees and other assets (Note 1d) 116,585
-------------
Total assets 565,741,251
-------------
Liabilities: Payables:
Beneficial interest redeemed 6,159,789
Investment adviser (Note 2) 213,235
Distributor (Note 2) 130,378
Dividends to shareholders (Note 1f) 282 6,503,684
-------------
Accrued expenses and other liabilities 308,797
-------------
Total liabilities 6,812,481
-------------
Net Assets: Net assets $ 558,928,770
=============
Net Assets Shares of beneficial interest, $0.10 par value, unlimited
Consist of: number of shares authorized $ 55,888,269
Paid-in capital in excess of par 502,994,419
Unrealized appreciation on investments--net* 46,082
-------------
Net Assets--Equivalent to $1.00 per share, based on 558,882,687
shares of beneficial interest outstanding $ 558,928,770
=============
<FN>
*Cost for Federal income tax purposes. As of August 31, 1995, net
unrealized appreciation for Federal income tax purposes amounted to
$46,082, of which $118,906 related to appreciated securities and
$72,824 related to depreciated securities.
<PAGE>
<CAPTION>
Statement of Operations
For the Year Ended August 31, 1995
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 29,807,933
(Note 1c):
Expenses: Investment advisory fees (Note 2) $ 2,408,559
Transfer agent fees (Note 2) 1,103,025
Distribution fees (Note 2) 617,903
Registration fees (Note 1d) 96,867
Accounting services (Note 2) 78,058
Professional fees 64,860
Printing and shareholder reports 64,089
Trustees' fees and expenses 43,007
Custodian fees 42,458
Other 10,708
-------------
Total expenses 4,529,534
-------------
Investment income--net 25,278,399
-------------
Realized & Realized gain on investments--net 351,372
Unrealized Gain on Change in unrealized appreciation/depreciation on investments--net 519,921
Investments--Net -------------
(Note 1c): Net Increase in Net Assets Resulting from Operations $ 26,149,692
=============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended
August 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 25,278,399 $ 16,068,852
Realized gain on investments--net 351,372 99,437
Change in unrealized appreciation/depreciation on
investments--net 519,921 (542,027)
------------- -------------
Net increase in net assets resulting from operations 26,149,692 15,626,262
------------- -------------
<PAGE>
Dividends & Investment income--net (25,278,399) (16,068,852)
Distributions to Realized gain on investments--net (351,372) (99,437)
Shareholders ------------- -------------
(Note 1f): Net decrease in net assets resulting from dividends
and distributions to shareholders (25,629,771) (16,168,289)
------------- -------------
Beneficial Interest Net proceeds from sale of shares 1,488,684,962 1,560,756,479
Transactions Net asset value of shares issued to shareholders in
(Note 3): reinvestment of dividends and distributions (Note 1f) 25,615,698 16,149,544
------------- -------------
1,514,300,660 1,576,906,023
Cost of shares redeemed (1,500,066,112) (1,607,233,265)
------------- -------------
Net increase (decrease) in net assets derived from
beneficial interest transactions 14,234,548 (30,327,242)
------------- -------------
Net Assets: Total increase (decrease) in net assets 14,754,469 (30,869,269)
Beginning of year 544,174,301 575,043,570
------------- -------------
End of year $ 558,928,770 $ 544,174,301
============= =============
<CAPTION>
Financial Highlights
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: 1995 1994 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .0472 .0280 .0248 .0365 .0602
Realized and unrealized gain (loss) on
investments--net .0017 (.0007) .0007 .0046 .0013
-------- -------- -------- -------- --------
Total from investment operations .0489 .0273 .0255 .0411 .0615
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.0472) (.0280) (.0248) (.0365) (.0602)
Realized gain on investments--net (.0007) (.0002) (.0013) (.0038) (.0013)*
-------- -------- -------- -------- --------
Total dividends and distributions (.0479) (.0282) (.0261) (.0403) (.0615)
-------- -------- -------- -------- --------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total investment return 4.89% 2.85% 2.64% 4.15% 6.37%
======== ======== ======== ======== ========
<PAGE>
Ratios to Average Expenses, excluding distribution fees .73% .69% .63% .63% .61%
Net Assets: ======== ======== ======== ======== ========
Expenses .85% .81% .75% .75% .73%
======== ======== ======== ======== ========
Investment income and realized gain
on investments--net 4.79% 2.82% 2.61% 4.10% 6.07%*
======== ======== ======== ======== ========
Supplemental Data: Net assets, end of year (in thousands) $558,929 $544,174 $575,044 $584,067 $658,207
======== ======== ======== ======== ========
<FN>
*Includes unrealized gain (loss).
See Notes to Financial Statements.
</TABLE>
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
management investment 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 market value. 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 value. 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.
<PAGE>
(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.
(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"). 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. 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 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 MLAM during the year which will cause such expenses
to exceed the expense limitation at the time of such payment.
<PAGE>
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.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), 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 officers and/or
directors of MLAM, PSI, MLFDS, MLFD, MLPF&S, and/or ML & Co.
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, 1995, 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.
<PAGE>
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, 1995 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, 1995, 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
October 6, 1995
</AUDIT-REPORT>
