MERRILL LYNCH
U.S.A. GOVERNMENT
RESERVES
FUND LOGO
Annual Report
August 31, 1996
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. Statements and
other information herein are as dated and are subject to change.
<PAGE>
Merrill Lynch
U.S.A. Government Reserves
Box 9011
Princeton, NJ
08543-9011
DEAR SHAREHOLDER
For the year ended August 31, 1996, Merrill Lynch U.S.A. Government
Reserves paid shareholders a net annualized dividend of 4.89%*. For
the six-month period ended August 31, 1996, the fund's net
annualized dividend was 4.57%*. The fund's 7-day yield as of August
31, 1996 was 4.60%.
The average portfolio maturity for Merrill Lynch U.S.A. Government
Reserves at August 31, 1996 was 65 days, compared to 60 days at
February 29, 1996.
The Environment
During the six-month period ended August 31, 1996, economic
crosscurrents led to continued stock and bond market volatility. The
US economy has demonstrated surprising resilience thus far this
year. As a result, when economic data releases during the August
period appeared to indicate that the US economy was expanding at a
stronger-than-expected (and potentially inflationary) rate,
investors focused on the increasing possibility of monetary policy
tightening by the Federal Reserve Board. During these periods, stock
prices declined and long-term interest rates moved higher. However,
when economic results were at or below expectations, investors'
concerns about an overheating economy and monetary policy tightening
subsided, and stock and bond prices improved. In this environment,
we reduced the fund's exposure to the 18-month sector and increased
the position in repurchase agreements to 75% of net assets, thereby
limiting price erosion.
<PAGE>
The shifts in perceptions were exemplified by investors' reactions
to the release of recent employment reports. Inflationary concerns
were heightened further with the report of a stronger-than-expected
employment report for June. Unemployment fell to a six-year low, and
hourly wages rose sharply. This mounting evidence of a tighter labor
market and rising labor costs suggested to many investors that the
US central bank would be forced to raise short-term interest rates
in the coming months. However, more subdued job growth and
decelerating hourly wage gains were subsequently reported for the
month of July. Although the employment report for August (released
in early September) showed that the unemployment rate had dropped to
its lowest level since 1989, non-farm payrolls came in as expected.
Overall, the employment report was received favorably by investors.
Accordingly, we undertook modest extensions in the six-month--
one-year sector, which outperformed financing rates.
[FN]
*Based on a constant investment throughout the period, with
dividends compounded daily, and reflecting a net return to the
investor after all expenses.
Investors will continue to monitor economic data releases to
determine the potential for monetary policy tightening by the
Federal Reserve Board. The potential outcome of the upcoming
November election will also increasingly influence investor
psychology in the weeks ahead.
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,
<PAGE>
(Arthur Zeikel)
Arthur Zeikel
President
(Donaldo S. Benito)
Donaldo S. Benito
Portfolio Manager
September 27, 1996
SCHEDULE OF INVESTMENTS (in Thousands)
Face Interest Maturity Value
Issue Amount Rate Date (Note 1a)
US Government Obligations--33.3%
US Treasury $ 2,100 5.10 % 10/03/96 $ 2,090
Bills* 5,000 5.34 10/17/96 4,967
1,000 5.095 11/14/96 989
12,000 4.55 2/06/97 11,719
1,540 4.67 2/06/97 1,504
700 5.305 8/21/97 661
1,500 5.31 8/21/97 1,418
1,500 5.32 8/21/97 1,418
US Treasury 5,000 6.50 9/30/96 5,005
Notes 4,500 8.00 10/15/96 4,516
15,000 6.875 10/31/96 15,033
6,000 7.25 11/15/96 6,021
3,500 8.00 1/15/97 3,530
17,000 7.50 1/31/97 17,127
22,100 6.875 2/28/97 22,238
21,280 6.625 3/31/97 21,393
7,850 6.875 3/31/97 7,906
6,140 8.50 4/15/97 6,240
10,505 6.50 4/30/97 10,556
200 6.50 5/15/97 201
5,000 5.625 6/30/97 4,991
18,800 8.50 7/15/97 19,205
2,250 5.50 7/31/97 2,242
11,500 5.875 7/31/97 11,493
1,500 5.75 9/30/97 1,496
750 6.125 8/31/98 747
<PAGE>
Total US Government Obligations
(Cost--$184,910) 184,706
Face
Amount Issue
Repurchase Agreements**--67.6%
$22,000 BZW Securities, Inc., purchased on
8/30/96 to yield 5.24% to 9/03/96 22,000
24,000 Bear Stearns Cos., Inc., purchased on
8/30/96 to yield 5.24% to 9/03/96 24,000
Face Issue Value
Amount (Note 1a)
Repurchase Agreements** (concluded)
$27,000 CS First Boston Corp., purchased
on 8/30/96 to yield 5.27% to
9/03/96 $ 27,000
27,000 Chase Securities Inc., purchased on
8/30/96 to yield 5.25% to 9/03/96 27,000
24,000 Daiwa Securities America, Inc., purchased
on 8/30/96 to yield 5.25% to 9/03/96 24,000
27,000 Dean Witter Reynolds, Inc., purchased on
8/30/96 to yield 5.25% to 9/03/96 27,000
21,000 Deutsche Morgan Grenfell/C.J. Lawrence
Inc., purchased on 8/30/96 to yield 5.23%
to 9/03/96 21,000
27,000 Fuji Securities, Inc., purchased on
8/30/96 to yield 5.25% to 9/03/96 27,000
27,000 Greenwich Capital Markets, Inc.,
purchased on 8/30/96 to yield 5.25%
to 9/03/96 27,000
<PAGE>
27,000 HSBC Securities, Inc., purchased on
8/30/96 to yield 5.26% to 9/03/96 27,000
27,000 Nesbitt Burns Securities, Inc., purchased
on 8/30/96 to yield 5.26% to 9/03/96 27,000
22,000 Nomura Securities International, Inc.,
purchased on 8/30/96 to yield 5.25% to
9/03/96 22,000
26,435 PaineWebber Inc., purchased on
8/30/96 to yield 5.27% to 9/03/96 26,435
24,000 Sanwa Securities USA Co., L.P., purchased
on 8/30/96 to yield 5.25% to 9/03/96 24,000
22,000 UBS Securities LLC, purchased on
8/30/96 to yield 5.24% to 9/03/96 22,000
Total Repurchase Agreements
(Cost--$374,435) 374,435
Total Investments (Cost--$559,345)--100.9% 559,141
Liabilities in Excess of Other Assets--(0.9%) (4,856)
--------
Net Assets--100.0% $554,285
========
[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
Statement of Assets and Liabilities as of August 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$559,344,807*) (Note 1a) $ 559,140,604
Cash 287
Interest receivable 3,215,050
Prepaid registration fees and other assets (Note 1d) 88,379
--------------
Total assets 562,444,320
--------------
<PAGE>
Liabilities: Payables:
Beneficial interest redeemed 6,781,278
Securities purchased 751,598
Investment adviser (Note 2) 207,619
Distributor (Note 2) 139,936
Dividends to shareholders (Note 1f) 58 7,880,489
--------------
Accrued expenses and other liabilities 279,203
--------------
Total liabilities 8,159,692
--------------
Net Assets: Net assets $ 554,284,628
==============
Net Assets Shares of beneficial interest, $0.10 par value, unlimited
Consist of: number of shares authorized $ 55,448,883
Paid-in capital in excess of par 499,039,948
Unrealized depreciation on investments--net* (204,203)
--------------
Net Assets--Equivalent to $1.00 per share, based on 554,488,831
shares of beneficial interest outstanding $ 554,284,628
==============
<FN>
*Cost for Federal income tax purposes. As of August 31, 1996, net
unrealized depreciation for Federal income tax purposes amounted to
$204,203, of which $23,591 related to appreciated securities and
$227,794 related to depreciated securities.
See Notes to Financial Statements.
</TABLE>
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended August 31, 1996
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 30,688,742
(Note 1c):
<PAGE>
Expenses: Investment advisory fees (Note 2) $ 2,478,931
Transfer agent fees (Note 2) 971,325
Distribution fees (Note 2) 642,390
Registration fees (Note 1d) 96,477
Accounting services (Note 2) 77,791
Custodian fees 72,318
Professional fees 71,097
Printing and shareholder reports 51,157
Trustees' fees and expenses 43,826
Other 12,431
--------------
Total expenses 4,517,743
--------------
Investment income--net 26,170,999
--------------
Realized & Unreal- Realized gain on investments--net 192,438
ized Gain (Loss) on Change in unrealized appreciation/depreciation on investments--net (250,285)
Investments--Net --------------
(Note 1c): Net Increase in Net Assets Resulting from Operations $ 26,113,152
==============
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: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 26,170,999 $ 25,278,399
Realized gain on investments--net 192,438 351,372
Change in unrealized appreciation/depreciation on
investments --net (250,285) 519,921
-------------- --------------
Net increase in net assets resulting from operations 26,113,152 26,149,692
-------------- --------------
Dividends & Investment income--net (26,170,999) (25,278,399)
Distributions to Realized gain on investments--net (192,438) (351,372)
Shareholders -------------- --------------
(Note 1f): Net decrease in net assets resulting from dividends and
distributions to shareholders (26,363,437) (25,629,771)
-------------- --------------
Beneficial Interest Net proceeds from sale of shares 1,473,714,747 1,488,684,962
Transactions Net asset value of shares issued to shareholders in
(Note 3): reinvestment of dividends and distributions (Note 1f) 26,345,553 25,615,698
-------------- --------------
1,500,060,300 1,514,300,660
Cost of shares redeemed (1,504,454,157) (1,500,066,112)
-------------- --------------
Net increase (decrease) in net assets derived from
beneficial interest transactions (4,393,857) 14,234,548
-------------- --------------
<PAGE>
Net Assets: Total increase (decrease) in net assets (4,644,142) 14,754,469
Beginning of year 558,928,770 544,174,301
-------------- --------------
End of year $ 554,284,628 $ 558,928,770
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
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: 1996 1995 1994 1993 1992
<S> <C> <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 .0474 .0472 .0280 .0248 .0365
Realized and unrealized gain (loss) on
investments--net (.0002) .0017 (.0007) .0007 .0046
-------- -------- -------- -------- --------
Total from investment operations .0472 .0489 .0273 .0255 .0411
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.0474) (.0472) (.0280) (.0248) (.0365)
Realized gain on investments--net (.0003) (.0007) (.0002) (.0013) (.0038)
-------- -------- -------- -------- --------
Total dividends and distributions (.0477) (.0479) (.0282) (.0261) (.0403)
-------- -------- -------- -------- --------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total investment return 4.89% 4.89% 2.85% 2.64% 4.15%
======== ======== ======== ======== ========
Ratios to Average Expenses .82% .85% .81% .75% .75%
Net Assets: ======== ======== ======== ======== ========
Investment income and realized gain
on investments--net 4.78% 4.79% 2.82% 2.61% 4.10%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $554,285 $558,929 $544,174 $575,044 $584,067
Data: ======== ======== ======== ======== ========
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
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 Board of 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 and distributions 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 and
distributions 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.
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.
NOTES TO FINANCIAL STATEMENTS (concluded)
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
<PAGE>
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, 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, 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 August
31, 1996 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, 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.
<PAGE>
Deloitte & Touche LLP
Princeton, New Jersey
October 8, 1996
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
None of the ordinary income distributions paid daily by Merrill
Lynch U.S.A. Government Reserves during the fiscal year ended August
31, 1996 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 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.
For the Percentage of
Quarter Ended Federal Obligations*
November 30, 1995 21.94%
February 29, 1996 28.15
May 31, 1996 26.41
August 31, 1996 32.84
Of the Fund's ordinary income dividends paid during the fiscal year
ended August 31, 1996, 25.41% 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.
<PAGE>
[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.
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
90 Washington Street, 12th Floor
New York, New York 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 221-7210
