MERRILL LYNCH
U.S.A. GOVERNMENT
RESERVES
[FUND LOGO]
STRATEGIC
Performance
Annual Report
August 31, 1997
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.
Merrill Lynch
U.S.A. Government Reserves
Box 9011
Princeton, NJ
08543-9011 #10087 -- 8/97
[RECYCLE LOGO]
Printed on post-consumer recycled paper
Merrill Lynch U.S.A. Government Reserves August 31, 1997
DEAR SHAREHOLDER
For the year ended August 31, 1997, Merrill Lynch U.S.A. Government
Reserves paid shareholders a net annualized dividend of 4.82%.* For the
six-month period ended August 31, 1997, the fund's net annualized
dividend was 4.78%.* The fund's 7-day yield as of August 31, 1997 was
4.82%.
The average portfolio maturity for Merrill Lynch U.S.A. Government
Reserves at August 31, 1997 was 85 days, compared to 72 days at February
28, 1997.
The Environment
During the six-month period ended August 31, 1997, investor perceptions
regarding the prospects for the US economy shifted, creating greater
volatility in the stock and bond markets. Early in the period, investor
concerns focused on an overheating economy, increasing inflationary
pressures and the prospect of higher interest rates. These concerns were
heightened when the Federal Reserve Board tightened monetary policy at
its March 25 meeting. However, as the period continued, there was
increasing evidence of noninflationary economic growth. Investor
confidence was boosted further when the Federal Reserve Board chose to
leave monetary policy unchanged at its May, July and August meetings.
This increased confidence was reinforced further in late July by the
passage of tax-cut and five-year balanced budget bills.
In this environment, we focused the fund's investments in the one-year
sector of the yield curve which represented attractive value versus the
18-month -- two-year sector. By late August, the consensus outlook had
changed, with forecasts of overheating growth and inflationary
expectations. These concerns were reinforced by a large upward revision
in second-quarter real gross domestic product growth from an original
estimate of 2.2% to 3.6%. In contrast, employment data reported for
August were weaker than expected as the United Parcel Service strike
dampened job growth. Accordingly, we extended the fund's average
portfolio maturity into the mid 70-day range by purchasing one-year
Treasury bills which traded even in yields when compared to similar
maturity Treasury coupons. As the period progressed the fund took
advantage of opportunities in the two-year sector of the yield curve.
Although there are few inflationary pressures at present, it remains to
be seen whether economic activity will continue to moderate enough to
rule out future Federal Reserve Board monetary policy tightenings later
this year.
In Conclusion
We appreciate your continued support of Merrill Lynch U.S.A. Government
Reserves, and we look forward to assisting you with your financial needs
in the months and years ahead.
Sincerely,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/DONALDO S. BENITO
Donaldo S. Benito
Vice President and Portfolio Manager
September 26, 1997
* Based on a constant investment throughout the period, with dividends
compounded daily, and reflecting a net return to the investor after
all expenses.
<TABLE>
<CAPTION>
Merrill Lynch U.S.A. Government Reserves August 31, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
Face Interest Maturity Value
Issue Amount Rate Date (Note 1a)
US Government Obligations -- 44.4%
<S> <C> <C> <C> <C>
US Treasury Bills* $30,000 5.46 % 9/15/97 $29,941
2,100 5.09 1/22/98 2,056
1,900 5.52 5/28/98 1,825
2,250 5.525 5/28/98 2,161
3,080 5.275 7/23/98 2,932
US Treasury Notes 15,500 6.00 9/02/97 15,500
1,000 5.75 9/30/97 1,000
13,050 5.625 10/31/97 13,054
3,200 5.75 10/31/97 3,200
22,600 7.375 11/15/97 22,678
13,250 7.875 1/15/98 13,360
9,430 5.00 1/31/98 9,405
17,750 5.625 1/31/98 17,749
20,220 7.25 2/15/98 20,359
3,600 5.125 2/28/98 3,592
2,500 5.125 3/31/98 2,493
8,540 6.125 3/31/98 8,567
9,200 7.875 4/15/98 9,326
3,765 5.125 4/30/98 3,753
5,500 5.875 4/30/98 5,509
14,010 6.125 5/15/98 14,058
8,480 8.25 7/15/98 8,658
1,500 5.25 7/31/98 1,493
2,800 6.25 7/31/98 2,812
5,100 9.25 8/15/98 5,262
7,100 6.00 9/30/98 7,116
2,400 7.125 10/15/98 2,434
4,200 5.875 10/31/98 4,200
1,400 5.50 11/15/98 1,394
5,100 5.00 1/31/99 5,037
3,200 5.875 1/31/99 3,199
2,900 6.375 4/30/99 2,919
750 5.875 7/31/99 748
Total US Government Obligations
(Cost -- $247,744) 247,790
=========
<CAPTION>
Face Value
Amount Issue (Note 1a)
Repurchase Agreements** -- 62.1%
<S> <C> <C>
$21,000 BZW Securities, Inc., purchased on 8/29/97 to yield 5.57% to 9/02/97 $21,000
23,000 Bear Stearns & Co., Inc., purchased on 8/29/97 to yield 5.57% to 9/02/97 23,000
25,000 Daiwa Securities America, Inc., purchased on 8/29/97 to yield 5.57% to 9/02/1997 25,000
54,000 Fuji Securities, Inc., purchased on 8/29/97 to yield 5.57% to 9/02/97 54,000
26,000 HSBC Securities, Inc., purchased on 8/29/97 to yield 5.58% to 9/02/97 26,000
26,000 J. P. Morgan Securities Inc., purchased on 8/29/97 to yield 5.56% to 9/02/97 26,000
54,000 Nesbitt Burns Securities, Inc., purchased on 8/29/97 to yield 5.58% to 9/02/97 54,000
26,000 Nikko Securities Co. International, Inc., purchased on 8/29/97 to yield 5.57% to 9/02/97 26,000
24,000 Nomura Securities International, Inc., purchased on 8/29//97 to yield 5.56% to 9/02/97 24,000
24,875 PaineWebber Inc., purchased on 8/29/97 to yield 5.57% to 9/02/97 24,875
22,000 SBC Warburg Inc., purchased on 8/29/97 to yield 5.57% to 9/02/97 22,000
21,000 Sanwa Securities USA Co., L.P., purchased on 8/29/97 to yield 5.57% to 9/02/97 21,000
Total Repurchase Agreements
(Cost -- $346,875) 346,875
Total Investments (Cost -- $594,619) -- 106.5% 594,665
Liabilities in Excess of Other Assets -- (6.5%) (36,540)
---------
Net Assets -- 100.0% $558,125
=========
* 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>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $594,619,080*) (Note 1a) $594,664,811
Cash 652
Receivables:
Securities sold $10,857,459
Interest 3,172,456
Beneficial interest sold 7,110 14,037,025
-------------
Prepaid registration fees and other assets (Note 1d) 85,285
-------------
Total assets 608,787,773
-------------
Liabilities: Payables:
Securities purchased 42,116,473
Beneficial interest redeemed 8,005,923
Investment adviser (Note 2) 199,430
Distributor (Note 2) 133,879
Dividends to shareholders (Note 1f) 125 50,455,830
-------------
Accrued expenses and other liabilities 207,146
-------------
Total liabilities 50,662,976
-------------
Net Assets: Net assets $558,124,797
=============
Net Assets Shares of beneficial interest, $0.10 par value, unlimited number of
Consist of: shares authorized $55,807,907
Paid-in capital in excess of par 502,271,159
Unrealized appreciation on investments -- net 45,731
-------------
Net Assets -- Equivalent to $1.00 per share based on 558,079,066
shares of beneficial interest outstanding $558,124,797
=============
* Cost for Federal income tax purposes. As of August 31, 1997, net unrealized appreciation for Federal income
tax purposes amounted to $45,731, of which $96,475 related to appreciated securities and $50,744 related to
depreciated securities.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended August 31, 1997
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $30,430,249
(Note 1c):
Expenses: Investment advisory fees (Note 2) $2,476,982
Transfer agent fees (Note 2) 1,015,604
Distribution fees (Note 2) 621,180
Registration fees (Note 1d) 107,436
Printing and shareholder reports 89,985
Accounting services (Note 2) 57,756
Professional fees 57,524
Trustees' fees and expenses 43,729
Custodian fees 39,243
Other 12,716
-------------
Total expenses 4,522,155
-------------
Investment income -- net 25,908,094
-------------
Realized & Realized gain on investments -- net 42,945
Unrealized Gain on Change in unrealized appreciation/depreciation on investments -- net 249,934
Investments -- Net -------------
(Note 1c): Net Increase in Net Assets Resulting from Operations $26,200,973
=============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $25,908,094 $26,170,999
Realized gain on investments -- net 42,945 192,438
Change in unrealized appreciation/depreciation on investments -- net 249,934 (250,285)
------------- -------------
Net increase in net assets resulting from operations 26,200,973 26,113,152
------------- -------------
Dividends & Investment income -- net (25,908,094) (26,170,999)
Distributions to Realized gain on investments -- net (42,945) (192,438)
Shareholders ------------- -------------
(Note 1f): Net decrease in net assets resulting from dividends and distributions
to shareholders (25,951,039) (26,363,437)
------------- -------------
Beneficial Interest Net proceeds from sale of shares 1,575,865,679 1,473,714,747
Transactions Net asset value of shares issued to shareholders in reinvestment of
(Note 3): dividends and distributions (Note 1f) 25,939,110 26,345,553
------------- -------------
1,601,804,789 1,500,060,300
Cost of shares redeemed (1,598,214,554) (1,504,454,157)
------------- -------------
Net increase (decrease) in net assets derived from beneficial
interest transactions 3,590,235 (4,393,857)
------------- -------------
Net Assets: Total increase (decrease) in net assets 3,840,169 (4,644,142)
Beginning of year 554,284,628 558,928,770
------------- -------------
End of year $558,124,797 $554,284,628
============= =============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<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: 1997 1996 1995 1994 1993
<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 .0471 .0474 .0472 .0280 .0248
Realized and unrealized gain (loss) on
investments -- net .0005 (.0002) .0017 (.0007) .0007
--------- --------- --------- --------- ---------
Total from investment operations .0476 .0472 .0489 .0273 .0255
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income -- net (.0471) (.0474) (.0472) (.0280) (.0248)
Realized gain on investments -- net (.0001) (.0003) (.0007) (.0002) (.0013)
--------- --------- --------- --------- ---------
Total dividends and distributions (.0472) (.0477) (.0479) (.0282) (.0261)
--------- --------- --------- --------- ---------
Net asset value, end of year $1.00 $1.00 $1.00 $1.00 $1.00
========= ========= ========= ========= =========
Total investment return 4.82% 4.89% 4.89% 2.85% 2.64%
========= ========= ========= ========= =========
Ratios to Average Expenses .82% .82% .85% .81% .75%
Net Assets: ========= ========= ========= ========= =========
Investment income and realized gain
on investments -- net 4.71% 4.78% 4.79% 2.82% 2.61%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $558,125 $554,285 $558,929 $544,174 $575,044
Data: ========= ========= ========= ========= =========
See Notes to Financial Statements.
</TABLE>
Merrill Lynch U.S.A. Government Reserves August 31, 1997
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.
(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 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, 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.
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, 1997, 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, 1997 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, 1997, 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 1, 1997
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, 1997
qualify for the dividends received deduction for corporations.
Additionally, the Fund distributed long-term capital gains of $.0000081
per share to shareholders of record on August 27, 1997.
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, 1996 39.32%
February 28, 1997 37.95
May 31, 1997 35.52
August 31, 1997 40.70
Of the Fund's ordinary income dividends paid during the fiscal year
ended August 31, 1997, 36.97% 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.
* 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
Thomas D. Jones, III, Secretary
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
