MERRILL LYNCH
U.S.A. GOVERNMENT
RESERVES
FUND LOGO
Annual Report
August 31, 1998
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. An
investment in the Fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other Government agency.
Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the
Fund. 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
Printed on post-consumer recycled paper
Merrill Lynch U.S.A. Government Reserves
August 31, 1998
DEAR SHAREHOLDER
For the year ended August 31, 1998, Merrill Lynch U.S.A. Government
Reserves paid shareholders a net annualized dividend of 4.94%*. For
the six-month period ended August 31, 1998, the fund's net
annualized dividend was 4.87%*. The fund's 7-day yield as of August
31, 1998 was 4.79%.
The average portfolio maturity for Merrill Lynch U.S.A. Government
Reserves at August 31, 1998 was 65 days, compared to 80 days at
February 28, 1998.
The Environment
Mounting evidence of a slowing economy and the prospect of lower
corporate earnings growth led to greater volatility in the US
financial markets during the six months ended August 31, 1998. At
the same time, greater economic and political uncertainties in Asia
and Russia led investors to become concerned about the outlook for
economic activity worldwide. Although these developments were
negative for stock markets, they generally were beneficial to bond
prices, especially as inflationary trends remained subdued. As was
widely anticipated, the Federal Reserve Board did not move to
tighten monetary policy. However, shortly after the August quarter's
close, Federal Reserve Board Chairman Alan Greenspan indicated that
the central bank's focus had shifted from inflationary concerns to
the threat posed to the US economy by the increasing financial
troubles in other countries. During the six-month period ended
August 31, 1998, we maintained a constructive investment strategy,
based on our belief that these financial troubles could possibly
lead interest rates to decline.
[FN]
*Based on a constant investment throughout the period, with
dividends compounded daily, and reflecting a net return to the
investor after all expenses.
In the United States, gross domestic product rose at a rate of 1.4%
for the second calendar quarter, down from the 5.5% rate for the
first three months of the year. The economic slowdown in Asia
negatively impacted US exports, and the protracted strike at General
Motors Corporation also was a negative factor for economic activity.
However, the US dollar remained strong, especially relative to the
Japanese yen. The weakness of the Japanese economy continues to be a
source of concern not only for Asia, but for the rest of the world
as well.
In the months ahead, investors will continue to focus on the
economic outlook in Asia and its impact on worldwide economic
activity and corporate earnings results. If there were evidence of
more buoyant yet moderate US economic growth and a pick-up in
corporate profits growth, we would expect stability to return to the
financial markets on a global basis. Absent these developments,
market volatility is likely to continue.
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
(Marie Dwyer)
Marie Dwyer
Vice President and Portfolio Manager
September 28, 1998
Merrill Lynch U.S.A. Government Reserves
August 31, 1998
SCHEDULE OF INVESTMENTS (in Thousands)
Face Interest Maturity Value
Issue Amount Rate Date (Note 1a)
US Government Obligations--32.4%
US Treasury Notes $20,150 6.00 % 9/30/1998 $ 20,159
14,100 5.875 10/31/1998 14,109
15,800 5.50 11/15/1998 15,807
1,800 8.875 11/15/1998 1,813
7,000 5.125 11/30/1998 7,000
9,800 5.625 11/30/1998 9,811
17,100 6.375 1/15/1999 17,175
5,100 5.00 1/31/1999 5,095
11,200 5.875 1/31/1999 11,228
11,000 6.25 3/31/1999 11,067
6,100 6.375 4/30/1999 6,147
5,000 6.375 5/15/1999 5,039
3,000 6.75 5/31/1999 3,033
10,000 6.00 6/30/1999 10,066
5,000 6.75 6/30/1999 5,063
2,000 6.375 7/15/1999 2,020
3,000 6.875 7/31/1999 3,044
4,000 6.00 8/15/1999 4,030
20,000 5.875 8/31/1999 20,137
6,000 5.75 9/30/1999 6,036
14,000 7.125 9/30/1999 14,280
US Treasury STRIPS++ 4,700 5.282 2/15/1999 4,594
Total US Government Obligations
(Cost--$196,389) 196,753
Face
Amount Issue
Repurchase Agreements*--68.3%
$28,000 Aubrey G. Lanston & Co., Inc., purchased
on 8/31/1998 to yield 5.80% to 9/01/1998 28,000
26,000 BZW Securities, Inc., purchased on 8/31/1998
to yield 5.77% to 9/01/1998 26,000
28,000 Credit Suisse First Boston Corp.,
purchased on 8/31/1998 to yield 5.82% to
9/01/1998 28,000
Face Value
Amount Issue (Note 1a)
Repurchase Agreements (concluded)
$27,000 Donaldson, Lufkin & Jenrette Securities
Corp., purchased on 8/31/1998 to yield 5.77%
to 9/01/1998 $ 27,000
28,000 Goldman Sachs & Company, purchased on
8/31/1998 to yield 5.81% to 9/01/1998 28,000
30,000 Greenwich Capital Markets, Inc., purchased on
8/31/1998 to yield 5.80% to 9/01/1998 30,000
27,000 HSBC Securities, Inc., purchased on 8/31/1998
to yield 5.80% to 9/01/1998 27,000
28,000 J.P. Morgan Securities Inc., purchased on
8/31/1998 to yield 5.82% to 9/01/1998 28,000
28,000 Morgan Stanley & Co., Inc., purchased on
8/31/1998 to yield 5.80% to 9/01/1998 28,000
27,000 Nesbitt Burns Securities, Inc., purchased on
8/31/1998 to yield 5.80% to 9/01/1998 27,000
27,000 Nikko Securities Co. International, Inc.,
purchased on 8/31/1998 to yield 5.80% to
9/01/1998 27,000
28,000 Nomura Securities International, Inc.,
purchased on 8/31/1998 to yield 5.85%
to 9/01/1998 28,000
28,548 PaineWebber Inc., purchased on 8/31/1998 to
yield 5.80% to 9/01/1998 28,548
28,000 Salomon Brothers, Inc., purchased on
8/31/1998 to yield 5.80% to 9/01/1998 28,000
27,000 Warburg Dillon Read LLC, purchased on
8/31/1998 to yield 5.82% to 9/01/1998 27,000
Total Repurchase Agreements
(Cost--$415,548) 415,548
Total Investments (Cost--$611,937)--100.7% 612,301
Liabilities in Excess of Other Assets--(0.7%) (4,281)
--------
Net Assets--100.0% $608,020
========
[FN]
*Repurchase Agreements are fully collateralized by US Government &
Agency Obligations.
++Separate Trading of Registered Interest and Principal of
Securities (STRIPS).
See Notes to Financial Statements.
Merrill Lynch U.S.A. Government Reserves
August 31, 1998
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$611,937,260*) (Note 1a) $ 612,300,947
Cash 5
Receivables:
Interest $ 2,849,283
Beneficial interest sold 1,265,806 4,115,089
--------------
Prepaid registration fees and other assets (Note 1d) 57,057
--------------
Total assets 616,473,098
--------------
Liabilities: Payables:
Beneficial interest redeemed 7,860,060
Investment adviser (Note 2) 228,220
Distributor (Note 2) 129,542
Dividends to shareholders (Note 1f) 236 8,218,058
--------------
Accrued expenses and other liabilities 234,756
--------------
Total liabilities 8,452,814
--------------
Net Assets: Net assets $ 608,020,284
==============
Net Assets Shares of beneficial interest, $0.10 par value,
Consist of: unlimited number of shares authorized $ 60,765,660
Paid-in capital in excess of par 546,890,937
Unrealized appreciation on investments--net 363,687
--------------
Net Assets--Equivalent to $1.00 per share based on 607,656,597
shares of beneficial interest outstanding $ 608,020,284
==============
<FN>
*Cost for Federal income tax purposes. As of August 31, 1998, net
unrealized appreciation for Federal income tax purposes amounted to
$363,687, all of which related to appreciated securities.
See Notes to Financial Statements.
</TABLE>
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended August 31, 1998
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 32,529,956
(Note 1c):
Expenses: Investment advisory fees (Note 2) $ 2,594,327
Transfer agent fees (Note 2) 1,079,630
Distribution fees (Note 2) 670,043
Registration fees (Note 1d) 87,857
Custodian fees 86,078
Professional fees 80,486
Accounting services (Note 2) 62,771
Trustees' fees and expenses 51,142
Printing and shareholder reports 34,915
Other 14,258
--------------
Total expenses 4,761,507
--------------
Investment income--net 27,768,449
--------------
Realized & Realized gain on investments--net 29,131
Unrealized Change in unrealized appreciation on investments--net 317,956
Gain on --------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 28,115,536
(Note 1c): ==============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch U.S.A. Government Reserves
August 31, 1998
FINANCIAL INFORMATION (concluded)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <S> <S> <S>
Operations: Investment income--net $ 27,768,449 $ 25,908,094
Realized gain on investments--net 29,131 42,945
Change in unrealized appreciation/depreciation
on investments--net 317,956 249,934
-------------- --------------
Net increase in net assets resulting from operations 28,115,536 26,200,973
-------------- --------------
Dividends & Investment income--net (27,768,449) (25,908,094)
Distributions to Realized gain on investments--net (29,131) (42,945)
Shareholders -------------- --------------
(Note 1f): Net decrease in net assets resulting from dividends
and distributions to shareholders (27,797,580) (25,951,039)
-------------- --------------
Beneficial Net proceeds from sale of shares 1,655,219,704 1,575,865,679
Interest Net asset value of shares issued to shareholders
Transactions in reinvestment of dividends and distributions (Note 1f) 27,785,818 25,939,110
(Note 3): -------------- --------------
1,683,005,522 1,601,804,789
Cost of shares redeemed (1,633,427,991) (1,598,214,554)
-------------- --------------
Net increase in net assets derived from beneficial interest
transactions 49,577,531 3,590,235
-------------- --------------
Net Assets: Total increase in net assets 49,895,487 3,840,169
Beginning of year 558,124,797 554,284,628
-------------- --------------
End of year $ 608,020,284 $ 558,124,797
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
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: 1998 1997 1996 1995 1994
<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 .0484 .0471 .0474 .0472 .0280
Realized and unrealized gain (loss)
on investments--net .0007 .0005 (.0002) .0017 (.0007)
-------- -------- -------- -------- --------
Total from investment operations .0491 .0476 .0472 .0489 .0273
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.0484) (.0471) (.0474) (.0472) (.0280)
Realized gain on investments--net (.0001) (.0001) (.0003) (.0007) (.0002)
-------- -------- -------- -------- --------
Total dividends and distributions (.0485) (.0472) (.0477) (.0479) (.0282)
-------- -------- -------- -------- --------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total investment return 4.92% 4.81% 4.97% 4.87% 2.84%
======== ======== ======== ======== ========
Ratios to Average Expenses .83% .82% .82% .85% .81%
Net Assets: ======== ======== ======== ======== ========
Investment income and realized gain
on investments--net 4.82% 4.71% 4.78% 4.79% 2.82%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $608,020 $558,125 $554,285 $558,929 $544,174
Data: ======== ======== ======== ======== ========
See Notes to Financial Statements.
</TABLE>
Merrill Lynch U.S.A. Government Reserves
August 31, 1998
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--Portfolio securities with remaining
maturities of greater than sixty days are valued at the most recent
bid price or yield equivalent as obtained from dealers that make
markets in such securities. As securities transition from sixty-one
to sixty days 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. Securities
maturing sixty days or less 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. Other investments for which market value quotations are
not available are valued at their fair value as determined in good
faith by or under the direction of the Fund's Board of Trustees.
(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. Under such agreements,
the counterparty 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 U.S.A. Government Reserves
August 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
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 officers and/or
directors of MLAM, PSI, FDS, 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, 1998, 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, 1998 by correspondence with the custodian and brokers or other
alternative procedures. 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, 1998, 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 5, 1998
</AUDIT-REPORT>
Merrill Lynch U.S.A. Government Reserve
August 31, 1998
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, 1998 qualify for the dividends received deduction for
corporations.
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, 1997 28.15%
February 28, 1998 36.49
May 31, 1998 21.38
August 31, 1998 31.92
Of the Fund's ordinary income dividends paid during the fiscal year
ended August 31, 1998, 33.64% 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.
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
Fred G. Weiss, Trustee
Terry K. Glenn, Executive Vice President
Joseph T. Monagle Jr., Executive Vice President
Kevin J. McKenna, Senior Vice President
Donald C. Burke, Vice President
Marie Dwyer, 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
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 221-7210
