MERRILL LYNCH
U.S.A. GOVERNMENT
RESERVES
FUND LOGO
Annual Report
August 31, 1999
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. 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. Past performance results shown in this report should not be
considered a representation of future performance, which will
fluctuate. 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, 1999
DEAR SHAREHOLDER
For the year ended August 31, 1999, Merrill Lynch U.S.A. Government
Reserves paid shareholders a net annualized dividend of 4.30%*. For
the six-month period ended August 31, 1999, the fund's net
annualized dividend was 4.11%*. The fund's 7-day yield as of August
31, 1999 was 4.37%.
The average portfolio maturity for Merrill Lynch U.S.A. Government
Reserves at August 31, 1999 was 68 days, compared to 75 days at
February 28, 1999.
The Environment
During the latter half of the six months ended August 31, 1999, the
interest rate environment dominated the US capital markets.
Investors were concerned that the ongoing strength in the economy
would prompt the Federal Reserve Board into a round of tightening of
the Federal Funds rate. At the end of June, there was relief when
the Federal Reserve Board only raised interest rates by 25 basis
points (0.25%). However, there were continued signs of strength in
the economy, and the Federal Reserve Board raised short-term
interest rates another 0.25% on August 24, 1999.
The US equity market, as measured by the Standard & Poor's 500
Index, rose 1.75% for the three months ended August 31, 1999. The
market rose very strongly at the end of June when it appeared that
the quarter-point increase in the Federal Funds rate might be
sufficient to address the central bank's inflationary concerns.
However, sentiment deteriorated in July and August as a result of
continued strong economic data and widening credit spreads. The US
dollar also weakened during the period, keeping upward pressure on
bond yields for the near term.
Portfolio Matters
During the six months ended August 31, 1999, changes in the yield
curve, as well as a rise in interest rates created an opportunity
for some different investment options for the fund. Uncertainty
surrounding Year 2000-related issues caused yields on six-month
Treasury bills to rise and trade at times at the same yield as one-
year bills. As a result, we increased the fund's exposure to
Treasury bills (with maturities ranging from December 1999 to
February 2000) at favorable yields, with a limited increase in
interest rate risk. We believe that allocating more than 9% of the
portfolio to Treasury bills by August 31, 1999 provided an added
benefit of enhanced liquidity as the year 2000 approaches.
[FN]
*Based on a constant investment throughout the period, with
dividends compounded daily, and reflecting a net return to the
investor after all expenses.
Even as interest rates rose, the short end of the Treasury coupon
curve benefited from investors seeking preservation of capital.
Several issues owned by the fund became highly valued as demand
increased, allowing us to swap to other issues providing higher
yields.
In an effort to enhance the fund's yield and limit interest rate
risk in an uncertain interest rate environment, we increased our
allocation in repurchase agreements. With the overnight Federal
Funds rate higher by 50 basis points, the fund had an immediate
benefit as interest rates on repurchase agreements rose
concurrently. As a precautionary measure with the approach of the
year 2000, we expanded the number of counterparties that have
outstanding repurchase agreements in an effort to ensure reliable
sources of collateral over the year-end.
During the six-month period ended August 31, 1999, the average life
of the fund ranged from 62 days to 80 days. Yields rose almost to
their peak prior to the first 25 basis point tightening in late
June, and have traded in a range since that time. We had limited
exposure to securities longer than one year, giving us the
opportunity to add higher-yielding securities during that period to
maintain our desired average life range, between 65 days--75 days.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Trustee
(Linda B. Costanzo)
Linda B. Costanzo
Vice President and Senior Portfolio Manager
October 11, 1999
We are pleased to announce that Linda B. Costanzo is responsible for
the day-to-day management of Merrill Lynch USA Government Reserves.
Ms. Costanzo has been employed by Merrill Lynch Asset Management,
L.P. (MLAM) since 1986 and has been Portfolio Manager for MLAM
institutional fixed-income separate accounts since 1997.
Merrill Lynch U.S.A. Government Reserves
August 31, 1999
SCHEDULE OF INVESTMENTS (in Thousands)
Face Interest Maturity Value
Issue Amount Rate Date (Note 1a)
US Government Obligations--37.2%
US Treasury Bills* $25,000 5.19 % 9/15/1999 $ 24,946
4,000 4.755 12/02/1999 3,951
5,000 4.91 2/03/2000 4,895
3,000 4.865 2/10/2000 2,933
10,000 4.90 2/17/2000 9,767
10,000 4.935 2/24/2000 9,758
US Treasury Notes 13,500 5.75 9/30/1999 13,510
11,000 7.125 9/30/1999 11,020
10,000 6.00 10/15/1999 10,016
16,000 5.875 11/15/1999 16,035
5,000 5.625 11/30/1999 5,006
8,000 5.375 1/31/2000 8,000
8,000 7.75 1/31/2000 8,082
18,000 5.875 2/15/2000 18,045
3,000 5.50 2/29/2000 3,003
2,000 7.125 2/29/2000 2,018
10,000 6.875 3/31/2000 10,088
15,000 6.375 5/15/2000 15,094
3,000 6.25 5/31/2000 3,016
2,000 5.375 6/30/2000 1,998
2,000 5.875 6/30/2000 2,006
8,000 5.375 7/31/2000 7,990
25,000 5.125 8/31/2000 24,898
1,000 4.50 9/30/2000 988
7,000 4.00 10/31/2000 6,871
1,300 4.625 12/31/2000 1,282
2,000 4.875 3/31/2001 1,974
2,000 5.00 4/30/2001 1,976
Total US Government Obligations
(Cost--$229,546) 229,166
Face
Amount Issue
Repurchase Agreements**--63.2%
$30,000 Aubrey G. Lanston & Co., Inc., purchased
on 8/25/1999 to yield 5.15% to 9/01/1999 30,000
Face Value
Amount Issue (Note 1a)
Repurchase Agreements (concluded)
$30,000 Barclays Capital Inc., purchased on
8/27/1999 to yield 5.20% to 9/03/1999 $ 30,000
28,000 Chase Securities Inc., purchased on
8/31/1999 to yield 5.49% to 9/01/1999 28,000
30,000 Credit Suisse First Boston Corp., purchased
on 8/26/1999 to yield 5.24% to 9/02/1999 30,000
28,000 Deutsche Bank Securities Inc., purchased on
8/31/1999 to yield 5.49% to 9/01/1999 28,000
30,000 Donaldson, Lufkin & Jenrette Securities
Corp., purchased on 8/27/1999 to yield
5.20% to 9/03/1999 30,000
30,000 Greenwich Capital Markets, Inc., purchased
on 8/26/1999 to yield 5.20% to 9/02/1999 30,000
30,000 J.P. Morgan Securities Inc., purchased on
8/25/1999 to yield 5.20% to 9/01/1999 30,000
30,000 Lehman Brothers Inc., purchased on
8/26/1999 to yield 5.20% to 9/02/1999 30,000
30,000 Morgan Stanley & Co., Inc., purchased on
8/25/1999 to yield 5.25% to 9/03/1999 30,000
30,000 Nesbitt Burns Securities, Inc., purchased
on 8/27/1999 to yield 5.20% to 9/03/1999 30,000
13,150 PaineWebber Inc., purchased on 8/31/1999
to yield 5.45% to 9/01/1999 13,150
30,000 Prudential Securities Inc., purchased on
8/27/1999 to yield 5.21% to 9/03/1999 30,000
20,000 Salomon, Smith Barney, Inc., purchased
on 8/27/1999 to yield 5.22% to 9/03/1999 20,000
Total Repurchase Agreements
(Cost--$389,150) 389,150
Total Investments (Cost--$618,696)--100.4% 618,316
Liabilities in Excess of Other Assets--(0.4%) (2,435)
--------
Net Assets--100.0% $615,881
========
[FN]
*US Treasury Bills are traded on a discount basis; the interest
rates shown reflect 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.
Merrill Lynch U.S.A. Government Reserves
August 31, 1999
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$618,695,832*) (Note 1a) $ 618,315,777
Cash 166,234
Receivables:
Interest $ 2,469,498
Beneficial interest sold 6,346 2,475,844
--------------
Prepaid registration fees and other assets (Note 1d) 37,737
--------------
Total assets 620,995,592
--------------
Liabilities: Payables:
Beneficial interest redeemed 4,318,228
Investment adviser (Note 2) 242,038
Distributor (Note 2) 139,121 4,699,387
--------------
Accrued expenses and other liabilities 415,339
--------------
Total liabilities 5,114,726
--------------
Net Assets: Net assets $ 615,880,866
==============
Net Assets Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized $ 61,626,092
Paid-in capital in excess of par 554,634,829
Unrealized depreciation on investments--net (380,055)
--------------
Net Assets--Equivalent to $1.00 per share based on 616,260,921
shares of beneficial interest outstanding $ 615,880,866
==============
<FN>
*Cost for Federal income tax purposes. As of August 31, 1999, net
unrealized depreciation for Federal income tax purposes amounted to
$380,055 of which $7,460 related to appreciated securities and
$387,515 related to depreciated securities.
See Notes to Financial Statements.
<CAPTION>
Statement of Operations
For the Year Ended August 31, 1999
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 32,418,753
(Note 1c):
Expenses: Investment advisory fees (Note 2) $ 2,905,122
Transfer agent fees (Note 2) 1,186,277
Distribution fees (Note 2) 737,866
Registration fees (Note 1d) 103,533
Accounting services (Note 2) 92,069
Professional fees 85,571
Custodian fees 74,054
Printing and shareholder reports 71,343
Trustees' fees and expenses 52,504
Other 8,200
--------------
Total expenses 5,316,539
--------------
Investment income--net 27,102,214
--------------
Realized & Realized gain on investments--net 149,003
Unrealized Change in unrealized appreciation/depreciation on
Gain (Loss) on investments--net (743,742)
Investments--Net --------------
(Note 1c): Net Increase in Net Assets Resulting from Operations $ 26,507,475
==============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch U.S.A. Government Reserves
August 31, 1999
FINANCIAL INFORMATION (concluded)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1999 1998
<S> <S> <C> <C>
Operations: Investment income--net $ 27,102,214 $ 27,768,449
Realized gain on investments--net 149,003 29,131
Change in unrealized appreciation/depreciation on
investments--net (743,742) 317,956
-------------- --------------
Net increase in net assets resulting from operations 26,507,475 28,115,536
-------------- --------------
Dividends & Investment income--net (27,102,214) (27,768,449)
Distributions to Realized gain on investments--net (149,003) (29,131)
Shareholders -------------- --------------
(Note 1f): Net decrease in net assets resulting from dividends and
distributions to shareholders (27,251,217) (27,797,580)
-------------- --------------
Beneficial Interest Net proceeds from sale of shares 1,719,348,432 1,655,219,704
Transactions Net asset value of shares issued to shareholders in
(Note 3): reinvestment of dividends and distributions (Note 1f) 27,249,536 27,785,818
-------------- --------------
1,746,597,968 1,683,005,522
Cost of shares redeemed (1,737,993,644) (1,633,427,991)
-------------- --------------
Net increase in net assets derived from beneficial
interest transactions 8,604,324 49,577,531
-------------- --------------
Net Assets: Total increase in net assets 7,860,582 49,895,487
Beginning of year 608,020,284 558,124,797
-------------- --------------
End of year $ 615,880,866 $ 608,020,284
============== ==============
See Notes to Financial Statements.
<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: 1999 1998 1997 1996 1995
<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 .0420 .0484 .0471 .0474 .0472
Realized and unrealized gain (loss) on
investments--net (.0010) .0007 .0005 (.0002) .0017
-------- -------- -------- -------- --------
Total from investment operations .0410 .0491 .0476 .0472 .0489
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.0420) (.0484) (.0471) (.0474) (.0472)
Realized gain on investments--net (.0002) (.0001) (.0001) (.0003) (.0007)
-------- -------- -------- -------- --------
Total dividends and distributions (.0422) (.0485) (.0472) (.0477) (.0479)
-------- -------- -------- -------- --------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total investment return 4.29% 4.92% 4.81% 4.97% 4.87%
======== ======== ======== ======== ========
Ratios to Average Expenses .82% .83% .82% .82% .85%
Net Assets: ======== ======== ======== ======== ========
Investment income and realized gain
on investments--net 4.22% 4.82% 4.71% 4.78% 4.79%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $615,881 $608,020 $558,125 $554,285 $558,929
Data: ======== ======== ======== ======== ========
See Notes to Financial Statements.
</TABLE>
Merrill Lynch U.S.A. Government Reserves
August 31, 1999
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 Fund's financial statements are
prepared in accordance with generally accepted accounting
principles, which may require the use of management accruals and
estimates. 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, for which market quotations
are readily available, are valued at market value. 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 the 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
quotations are not readily 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 .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 Incorporated
("MLPF&S") receives a distribution fee under the Distribution
Agreement from the Fund at the end of each month at the annual rate
of .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, 1999
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, reinvested 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, 1999, 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, 1999 by correspondence with the custodian. 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, 1999, 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 14, 1999
</AUDIT-REPORT>
Merrill Lynch U.S.A. Government Reserves
August 31, 1999
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, 1999 qualify for the dividends received deduction for
corporations. Additionally, the Fund paid long-term capital gains
distributions of $.0000051 per share to shareholders of record on
October 7, 1998 and August 30, 1999, respectively. All distributions
are subject to the 20% tax rate.
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, 1998 22.41%
February 28, 1999 37.71
May 31, 1999 28.79
August 31, 1999 36.90
Of the Fund's ordinary income dividends paid during the fiscal year
ended August 31, 1999, 37.91% was attributable to Federal
obligations. In calculating the foregoing percentage, expenses of
the Fund 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
Terry K. Glenn, 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
Arthur Zeikel, Trustee
Joseph T. Monagle Jr., Executive Vice President
Kevin J. McKenna, Senior Vice President
Linda B. Costanzo, Vice President
Donald C. Burke, Vice President and Treasurer
William E. Zitelli, 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
