MERRILL LYNCH
U.S.A. GOVERNMENT
RESERVES
FUND LOGO
Annual Report
August 31, 2000
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, 2000
DEAR SHAREHOLDER
For the year ended August 31, 2000, Merrill Lynch U.S.A. Government
Reserves paid shareholders a net annualized dividend of 4.94%.* For
the six-month period ended August 31, 2000, the Fund's net
annualized dividend was 5.19%.* The Fund's 7-day yield as of August
31, 2000 was 5.46%.
The average portfolio maturity for Merrill Lynch U.S.A. Government
Reserves at August 31, 2000 was 31 days, compared to 44 days at
February 29, 2000.
The Environment
By August 31, 2000, it seemed that the economy was beginning to
moderate from the unsustainable growth rate of the previous three
quarters. The 100 basis point (1.00%) increase in the Federal Funds
rate so far this year has begun to have an effect. The unbridled
enthusiasm for US equities also moderated, with major equity indexes
slightly negative for the year. Earnings shortfalls and slower
economic growth have combined to bring stock prices to more
realistic levels. Evidence of slowing consumer demand has been seen
in auto sales, which are running behind 1999's rate. Real estate
sales are mixed, but the overall trend may be an indication that
higher interest rates are slowing down this sector as well. Although
the labor market is still tight, with the unemployment rate hovering
around 4%, continued productivity gains will most likely alleviate
inflationary pressures from gains in wages and benefits. The
extraordinary rise in oil and gasoline prices during the spring and
summer have undoubtedly had an influence on consumers' perceptions,
and may have contributed to the drop in consumer confidence.
Investors are hoping that the economy has a soft landing, with gross
domestic product growth more in line with the Federal Reserve
Board's target of about 3%, making further interest rate increases
unnecessary.
Portfolio Matters
During the six-month period ended August 31, 2000, the US Treasury
market focused on the paydown of Treasury debt, as a result of the
Federal budget surplus. Because of the inversion of the Treasury
*Based on a constant investment throughout the period, with
dividends compounded daily, and reflecting a net return to the
investor after all expenses.
yield curve, along with the diminished auction schedule, much of the
longer end of the curve became inactive. Therefore, we focused our
purchases primarily on the bill sector with maturities no greater
than six months. We continued to remain heavily weighted in
repurchase agreements because of the negative cost of carry
associated with purchasing Treasury securities compared to
repurchase agreements. The issuance of cash management bills
throughout the period, along with the increase in supply of three-
month and six-month bills, kept yields in the short-end of the
market high, allowing us to take advantage of their superior value
compared to repurchase agreements. Going forward, we intend to
continue to take advantage of pressure in the short-end of the yield
curve, while remaining heavily weighted in repurchase agreements as
a result of their relative value compared to Treasury issues.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Trustee
(Robert Sabatino)
Robert Sabatino
Portfolio Manager
September 27, 2000
We are pleased to announce that Robert Sabatino is responsible for
the day-to-day management of Merrill Lynch U.S.A. Government
Reserves. Mr. Sabatino has been employed by Merrill Lynch Investment
Managers since 1995 as Vice President and Portfolio Manager.
Merrill Lynch U.S.A. Government Reserves
August 31, 2000
SCHEDULE OF INVESTMENTS (in Thousands)
Face Interest Maturity
Issue Amount Rate Date Value
US Government Obligations--31.1%
US Treasury Bills* $ 6,000 4.995% 9/14/2000 $ 5,987
10,000 6.425 9/15/2000 9,975
15,000 5.935 11/02/2000 14,841
26,000 6.19 11/09/2000 25,695
25,000 5.94 12/28/2000 24,503
2,000 6.01 1/18/2001 1,953
15,000 6.00 1/25/2001 14,630
US Treasury Notes 7,000 4.00 10/31/2000 6,969
4,842 5.75 10/31/2000 4,834
11,300 4.625 12/31/2000 11,233
629 4.875 3/31/2001 624
2,000 5.00 4/30/2001 1,982
Total US Government Obligations
(Cost--$123,295) 123,226
Face
Amount Issue
Repurchase Agreements**--72.0%
$19,800 Chase Securities Inc., purchased on 8/31/2000
to yield 6.64% to 9/01/2000 19,800
19,800 Credit Suisse First Boston Corp., purchased
on 8/30/2000 to yield 6.52% to 9/06/2000 19,800
19,800 Deutsche Bank Securities Inc., purchased on
8/31/2000 to yield 6.61% to 9/01/2000 19,800
19,800 Fuji Securities Inc., purchased on 8/31/2000
to yield 6.62% to 9/01/2000 19,800
20,000 Goldman Sachs & Company, purchased on
8/11/2000 to yield 6.49% to 9/08/2000 20,000
SCHEDULE OF INVESTMENTS (in Thousands)
Face
Amount Issue Value
Repurchase Agreements (concluded)
$19,800 Greenwich Capital Markets, Inc., purchased
on 8/31/2000 to yield 6.60% to 9/01/2000 $ 19,800
20,000 J.P. Morgan Securities Inc., purchased on
8/25/2000 to yield 6.47% to 9/01/2000 20,000
19,800 Lehman Brothers Inc., purchased on 8/30/2000
to yield 6.52% to 9/06/2000 19,800
20,000 Morgan Stanley & Co., Inc., purchased on
8/24/2000 to yield 6.49% to 9/07/2000 20,000
19,800 Nomura Securities International, Inc.,
purchased on 8/30/2000 to yield 6.54% to
9/06/2000 19,800
19,800 Paine Webber Inc., purchased on
8/31/2000 to yield 6.53% to 9/07/2000 19,800
20,000 Prudential Securities Inc., purchased on
8/25/2000 to yield 6.45% to 9/01/2000 20,000
19,800 S.G. Cowen Securities Corp., purchased on
8/29/2000 to yield 6.50% to 9/05/2000 19,800
19,800 Salomon Smith Barney, Inc., purchased on
8/31/2000 to yield 6.53% to 9/07/2000 19,800
6,909 UBS Warburg LLC, purchased on
8/31/2000 to yield 6.61% to 9/01/2000 6,909
Total Repurchase Agreements
(Cost--$284,909) 284,909
Total Investments (Cost--$408,204)--103.1% 408,135
Liabilities in Excess of Other Assets--(3.1%) (12,284)
--------
Net Assets--100.0% $395,851
========
*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, 2000
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 2000
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$408,204,293*) $ 408,135,416
Interest receivable 479,273
Prepaid registration fees and other assets 36,060
--------------
Total assets 408,650,749
--------------
Liabilities: Payables:
Securities purchased $ 9,975,014
Beneficial interest redeemed 2,080,765
Investment adviser 136,823
Distributor 106,506 12,299,108
--------------
Accrued expenses and other liabilities 501,060
--------------
Total liabilities 12,800,168
--------------
Net Assets: Net assets $ 395,850,581
==============
Net Assets Shares of beneficial interest, $.10 par value,
Consist of: unlimited number of shares authorized $ 39,591,946
Paid-in capital in excess of par 356,327,512
Unrealized depreciation on investments--net (68,877)
--------------
Net Assets--Equivalent to $1.00 per share based on
395,919,458 shares of beneficial interest outstanding $ 395,850,581
==============
*Cost for Federal income tax purposes. As of August 31, 2000, net
unrealized depreciation for Federal income tax purposes amounted to
$68,877 of which $6,888 related to appreciated securities and
$75,765 related to depreciated securities.
See Notes to Financial Statements.
<CAPTION>
Statement of Operations
For the Year Ended August 31, 2000
<S> <S> <C> <C>
Investment Income: Interest and amortization of premium and discount earned $ 30,521,197
Expenses: Investment advisory fees $ 2,421,705
Transfer agent fees 1,166,238
Distribution fees 611,208
Accounting services 92,435
Professional fees 71,680
Registration fees 61,395
Trustees' fees and expenses 47,047
Custodian fees 31,980
Printing and shareholder reports 30,493
Other 12,274
--------------
Total expenses 4,546,455
--------------
Investment income--net 25,974,742
--------------
Realized & Realized loss on investments--net (3,861)
Unrealized Change in unrealized depreciation on investments--net 311,178
Gain (Loss) on --------------
Investments--Net: Net Increase in Net Assets Resulting from Operations $ 26,282,059
==============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch U.S.A. Government Reserves
August 31, 2000
<TABLE>
FINANCIAL INFORMATION (concluded)
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 2000 1999
<S> <S> <C> <C>
Operations: Investment income--net $ 25,974,742 $ 27,102,214
Realized gain (loss) on investments--net (3,861) 149,003
Change in unrealized appreciation/depreciation
on investments--net 311,178 (743,742)
-------------- --------------
Net increase in net assets resulting from operations 26,282,059 26,507,475
-------------- --------------
Dividends & Investment income--net (25,970,881) (27,102,214)
Distributions to Realized gain on investments--net -- (149,003)
Shareholders: -------------- --------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (25,970,881) (27,251,217)
-------------- --------------
Beneficial Net proceeds from sale of shares 1,057,502,457 1,719,348,432
Interest Net asset value of shares issued to shareholders in
Transactions: reinvestment of dividends and distributions 25,968,491 27,249,536
-------------- --------------
1,083,470,948 1,746,597,968
Cost of shares redeemed (1,303,812,411) (1,737,993,644)
-------------- --------------
Net increase (decrease) in net assets derived from
beneficial interest transactions (220,341,463) 8,604,324
-------------- --------------
Net Assets: Total increase (decrease) in net assets (220,030,285) 7,860,582
Beginning of year 615,880,866 608,020,284
-------------- --------------
End of year $ 395,850,581 $ 615,880,866
============== ==============
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: 2000 1999 1998 1997 1996
<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 .0446 .0420 .0484 .0471 .0474
Realized and unrealized gain (loss) on
investments--net .0005 (.0010) .0007 .0005 (.0002)
-------- -------- -------- -------- --------
Total from investment operations .0451 .0410 .0491 .0476 .0472
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.0446) (.0420) (.0484) (.0471) (.0474)
Realized gain on investments--net -- (.0002) (.0001) (.0001) (.0003)
-------- -------- -------- -------- --------
Total dividends and distributions (.0446) (.0422) (.0485) (.0472) (.0477)
-------- -------- -------- -------- --------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total investment return 4.94% 4.29% 4.92% 4.81% 4.97%
======== ======== ======== ======== ========
Ratios to Average Expenses .84% .82% .83% .82% .82%
Net Assets: ======== ======== ======== ======== ========
Investment income and realized gain
on investments--net 4.82% 4.22% 4.82% 4.71% 4.78%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $395,851 $615,881 $608,020 $558,125 $554,285
Data: ======== ======== ======== ======== ========
See Notes to Financial Statements.
</TABLE>
Merrill Lynch U.S.A. Government Reserves
August 31, 2000
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 accounting principles generally accepted
in the United States of America, 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. If the counterparty defaults and
fair value of the collateral declines, liquidation of the collateral
by the Fund may be delayed or limited.
(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 Investment Managers, L.P. ("MLIM"). The general
partner of MLIM 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, 2000
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 MLIM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of MLIM, 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, value of shares reinvested 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, 2000, 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 auditing standards
generally accepted in the United States of America. 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, 2000 by
correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing 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, 2000, the
results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity
with accounting principles generally accepted in the United States
of America.
Deloitte & Touche LLP
Princeton, New Jersey
October 5, 2000
Merrill Lynch U.S.A. Government Reserves
August 31, 2000
IMPORTANT TAX INFORMATION (unaudited)
Of the Fund's net investment income distributions paid during the
fiscal year ended August 31, 2000, 35.18% was attributable to
Federal obligations. In calculating the foregoing percentage, Fund
expenses have been allocated on a pro-rata basis.
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.
Additionally, the Fund paid a long-term capital gain distribution of
$.0000104 per share to shareholders of record on August 30, 2000.
The entire long-term capital gain distribution is subject to a
maximum 20% tax rate.
Please retain this information for your records.
OFFICERS AND TRUSTEES
Terry K. Glenn, President and Trustee
M. Colyer Crum, Trustee
Laurie Simon Hodrick, 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
Donald C. Burke, Vice President and Treasurer
Phillip Gillespie, 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
