MERRILL LYNCH
U.S.A. GOVERNMENT
RESERVES
FUND LOGO
Semi-Annual Report
February 29, 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
February 29, 2000
DEAR SHAREHOLDER
For the six-months ended February 29, 2000, Merrill Lynch U.S.A.
Government Reserves paid shareholders a net annualized dividend of
4.55%*. The Fund's 7-day yield as of February 29, 2000 was 4.82%.
The average portfolio maturity for Merrill Lynch U.S.A. Government
Reserves at February 29, 2000 was 44 days, compared to 68 days at
August 31, 1999.
The Environment
The US economy continued to enjoy above-average growth during the
last half of 1999 and into the first quarter of 2000. Gross domestic
product (GDP) growth for the last six months of 1999 grew at a rate
of 6.3%, well above expectations this far into the current economic
cycle, and much higher than the target for GDP set by the Federal
Reserve Board. Currently, more Americans have jobs and are enjoying
increases in their income as seen in the low unemployment rate and
large number of new jobs created (283,000 average for the fourth
quarter). This, as well as the relentless rise in equity prices, has
created a momentum in consumer demand that has yet to be dampened by
rising interest rates.
The recovery of overseas economies boosted export levels that
suffered during the first half of 1999, contributing to the strong
US GDP. The Federal Reserve Board remains concerned that although
productivity gains are high, they cannot keep pace with the demand,
and imbalances are developing in the economy that may soon prove to
be inflationary. A more visible sign of pressure is the price of
oil, which recently exceeded $30 per barrel. Oil price pressures are
expected to continue during the spring and summer since oil
inventories are low. The outlook for an increased oil supply is
uncertain, as the Organization of Petroleum Exporting Countries has
just begun its meetings to discuss production quotas.
The Federal Reserve Board took extraordinary steps to ensure
liquidity in the financial markets because of Year 2000 concerns.
The Federal Reserve Board moved to tighten policy once during the
last quarter of 1999, but adopted a neutral bias through year-end in
an effort to reassure investors and eliminate uncertainty. However,
growth remained strong and another 25 basis point (0.25%) interest
rate hike was implemented in early February. At that time, the
Treasury announced anticipated changes to the auction schedule. The
Federal budget surplus has made it necessary to decrease the amount
of securities sold by the Treasury, therefore changes will include
reduced auctions and auction sizes as well as a buy-back program
(the Treasury intends to buy back old, off-the-run, less-liquid
issues in order to keep current issues liquid). The announcement
caused unexpected results as the yield curve inverted dramatically
as investors rushed to buy the longer issues. At this time, it is
unclear when this technical inversion will be unwound, as it seems
likely to us that further short-term interest rate hikes will be
forthcoming as long as the current economic momentum continues.
*Based on a constant investment throughout the period, with
dividends compounded daily, and reflecting a net return to the
investor after all expenses.
Portfolio Matters
During the six-month period ended February 29, 2000, our strategy
centered on the availability of collateral over the year-end, as a
large percentage of the fund's assets are typically allocated to
repurchase agreements. At the same time, there was concern that
redemptions could be heavy during the end of the year because of the
century date change. Therefore, we reduced our allocation to
repurchase agreements, but preferred overnight repurchase agreements
as opposed to term. We then increased our holdings in Treasury
bills. Three-month and six-month Treasury bills alternated in
relative value while interest rates rose during the period,
providing the added benefit of excellent liquidity. The steepness of
the yield curve out to two years presented opportunities to buy
Treasury coupons in the 12-month - 18-month sector, and coupons were
trading at a 20 basis points yield advantage to Treasury bills.
However, since the beginning of the year, we have adopted a much
more conservative strategy. We reduced the fund's average life in
expectation of higher interest rates, suspending all purchases of
maturities one year or longer.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Trustee
(Linda B. Costanzo)
Linda B. Costanzo
Vice President and Senior Portfolio Manager
March 28, 2000
Merrill Lynch U.S.A. Government Reserves
February 29, 2000
SCHEDULE OF INVESTMENTS (in Thousands)
Face Interest Maturity
Issue Amount Rate Date Value
US Government Obligations--37.8%
US Treasury Bills* $ 5,000 4.99 % 3/02/2000 $ 4,999
7,000 4.905 3/09/2000 6,991
7,000 4.91 4/06/2000 6,964
4,000 5.115 4/20/2000 3,971
6,000 5.405 4/27/2000 5,948
25,000 5.70 4/27/2000 24,770
3,000 5.705 4/27/2000 2,974
8,000 5.50 5/11/2000 7,911
5,000 5.25 5/18/2000 4,940
7,000 5.53 5/18/2000 6,915
7,000 5.58 6/22/2000 6,876
3,000 5.765 8/17/2000 2,919
6,000 4.995 9/14/2000 5,810
3,000 5.245 11/09/2000 2,876
US Treasury Notes 8,000 5.50 3/31/2000 8,000
10,000 6.875 3/31/2000 10,012
15,000 6.375 5/15/2000 15,014
3,000 6.25 5/31/2000 3,003
13,000 5.375 6/30/2000 12,976
2,000 5.875 6/30/2000 2,000
16,000 5.375 7/31/2000 15,960
4,000 6.125 7/31/2000 4,003
25,000 5.125 8/31/2000 24,875
1,000 4.50 9/30/2000 990
7,000 4.00 10/31/2000 6,897
4,842 5.75 10/31/2000 4,825
1,300 4.625 12/31/2000 1,282
809 4.875 3/31/2001 796
2,000 5.00 4/30/2001 1,969
Total US Government Obligations
(Cost--$207,885) 207,466
Face
Amount Issue
Repurchase Agreements**--63.4%
$27,000 Chase Securities Inc., purchased on 2/29/2000
to yield 5.83% to 3/01/2000 27,000
SCHEDULE OF INVESTMENTS (in Thousands)
Face
Amount Issue Value
Repurchase Agreements (concluded)
$27,000 Credit Suisse First Boston, International Ltd.,
purchased on 2/23/2000 to yield 5.70% to
3/01/2000 $ 27,000
27,000 Deutsche Bank AG, NY, purchased on
2/29/2000 to yield 5.83% to 3/01/2000 27,000
27,000 Donaldson, Lufkin & Jenrette, purchased on
2/24/2000 to yield 5.68% to 3/02/2000 27,000
28,000 Goldman Sachs Group, Inc., purchased on
2/18/2000 to yield 5.76% to 3/17/2000 28,000
27,000 Greenwich Funding Corp., purchased on
2/24/2000 to yield 5.68% to 3/02/2000 27,000
25,352 J.P. Morgan Securities Inc., purchased on
2/29/2000 to yield 5.81% to 3/01/2000 25,352
25,000 Morgan Stanley & Company, purchased on
2/23/2000 to yield 5.72% to 3/03/2000 25,000
27,000 Nomura Securities International, Inc.,
purchased on 2/29/2000 to yield 5.83% to
3/01/2000 27,000
27,000 Paine Webber Jackson, purchased on
2/29/2000 to yield 5.83% to 3/01/2000 27,000
27,000 Prudential Securities Inc., purchased on
2/23/2000 to yield 5.72% to 3/01/2000 27,000
27,000 S.G. Cowen Securities, purchased on
2/24/2000 to yield 5.70% to 3/02/2000 27,000
27,000 Salomon, Smith Barney Holdings, Inc.,
purchased on 2/23/2000 to yield 5.69% to
3/01/2000 27,000
Total Repurchase Agreements
(Cost--$348,352) 348,352
Total Investments (Cost--$556,237)--101.2% 555,818
Liabilities in Excess of Other Assets--(1.2%) (6,522)
--------
Net Assets--100.0% $549,296
========
[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
February 29, 2000
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of February 29, 2000
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$556,236,744*) $ 555,818,447
Cash 57
Receivables:
Interest $ 1,493,851
Beneficial interest sold 60,000 1,553,851
--------------
Prepaid registration fees and other assets 37,543
--------------
Total assets 557,409,898
--------------
Liabilities: Payables:
Beneficial interest redeemed 7,399,550
Distributor 180,576
Investment adviser 173,587 7,753,713
--------------
Accrued expenses and other liabilities 359,700
--------------
Total liabilities 8,113,413
--------------
Net Assets: Net assets $ 549,296,485
==============
Net Assets Shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized $ 54,971,478
Paid-in capital in excess of par 494,743,304
Unrealized depreciation on investments--net (418,297)
--------------
Net Assets--Equivalent to $1.00 per share based on 549,714,781
shares of beneficial interest outstanding $ 549,296,485
==============
*Cost for Federal income tax purposes. As of February 29, 2000, net
unrealized depreciation for Federal income tax purposes amounted to
$418,297, of which $1,624 related to appreciated securities and
$419,921 related to depreciated securities.
See Notes to Financial Statements.
<CAPTION>
Statement of Operations
For the Six Months Ended
February 29, 2000
<S> <S> <C> <C>
Investment Income: Interest and amortization of premium and discount earned $ 15,759,034
Expenses: Investment advisory fees $ 1,325,733
Transfer agent fees 595,630
Distribution fees 339,704
Registration fees 50,394
Professional fees 38,792
Printing and shareholder reports 30,401
Accounting services 27,784
Trustees' fees and expenses 22,989
Custodian fees 21,590
Other 4,872
--------------
Total expenses 2,457,889
--------------
Investment income--net 13,301,145
--------------
Realized & Realized loss on investments--net (12,347)
Unrealized Change in unrealized depreciation on investments--net (38,242)
Loss on --------------
Investments--Net: Net Increase in Net Assets Resulting from Operations $ 13,250,556
==============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch U.S.A. Government Reserves
February 29, 2000
FINANCIAL INFORMATION (concluded)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Six For the
Months Ended Year Ended
February 29, August 31,
Increase (Decrease) in Net Assets: 2000 1999
<S> <S> <C> <C>
Operations: Investment income--net $ 13,301,145 $ 27,102,214
Realized gain (loss) on investments--net (12,347) 149,003
Change in unrealized appreciation/depreciation on
investments--net (38,242) (743,742)
-------------- --------------
Net increase in net assets resulting from operations 13,250,556 26,507,475
-------------- --------------
Dividends & Investment income--net (13,288,798) (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 (13,288,798) (27,251,217)
-------------- --------------
Beneficial Net proceeds from sale of shares 677,518,763 1,719,348,432
Interest Net asset value of shares issued to shareholders in
Transactions: reinvestment of dividends and distributions 13,287,104 27,249,536
-------------- --------------
690,805,867 1,746,597,968
Cost of shares redeemed (757,352,006) (1,737,993,644)
-------------- --------------
Net increase (decrease) in net assets derived from
beneficial interest transactions (66,546,139) 8,604,324
-------------- --------------
Net Assets: Total increase (decrease) in net assets (66,584,381) 7,860,582
Beginning of period 615,880,866 608,020,284
-------------- --------------
End of period $ 549,296,485 $ 615,880,866
============== ==============
See Notes to Financial Statements.
<CAPTION>
Financial Highlights
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
February 29, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
Per Share Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .0225 .0420 .0484 .0471 .0474
Realized and unrealized gain (loss) on
investments--net (.0001) (.0010) .0007 .0005 (.0002)
-------- -------- -------- -------- --------
Total from investment operations .0224 .0410 .0491 .0476 .0472
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.0225) (.0420) (.0484) (.0471) (.0474)
Realized gain on investments--net -- (.0002) (.0001) (.0001) (.0003)
-------- -------- -------- -------- --------
Total dividends and distributions (.0225) (.0422) (.0485) (.0472) (.0477)
-------- -------- -------- -------- --------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total investment return 4.55%* 4.29% 4.92% 4.81% 4.97%
======== ======== ======== ======== ========
Ratios to Average Expenses .83%* .82% .83% .82% .82%
Net Assets: ======== ======== ======== ======== ========
Investment income and realized gain
on investments--net 4.51%* 4.22% 4.82% 4.71% 4.78%
======== ======== ======== ======== ========
Supplemental Data: Net assets, end of period (in thousands) $549,296 $615,881 $608,020 $588,125 $554,285
======== ======== ======== ======== ========
*Annualized.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch U.S.A. Government Reserves
February 29, 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 generally accepted accounting
principles, which may require the use of management accruals and
estimates. These unaudited financial statements reflect all
adjustments, which are, in the opinion of management, necessary to a
fair statement of the results for the interim period presented. All
such adjustments are of a normal recurring nature. 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
the 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 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
February 29, 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 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, value of shares reinvested and cost of shares redeemed,
respectively, since shares are recorded at $1.00 per share.
Merrill Lynch U.S.A. Government Reserves
February 29, 2000
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
Linda B. Costanzo, Vice President
Donald C. Burke, Vice President and Treasurer
William E. Zitelli, Secretary
Donald Cecil and Edward H. Meyer, Trustees of Merrill Lynch U.S.A.
Government Reserves have recently retired. The Fund's Board of
Trustees wishes Mr. Cecil and Mr. Meyer well in their retirements.
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
