Commonwealth
Cash Reserve Fund
ANNUAL REPORT
March 31, 1999
Commonwealth Cash Reserve Fund, Inc.
P. O. Box 1192
Richmond, Virginia 23209-1192
(800) 338-3383
Message to our Shareholders
We are pleased to present the annual report for the Commonwealth Cash Reserve
Fund (the Fund) for the period ended March 31, 1999.
The U.S. econonmy in in the ninth year of an economic expansion, a fact that
has confounded many economists. Robust growthover the past twelve months,
accompanied by falling inflation and strong productivity gains, fueled
another yaer of strong stock market gains and a bond market rally that hit
its zenith in the second half of 1998 which pushed most interst rates to
their lowest level in decades. These gains, however, came in a period of
great price volatility. This last year will be noteworthy in history as one
which saw a near financial panic worldwide emanating initially from Asia and
a large hedge fund failure but which moved quickly to Russia and Latin
America. During this brief but very significant period, most world stock
markets, including the U.S., experienced very heavy losses while interest
rates in the U.S. plunged. In September, the Federal Reserve moved
agressively to lower rates with the first of three reductions in the
overnight bank rate that brought it from 5.50% to 4.75% in six weeks. This
agressive by our central bank restored confidence in our U.S. markets and
commenced the recovery in most world markets. In an abrupt turnaround, by
the end of the Fund's fiscal year, investors were focused on the strong
worldwide recovery and the potential for inflation. U.S. investors were
also concerned that worker productivity gains and declines in commodity
prices, which have contained inflation over the past few years, may soon end.
In this environment of global economic crises, within a period of strong
economic growth and suprisingly low inflation, many local government
invetors turned to the Fund to provide stable short-term returns and daily
liquidity. Becasue a money market fund such as the Commonwealth Cash
Reserve Fund can invest in only short-term investment securities with terms
to maturity as long as thirteen months, the return will be relatively stable
and will generally outperform alternative short-term investments during
periods of declining and volatile interest rates. Thus investors in the
Fund enjoyed above average market returns during the fiscal year.
To ensure that investor funds are properly safeguarded during these volatile
times, we have continued to focus attention on maintaining a high level of
credit quality. In particular, a prudent percentage of the portfolio has
been invested in U.S. Goverment obligations and repurchase agreements backed
by U.S. Government obligations. At the end of the quarter, fully 30% of the
portfolio was invested in these securities ensuring both superior credit
quality and a high degree of liquidity. The remainder of the portfolio is
invested in other top rated short-term money market securities.
The Commonwealth Cash Reserve Fund will continue its tradition of care and
prudence in the management of local government investments. We look forward
to the continued opportunity to meet your investment needs.
Report of Independent Auditors
To the Shareholders and Board of Directors of the
Commonwealth Cash Reserve Fund, Inc.
We have audited the statement of net assets of the Commonwealth Cash Reserve
Fund, Inc. (the "Fund") as of March 31, 1999, and the related statement of
operations, statement of changes in net assets, and financial highlights for
the year then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights
based on our audit. The statement of changes in net assets for the year
ended March 31, 1998 and financial highlights for the years through
March 31, 1998 were audited by other auditors whose report dated April 24,
1998, expressed an unqualified opinion on that financial statement and those
financial highlights.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to
obtain reasonable assurance about whether the financial statements and
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 as of March 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 audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above represent fairly, in all material respects, the financial position of
the Fund at March 31, 1999, the results of its operations, the changes in
its net assets and its financial highlights for the year then ended, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
April 20, 1999
COMMONWEALTH CASH RESERVE FUND, INC.
Statement of Net Assets
March 31, 1999
Face
Amount Value
($000) Rate Date ($000)
BANKER'S ACCEPTANCES (4.6%)
Mellon Bank $1,792 4.78% 4/27/99 $1,786
Mellon Bank 1,738 4.81% 5/06/99 1,730
Mellon Bank 1,680 4.81% 5/18/99 1,669
------
TOTAL BANKER'S ACCEPTANCES 5,185
------
CERTIFICATES OF DEPOSIT (20.7%)
CIBC Bank (NY) 1,000 5.74% 4/01/99 1,000
Rabobank (NY) 4,500 5.71% 4/16/99 4,501
Rabobank (NY) 1,000 5.70% 4/20/99 1,000
Bank of Montreal (CHIC) 3,500 4.86% 4/21/99 3,500
Morgan Guaranty Trust 7,000 4.85% 5/17/99 7,000
Toronto Dominion Bank (NY) 6,500 5.05% 2/14/00 6,492
------
TOTAL CERTIFICATES OF DEPOSIT 23,493
------
COMMERCIAL PAPER (39.6%)
Salomon Smith Barney Holdings, Inc. 5,900 4.86% 4/08/99 5,894
J.P. Morgan & Co., Inc. 2,800 4.86% 4/09/98 2,797
Centric Captial Corp. 4,500 4.89% 4/12/98 4,493
Bear Stearns Co., Inc. 4,500 4.87% 4/13/98 4,493
J.P. Morgan & Co., Inc. 3,000 4.93% 4/19/98 2,993
Credit Suisse First Boston 7,000 4.88% 4/22/98 6,980
General Electric Capital Corp. 3,000 5.09% 4/22/98 2,991
Ford Motor Credit Corp. 6,000 4.87% 4/27/99 5,979
Bear Stearns Co., Inc. 2,000 4.90% 5/17/99 1,988
Goldman Sachs Corp. 6,500 4.88% 5/19/99 6,458
------
TOTAL COMMERCIAL PAPER 45,066
------
CORPORATE NOTE (5.7%)
First National Bank of Chicago 6,500 4.86% 5/04/99 6,500
------
TOTAL CORPORATE NOTE 6,500
------
U.S. GOVERNMENT AND AGENCY
OBLIGATIONS (28.9%)
Federal Home Loan Bank Note 3,000 5.61% 6/11/99 2,999
Federal Home Loan Bank Note 4,000 5.00% 1/05/00 3,999
Federal Home Loan Bank Note 2,000 5.05% 3/01/00 2,000
Federal Home Loan Bank Discount Note 885 4.80% 4/01/99 885
Student Loan Marketing Association
Irrevocable Letter of Credit
Guaranteeing Notes of USA Group
Secondary Market Services 15,218 4.84% 4/09/99 15,202
Federal Home Loan Mortgage
Corporation Discount Note 520 4.78% 4/15/99 519
Federal Home Loan Mortgage
Corporation Discount Note 1,540 4.80% 4/23/99 1,536
Federal Home Loan Mortgage
Corporation Discount Note 4,210 4.80% 5/06/99 4,190
Federal Home Loan Mortgage
Corporation Discount Note 1,566 4.85% 5/20/99 1,556
------
TOTAL U.S. GOVERNMENT AND AGENCY
OBLIGATIONS 32,886
------
TOTAL INVESTMENTS (99.5%) (Cost $113,130) 113,130
-------
OTHER ASSETS AND LIABILITIES
Interest Receivable and Other Assets 663
Distribution Fees Payable (2)
Audit Fees Payable (9)
Legal Fees Payable (8)
Custodian Fees Payable (4)
Other Accrued Expenses (39)
-------
601
-------
NET ASSETS (100%)
Applicable to 113,731,400 outstanding shares of
beneficial interest (500,000,000 shares authorized
- no par value) 113,731
-------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION
PRICE PER SHARE $ 1.00
-------
AT MARCH 31, 1999 NET ASSETS CONSISTED OF:
Amount Per
(000) Share
Paid in Capital $113,731 $ 1.00
Undistributed Net Investment Income - -
Accumulated Net Realized Gain - -
Unrealized Appreciation (Depreciation)
of Investments - -
------- ----
NET ASSETS $113,731 $ 1.00
------- ----
The accompanying notes are an integral part of these financial statements.
Statement of Operations
Year Ended March 31, 1999
(000)
INVESTMENT INCOME
Income
Interest $ 7,198
-----
Expenses
Management Fees 225
Custodian 26
Distribution Fees 31
Legal 23
Audit 12
Directors Fees and Expenses 8
Insurance, Registration Fees and Other 10
Miscellaneous 3
Expenses waived by Investment Advisor and Distributor (136)
-----
Total Expenses 199
-----
Net Investment Income $ 6,999
-----
Net Increase in Net Assets
Resulting From Operations $ 6,999
-----
Statement of Changes in Net Assets
Year Ended March 31,
1999 1998
(000) (000)
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS
Net Investment Income $ 6,999 $ 6,477
------- -------
DISTRIBUTIONS
Net Investment Income (6,999) (6,477)
------- -------
CAPITAL SHARE TRANSACTIONS (at $1.00 per share)
Issued 373,085 216,592
Redeemed (386,712) (218,893)
Distributions Reinvested 6,999 6,477
------- -------
Net Increase (Decrease) from Capital Share
Transactions (6,628) 4,176
------- -------
Total Increase (Decrease) in Net Assets (6,628) 4,176
------- -------
NET ASSETS
Beginning of Year 120,359 116,183
------- -------
End of Year $113,731 $120,359
------- -------
The accompanying notes are an integral part of these financial statements.
<TABLE>
Financial Highlights
<CAPTION>
Year Ended March 31,
For a Share Outstanding
Throughout Each Year 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.053 0.055 0.053 0.058 0.049
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS 0.053 0.055 0.053 0.058 0.049
------ ------ ------ ------ ------
LESS: DISTRIBUTIONS
Net Investment Income (0.053) (0.055) (0.053) (0.058) (0.049)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS (0.053) (0.055) (0.053) (0.058) (0.049)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------
Total Return 5.40% 5.68% 5.43% 5.90% 5.01%
------ ------ ------ ------ ------
Ratios/Supplemental Data
Net Assets, End of Period (000) $113,731 $120,359 $116,183 $102,614 $130,940
Ratio of Expenses to Average
Net Assets <F1> 0.15% 0.15% 0.15% 0.15% 0.70%
Ratio of Net Investment Income
to Average Net Assets 5.28% 5.54% 5.31% 5.78% 4.91%
-------- -------- -------- -------- --------
<FN>
<F1>
Certain fees were voluntarily waived in the fiscal years ended March 31, 1999, 1998,
1997, 1996 and 1995. If these fees had not been waived, the ratio of expenses to
average net assets would have been .25%, .25%, .28%, .29% and .29% respectively for
the fiscal years ended March 31, 1999, 1998, 1997, 1996 and 1995. The ratio of net
investment income to average net assets would have been 5.18%, 5.44%, 5.18%, 5.64%
and 4.77%, for the fiscal years ended March 31, 1999, 1998, 1997, 1996 and 1995,
respectively.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
ORGANIZATION
A. The Commonwealth Cash Reserve Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as a diversified open-end investment
company and was organized as a Virginia corporation on December 8, 1986.
The Fund provides comprehensive investment management to counties, cities,
towns, political subdivisions and public bodies. The Fund invests in
short-term debt instruments issued by the U.S. government or its agencies and
instrumentalities and by companies primarily operating in the banking
industry; the issuers' abilities to meet their obligations may be affected
by economic developments in such industry.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
B. The following significant accounting policies of the Fund are in
conformity with generally accepted accounting principles. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the amounts and disclosures reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
significant accounting policies are as follows:
1. Securities held are valued at amortized cost, which approximates fair
value at March 31, 1999. It is the Fnd's policy to compare amortized cost
and fair value of securities weekly and on the last business day of each
month.
2. Security transactions are accounted for on the trade date. Costs used
in determining realized gains and losses on sales of investment securities
are those of specific securities sold. Interest income is recorded using
the accrual method. Discounts and premiums are accreted and amortized,
respectively, to interest income over the lives of the respective securities.
3. Dividends from net investment income are declared daily and reinvested
in each participant's account by the purchase of additional shares of the
Fund on the last business day of each month.
4. The Fund invests cash in repurchase agreements secured by U.S.
Government and Agency obligations. Securities pledged as collateral for
repurchase agreements are held by the Fund's custodian bank until
maturity of the repurchase agreement. Provisions of each agreement
require that the market value of the collateral including accrued interest
thereon, is sufficient in the event of default; however, in the event of
default or bankruptcy by the other party to the agreement, realization and/or
retention of the collateral may be subject to legal proceedings. As of March
31, 1999, there were no repurchase agreements held by the Fund.
5. The Fund intends to continue to qualify as a "regulated investment
company" under the Internal Revenue Code and distribute all of its taxable
income. Accordingly, no provision for federal income taxes is required in
the financial statements. As March 31, 1999, the cost of securities for
federal income tax purposes is the same as the amounts reported for
financial reporting purposes.
FEES AND CHARGES
C. Public Financial Management, Inc. ("PFM"), an investment advisory firm,
provides investment advisory, administration, and transfer agent services
to the Fund, pursuant to separate agreements with the Fund expiring November
21, 1999. Fees for investment advisory services are calculated at an annual
rate of .12 of 1% of the Fund's average daily net assetsup to $200 million,
.10% on the next $200 million, .09% on the next $200 million and .08% on
such assets in excess of $600 million. Fees for administration services
are calculated at an annual rate of .05% of average daily net assets. Fees
for transfer agent services are limited to out-of-pocket expenses attributable
to the performance of duties under the transfer agency agreement. There have
been no transfer agent fees charged for the year ended March 31, 1999. PFM
waived $130,000 of its fees under the advisory, administration, and transfer
agency agreements so that the aggregate operating expenses of the Fund for
the Fund's fiscal year ended March 31, 1999would not exceed .15% of the
Fund's average net assets. Fees paid to PFM, after such waiver for the year
represented .07% of average net assets.
The Fund has adopted an Amended and Restated Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1 of the Investment Company Act of
1940 which permits the Fund to bear certain expenses in connection with the
distribution of its shares, provided the requirements of the Rule are met.
Commonwealth Financial Group, Inc. (the "Distributor") serves as the Fund's
Distributor pursuant to the distribution agreement with the Fund. The
President and a director of the Fund is the President and sole shareholder
of the Distributor. The Distribution Plan authorizes the Fund to reimburse
the Distributor for expenses incurred by the Distributor in connection with
the sale, promotion and distribution of Fund shares, in an amount not to
exceed .25% of the Fund's average daily net asset value in any year. Any
payments made under the Plan shall be made only as determined from time to
time by the Board of Directors. For the year ended March 31, 1999, total
payments made to the Distributor under the Plan were $26,700, after
waiving fees of $6,000.
During the year ended March 31, 1999, the Fund paid approximately $11,400
for legal services of a law firm of which the Secretary of the Fund is
a Partner.
GOVERNMENT ACCOUNTING STANDARDS
D. Under Governmental Accounting Standards ("GAS"), state and local
governments, including school districts and other municipal entities, are
required to classify their investments, excluding pools managed by
governments or investment funds similar to the Fund in prescribed
categories of credit risk. Although the Fund is not subject to GAS its
March 31, 1999 investments have been classified for the information of
the participants as Category 1 investments. Category 1 includes investments
that are insured or registered or are held by the Fund or its agent in the
Fund's name. Category 2 includes uninsured and unregistered investments
held by the broker's or dealer's trust department or agent in the Fund's name.
Category 3 includes uninsured and unregistered investments held by broker's or
dealer's trust department or agent but not in the Fund's name.
Other Information
CHANGE IN INDEPENDENT AUDITOR
On June 24, 1998, the Fund's Board of Directors Determined not to retain
PricewaterhouseCoopers LLP ("PwC") as the Fund's independent auditor. At
the same time, the Board voted to appoint Ernst & Young LLP to serve as the
Fund's independent auditor for the fiscal year ended March 31, 1999. As
required under rules adopted by the Securities and Exchange Commission, this
change was reported on the Fund's semi-annual report on Form N-SAR, which
report was filed with the Commission on December 7, 1998. During the Fund's
two most recent fiscal years prior to the change in independent auditor,
PwC's audit reports contained no adverse opinion or disclaimer of opinion, nor
were the reports qualified or modified as to uncertainty, audit scope, or
accounting principles or practices, financial statement disclosure, or
auditing scope procedures, which disagreement, if not resolved to PwC's
satisfaction, would have caused PwC to make a reference to the subject matter
of the disagreement in connection with its report. PwC's report on the Fund's
financial statements for the two most recent fiscal years prior to the change
in independent auditor, did not contain any adverse opinion and was not
qualified as to uncertainty, audit scope or accounting principles.
YEAR 2000
As the Year 2000 approaches, an issue has emerged regarding how existing
microprocessors, computer hardware and computer software, including software
programs and operating systems can accomodate this date value. Failure of
systems could affect net asset values, portfolio yields, shareholder
services and the processing of transactions. The Fund has taken steps that
it believes are reasonably designed to address the potential failure of
systems used by the Fund and its third party service providers, including
the custodians, due to the Year 2000 issues. The Fund has identified the
systems which it has assessed as mission critical, and is obtaining
readiness disclosure statements from vendors, significant counter-parties,
suppliers and other service providers. Testing of the mission critical
systems was in process at March 31, 1999, and is expected to be completed
by the end of the second quarter of 1999. Additionally, the Fund is in the
process of developing a contingency plan which it expects to complete by the
end of third quarter of 1999.
The Fund does not expect that the financial condition or results of operations
of the Fund will be significantly affected by the costs of converting systems.
However, because of the ultimately unpredictable consequences of the Year 2000
issue, the Year 2000 could have a material impact on the operations of the
Fund.
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Investment Adviser
Public Financial Management, Inc.
Governor's Plaza North
2101 North Front Street
Building 3, Suite 200
Harrisburg, Pennsylvania 17110
Custodian
Wachovia Bank, N.A.
1021 East Cary Street
P. O. Box 27602
Richmond, Virginia 23261
Administrator and Transfer Agent
Public Financial Management, Inc.
Governor's Plaza North
2101 North Front Street
Building 3, Suite 200
Harrisburg, Pennsylvania 17110
Distributor
Commonwealth Financial Group, Inc.
38 Cohasset Lane
Cherry Hill, New Jersey 08003
Independent Accountants
Ernst & Young, LLP
Two Commerce Square, Suite 4000
2001 Market Street
Philadelphia, Pennsylvania 19103
Co-Counsel
McGuire, Woods, Battle & Boothe, L.L.P.
One James Center
901 E. Cary Street
Richmond, Virginia 23219
Laura Anne Corsell, Esq.
7307 Elbow Lane
Philadelphia, Pennsylvania 19119
This report is not authorized for distribution to prospective
investors unless preceded or accompanied by a current
prospectus. The prospectus can be obtained from the Fund's
Distributor. The prospectus provides more complete
information including charges and expenses. Please read it
carefully before investing.
