N-30D 1 dn30d.txt GOVERNMENT FUND SEMI ANNUAL REPORT DATED April 2, 2002 Dear Shareholder: We are pleased to present this report on the Hilliard-Lyons Government Fund ("HLGF" or the "Fund") for the six months ended February 28, 2002. After eight straight years of growth in assets, the net assets of the Fund decreased $88 million during the six months to $1.8 billion. Historically low interest rates have some investors looking for higher yielding alternatives. The trend is the same for other money market funds which, as a group, have seen assets decline so far this calendar year. In the 30-year history of money market funds, there has only been one year in which money market fund assets decreased and that was 1983 when deregulation made bank products an attractive alternative. The Federal Reserve (the "Fed") cut the federal funds rate, which is the rate banks charge each other for overnight loans, eleven times last year lowering it from 6.50% to 1.75%. The federal funds rate affects interest rates on a variety of loans that impact the average consumer from mortgage rates to credit cards. The prime lending rate charged by commercial banks stands at 4.75%, a level last seen in November 1965. The Fed left interest rates unchanged at its most recent meeting and shifted to a "neutral" stance which indicates rates could be raised or lowered as deemed necessary to further the economic recovery. Many economists predict the Fed will raise rates at its next meeting in June. We feel that the next major change will be in the direction of higher rates. We would guess that the lows had been seen. These possible interest rate increases have made many stock market investors nervous and many have taken a wait and see attitude. Investors are also waiting for corporate first quarter earnings reports due to be released shortly. However, these jitters have been largely offset by a belief that the economic recovery is taking hold and increasing consumer confidence. Consumer confidence as rated by the Conference Board had its largest one month increase in eleven years in February. It is quite positive if consumers believe the recession is over since spending should increase thereby fueling the economic recovery. Low interest rates, while attractive to borrowers, disappoint savers. HLGF offers its shareholders a competitive yield with the added value of dividends that are exempt from state income tax in all states. HLGF is also one of the few money market funds to offer completely free checkwriting. We are committed to giving our clients a money market fund to meet their needs for quality, convenience and service. /s/ Donald F. Kohler /s/ Joseph C. Curry, Jr. /s/ Dianna P. Wengler DONALD F. KOHLER JOSEPH C. CURRY, JR. DIANNA P. WENGLER Chairman President Vice President and Treasurer HILLIARD-LYONS GOVERNMENT FUND, INC. SCHEDULE OF INVESTMENTS (UNAUDITED) February 28, 2002
Principal Purchase Maturity Amount Yield Date Value ----------- -------- -------- ----------- U.S. GOVERNMENT AGENCY OBLIGATIONS--100.1% $28,810,000 Federal Home Loan Bank 1.812% 03/01/02 $28,810,000 19,000,000 Federal Home Loan Bank 1.833 03/04/02 18,997,150 8,000,000 Federal Home Loan Bank 1.741 03/05/02 7,998,480 14,000,000 Federal Home Loan Bank 1.726 03/05/02 13,997,356 34,000,000 Federal Home Loan Bank 1.812 03/06/02 33,991,594 27,000,000 Federal Home Loan Bank 1.700 03/07/02 26,992,485 20,000,000 Federal Home Loan Bank 1.711 03/08/02 19,993,467 11,000,000 Federal Home Loan Bank 2.230 03/08/02 10,995,337 20,000,000 Federal Farm Credit Bank 1.795 03/11/02 19,990,222 19,000,000 Federal Farm Credit Bank 1.760 03/12/02 18,989,956 34,000,000 Federal Home Loan Bank 1.679 03/13/02 33,981,300 15,000,000 Federal Home Loan Bank 1.716 03/14/02 14,990,792 25,000,000 Federal Home Loan Bank 1.815 03/15/02 24,982,694 25,000,000 Federal Home Loan Bank 1.680 03/18/02 24,980,521 19,000,000 Federal Home Loan Bank 1.711 03/19/02 18,984,040 25,000,000 Federal Home Loan Bank 1.711 03/20/02 24,977,833 25,000,000 Federal Home Loan Bank 1.711 03/21/02 24,976,667 25,000,000 Federal Home Loan Bank 1.680 03/22/02 24,975,938 20,000,000 Federal Home Loan Bank 1.680 03/25/02 19,978,000 17,000,000 Federal Home Loan Bank 1.680 03/26/02 16,980,521 5,000,000 Federal Home Loan Bank 1.698 03/27/02 4,993,969 18,500,000 Federal Home Loan Bank 2.430 03/27/02 18,470,739 5,150,000 Federal Farm Credit Bank 1.711 03/28/02 5,143,511 10,000,000 Federal Home Loan Bank 1.680 03/28/02 9,987,625 22,784,000 Federal Home Loan Bank 1.720 04/01/02 22,750,843 25,000,000 Federal Farm Credit Bank 1.939 04/02/02 24,957,778 27,000,000 Federal Home Loan Bank 1.711 04/03/02 26,958,420 8,000,000 Federal Home Loan Bank 1.751 04/04/02 7,987,004 15,000,000 Federal Home Loan Bank 1.577 04/04/02 14,978,042 20,000,000 Federal Home Loan Bank 2.218 04/05/02 19,957,903 31,000,000 Federal Home Loan Bank 1.675 04/08/02 30,946,008 25,000,000 Federal Farm Credit Bank 1.690 04/09/02 24,955,042 25,000,000 Federal Home Loan Bank 1.994 04/10/02 24,945,833 31,000,000 Federal Farm Credit Bank 1.889 04/11/02 30,934,685 25,000,000 Federal Home Loan Bank 2.234 04/12/02 24,936,417 38,000,000 Federal Home Loan Bank 1.788 04/15/02 37,916,875 34,000,000 Federal Home Loan Bank 1.962 04/16/02 33,916,587 23,000,000 Federal Home Loan Bank 2.203 04/17/02 22,935,440 35,000,000 Federal Farm Credit Bank 1.753 04/18/02 34,919,733 22,000,000 Federal Home Loan Bank 1.554 04/19/02 21,953,586 23,000,000 Federal Home Loan Bank 1.670 04/22/02 19,952,622 26,000,000 Federal Farm Credit Bank 1.712 04/23/02 25,935,693 15,000,000 Federal Home Loan Bank 1.578 04/24/02 14,965,125
See notes to financial statements. 2 HILLIARD-LYONS GOVERNMENT FUND, INC. SCHEDULE OF INVESTMENTS (UNAUDITED) February 28, 2002
Principal Purchase Maturity Amount Yield Date Value ----------- -------- -------- -------------- $15,896,000 Federal Home Loan Bank 1.953% 04/24/02 $ 15,850,458 17,000,000 Federal Farm Credit Bank 1.700 04/25/02 16,956,626 13,000,000 Federal Home Loan Bank 1.578 04/25/02 12,969,215 21,000,000 Federal Farm Credit Bank 2.076 04/26/02 20,933,687 28,000,000 Federal Home Loan Bank 1.568 04/29/02 27,929,331 32,000,000 Federal Home Loan Bank 1.568 04/30/02 31,917,867 22,000,000 Federal Home Loan Bank 1.731 05/01/02 21,936,628 17,000,000 Federal Home Loan Bank 1.744 05/02/02 16,949,935 36,000,000 Federal Home Loan Bank 1.744 05/03/02 35,892,270 24,000,000 Federal Home Loan Bank 1.744 05/06/02 23,924,760 29,000,000 Federal Home Loan Bank 1.712 05/07/02 28,909,326 33,000,000 Federal Home Loan Bank 1.752 05/08/02 32,892,786 9,000,000 Federal Farm Credit Bank 1.750 05/09/02 8,970,330 16,000,000 Federal Home Loan Bank 1.730 05/09/02 15,947,867 23,000,000 Federal Home Loan Bank 1.756 05/10/02 22,922,854 10,000,000 Federal Home Loan Bank 1.778 05/13/02 9,964,575 30,000,000 Federal Home Loan Bank 1.671 05/14/02 29,898,867 25,000,000 Federal Home Loan Bank 1.772 05/15/02 24,909,375 27,000,000 Federal Home Loan Bank 1.747 05/17/02 26,899,515 30,000,000 Federal Home Loan Bank 1.762 05/20/02 29,884,667 23,000,000 Federal Home Loan Bank 1.774 05/23/02 22,908,739 30,000,000 Federal Home Loan Bank 1.771 05/25/02 29,878,200 19,000,000 Federal Home Loan Bank 1.731 05/28/02 18,921,044 31,000,000 Federal Home Loan Bank 1.740 05/29/02 30,868,948 20,000,000 Federal Farm Credit Bank 1.774 06/03/02 19,909,133 36,000,000 Federal Home Loan Bank 1.783 06/04/02 35,833,750 38,715,000 Federal Home Loan Bank 1.758 06/05/02 38,537,427 21,000,000 Federal Farm Credit Bank 1.785 06/06/02 20,900,979 12,473,000 Federal Farm Credit Bank 1.750 06/07/02 12,413,920 19,000,000 Federal Home Loan Bank 1.754 06/14/02 18,904,794 30,000,000 Federal Farm Credit Bank 1.807 06/27/02 29,825,950 17,000,000 Federal Home Loan Bank 1.797 06/28/02 16,901,098 42,000,000 Student Loan Marketing Association 1.806 07/01/02 41,748,070 13,377,000 Federal Home Loan Bank 1.656 07/12/02 13,296,939 30,000,000 Federal Home Loan Bank 1.828 07/19/02 29,791,167 28,953,000 Federal Home Loan Bank 1.851 07/31/02 28,731,735 23,000,000 Federal Home Loan Bank 1.841 08/08/02 22,816,000 20,000,000 Federal Home Loan Bank 1.831 08/09/02 19,839,894 -------------- TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS (amortized cost--$1,844,452,559) 1,844,452,559 -------------- TOTAL INVESTMENTS (100.1%) (cost--$1,844,452,559*) $1,844,452,559 ==============
* Also represents cost for federal income tax purposes. The percentage shown for each investment category is the total value of that category as a percentage of the total net assets of the Fund. See notes to financial statements. 3 HILLIARD-LYONS GOVERNMENT FUND, INC. STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) February 28, 2002 ASSETS Investments in money market instruments, at value: United States Government Agency Obligations, at value (amortized cost--$1,844,452,559)..... $ 1,844,452,559 --------------- Total Investments....................................................................... 1,844,452,559 Cash......................................................................................... 1,288 Prepaid expenses............................................................................. 30,921 --------------- TOTAL ASSETS............................................................................ 1,844,484,768 --------------- LIABILITIES Dividends payable............................................................................ 689,068 Due to J.J.B. Hilliard, W.L. Lyons, Inc.--Note B............................................. 1,026,106 Miscellaneous accrued expenses............................................................... 207,300 --------------- TOTAL LIABILITIES....................................................................... 1,922,474 --------------- NET ASSETS (equivalent to $1.00 per share; 2,500,000,000 shares authorized and 1,842,562,294 shares issued and outstanding)--Note C...................................................... $1,842,562,294 ===============
HILLIARD-LYONS GOVERNMENT FUND, INC. STATEMENT OF OPERATIONS (UNAUDITED) For the six months ended February 28, 2002 INVESTMENT INCOME Interest income............................................ $ 24,469,009 EXPENSES Investment Advisory fee--Note B............................ 2,711,530 Shareholder servicing fees--Note B......................... 1,449,227 Administrative Fee--Note B................................. 558,431 Filing fees................................................ 170,225 Custodian fees............................................. 156,565 Transfer Agent............................................. 90,302 Directors' fees............................................ 32,942 Legal and audit fees....................................... 32,580 Printing and other expenses................................ 31,032 Insurance expense.......................................... 18,636 -------------- Total expenses........................................... 5,251,470 -------------- Net investment income................................... 19,217,539 -------------- Net increase in net assets resulting from operations.... $ 19,217,539 ==============
See notes to financial statements. 4 HILLIARD-LYONS GOVERNMENT FUND, INC. STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended For the February 28, Year Ended 2002 August 31, (UNAUDITED) 2001 -------------- -------------- FROM OPERATIONS Net investment income....................................... $ 19,217,539 $ 83,635,852 -------------- -------------- Net increase in net assets resulting from operations...... 19,217,539 83,635,852 DISTRIBUTIONS TO SHAREHOLDERS FROM Net investment income....................................... (19,217,539) (83,635,852) -------------- -------------- Total distributions......................................... (19,217,539) (83,635,852) -------------- -------------- FROM CAPITAL SHARE TRANSACTIONS Net capital share transactions (at $1.00 per share)--Note C. (88,082,816) 564,222,986 NET ASSETS Beginning of period......................................... 1,930,645,110 1,366,422,124 -------------- -------------- End of period............................................... $1,842,562,294 $1,930,645,110 ============== ==============
FINANCIAL HIGHLIGHTS The following table includes selected data for a share of capital stock outstanding throughout each period and other performance information derived from the financial statements. It should be read in conjunction with the financial statements and notes thereto.
For the Six Months Ended February 28, 2002 For the Year Ended August 31, (UNAUDITED) 2001 2000 1999 1998 1997 ------------ ---------- ---------- ---------- -------- -------- Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ---------- ---------- ---------- ---------- -------- -------- Net investment income............... .01 .05 .05 .05 .05 .05 ---------- ---------- ---------- ---------- -------- -------- Total from investment operations.. .01 .05 .05 .05 .05 .05 Less distributions:................. Dividend distributions............ (.01) (.05) (.05) (.05) (.05) (.05) ---------- ---------- ---------- ---------- -------- -------- Total distributions............... (.01) (.05) (.05) (.05) (.05) (.05) ---------- ---------- ---------- ---------- -------- -------- Net asset value, end of period...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ========== ========== ========== ========== ======== ======== Number of shares outstanding (000's omitted).................... 1,842,562 1,930,645 1,366,422 1,108,817 944,966 587,080 Total investment return............. 1.00% 5.14% 5.52% 4.65% 5.11% 4.96% SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (000's omitted).................. $1,842,562 $1,930,645 $1,366,422 $1,108,817 $944,966 $587,080 Operating expenses to average net assets....................... .55%(a) .44% .48% .46% .51% .57% Net investment income to average net assets....................... 2.00%(a) 4.92% 5.41% 4.55% 4.99% 4.86%
(a)Annualized See notes to financial statements 5 HILLIARD-LYONS GOVERNMENT FUND, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE A--ACCOUNTING POLICIES Hilliard-Lyons Government Fund, Inc. (the "Fund") is a diversified open-end management investment company registered under the Investment Company Act of 1940, as amended. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. Security Valuation: The Fund employs the amortized cost method of security valuation for U.S. Government securities, which, in the opinion of the Board of Directors, represents fair value of the particular security. The Board monitors deviations between net asset value per share as determined by using available market quotations and the amortized cost method of security valuation. If the deviation in the aggregate is significant, the Board considers what action, if any, should be initiated to provide fair valuation. The Fund values repurchase agreements at cost and accrues interest into interest receivable. Normally, repurchase agreements are not subject to trading. Repurchase agreements are fully collateralized by U.S. Treasury and U.S. Government Agency obligations valued at bid prices plus accrued interest. U.S. Treasury and U.S. Government Agency obligations pledged as collateral for repurchase agreements are held by the Fund's custodian bank until maturity of the repurchase agreements. Provisions of the agreements provide that the market value of the collateral plus accrued interest on the collateral is greater than or equal to the repurchase price plus accrued interest at all times. In the event of default or bankruptcy by the other party to the agreements, the Fund maintains the right to sell the underlying securities at market value; however, realization and/or retention of the collateral may be subject to legal proceedings. Federal Income Taxes: It is the policy of the Fund to continue to qualify under the Internal Revenue Code as a regulated investment company and to distribute all of its taxable income to shareholders, thereby relieving the Fund of federal income tax liability. Dividends to Shareholders: The net investment income of the Fund is determined on each business day and is declared as a dividend payable to shareholders of record immediately prior to the time of determination of net asset value on each such day. Dividends declared since the preceding dividend payment date are distributed monthly. The Fund's net investment income for dividend purposes includes accrued interest and accretion of original issue and market discounts earned and amortization of premiums, plus or minus any net realized gain or loss on portfolio securities, if any, occurring since the previous dividend declaration, less the accrued expenses of the Fund for such period. Investment Transactions: Investment transactions are accounted for on the date the securities are bought or sold. Net realized gains and losses on sales of investments if any are determined on the basis of identified cost. The Fund may enter into repurchase agreements with financial institutions, deemed to be credit worthy by J.J.B. Hilliard, W.L. Lyons, Inc. (the "Adviser"), subject to the seller's agreement to repurchase and the Fund's agreement to sell such security at a mutually agreed upon date and price. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE B--INVESTMENT ADVISORY FEES & OTHER TRANSACTIONS WITH AFFILIATES On October 10, 2001, the Fund renewed its investment advisory agreement with the Adviser. Under the investment advisory agreement, the Adviser supervises investment operations of the Fund and the composition of its portfolio, and furnishes advice and recommendations with respect to investments and the purchase and sale of securities in accordance with the Fund's investment objectives, policies and restrictions; subject, however, to the general supervision and control of the Fund's Board of Directors. For the services the Adviser renders, the Fund has agreed to pay the Adviser an annual advisory fee of 1/2 of 1% of the first $200 million of average daily net assets, 3/8 of 1% of the next $100 million of average daily net assets, and 1/4 of 1% of the average daily net assets in excess of $300 million. Such fee is accrued daily and paid monthly. The Adviser has agreed to reimburse the Fund if total operating expenses of the Fund, excluding taxes, interest and extraordinary expenses (as defined), exceed on an annual basis 1 1/2% of the first $30 million of average daily net assets and 1% of average daily net assets over $30 million. There was no reimbursement required for the six months ended February 28, 2002. The Fund has entered into a separate shareholder and administration services agreement with Hilliard-Lyons. Under the Administration Agreement, Hilliard-Lyons provides certain shareholder and administrative functions for the Fund, including but not limited to: (i) preparing and mailing monthly statements to shareholders; (ii) forwarding shareholder communications from the Fund; (iii) responding to inquiries from shareholders concerning their investments in the Fund; (iv) maintaining account information relating to shareholders that invest in the fund; and (v) processing purchase, exchange and redemption requests from shareholders and placing orders and appropriate documentation with the Fund or its service providers. For its services to the Fund under the Administration Agreement, Hilliard-Lyons receives a monthly fee from the Fund at the annual rate of .25% of the Fund's average daily net assets for shareholder services and .18% of the Fund's average daily net assets for administration services. No compensation is paid by the Fund to officers of the Fund and Directors who are affiliated with the Adviser. The Fund pays each unaffiliated director an annual retainer of $5,000, a fee of $1,000 for each Board of Directors or committee meeting attended, and all expenses the Directors incur in attending meetings. 6 HILLIARD-LYONS GOVERNMENT FUND, INC. NOTES TO FINANCIAL STATEMENTS (continued) (UNAUDITED) NOTE C--CAPITAL STOCK The Fund was incorporated in June 1980 under the laws of the state of Maryland. At February 28, 2002, there were 2,500,000,000 shares of $.01 par value Common Stock authorized, and capital paid in aggregated $1,824,136,671. Transactions in Fund shares at $1.00 per share were as follows:
Six months ended Year ended February 28, August 31, 2002 2001 -------------- -------------- Shares sold............ 2,665,805,458 5,569,914,084 Shares issued to shareholders in reinvestment of dividends............. 20,747,669 82,931,674 -------------- -------------- 2,686,553,127 5,652,845,758 Less shares repurchased........... (2,774,635,943) (5,088,622,772) -------------- -------------- Net increase (decrease) in capital shares..... (88,082,816) 564,222,986 ============== ==============
NOTE D: SUBSEQUENT EVENTS Change in Independent Auditors: Ernst & Young LLP (Ernst & Young) served as independent auditors for the Fund until March 18, 2002 when Ernst & Young resigned as the Fund's independent auditors. Ernst & Young's reports on the financial statements for the past two years contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. During the two fiscal years immediately preceding Ernst & Young's resignation and from September 1, 2001 through the date of Ernst & Young's resignation, there have been no disagreements with Ernst & Young on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure. On March 19, 2002, based on the recommendation of the Audit Committee of the Fund, the Board of Directors appointed Deloitte & Touche LLP as the new independent auditors for the Fund. 7 HILLIARD-LYONS GOVERNMENT FUND, INC. Hilliard Lyons Center Louisville, Kentucky 40202 (502) 588-8400 Investment Adviser and Distributor J.J.B. Hilliard, W.L. Lyons, Inc. Hilliard Lyons Center Louisville, Kentucky 40202 (502) 588-8400 Custodian and Transfer Agent State Street Bank and Trust Company 225 Franklin Street P.O. Box 1912 Boston, Massachusetts 02105 Legal Counsel Frost Brown & Todd LLP 400 West Market Street, 32/nd/ Floor Louisville, Kentucky 40202 Independent Public Accountants Deloitte & Touche LLP 200 Berkley Street Boston, Massachusetts 02116 DIRECTORS AND OFFICERS BOARD OF DIRECTORS Donald F. Kohler Samuel G. Miller Lindy B. Richardson J. Robert Shine OFFICERS Donald F. Kohler--Chairman Joseph C. Curry, Jr.--President Dianna P. Wengler--Vice President Secretary and Treasurer Hilliard-Lyons Government Fund, Inc. Semi-Annual Report February 28, 2002 [GRAPHIC] Bear & Bull