N-30D 1 dn30d.txt HILLIARD LYONS GOV'T FUND ANNUAL REPORT October 10, 2001 Dear Shareholder: A WORD FROM OUR CHAIRMAN. . . Mr. Donald Kohler, Chairman of the Fund, was for a great many years Chairman of the Investment Management Group and Hilliard Lyons Trust Company. On September 20, 2001 he composed a letter to his own clients right after the terrorist attacks on New York and Washington and we wish to share it with you herein. Dear Client: It is very difficult to measure public or market psychology at a time like this. I cannot add much to all the opinions expressed in the press, TV or in business gatherings everywhere. America is strong; its people are resolute and its leadership, I think, is the best in decades. I am impressed with the unity in Congress on this issue. I know Don Rumsfeld from college and assure you that he is a top-flight leader with plenty of both public and private sector experience. I also feel that the rest of the Administration is of high quality and very dedicated. I think the President is handling himself well and has instilled confidence to the extent he could. We have sustained a terrible tragedy. As far as the investment scene is concerned, it is very volatile and uncertain. As I have said for two years, the twenty-year party is over. We must get used to a lower level of growth, some dislocations and economic slowdowns, and a more historical valuation on stocks. The terrorist attack just enhanced this uncertainty and concern and both of these are enemies of the market. Remember we are no longer in Oz--we are in Kansas--and the storm, which carried us to the Emerald City, has now brought us back to the real world. Unfortunately and sadly this "tornado" struck us where we were vulnerable--our homeland. We will survive this as we have others in the past. But we shall pay a price, certainly in economic terms and, I hope, only a small one in human terms. Consumer and capital activity will lessen. These had begun to decline before September 11. The government will become much more involved--less with hardware, more with intelligence. The depth and breadth of our undertaking are incalculable at this point. It may be a long process. It definitely will be difficult; and it will be expensive. It is hard to provide advice at a time like this without appearing arrogant. All of us have seen the value of our investments decline. I am "staying the course" with some reserves, and suggest you do the same. Dividends and interest seem secure even as prices decline. We know how important your financial security is to you and we hope by now you know how important it is to us. What is even more important, however, is the security of our citizens and our nation. The purple mountain majesties and the amber waves of grain are ours, and, the financial system supporting them is sound and will not be denied. I close this letter as I did the last one with St. Paul's definition of FAITH--"the substance of things hoped for, the evidence of which is not seen." HIGHLIGHTS FROM THE YEAR. . . Net assets of the Fund increased substantially during the year from $1,366.4 million to $1,930.6 million at August 31, 2001, a 41% increase. The average seven day yield ranged from a low of 3.19% to a high of 6.12% during the year. Distributions of $.05022 were paid to shareholders, equivalent to an annualized return of 5.02%. For those shareholders reinvesting their dividends, this equates to a compound annual return of 5.14%. The current yield is 2.86%. As shown on the following Schedule of Investments, the Fund continued to invest exclusively in short term discount notes issued by the Federal Home Loan and Federal Farm Credit Banks. We believe these securities offer both a high degree of credit safety and a competitive yield. HENNING HILLIARD'S DEATH. . . We lost a dear friend and fellow director Henning Hilliard, who passed away on September 22, 2001. Henning had been a director since the inception of the Fund in 1980 and a mentor to us all. At the October 10, 2001 meeting of the Board, Henning was posthumously elected SENIOR DIRECTOR EMERITUS. He will be missed. DONALD F. KOHLER JOSEPH C. CURRY, JR. DIANNA P. WENGLER Chairman President Vice President and Treasurer HILLIARD-LYONS GOVERNMENT FUND, INC. SCHEDULE OF INVESTMENTS August 31, 2001
Principal Purchase Maturity Amount Yield Date Value ----------- -------- -------- -------------- U.S. GOVERNMENT AGENCY OBLIGATIONS--100.2% $17,320,000 Federal Home Loan Bank 3.631% 09/04/01 $ 17,314,833 30,000,000 Federal Home Loan Bank 4.123 09/04/01 29,989,975 27,000,000 Federal Home Loan Bank 3.966 09/05/01 26,988,420 24,000,000 Federal Home Loan Bank 3.880 09/06/01 23,987,400 10,000,000 Federal Home Loan Bank 3.641 09/07/01 9,994,050 19,494,000 Federal Home Loan Bank 3.879 09/07/01 19,481,719 18,000,000 Federal Farm Credit Bank 3.856 09/10/01 17,983,080 21,000,000 Federal Home Loan Bank 3.897 09/10/01 20,980,050 26,000,000 Federal Farm Credit Bank 3.800 09/11/01 25,973,206 20,000,000 Federal Home Loan Bank 3.766 09/12/01 19,977,511 25,000,000 Federal Farm Credit Bank 3.802 09/13/01 24,969,083 19,000,000 Federal Home Loan Bank 3.704 09/14/01 18,975,163 10,000,000 Federal Home Loan Bank 3.704 09/14/01 9,986,928 30,000,000 Federal Farm Credit Bank 3.867 09/17/01 29,949,733 23,000,000 Federal Home Loan Bank 3.632 09/18/01 22,961,443 25,000,000 Federal Home Loan Bank 3.581 09/19/01 24,956,250 5,000,000 Federal Home Loan Bank 3.610 09/19/01 4,991,150 25,000,000 Federal Home Loan Bank 3.581 09/20/01 24,953,819 16,000,000 Federal Home Loan Bank 3.529 09/21/01 15,969,333 7,000,000 Federal Home Loan Bank 3.591 09/21/01 6,986,350 15,718,000 Federal Home Loan Bank 3.529 09/24/01 15,683,355 15,000,000 Federal Home Loan Bank 3.585 09/24/01 14,966,363 30,000,000 Federal Home Loan Bank 3.518 09/25/01 29,931,200 38,000,000 Federal Home Loan Bank 3.580 09/26/01 37,907,639 13,242,000 Federal Farm Credit Bank 3.916 09/27/01 13,205,562 15,000,000 Federal Home Loan Bank 3.586 09/27/01 14,961,975 20,000,000 Federal Home Loan Bank 3.724 09/28/01 19,945,400 12,000,000 Federal Home Loan Bank 3.724 09/28/01 11,967,240 24,000,000 Federal Home Loan Bank 3.744 10/01/01 23,927,000 24,000,000 Federal Home Loan Bank 3.734 10/02/01 23,924,773 15,000,000 Federal Home Loan Bank 3.704 10/03/01 14,951,733 15,000,000 Federal Home Loan Bank 4.126 10/03/01 14,946,667 9,000,000 Federal Home Loan Bank 3.559 10/04/01 8,971,208 19,000,000 Federal Home Loan Bank 3.584 10/04/01 18,938,867 20,000,000 Federal Farm Credit Bank 3.799 10/05/01 19,930,111 15,000,000 Federal Home Loan Bank 3.682 10/05/01 14,949,000 20,000,000 Federal Home Loan Bank 3.707 10/09/01 19,923,578 23,415,000 Federal Home Loan Bank 3.790 10/10/01 23,321,399 37,000,000 Federal Home Loan Bank 3.624 10/11/01 36,854,467 33,000,000 Federal Home Loan Bank 4.143 10/12/01 32,849,291 15,000,000 Federal Farm Credit Bank 3.709 10/15/01 14,933,633 15,000,000 Federal Home Loan Bank 3.708 10/15/01 14,933,633 34,000,000 Federal Home Loan Bank 3.601 10/16/01 33,850,400 27,000,000 Federal Farm Credit Bank 3.634 10/17/01 26,877,525 16,000,000 Federal Farm Credit Bank 3.624 10/18/01 15,926,053 20,000,000 Federal Farm Credit Bank 3.569 10/19/01 19,907,200 12,000,000 Federal Home Loan Bank 3.394 10/19/01 11,946,720 15,000,000 Federal Farm Credit Bank 3.538 10/22/01 14,926,688 15,000,000 Federal Farm Credit Bank 3.630 10/22/01 14,924,563 17,000,000 Federal Farm Credit Bank 3.581 10/23/01 16,914,301 10,000,000 Federal Home Loan Bank 3.570 10/23/01 9,949,589
See notes to financial statements. 2 HILLIARD-LYONS GOVERNMENT FUND, INC. SCHEDULE OF INVESTMENTS August 31, 2001
Principal Purchase Maturity Amount Yield Date Value ----------- -------- -------- -------------- $10,510,000 Federal Farm Credit Bank 3.670% 10/24/01 $ 10,454,606 17,035,000 Federal Home Loan Bank 3.901 10/24/01 16,940,200 20,000,000 Federal Farm Credit Bank 3.538 10/25/01 19,896,500 11,000,000 Federal Home Loan Bank 3.334 10/25/01 10,946,045 21,500,000 Federal Home Loan Bank 3.918 10/26/01 21,375,181 24,000,000 Federal Farm Credit Bank 3.574 10/29/01 23,865,053 16,000,000 Federal Home Loan Bank 3.462 10/30/01 15,911,107 10,000,000 Federal Home Loan Bank 3.594 10/30/01 9,942,475 10,000,000 Federal Home Loan Bank 3.670 10/31/01 9,940,500 10,000,000 Federal Home Loan Bank 3.852 10/31/01 9,937,667 31,000,000 Federal Farm Credit Bank 3.550 11/01/01 30,817,729 15,000,000 Federal Home Loan Bank 3.569 11/02/01 14,909,842 10,976,000 Federal Home Loan Bank 3.755 11/02/01 10,907,004 22,093,000 Federal Farm Credit Bank 3.542 11/05/01 21,954,980 33,000,000 Federal Home Loan Bank 3.564 11/06/01 32,789,460 15,000,000 Federal Home Loan Bank 3.446 11/07/01 14,905,921 21,000,000 Federal Home Loan Bank 3.575 11/07/01 20,863,599 23,000,000 Federal Home Loan Bank 3.478 11/08/01 22,852,289 25,000,000 Federal Home Loan Bank 3.565 11/09/01 24,833,250 34,000,000 Federal Home Loan Bank 3.448 11/13/01 33,767,657 16,000,000 Federal Farm Credit Bank 3.544 11/14/01 15,886,204 19,885,000 Federal Home Loan Bank 3.416 11/14/01 19,748,478 25,000,000 Federal Farm Credit Bank 3.523 11/15/01 24,820,833 23,061,000 Federal Farm Credit Bank 3.554 11/16/01 22,892,065 25,000,000 Federal Home Loan Bank 3.397 11/19/01 24,817,861 25,000,000 Federal Home Loan Bank 3.376 11/20/01 24,816,667 22,000,000 Federal Home Loan Bank 3.397 11/21/01 21,835,660 28,000,000 Federal Home Loan Bank 3.624 11/23/01 27,772,119 24,386,000 Federal Home Loan Bank 3.346 11/26/01 24,195,505 16,000,000 Federal Farm Credit Bank 3.386 11/27/01 15,872,013 23,000,000 Federal Home Loan Bank 3.628 11/28/01 22,801,536 33,000,000 Federal Farm Credit Bank 3.395 11/29/01 32,729,143 20,000,000 Federal Home Loan Bank 3.799 11/30/01 19,816,000 27,000,000 Federal Farm Credit Bank 3.366 12/04/01 26,768,760 35,000,000 Federal Farm Credit Bank 3.398 12/06/01 34,690,133 20,250,000 Federal Home Loan Bank 3.748 12/07/01 20,051,938 33,000,000 Federal Home Loan Bank 3.662 12/10/01 32,673,667 29,000,000 Federal Farm Credit Bank 3.399 12/11/01 28,729,881 15,000,000 Federal Farm Credit Bank 3.368 12/17/01 14,853,321 25,000,000 Federal Home Loan Bank 3.404 12/21/01 24,744,083 33,000,000 Federal Home Loan Bank 3.389 01/09/02 32,606,750 25,000,000 Federal Home Loan Bank 3.443 01/11/02 24,692,917 14,197,000 Federal Home Loan Bank 3.414 01/18/02 14,015,010 -------------- TOTAL U. S. GOVERNMENT AGENCY OBLIGATIONS (amortized cost--$1,934,158,238) 1,934,158,238 -------------- TOTAL INVESTMENTS (100.2%) (cost-- $1,934,158,238*) $1,934,158,238 ==============
* 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 August 31, 2001 ASSETS Investments in money market instruments, at value: United States Government Agency Obligations, at value (amortized cost--$1,934,158,238)............................. $1,934,158,238 -------------- Total Investments............................................ 1,934,158,238 Cash........................................................... 1,692 Prepaid expenses............................................... 3,721 -------------- TOTAL ASSETS................................................. 1,934,163,651 -------------- LIABILITIES Dividends payable.............................................. 2,739,085 Due to J. J. B. Hilliard, W. L. Lyons, Inc.--Note B............ 464,171 Miscellaneous accrued expenses................................. 315,285 -------------- TOTAL LIABILITIES............................................ 3,518,541 -------------- NET ASSETS (equivalent to $1.00 per share; 2,500,000,000 shares authorized and 1,930,645,110 shares issued and outstanding)-- Note C........................................................ $1,930,645,110 ============== HILLIARD-LYONS GOVERNMENT FUND, INC. STATEMENT OF OPERATIONS For the year ended August 31, 2001 INVESTMENT INCOME Interest income................................................ $ 91,120,761 EXPENSES Investment Advisory fee--Note B................................ 4,878,826 Shareholder servicing fees--Note B............................. 1,896,058 Transfer agent fees............................................ 88,722 Custodian fees................................................. 228,590 Printing and other expenses.................................... 71,640 Filing fees.................................................... 174,245 Insurance expense.............................................. 54,700 Legal and audit fees........................................... 45,537 Directors' fees................................................ 46,591 -------------- Total expenses................................................ 7,484,909 -------------- Net investment income......................................... 83,635,852 -------------- Net increase in net assets resulting from operations.......... $ 83,635,852 ==============
See notes to financial statements. 4 HILLIARD-LYONS GOVERNMENT FUND, INC. STATEMENT OF CHANGES IN NET ASSETS
For the year ended August 31, ------------------------------ 2001 2000 -------------- -------------- INCREASE IN NET ASSETS: FROM OPERATIONS Net investment income.......................... $ 83,635,852 $ 68,514,897 -------------- -------------- Net increase in net assets resulting from operations................................... 83,635,852 68,514,897 Distributions to shareholders from net investment income............................. ( 83,635,852) ( 68,514,897) -------------- -------------- FROM CAPITAL SHARE TRANSACTIONS Net capital share transaction (at $1.00 per share)--Note C................................ 564,222,986 257,605,168 -------------- -------------- Net increase in net assets..................... 564,222,986 257,605,168 NET ASSETS Beginning of year.............................. 1,366,422,124 1,108,816,956 -------------- -------------- End of year.................................... $1,930,645,110 $1,366,422,124 ============== ==============
FINANCIAL HIGHLIGHTS The following table includes selected data for a share of capital stock outstanding throughout each year and other performance information derived from the financial statements. It should be read in conjunction with the financial statements and notes thereto.
For the year ended August 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---------- ---------- ---------- -------- -------- Net asset value, beginning of year...... $1.00 $1.00 $1.00 $1.00 $1.00 ---------- ---------- ---------- -------- -------- Net investment income... .05 .05 .05 .05 .05 ---------- ---------- ---------- -------- -------- Total from investment operations............ .05 .05 .05 .05 .05 Less distributions: From net investment income................ (.05) (.05) (.05) (.05) ---------- ---------- ---------- -------- -------- Total distributions.... (.05) (.05) (.05) (.05) (.05) ---------- ---------- ---------- -------- -------- Net asset value, end of year................... $1.00 $1.00 $1.00 $1.00 $1.00 ========== ========== ========== ======== ======== Number of shares outstanding (000's omitted)............... 1,930,645 1,366,422 1,108,817 944,966 587,080 Total investment return. 5.14% 5.52% 4.65% 5.11% 4.96% SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA Net assets, end of year (000's omitted)....... $1,930,645 $1,366,422 $1,108,817 $944,966 $587,080 Operating expenses to average net assets.... .44% .48% .46% .51% .57% Net investment income to average net assets. 4.92% 5.41% 4.55% 4.99% 4.86%
See notes to financial statements. 5 HILLIARD-LYONS GOVERNMENT FUND, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2001 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 proceeding 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. In November 2000, the American Institute of Certified Public Accountants (AICPA) issued a revised version of the AICPA Audit and Accounting Guide for Investment Companies (the "Guide"). The Guide is effective for fiscal years beginning after December 15, 2000. Management of the Hilliard-Lyons Government Fund, Inc. does not anticipate that the adoption of the Guide will have a significant effect on the financial statements. NOTE B--INVESTMENT ADVISORY FEES & OTHER TRANSACTIONS WITH AFFILIATES 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 year ended August 31, 2001. The Fund contracted with the Adviser to provide shareholder accounting services. The Adviser is paid a fee of $1.00 per open account each month. 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. NOTE C--CAPITAL STOCK The Fund was incorporated in June 1980 under the laws of the state of Maryland. At August 31, 2001, there were 2,500,000,000 shares of $.01 par value Common Stock authorized, and capital paid in aggregated $1,911,338,659. Transactions in Fund shares at $1.00 per share were as follows:
For the year ended August 31, ------------------------------ 2001 2000 -------------- -------------- Shares sold.................................... 5,569,914,084 5,027,027,063 Shares issued to shareholders in reinvestment of dividends.................................. 82,931,674 65,686,096 -------------- -------------- 5,652,845,758 5,092,713,159 Less shares repurchased........................ (5,088,622,772) (4,835,107,991) -------------- -------------- Net increase in capital shares................. 564,222,986 257,605,168 ============== ==============
6 Report of Independent Auditors The Board of Directors and Shareholders Hilliard-Lyons Government Fund, Inc. We have audited the accompanying statement of assets and liabilities of the Hilliard-Lyons Government Fund, Inc., including the schedule of portfolio investments, as of August 31, 2001, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the 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 and financial highlights. Our procedures included confirmation of securities owned as of August 31, 2001, 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, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Hilliard-Lyons Government Fund, Inc. as of August 31, 2001, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young October 2, 2001 Louisville, Kentucky 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 LLC 400 West Market Street, 32nd Floor Louisville, Kentucky 40202 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 and Treasurer Hilliard-Lyons Government Fund, Inc. Annual Report August 31, 2001