N-30D 1 dn30d.txt HILLARD-LYONS GOVERNMENT FUND ANNUAL REPORT October 10, 2002 Dear Shareholder: We are pleased to present this report on the Hilliard-Lyons Government Fund ("HLGF" or the "Fund") for the year ended August 31, 2002. After eight straight years of growth in assets, the net assets of the Fund decreased, $263 million during the year to $1.6 billion. Historically low interest rates have some investors looking for higher yielding alternatives. While extremely active last year, the Federal Reserve ( the "Fed") has not acted to change interest rates yet this calendar year. 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 prime lending rate charged by commercial banks is at a 40 year low of 4.75%. Economists' opinions are mixed as to whether the Fed needs further action to stimulate the economy. The prevailing view is that the economic recovery is underway and that stimulus in the form of additional rate cuts is not needed. Most economists believe there is enough stimulus in the system to generate solid economic growth. Equity markets, however, do not reflect such optimism about the economic recovery. The Dow Jones Industrial Average (the "Dow") has fallen to its lowest level since October 1997. The sell-off that began in early 2000 has cut the gains achieved by the Dow in the booming 1990s by nearly half. Whereas predictions of a Dow 36000 were not unheard of a couple of years ago, pessimistic predictions of a Dow 6000 are now common. If the previous eight bear markets going back to 1962 are a reliable indicator, the current bear market can't end until the Dow has given back at least 50% of the 9000 plus gained from October 1990 to its peak in January 2000. For that to happen, the Dow would not have to fall much further to reach that level of 7044. Concern over the weak economy, a possible war with Iraq, lackluster corporate profits and corporate governance all weigh on financial markets. However, our "worry factor" declines as the public's "worry factor" increases. We have more confidence in the underlying value of the companies in our great country than we do in the stability of their stockholders. In this time of economic uncertainty, as always, the Fund is committed to offering its shareholders a convenient investment for cash that offers both a high degree of credit safety and sought after features such as checkwriting. As shown on the Schedule of Investments that follows, at August 31, 2002 the Fund was fully invested in high quality, short term U.S. government agency securities. These securities offer a high degree of credit safety with the added benefit of income that flows through to shareholders as exempt from state income tax. HLGF also offers its shareholders completely free checkwriting with no check limit and no minimum dollar amount per check. One change to the checkwriting feature will become effective January 1, 2003. The Fund will no longer return canceled checks to shareholders though shareholders will be able to obtain microfiche copies of such checks if needed. At the board of directors meeting held October 9, 2002, Donald F. Kohler announced he was retiring from the board. He has been chairman of the Fund since its inception in 1980. The Fund grew from his idea and under his leadership over the years. He could never have imagined what the Fund would go on to achieve from when it began. His contributions to the Fund have been invaluable and he will be greatly missed. The Fund's remaining directors: J. Robert Shine, Samuel G. Miller and Lindy B. Richardson and management: Joseph C. Curry, Jr. and Dianna P. Wengler remain committed to serving our shareholders to the best of our abilities. /s/ Joseph C. Cury Jr. /s/ Dianna P. Wengler JOSEPH C. CURRY, JR DIANNA P. WENGLER President Vice President and Treasurer
2 HILLIARD-LYONS GOVERNMENT FUND, INC. SCHEDULE OF INVESTMENTS August 31, 2002
Principal Purchase Maturity Amount Yield Date Value ----------- -------- -------- -------------- U.S. GOVERNMENT AGENCY OBLIGATIONS--100.3% $27,000,000 Federal Home Loan Bank Discount Note 1.821% 09/03/02 $ 26,997,323 21,000,000 Federal Home Loan Bank Discount Note 1.890 09/04/02 20,996,763 18,000,000 Federal Home Loan Bank Discount Note 1.993 09/06/02 17,995,125 30,000,000 Federal Home Loan Bank Discount Note 1.762 09/09/02 29,988,467 27,500,000 Federal Home Loan Bank Discount Note 1.742 09/10/02 27,488,244 18,000,000 Federal Home Loan Bank Discount Note 1.769 09/11/02 17,991,315 20,000,000 Federal Farm Credit Bank Discount Note 1.730 09/12/02 19,989,611 24,000,000 Federal Home Loan Bank Discount Note 1.736 09/13/02 23,986,360 20,431,000 Federal Home Loan Bank Discount Note 1.795 09/16/02 20,416,017 28,000,000 Federal Home Loan Bank Discount Note 1.742 09/17/02 27,978,720 20,000,000 Federal Home Loan Bank Discount Note 1.732 09/18/02 19,983,944 31,000,000 Federal Home Loan Bank Discount Note 1.731 09/19/02 30,973,650 13,000,000 Federal Home Loan Bank Discount Note 1.752 09/20/02 12,988,199 28,000,000 Federal Home Loan Bank Discount Note 1.731 09/23/02 27,970,911 26,000,000 Federal Home Loan Bank Discount Note 1.731 09/24/02 25,971,761 25,000,000 Federal Home Loan Bank Discount Note 1.705 09/25/02 24,972,083 19,000,000 Federal Farm Credit Bank Discount Note 1.675 09/26/02 18,978,229 13,000,000 Federal Home Loan Bank Discount Note 1.751 09/27/02 12,983,851 16,864,000 Federal Home Loan Bank Discount Note 1.787 09/30/02 16,840,226 22,000,000 Student Loan Marketing Association Discount Note 1.742 10/01/02 21,968,650 35,000,000 Federal Home Loan Bank Discount Note 1.752 10/02/02 34,948,161 24,300,000 Federal Farm Credit Bank Discount Note 1.731 10/03/02 24,263,280 25,000,000 Federal Home Loan Bank Discount Note 1.762 10/04/02 24,960,354 30,000,000 Federal Home Loan Bank Discount Note 1.731 10/07/02 29,949,000 31,000,000 Federal Home Loan Bank Discount Note 1.731 10/08/02 30,945,836 31,000,000 Federal Home Loan Bank Discount Note 1.762 10/09/02 30,943,391 16,000,000 Federal Home Loan Bank Discount Note 1.700 10/10/02 15,971,053 37,000,000 Federal Home Loan Bank Discount Note 1.746 10/11/02 36,929,494 13,000,000 Federal Farm Credit Bank Discount Note 1.627 10/15/02 12,974,578 45,000,000 Federal Home Loan Bank Discount Note 1.752 10/16/02 44,903,250 18,000,000 Federal Home Loan Bank Discount Note 1.710 10/17/02 17,961,360 31,000,000 Federal Home Loan Bank Discount Note 1.741 10/18/02 30,930,793 30,000,000 Federal Home Loan Bank Discount Note 1.753 10/21/02 29,928,333 30,000,000 Federal Home Loan Bank Discount Note 1.835 10/22/02 29,923,628 24,000,000 Federal Home Loan Bank Discount Note 1.659 10/23/02 23,943,493 19,000,000 Federal Home Loan Bank Discount Note 1.744 10/24/02 18,952,168 48,000,000 Federal Home Loan Bank Discount Note 1.734 10/25/02 47,877,600 16,000,000 Federal Home Loan Bank Discount Note 1.700 10/28/02 15,957,693 27,500,000 Federal Home Loan Bank Discount Note 1.808 10/30/02 27,420,227 39,000,000 Federal Home Loan Bank Discount Note 1.644 10/31/02 38,895,025
See notes to financial statements. 3 HILLIARD-LYONS GOVERNMENT FUND, INC. SCHEDULE OF INVESTMENTS August 31, 2002
Principal Purchase Maturity Amount Yield Date Value ----------- -------- -------- -------------- $24,000,000 Federal Farm Credit Bank Discount Note 1.690% 11/01/02 $ 23,932,493 39,000,000 Federal Home Loan Bank Discount Note 1.598 11/04/02 38,891,147 27,000,000 Federal Home Loan Bank Discount Note 1.618 11/05/02 26,922,488 17,000,000 Federal Home Loan Bank Discount Note 1.638 11/06/02 16,949,822 16,000,000 Federal Home Loan Bank Discount Note 1.644 11/06/02 15,952,626 18,000,000 Federal Home Loan Bank Discount Note 1.608 11/07/02 17,947,070 16,000,000 Federal Home Loan Bank Discount Note 1.629 11/08/02 15,951,644 30,000,000 Federal Home Loan Bank Discount Note 1.743 11/12/02 29,897,400 21,000,000 Federal Home Loan Bank Discount Note 1.632 11/13/02 20,931,739 16,000,000 Federal Home Loan Bank Discount Note 1.699 11/14/02 15,945,076 13,000,000 Federal Home Loan Bank Discount Note 1.733 11/14/02 12,954,572 39,000,000 Federal Home Loan Bank Discount Note 1.712 11/15/02 38,863,500 30,000,000 Federal Home Loan Bank Discount Note 1.629 11/18/02 29,896,000 23,000,000 Federal Home Loan Bank Discount Note 1.629 11/19/02 22,919,244 21,000,000 Federal Farm Credit Bank Discount Note 1.639 11/20/02 20,924,867 28,000,000 Federal Home Loan Bank Discount Note 1.629 11/21/02 27,899,200 24,000,000 Federal Home Loan Bank Discount Note 1.675 11/22/02 23,910,073 37,000,000 Federal Home Loan Bank Discount Note 1.721 11/27/02 36,848,886 22,000,000 Federal Home Loan Bank Discount Note 1.671 12/04/02 21,905,791 20,000,000 Federal Home Loan Bank Discount Note 1.756 12/06/02 19,908,267 20,000,000 Federal Home Loan Bank Discount Note 1.746 12/13/02 19,902,150 25,000,000 Federal Home Loan Bank Discount Note 1.651 12/18/02 24,878,500 31,000,000 Federal Home Loan Bank Discount Note 1.768 12/26/02 30,827,192 21,000,000 Federal Home Loan Bank Discount Note 1.709 12/27/02 20,885,818 30,000,000 Federal Home Loan Bank Discount Note 1.774 01/02/03 29,822,163 25,000,000 Federal Home Loan Bank Discount Note 1.769 01/03/03 24,850,856 25,000,000 Federal Home Loan Bank Discount Note 1.647 01/07/03 24,856,533 -------------- TOTAL U. S. GOVERNMENT AGENCY OBLIGATIONS (Amortized Cost--$1,671,413,283) 1,671,413,283 -------------- TOTAL INVESTMENTS (100.3%) (cost--$1,671,413,283*) $1,671,413,283 ==============
* 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. 4 HILLIARD-LYONS GOVERNMENT FUND, INC. STATEMENT OF ASSETS AND LIABILITIES August 31, 2002 ASSETS Investments, at value (amortized cost-$1,671,413,283)......................... $1,671,413,283 Prepaid expenses.............................................................. 6,003 -------------- TOTAL ASSETS............................................................ 1,671,419,286 -------------- LIABILITIES Cash overdraft................................................................ 2,188,162 Dividends payable............................................................. 719,143 Due to Affiliate--Note B...................................................... 1,031,468 Accrued expenses.............................................................. 235,283 -------------- TOTAL LIABILITIES....................................................... 4,174,056 -------------- NET ASSETS (equivalent to $1.00 per share; 2,500,000,000 shares authorized and 1,667,245,230 shares issued and outstanding)--Note C........................ $1,667,245,230 ==============
See notes to financial statements. 5 HILLIARD-LYONS GOVERNMENT FUND, INC. STATEMENT OF OPERATIONS For the year ended August 31, 2002 INVESTMENT INCOME Interest income............................................ $39,976,293 ----------- EXPENSES Investment Advisory fee--Note B............................ 5,211,083 Shareholder Servicing fee--Note B.......................... 3,633,712 Administrative fee--Note B................................. 2,131,260 Custodian fees............................................. 302,860 Filing fees................................................ 159,401 Transfer agent fees........................................ 128,652 Insurance expense.......................................... 99,099 Printing and other expenses................................ 79,031 Legal and audit fees....................................... 65,080 Directors' fees............................................ 60,788 ----------- Total expenses........................................... 11,870,966 ----------- Net investment income.................................. 28,105,327 ----------- Net increase in net assets resulting from operations... $28,105,327 ===========
See notes to financial statements. 6 HILLIARD-LYONS GOVERNMENT FUND, INC. STATEMENT OF CHANGES IN NET ASSETS
For the year ended August 31, ---------------------------------- 2002 2001 ---------------- ---------------- FROM OPERATIONS Net investment income..................................... $ 28,105,327 $ 83,635,852 ---------------- ---------------- Net increase in net assets resulting from operations.... 28,105,327 83,635,852 DISTRIBUTIONS TO SHAREHOLDERS FROM Net investment income..................................... ( 28,105,327) ( 83,635,852) Total distributions..................................... ( 28,105,327) ( 83,635,852) ---------------- ---------------- FROM CAPITAL SHARE TRANSACTIONS Net capital share transaction (at $1.00 per share)--Note C ( 263,399,880) 564,222,986 ---------------- ---------------- NET ASSETS Beginning of year......................................... 1,930,645,110 1,366,422,124 ---------------- ---------------- End of year............................................... $ 1,667,245,230 $ 1,930,645,110 ================ ================
See notes to financial statements. 7 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, -------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- -------- Net asset value, beginning of year $1.00 $1.00 $1.00 $1.00 $1.00 ---------- ---------- ---------- ---------- -------- Net investment income............. .01 .05 .05 .05 .05 ---------- ---------- ---------- ---------- -------- Total from investment operations. .01 .05 .05 .05 .05 Less distributions: From net investment income....... (.01) (.05) (.05) (.05) (.05) ---------- ---------- ---------- ---------- -------- Total distributions.............. (.01) (.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)................. 1,667,245 1,930,645 1,366,422 1,108,817 944,966 Total investment return........... 1.44% 5.14% 5.52% 4.65% 5.11% SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA Net assets, end of year (000's omitted)................ $1,667,245 $1,930,645 $1,366,422 $1,108,817 $944,966 Operating expenses to average net assets..................... .65% .44% .48% .46% .51% Net investment income to average net assets..................... 1.53% 4.92% 5.41% 4.55% 4.99%
See notes to financial statements. 8 HILLIARD-LYONS GOVERNMENT FUND, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2002 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 (the "Board") 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. Repurchase Agreements: 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. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 J.J.B. Hilliard W.L. Lyons, Inc. (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. 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, 2002. The Fund has entered into a separate shareholder and administration services agreement with the Adviser. Under the Administration Agreement, the Adviser 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, the Adviser 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 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, 2002, there were 2,500,000,000 shares of $.01 par value Common Stock authorized, and capital paid in aggregated $1,650,572,778. Transactions in Fund shares at $1.00 per share were as follows:
For the year ended August 31, ------------------------------ 2002 2001 -------------- -------------- Shares sold............... 5,347,712,722 5,569,914,084 Shares issued to share holders in reinvestment of dividends............. 29,390,594 82,931,674 -------------- -------------- 5,377,103,316 5,652,845,758 Less shares repurchased... (5,640,503,196) (5,088,622,772) -------------- -------------- Net increase (decrease) in capital shares........... (263,399,880) 564,222,986 ============== ==============
9 HILLIARD-LYONS GOVERNMENT FUND, INC. MANAGEMENT INFORMATION CHART
Term of Office Other Positions held and Length of Principal Occupation(s) Directorships Name and Address Age with the fund Time Served During Past Five Years Held by Director ---------------- --- --------------- ----------------- --------------------------------- ---------------- Donald F. Kohler........ 71 Chairman of the Indefinite; since Investment Consultant; None Hilliard Lyons Center Board inception Executive Vice-President of Louisville, KY 40202 J.J.B. Hilliard, W.L. Lyons, Inc. from 1986 to 1996 and Director of J.J.B. Hilliard, W.L. Lyons, Inc. from 1981 to 1996 J. Robert Shine......... 78 Director Indefinite; since Chairman and None 222 East Market Street October 17, 1989 Certified Public Accountant, New Albany, IN 47150 Monroe, Shine & Co., Inc. Samuel G. Miller........ 77 Director Indefinite; since Retired, Chairman of None 402 Wynfield Close Court March 26, 1987 Vineyard Village Louisville, KY 40206 Lindy B. Richardson..... 56 Director Indefinite; since Retired, former None 406 Wynfield Close Court November 2, 1999 Senior Vice President of Louisville, KY 40206 Marketing & Public Affairs of Columbia/HCA Healthcare Corporation Joseph C. Curry, Jr..... 57 President Annually Senior Vice President of Hilliard Lyons Center J.J.B. Hilliard, W.L. Lyons, Inc. Louisville, KY 40202 since July 1994 and Vice President prior thereto Dianna P. Wengler....... 42 Vice President, Annually Vice President of Hilliard Lyons Center Treasurer and J.J.B. Hilliard, W.L. Lyons, Inc. Louisville, KY 40202 Secretary since 1990
10 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Hilliard-Lyons Government Fund, Inc. We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of the Hilliard-Lyons Government Fund, Inc. (the "Fund") as of August 31, 2002, and the related statements of operations and changes in net assets and the financial highlights for the year then ended. These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audit. The statement of changes in net assets for the year ended August 31, 2001, and the financial highlights for each of the four years in the period ended August 31, 2001 were audited by other auditors whose report, dated October 2, 2001, expressed an unqualified opinion on those statements. We conducted our audit 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 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 the securities owned as of August 31, 2002 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, such financial statements present fairly, in all material respects, the financial position of the Fund as of August 31, 2002, and the results of its operations, the changes in its net assets and its financial highlights for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP September 27, 2002 11 HILLIARD-LYONS GOVERNMENT FUND, INC. Hilliard Lyons Center Louisville, Kentucky 40202 (502) 588-8400 Investment Adviser, Administrator 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, 32nd 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. Annual Report August 31, 2002 [LOGO] BEAR AND BULL(R)