-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TD/CElu2+pCUm4kkawR/n82VI0EuhbmjokTiB2Yt87LDo+kZb269il/95lMR3K8x 8Bqi3AlacuRmtuYG19KBuA== 0000950131-98-005461.txt : 19981008 0000950131-98-005461.hdr.sgml : 19981008 ACCESSION NUMBER: 0000950131-98-005461 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981007 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HILLIARD LYONS GOVERNMENT FUND INC CENTRAL INDEX KEY: 0000317872 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 610978881 STATE OF INCORPORATION: MD FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-03070 FILM NUMBER: 98722170 BUSINESS ADDRESS: STREET 1: HILLIARD LYONS CTR CITY: LOUISVILLE STATE: KY ZIP: 40202 BUSINESS PHONE: 5025888832 MAIL ADDRESS: STREET 1: PO BOX 32760 CITY: LOUISVILLE STATE: KY ZIP: 40232 FORMER COMPANY: FORMER CONFORMED NAME: HILLIARD LYONS CASH MANAGEMENT INC DATE OF NAME CHANGE: 19830125 N-30D 1 ANNUAL REPORT - HILLIARD LYONS GOV'T FUND September 25, 1998 Dear Shareholder: We are pleased to present this report on the Hilliard-Lyons Government Fund, Inc. ("HLGF" or the "Fund") for the year ended August 31, 1998. This has been an eventful year for the Fund. Net assets increased dramatically from $519 million to $945 million, an 82% increase. This is a new record net asset level. The average seven day yield ranged from a low of 4.92% to a high of 5.13% during the year. Distributions of $.0499026 were paid, equivalent to a 4.99% yield. For those shareholders in the dividend reinvestment plan, this equates to a compound annual yield of 5.11%. As evidenced by the narrow spread between the low and high yields for the year, short term interest rates remained relatively stable. The Federal Reserve has not changed short term rates since March 1997, but a 25 basis point cut in the federal funds rate is widely expected at their next meeting. The federal funds rate is what member banks charge each other for overnight loans and is a determining factor for other rates from credit cards to mortgages. Federal Reserve Chairman Alan Greenspan has indicated he believes the U.S. economy has just began to feel the effects of the financial crises in Asia and Latin America and he is ready to use Federal Reserve control over interest rates to strengthen the world economy. The Asian financial crisis has impacted financial markets for more than a year and the effects continue to spread. Distant economies have been greatly affected with Russia seemingly in a depression. Other commodity producing nations such as Canada and Mexico have also been hard hit. With these far reaching effects, global investors have become wary further weakening the world economy. This global turmoil has also impacted the U.S. economy. The equity markets, as measured by the Dow Jones Industrial Average, have been quite volatile with several large one day swings including a 513 point drop on August 31, 1998 and a 257 point increase on September 23, 1998. Such volatility can make even seasoned investors cautious and makes our Fund an attractive option for investors wanting to hold cash. As shown on the attached Schedule of Investments, the Fund was 100% invested in U.S. government agency obligations on August 31, 1998. These discount notes of the Federal Home Loan and Federal Farm Credit Banks while offering a high degree of credit safety, have allowed the Fund to offer a competitive yield and an added advantage of income which is exempt from state income tax. The Fund's expense ratio of 0.51% as shown on the attached financial highlights table, is the lowest in the history of the Fund. This is due in part to the Fund's increased asset size and management structure. We are sorry to report that one of the Fund's original directors, General Dillman A. Rash passed away on September 8, 1998. His wisdom and guidance not only helped the Fund get started but also have contributed greatly to its success through the years. We shall miss him. You are being asked in the enclosed proxy material to vote for a new director, Marianne R. Rowe as well as for the other directors who are continuing to serve. The proxy materials also contain information about another important item you are being asked to vote on. Each shareholder should have already received information about the proposed merger of Hilliard-Lyons, Inc. with PNC Bank Corp. As explained in the enclosed proxy materials, this merger will cause the termination of the existing investment advisory agreement. All shareholders are being asked to approve a new investment advisory agreement to become effective on the date of the merger, expected to be about November 30, 1998. We ask each shareholder to please read the enclosed proxy materials and vote promptly. Your vote is greatly appreciated. /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 AUGUST 31, 1998
PRINCIPAL PURCHASE MATURITY AMOUNT YIELD DATE VALUE ----------- -------- -------- ----------- U.S. GOVERNMENT AGENCY OBLIGATIONS--100.3% $10,000,000 Federal Farm Credit Bank 5.504% 09/01/98 $10,000,000 9,145,000 Federal Home Loan Bank 5.729 09/01/98 9,145,000 20,000,000 Federal Home Loan Bank 5.520 09/02/98 19,997,017 13,000,000 Federal Farm Credit Bank 5.507 09/03/98 12,996,114 15,000,000 Federal Home Loan Bank 5.502 09/04/98 14,993,325 10,000,000 Federal Home Loan Bank 5.485 09/08/98 9,989,558 20,000,000 Federal Home Loan Bank 5.529 09/09/98 19,976,089 9,000,000 Federal Farm Credit Bank 5.524 09/10/98 8,987,895 8,000,000 Federal Farm Credit Bank 5.541 09/11/98 7,988,000 4,500,000 Federal Home Loan Bank 5.512 09/11/98 4,493,300 15,000,000 Federal Home Loan Bank 5.490 09/14/98 14,970,913 7,000,000 Federal Farm Credit Bank 5.510 09/15/98 6,985,409 20,000,000 Federal Home Loan Bank 5.530 09/16/98 19,955,167 17,000,000 Federal Farm Credit Bank 5.508 09/17/98 16,959,276 13,000,000 Federal Home Loan Bank 5.520 09/18/98 12,967,034 5,000,000 Federal Farm Credit Bank 5.510 09/21/98 4,985,139 6,000,000 Federal Farm Credit Bank 5.520 09/21/98 5,982,133 17,000,000 Federal Farm Credit Bank 5.505 09/22/98 16,946,648 8,000,000 Federal Home Loan Bank 5.528 09/23/98 7,973,796 15,000,000 Federal Farm Credit Bank 5.517 09/24/98 14,948,538 20,000,000 Federal Home Loan Bank 5.540 09/25/98 19,928,133 11,000,000 Federal Farm Credit Bank 5.509 09/28/98 10,955,615 7,000,000 Federal Farm Credit Bank 5.522 09/29/98 6,970,818 5,000,000 Federal Farm Credit Bank 5.515 09/30/98 4,978,371 9,000,000 Federal Home Loan Bank 5.510 09/30/98 8,961,140 6,754,000 Federal Farm Credit Bank 5.531 10/01/98 6,723,776 8,000,000 Federal Farm Credit Bank 5.511 10/01/98 7,963,933 20,000,000 Federal Home Loan Bank 5.510 10/02/98 19,907,689 25,000,000 Federal Home Loan Bank 5.512 10/05/98 24,873,444 18,000,000 Federal Farm Credit Bank 5.533 10/06/98 17,905,325 15,000,000 Federal Home Loan Bank 5.526 10/07/98 14,919,750 15,000,000 Federal Home Loan Bank 5.508 10/08/98 14,917,367 12,000,000 Federal Home Loan Bank 5.524 10/09/98 11,932,107 20,000,000 Federal Home Loan Bank 5.543 10/13/98 19,874,933 8,000,000 Federal Home Loan Bank 5.532 10/14/98 7,948,782 8,000,000 Federal Home Loan Bank 5.530 10/14/98 7,948,591 21,000,000 Federal Home Loan Bank 5.515 10/15/98 20,862,170 20,000,000 Federal Home Loan Bank 5.540 10/16/98 19,865,250 10,000,000 Federal Farm Credit Bank 5.538 10/19/98 9,928,533 18,000,000 Federal Farm Credit Bank 5.522 10/20/98 17,867,700 14,000,000 Federal Home Loan Bank 5.540 10/21/98 13,895,194
See notes to financial statements. 2 HILLIARD-LYONS GOVERNMENT FUND, INC. SCHEDULE OF INVESTMENTS (CONTINUED) AUGUST 31, 1998
PRINCIPAL PURCHASE MATURITY AMOUNT YIELD DATE VALUE ----------- -------- -------- ------------ $12,000,000 Federal Home Loan Bank 5.542% 10/23/98 $ 11,906,400 15,000,000 Federal Farm Credit Bank 5.537 10/26/98 14,876,479 23,000,000 Federal Home Loan Bank 5.540 10/28/98 22,803,714 14,000,000 Federal Home Loan Bank 5.540 10/30/98 13,877,247 19,000,000 Federal Home Loan Bank 5.489 11/02/98 18,824,609 15,000,000 Federal Farm Credit Bank 5.523 11/03/98 14,859,563 12,000,000 Federal Farm Credit Bank 5.520 11/04/98 11,885,440 20,000,000 Federal Farm Credit Bank 5.508 11/05/98 19,806,444 12,000,000 Federal Home Loan Bank 5.510 11/06/98 11,882,080 17,000,000 Federal Home Loan Bank 5.508 11/09/98 16,825,353 18,000,000 Federal Farm Credit Bank 5.518 11/10/98 17,812,050 15,000,000 Federal Home Loan Bank 5.531 11/12/98 14,838,900 13,000,000 Federal Farm Credit Bank 5.510 11/13/98 12,859,495 7,000,000 Federal Farm Credit Bank 5.530 11/17/98 6,919,449 30,000,000 Federal Home Loan Bank 5.556 11/18/98 29,648,675 10,000,000 Federal Farm Credit Bank 5.505 11/20/98 9,881,778 5,000,000 Federal Home Loan Bank 5.530 11/20/98 4,940,222 17,000,000 Federal Home Loan Bank 5.530 11/25/98 16,784,053 16,000,000 Federal Home Loan Bank 5.520 11/27/98 15,792,360 9,090,000 Federal Home Loan Bank 5.540 12/02/98 8,965,720 8,000,000 Federal Home Loan Bank 5.486 12/04/98 7,888,871 6,390,000 Federal Home Loan Bank 5.532 12/14/98 6,291,054 12,000,000 Federal Farm Credit Bank 5.511 12/21/98 11,802,420 20,000,000 Federal Home Loan Bank 5.498 01/04/99 19,633,333 17,000,000 Federal Home Loan Bank 5.551 01/06/99 16,679,149 20,000,000 Federal Home Loan Bank 5.501 01/08/99 19,619,450 14,000,000 Federal Home Loan Bank 5.514 01/14/99 13,720,700 13,000,000 Federal Home Loan Bank 5.548 01/15/99 12,737,747 13,000,000 Federal Home Loan Bank 5.534 01/20/99 12,728,615 ------------ TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS (amortized cost -- $947,460,342) 947,460,342 ------------ TOTAL INVESTMENTS (100.3%) (cost -- $947,460,342*) $947,460,342 ============
* 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, 1998 ASSETS Investments in money market instruments, at value: United States Government Agency Obligations, at value (amortized cost--$947,460,342)............................................ $947,460,342 ------------ Total Investments.............................................. 947,460,342 Cash............................................................. 2,583 Prepaid expenses................................................. 3,666 ------------ TOTAL ASSETS................................................... 947,466,591 ------------ LIABILITIES Dividends payable................................................ 2,054,324 Due to J.J.B. Hilliard, W.L. Lyons, Inc.--Note B................. 252,165 Miscellaneous accrued expenses................................... 194,279 ------------ TOTAL LIABILITIES.............................................. 2,500,768 ------------ NET ASSETS (equivalent to $1.00 per share; 1,500,000,000 shares authorized and 944,965,823 shares issued and outstanding)--Note C............................................................... $944,965,823 ============ HILLIARD-LYONS GOVERNMENT FUND, INC. STATEMENT OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 1998 INVESTMENT INCOME Interest income.................................................. $ 42,367,727 EXPENSES Investment Advisory fee--Note B.................................. 2,550,536 Shareholder servicing fees--Note B............................... 772,607 Transfer agent fees.............................................. 221,993 Custodian fees................................................... 123,130 Printing and other expenses...................................... 83,144 Filing fees...................................................... 112,340 Insurance expense................................................ 32,371 Legal and audit fees............................................. 35,107 Directors' fees.................................................. 21,550 ------------ Total expenses.................................................. 3,952,778 ------------ Net investment income........................................... 38,414,949 ------------ Net increase in net assets resulting from operations............ $ 38,414,949 ============
See notes to financial statements. 4 HILLIARD-LYONS GOVERNMENT FUND, INC. STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED AUGUST 31 1998 1997 ------------- ------------- INCREASE IN NET ASSETS: FROM OPERATIONS Net investment income............................ $ 38,414,949 $ 24,409,576 ------------- ------------- Net increase in net assets resulting from operations..................................... 38,414,949 24,409,576 Dividends to shareholders ($.049903 and $.048529 per share, respectively)........................ ( 38,414,949) ( 24,409,576) ------------- ------------- Undistributed net investment income.............. 0 0 ------------- ------------- FROM CAPITAL SHARE TRANSACTIONS Net capital share transactions (at $1.00 per share)--Note C.................................. 357,885,980 159,585,459 NET ASSETS Beginning of year................................ 587,079,843 427,494,384 ------------- ------------- End of year...................................... $944,965,823 $587,079,843 ============= =============
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, 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Net asset value, beginning of year........................ $1.00 $1.00 $1.00 $1.00 $1.00 -------- -------- -------- -------- -------- Net investment income........ .05 .05 .05 .05 .03 -------- -------- -------- -------- -------- Total from investment operations................. .05 .05 .05 .05 .03 Less distributions: Dividend distributions...... ( .05) ( .05) ( .05) ( .05) ( .03) -------- -------- -------- -------- -------- Total distributions......... ( .05) ( .05) ( .05) ( .05) ( .03) -------- -------- -------- -------- -------- Net asset value, end of year. $1.00 $1.00 $1.00 $1.00 $1.00 ======== ======== ======== ======== ======== Number of shares outstanding (000's omitted)............. 944,966 587,080 427,494 335,776 210,652 Total investment return...... 5.11% 4.96% 4.96% 5.04% 2.85% SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA Net assets, end of year (000's omitted)............ $944,966 $587,080 $427,494 $335,776 $210,652 Operating expenses to average net assets......... .51% .57% .61% .72% .75% Net investment income to average net assets......... 4.99% 4.86% 4.84% 4.97% 2.80%
See notes to financial statements 5 HILLIARD-LYONS GOVERNMENT FUND, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1998 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 23, 1997, 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 year ended August 31, 1998. On August 20, 1998, PNC Bank Corp. entered into an Agreement and Plan of Merger with Hilliard-Lyons, Inc. (the "Merger") pursuant to which the Adviser will become a subsidiary of PNC Bank Corp. The Merger is expected to become effective on or after November 30, 1998. This Merger constitutes an assignment of the Investment Advisory Agreement (the "Agreement") as defined in the Investment Company Act of 1940. Shareholders are being asked to approve a new Agreement at a Special Shareholders Meeting scheduled to be held November 6, 1998. 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 $3,000, a fee of $750 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, 1998, there were 1,500,000,000 shares of $.01 par value Common Stock authorized, and capital paid in aggregated $935,516,165. Transactions in Fund shares at $1.00 per share were as follows:
FOR THE YEAR ENDED AUGUST 31, 1998 1997 -------------- -------------- Shares sold.................................... 2,979,565,610 1,740,443,413 Shares issued to shareholders in reinvestment of dividends.................................. 36,974,418 23,618,228 -------------- -------------- 3,016,540,028 1,764,061,641 Less shares repurchased........................ (2,658,654,048) (1,604,476,182) -------------- -------------- Net increase in capital shares................. 357,885,980 159,585,459 ============== ==============
6 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Hilliard-Lyons Government Fund, Inc. We have audited the accompanying statement of assets and liabilities, including the schedule of portfolio investments, of the Hilliard-Lyons Government Fund, Inc. (the Fund) as of August 31, 1998, and the related statement of operations for the year then ended, statement 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 generally accepted auditing standards. 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, 1998, 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 Fund as of August 31, 1998, 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 its financial highlights for each of the five years in the period then ended, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Louisville, Kentucky September 18, 1998 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 Brown, Todd & Heyburn PLLC 3200 Providian Center Louisville, Kentucky 40202 DIRECTORS AND OFFICERS BOARD OF DIRECTORS Joseph C. Curry, Jr. J. Henning Hilliard Donald F. Kohler Samuel G. Miller Gilbert L. Pamplin J. Robert Shine OFFICERS Donald F. Kohler - Chairman Joseph C. Curry, Jr. - President Dianna P. Wengler - Vice President and Treasurer Penny L. Wellinghurst -Secretary HILLIARD-LYONS GOVERNMENT FUND, INC. ANNUAL REPORT AUGUST 31, 1998 LOGO -----END PRIVACY-ENHANCED MESSAGE-----