N-CSRS 1 dncsrs.txt HILLIARD LYONS GOVERNMENT FUND, INC. =========================== OMB APPROVAL =========================== OMB Number: 3235-0570 Expires: September 30, 2007 Estimated average burden hours per response: 19.4 =========================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-3070 Hilliard-Lyons Government Fund, Inc. (Exact name of registrant as specified in charter) P. O. Box 32760, Louisville, Kentucky 40232-2760 (Address of principal executive offices) (Zip code) Joseph C. Curry, Jr. William G. Strench Hilliard-Lyons Government Fund, Inc. Frost Brown Todd LLC P. O. Box 32760 400 West Market Street, 32nd Floor Louisville, Kentucky 40232-2760 Louisville, Kentucky 40202-3363 (Name and address of agents for service) Registrant's telephone number, including area code: (502) 588-8602 Date of fiscal year end: August 31 Date of reporting period: February 28, 2005 Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. (S) 35 ITEM 1. REPORTS TO SHAREHOLDERS. The Semi-Annual Report to Shareholders follows. March 23, 2005 Dear Shareholder: We are pleased to present this report on the Hilliard-Lyons Government Fund, Inc. ("HLGF" or the "Fund") for the six months ended February 28, 2005. The Federal Reserve ("Fed") has raised short term interest rates seven times since beginning a series of "measured" rate increases in the federal funds rate in June 2004. That marked the first rate increase in four years. This rate is the rate charged on overnight loans between banks and the Fed uses this rate to influence the economy. It has a direct affect on rates that affect consumers such as mortgages and credit card interest rates. Of interest is not only the actions taken by the Fed but also the language in its accompanying policy statement. The Fed used language similar to that which has accompanied each rate increase with its latest increase of 1/4 of 1% on March 22, 2005, stating that future rate increases would be "at a pace that is likely to be measured." There had been some speculation that the Fed would drop the word "measured" if concern about inflation were heightened. The Fed indicated that long term inflation expectations remain well contained although pressures on inflation have picked up in recent months. Evident to all consumers has been the recent increase in energy prices but the Fed did not believe this increase had flowed through to core consumer prices yet even as it acknowledged evidence of increasing pricing power. While continuing to use the word "measured" in relation to future rate increases, this discussion of inflation in the policy statement was enough to rattle equity markets. Most economic analysts believe the Fed will continue to raise the federal funds rate through the end of this calendar year. If the rate were increased by 1/4 of 1% at each meeting of the Fed remaining this year, the federal funds rate would be 41/4% at year end. Many believe this would be the "neutral" level the Fed is seeking. A "neutral" level is a level that still encourages economic growth but works to keep inflation in check. Rising interest rates are evidenced by the dividends paid by the Fund. Dividends paid for the six months ended February 28, 2005 of $.00589 per share compare to dividends paid per share for the year ended August 31, 2004 of $.00525. Money market funds currently have a yield advantage over other popular short term bank products such as money market deposit accounts and three month certificates of deposit. Core bank deposits have increased over the last three years but that trend could reverse as interest rates rise creating a more competitive environment for banks. Assets of the Fund decreased only slightly during the six months after an almost three year period of declining assets. The money market fund industry overall has endured a similar period of increased competition from bank products and loss of assets. Some banks have begun to respond to rising rates. Banks have flexibility to set rates at a level of their choice whereas a money market fund's rate is determined by the rate earned on its investments. Money market funds are often the investment of choice for savings dollars in a rising rate environment as their yield will adjust more quickly than that of a fixed rate investment such as a certificate of deposit. It is expected in a rising rate environment to see assets shift from banks to money funds. Interest rates impact equity and fixed income markets as well. Yields typically move inversely with prices. The latest rate increase caused the yield on ten year Treasury notes to rise as expected. However, the previous rate increase had the opposite effect causing Fed chairman Alan Greenspan to state it was utterly unprecedented for longer term interest rates to decrease when the Fed was actively increasing short term rates. The major indices of equity markets, the Dow Jones Industrial Average, the NASDAQ Composite index and the Standard & Poor's 500, each have had lackluster performance so far this year. Each of these indices closed lower on the day of the Fed announcement, reflecting investor concern about the Fed's future actions. There is debate about whether the Fed will continue with rate increases of 1/4 of 1% or will move to a rate increase of 1/2 of 1%. Either way, it appears that higher rates are here to stay. As shown on the following Schedule of Investments, the Fund continues to invest exclusively in high quality, short term securities issued by U.S. government sponsored enterprises, primarily short term discount notes issued by the Federal Home Loan Banks. These securities offer a high degree of credit safety but still have a competitive yield. The income earned on these investments flows through to shareholders in the form of dividends that are exempt from state income taxes. The Fund also continues to offer popular features for your convenience such as completely free, unlimited check-writing. We appreciate your investment in the Hilliard-Lyons Government Fund, Inc. and we remain committed to serving you to the best of our abilities. /s/ Joseph C. Curry, Jr. /s/ Dianna P. Wengler Joseph C. Curry, Jr. Dianna P. Wengler President Vice President and Treasurer 2 Portfolio Allocation/1/ [CHART] U.S. Government Sponsored Enterprises - 100% /1/As a percentage of total investments at February 28, 2005. Investments are subject to change daily. -------------------------------------------------------------------------------- Understanding Your Fund's Expenses All mutual funds have operating expenses. As a shareholder of the Fund, you incur ongoing costs including costs for portfolio management, administrative services and shareholder reports such as this one. Operating expenses directly reduce the investment return of a fund as they are paid from gross income. A fund's expenses are shown by its expense ratio which is calculated as a percentage of average net assets. The following table is intended to help you understand the ongoing fees, expressed in dollars, of investing in the Fund and to be able to compare these costs with those of other mutual funds. The examples in the table are based on an initial investment of $1,000 made at the beginning of the period and held for the entire period. The table shows costs in two ways. Actual Return. The first line of the table below lets you estimate the actual expenses you paid over the period. It shows the expenses that would have been paid on a $1,000 investment for the period September 1, 2004 to February 28, 2005. It shows the value of the investment at the end of the period using actual returns and expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical 5% Return. The second line of the table below lets you compare the expenses of investing in the Fund with the expenses of other mutual funds. It uses a hypothetical annualized rate of return of 5% per year and the Fund's actual expenses. All mutual fund shareholder reports will provide this information. You can compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Ending Net Expenses Account Account Annualized Paid Value Value Expense During 9/1/04 2/28/05 Ratio Period* --------- --------- ---------- -------- Actual Fund Return.... $1,000.00 $1,009.75 .78% $3.89 Hypothetical 5% Return $1,000.00 $1,021.22 .78% $3.91
*Expenses are equal to the Fund's annualized expense ratio multiplied by the average account value for the period; multiplied by the number of days in the period; divided by the number of days in the year. Information About Proxy Voting by the Fund The Fund invests exclusively in non-voting securities and therefore is not required to include information regarding proxy voting policies and procedures. Information About the Fund's Portfolio Holdings The Fund files its complete schedule of portfolio holdings with the SEC for the first and third fiscal quarters of each fiscal year (quarters ended May 31 and November 30) on Form N-Q. The Fund's Form N-Q is available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330. 3 HILLIARD-LYONS GOVERNMENT FUND, INC. SCHEDULE OF INVESTMENTS (UNAUDITED) February 28, 2005
Cash Principal Equivalent Maturity Amount Yield Date Value ----------- ---------- -------- -------------- U.S. GOVERNMENT SPONSORED ENTERPRISES*--100.1%** $29,000,000 Federal Home Loan Bank Discount Note 2.328% 03/01/05 $ 29,000,000 23,343,000 Federal Home Loan Bank Discount Note 2.552 03/01/05 23,343,000 28,878,000 Federal Home Loan Bank Discount Note 1.954 03/02/05 28,876,468 20,000,000 Federal Home Loan Bank Discount Note 2.361 03/03/05 19,997,422 32,000,000 Federal Home Loan Bank Discount Note 1.947 03/04/05 31,994,925 40,000,000 Federal Home Loan Bank Discount Note 2.457 03/07/05 39,983,867 30,000,000 Federal Home Loan Bank Discount Note 2.436 03/08/05 29,986,000 32,000,000 Federal Home Loan Bank Discount Note 2.140 03/09/05 31,985,102 20,000,000 Federal Home Loan Bank Discount Note 1.988 03/11/05 19,989,250 41,502,000 Federal Home Loan Bank Discount Note 2.390 03/14/05 41,466,781 30,000,000 Federal Home Loan Bank Discount Note 2.467 03/15/05 29,971,650 25,000,000 Federal Home Loan Bank Discount Note 2.423 03/16/05 24,975,208 20,500,000 Federal Home Loan Bank Discount Note 2.412 03/17/05 20,478,407 26,000,000 Federal Home Loan Bank Discount Note 1.991 03/18/05 25,976,120 17,000,000 Federal Home Loan Bank Discount Note 2.459 03/21/05 16,977,144 42,000,000 Federal Home Loan Bank Discount Note 2.433 03/22/05 41,941,445 25,000,000 Federal Home Loan Bank Discount Note 2.314 03/23/05 24,965,396 25,000,000 Federal Home Loan Bank Discount Note 2.168 03/28/05 24,960,250 28,000,000 Federal Home Loan Bank Discount Note 2.483 03/29/05 27,946,862 12,000,000 Federal Farm Credit Bank Discount Note 2.437 03/30/05 11,976,897 15,000,000 Federal Home Loan Bank Discount Note 2.498 03/30/05 14,970,335 15,000,000 Federal Home Loan Bank Discount Note 2.480 03/31/05 14,969,500 40,000,000 Federal Home Loan Bank Discount Note 2.504 04/01/05 39,915,267 25,000,000 Federal Home Loan Bank Discount Note 2.485 04/05/05 24,940,694 20,000,000 Federal Home Loan Bank Discount Note 2.392 04/06/05 19,953,200 38,700,000 Federal Home Loan Bank Discount Note 2.371 04/07/05 38,607,722 36,000,000 Federal Home Loan Bank Discount Note 2.494 04/08/05 35,907,090 31,000,000 Federal Home Loan Bank Discount Note 2.419 04/13/05 30,912,429 29,000,000 Federal Home Loan Bank Discount Note 2.545 04/14/05 28,911,389 35,000,000 Federal Home Loan Bank Discount Note 2.561 04/15/05 34,889,969 17,000,000 Federal Home Loan Bank Discount Note 2.315 04/20/05 16,946,639 20,000,000 Federal Home Loan Bank Discount Note 2.592 04/20/05 19,929,444 30,000,000 Federal Home Loan Bank Discount Note 2.424 04/21/05 29,899,275 29,000,000 Federal Home Loan Bank Discount Note 2.376 04/22/05 28,902,818 30,000,000 Federal Home Loan Bank Discount Note 2.551 04/25/05 29,885,417 23,803,000 Federal Home Loan Bank Discount Note 2.347 04/27/05 23,716,694 35,000,000 Federal Home Loan Bank Discount Note 2.352 04/29/05 34,868,356 45,000,000 Federal Home Loan Bank Discount Note 2.653 05/04/05 44,792,000 30,000,000 Federal Home Loan Bank Discount Note 2.648 05/06/05 29,857,275 30,000,000 Federal Home Loan Bank Discount Note 2.633 05/10/05 29,849,500
4 HILLIARD-LYONS GOVERNMENT FUND, INC. SCHEDULE OF INVESTMENTS--continued (UNAUDITED) February 28, 2005
Cash Principal Equivalent Maturity Amount Yield Date Value ----------- ---------- -------- -------------- $40,000,000 Federal Home Loan Bank Discount Note 2.633% 05/11/05 $ 39,796,467 40,000,000 Federal Home Loan Bank Discount Note 2.633 05/12/05 39,793,600 37,000,000 Federal Home Loan Bank Discount Note 2.532 05/13/05 36,814,306 20,000,000 Federal Home Loan Bank Discount Note 2.634 05/16/05 19,891,067 15,000,000 Federal Home Loan Bank Discount Note 2.673 05/18/05 14,918,587 15,000,000 Federal Home Loan Bank Discount Note 2.565 05/18/05 14,914,850 15,000,000 Federal Home Loan Bank Discount Note 2.703 05/19/05 14,912,771 10,000,000 Federal Home Loan Bank Discount Note 2.725 05/25/05 9,936,958 25,000,000 Federal Home Loan Bank Discount Note 2.766 05/27/05 24,836,271 30,000,000 Federal Home Loan Bank Discount Note 2.582 06/03/05 29,802,600 21,000,000 Federal Home Loan Bank Discount Note 2.730 06/08/05 20,845,808 30,000,000 Federal Home Loan Bank Discount Note 2.612 06/22/05 29,760,346 -------------- TOTAL U. S. GOVERNMENT SPONSORED ENTERPRISES (at amortized cost--$1,415,640,838) 1,415,640,838 -------------- TOTAL INVESTMENTS (100.1%) (at amortized cost--$1,415,640,838***) $1,415,640,838 ==============
* Obligations of U.S. Government sponsored enterprises are not issued nor guaranteed by the United States Treasury. ** 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. ***Also represents cost for federal income tax purposes. 5 HILLIARD-LYONS GOVERNMENT FUND, INC. STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) February 28, 2005 ASSET Investments, (at amortized cost which approximates market value (identified and tax cost--$1,415,640,838))............. $1,415,640,838 Cash.......................................................... 179 Prepaid Expenses.............................................. 122,996 -------------- TOTAL ASSETS............................................. 1,415,764,013 -------------- LIABILITIES Dividends payable............................................. 836,492 Due to Affiliates--Note B Investment advisory fee...................................... 317,954 Shareholder servicing fee.................................... 276,075 Administrative fee........................................... 198,353 Accrued directors' fees....................................... 1,994 Accrued expenses.............................................. 68,446 -------------- TOTAL LIABILITIES........................................ 1,699,314 -------------- NET ASSETS.................................................... $1,414,064,699 ============== Shares of beneficial interest outstanding..................... 1,414,064,699 ============== Net asset value, offering and redemption price per share (net $1.00 assets / shares of beneficial interest outstanding).......... =====
6 HILLIARD-LYONS GOVERNMENT FUND, INC. STATEMENT OF OPERATIONS (UNAUDITED) For the six months ended February 28, 2005 INVESTMENT INCOME Interest....................................................... $14,107,520 ----------- EXPENSES Investment advisory fee--Note B................................ 2,091,430 Shareholder servicing fee--Note B.............................. 1,781,498 Administrative fee--Note B..................................... 1,282,679 Printing and other expenses.................................... 120,649 Custodian fees and expenses.................................... 107,300 Insurance expense.............................................. 95,265 Directors' fees................................................ 33,950 Legal and audit fees........................................... 33,275 Registration fees.............................................. 18,550 Transfer agent fees and expenses............................... 18,300 ----------- Total expenses................................................ 5,582,896 Less waiver of investment advisory fee--Note B................. (3,097) ----------- Total net expenses............................................. 5,579,799 ----------- Net investment income.......................................... 8,527,721 ----------- Net increase in net assets resulting from operations........... $ 8,527,721 ===========
See notes to financial statements. 7 HILLIARD-LYONS GOVERNMENT FUND, INC. STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended For the February 28, Year Ended 2005 August 31, (UNAUDITED) 2004 -------------- -------------- FROM OPERATIONS Net investment income...................................... $ 8,527,721 $ 8,116,146 -------------- -------------- Net increase in net assets resulting from operations..... 8,527,721 8,116,146 -------------- -------------- DIVIDENDS TO SHAREHOLDERS FROM Net investment income...................................... ( 8,527,721) ( 8,116,146) -------------- -------------- Total dividends.......................................... ( 8,527,721) ( 8,116,146) -------------- -------------- FROM CAPITAL SHARE TRANSACTIONS Net capital share transactions (at $1.00 per share)--Note C ( 13,478,378) ( 179,691,327) -------------- -------------- NET ASSETS Beginning of period........................................ 1,427,543,077 1,607,234,404 -------------- -------------- End of period.............................................. $1,414,064,699 $1,427,543,077 ============== ==============
See notes to financial statements. 8 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. The total returns in the table represent the rate that an investor would have earned on an investment in the Fund (assuming reinvestment of all dividends and distributions). The 2004, 2003 and 2002 information has been audited by Deloitte & Touche LLP. Information for the prior years was audited by another independent auditor, whose report expressed an unqualified opinion. It should be read in conjunction with the financial statements and notes thereto.
For the Six Months Ended February 28, For the year ended August 31, 2005 ---------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ------------ ---------- ---------- ---------- ---------- ---------- Net asset value, beginning of period.... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 ---------- ---------- ---------- ---------- ---------- ---------- Net investment income................... .01(a) --(a)* .01(a) .05 .05 .05 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations...... .01 --* .01 .05 .05 .05 ---------- ---------- ---------- ---------- ---------- ---------- Less distributions: From net investment income............ .01 --* (.01) (.05) (.05) (.05) ---------- ---------- ---------- ---------- ---------- ---------- Total distributions................... .01 --* (.01) (.05) (.05) (.05) ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period.......... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 ========== ========== ========== ========== ========== ========== Total investment return................. .59% .53% .63% 1.44% 5.14% 5.52% ========== ========== ========== ========== ========== ========== SUPPLEMENTAL DATA Net assets, end of period (000's omitted)...................... $1,414,065 $1,427,543 $1,607,234 $1,667,245 $1,930,645 $1,366,422 RATIOS TO AVERAGE NET ASSETS Operating expenses.................... .78%(b)** .58%(c) .69%(d) .65% .44% .48% Net investment income................. 1.20%(b)** .53%(c) .65%(d) 1.53% 4.92% 5.41%
(a)Net of voluntary investment advisory fee waiver by the Adviser. (b)Net of voluntary investment advisory fee waiver by the Adviser. If the Fund had paid the full investment advisory fee, the ratios of expenses and net investment income to average net assets would have been unchanged at .78% and 1.20%, respectively, for the six months ended February 28, 2005. (c)Net of voluntary investment advisory fee waiver by the Adviser. If the Fund had paid the full investment advisory fee, the ratios of expenses and net investment income to average net assets would have been .78% and .33%, respectively, for the year ended August 31, 2004. (d)Net of voluntary investment advisory fee waiver by the Adviser. If the Fund had paid the full investment advisory fee, the ratios of expenses and net investment income to average net assets would have been .77% and .57%, respectively, for the year ended August 31, 2003. * Amount less than $.005 ** Annualized See notes to financial statements. 9 HILLIARD-LYONS GOVERNMENT FUND, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) FEBRUARY 28, 2005 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 (the "1940 Act"), as amended. The Fund was incorporated in June 1980 under the laws of the state of Maryland. The primary investment objective of the Fund is to provide investors with liquidity and the highest possible level of current income consistent with the preservation of capital. 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 in accordance with Rule 2a-7 of the 1940 Act. Securities are valued at cost when purchased, and thereafter a constant proportionate amortization of any discount or premium, if any, is recorded until maturity of the security. The Board of Directors (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: Repurchase agreements are fully collateralized by U.S. Treasury and U.S. Government Agency obligations. It is the policy of the Fund to take possession of collateral. 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 daily and is paid monthly. The tax character of distributions paid during 2004 and 2003 was as follows:
For the year ended August 31, ----------------------------- 2004 2003 ---------- ----------- Distributions paid from................. Ordinary income......................... $8,116,146 $10,635,655 ---------- ----------- Total Distribution...................... $8,116,146 $10,635,655
Investment Transactions: Investment transactions are accounted for on the date the securities are bought or sold. Income is accrued daily. Interest income and expenses are recorded on the accrual basis. 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 certain estimates and assumptions that may 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 September 28, 2004, 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 10 HILLIARD-LYONS GOVERNMENT FUND, INC. NOTES TO FINANCIAL STATEMENTS--continued (UNAUDITED) FEBRUARY 28, 2005 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 six months ended February 28, 2005. The Adviser voluntarily agreed to waive a portion of its advisory fee beginning April 1, 2003. The Adviser waived $3,097 for the period September 1, 2004 through February 28, 2005. The Adviser may discontinue or modify any such voluntary waiver at its discretion and such waiver ceased on September 7, 2004. The Fund has entered into a separate shareholder and administration services agreement (the "Administration 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 $10,000 and the audit committee chairman an annual retainer of $3,000, a fee of $2,000 for each board or committee meeting attended, and all expenses the directors incur in attending meetings. Total fees paid to directors for the six months ended February 28, 2005 were $34,500. Transfer agent fees are paid to State Street Bank & Trust Co. NOTE C--CAPITAL STOCK At February 28, 2005, there were 2,500,000,000 shares of $.01 par value Common Stock authorized, and capital paid in aggregated $1,399,924,052. Each transaction in Fund shares was at the net asset value of $1.00 per share. The dollar amount represented is the same as the shares shown below for such transactions.
For the Six Months For the Ended Year Ended February 28, August 31, 2005 2004 -------------- -------------- Shares sold............................. 2,738,450,111 5,491,302,031 Shares issued to shareholders in reinvestment of dividends.............. 7,919,055 7,844,117 Less shares repurchased................. (2,759,847,546) (5,678,837,475) -------------- -------------- Net decrease in capital shares.......... (13,478,378) (179,691,327) ============== ==============
NOTE D--INDEMNIFICATIONS Under the Fund's organizational documents, its Officers and Directors are indemnified against certain liabilities arising out of the performance of their duties of the Fund. In addition, in the normal course of business, the Fund enters into contracts that provide general indemnifications to other parties. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund has not had prior claims or losses pursuant to these contracts and believes the risk of loss to be remote. 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 LLC 400 West Market Street, 32/nd/ Floor Louisville, Kentucky 40202 Independent Registered Public Accounting Firm Deloitte & Touche LLP 1700 Market Street Philadelphia, Pennsylvania 19103 DIRECTORS AND OFFICERS BOARD OF DIRECTORS Samuel G. Miller J. Robert Shine Lindy B. Street OFFICERS Joseph C. Curry, Jr. - President Dianna P. Wengler - Vice President and Treasurer Edward J. Veilleux - Vice President and Chief Compliance Officer Stephanie J. Ferree - Secretary Hilliard-Lyons Government Fund, Inc. Semi-Annual Report February 28, 2005 [GRAPHIC] Bear & Bull ITEM 2. CODE OF ETHICS. Not applicable to semi-annual reports. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable to semi-annual reports. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable to semi-annual reports. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable to open-end investment companies. ITEM 6. SCHEDULE OF INVESTMENTS. Included as part of the report to shareholders filed under item 1 of this form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable to open-end investment companies. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable to open-end investment companies. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASES. Not applicable to open-end investment companies. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 11. CONTROLS AND PROCEDURES. (a) Within the 90-day period prior to the filing of this report, the registrant's management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer believe that the registrant's disclosure controls and procedures are effective to ensure that information required to be disclosed by the registrant on Form N-CSR is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) There have been no changes in the registrant's internal control over financial reporting during the registrant's most recent fiscal half-year that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Any code of ethics or amendment thereto. Not applicable. (a)(2) Certification pursuant to Rule 30a-2(a) under the Investment Company Act of 1940. Filed herewith. (a)(3) Not applicable. (b) Certification pursuant to Rule 30a-2(b) under the Investment Company Act of 1940. Furnished herewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) HILLIARD-LYONS GOVERNMENT FUND, INC. By (Signature and Title) /s/ Joseph C. Curry Jr. ---------------------------------------- Joseph C. Curry Jr. President Date: April 14, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title) /s/ Dianna P. Wengler ---------------------------------------- Dianna P. Wengler Vice President and Treasurer Date: April 14, 2005 By (Signature and Title) /s/ Joseph C. Curry Jr. ---------------------------------------- Joseph C. Curry Jr. President Date: April 14, 2005