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
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(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: August 31, 2004
ITEM 1. REPORTS TO STOCKHOLDERS.
The Annual Report to Stockholders follows.
September 28, 2004
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, 2004.
The Federal Reserve ("Fed") raised short-term interest rates for the first time
in four years in June. Prior to that, a series of thirteen rate cuts had led to
a federal funds rate of 1%. 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 impact on rates that affect consumers such as mortgages and credit card
interest rates. This period of historically low interest rates, while a boon to
consumers, has been a challenge for investors seeking higher rates of return.
That first rate increase in June has been followed by two other increases that
were widely anticipated. These rate increases signal the Fed's opinion about
the economy. Fed Chairman, Alan Greenspan, is clearly optimistic about the
economy mentioning steep increases in energy prices as one of his only
concerns. The Fed has indicated future rate increases will be at a measured
pace. The federal funds rate is currently at 1.75%.
Most economic analysts believe the federal funds rate will rise to 2% by the
end of this year but the consensus is mixed on whether the next 1/4 of 1%
increase will be in November or December. The longer term outlook is for the
federal funds rate to increase to 4% by the end of 2005.
Assets of the Fund declined during the year to $1.4 billion. The money market
fund industry overall has endured a year of increased competition from bank
products and loss of assets. 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.
Interest rates impact equity and fixed income markets as well. Yields typically
move inversely with prices yet the yield on ten year Treasury notes closed
lower the day of the Fed's announcement. This indicates some skepticism in the
bond market about the Fed's view of the economy. The major indices of equity
markets, the Dow Jones Industrial Average, the Nasdaq Composite index and the
Standard & Poor's 500, each closed up after the Fed's announcement, reflecting
the amount of confidence these markets put in the Federal Reserve. These
markets reacted positively to the Fed's outlook on the economy.
As discussed previously, while short term interest rates were at a 45 year low,
the Fund's investment adviser, J.J.B. Hilliard, W.L. Lyons, Inc. voluntarily
agreed to waive a portion of its advisory fee beginning April 1, 2003. For the
period covered in this report, the year ended August 31, 2004, the Adviser
waived $3.1 million of fees. The full amount of the fee waiver is passed on to
shareholders in the dividends paid by the Fund. Further information about this
fee waiver is included in these financial statements. The effect of the fee
waiver on the expense ratio and investment return of the Fund can be found in
the Financial Highlights table contained in this report. The Adviser
discontinued this voluntary waiver on September 8, 2004. This waiver may be
reinstated or modified in the future.
As shown on the Schedule of Investments, the Fund continues to invest
exclusively in high quality, short term securities issued by U.S. government
sponsored entities. These securities offer a high degree of credit safety and
also pay income that flows through to shareholders in the form of dividends
that are exempt from state income taxes. The Fund also offers 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. Cury Jr. /s/ Dianna P. Wengler
JOSEPH C. CURRY, JR DIANNA P. WENGLER
President Vice President and Treasurer
Portfolio Manager
________________________________________________________________________________
Portfolio Allocation/1/
[CHART]
U.S. Government Sponsored Entities - 100%
/1/As a percentage of total investments at August 31, 2004. 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 March 1, 2004 to August 31, 2004. 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
3/1/04 8/31/04 Ratio Period*
--------- --------- ---------- --------
Actual Fund Return.... $1,000.00 $1,005.73 .60% $3.03
Hypothetical 5% Return $1,000.00 $1,022.14 .60% $3.06
*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.
2
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS
August 31, 2004
Cash
Principal Equivalent Maturity
Amount Yield Date Value
- ----------- ---------- -------- --------------
U.S. GOVERNMENT SPONSORED ENTITIES*--100.1%**
$25,000,000 Federal Home Loan Bank Discount Note 1.226% 09/01/04 $ 25,000,000
20,026,000 Federal Home Loan Bank Discount Note 1.490 09/01/04 20,026,000
33,000,000 Federal Home Loan Bank Discount Note 1.170 09/02/04 32,998,946
20,000,000 Federal Home Loan Bank Discount Note 1.039 09/03/04 19,998,867
11,750,000 Federal Home Loan Bank Discount Note 1.393 09/07/04 11,747,317
29,500,000 Federal Home Loan Bank Discount Note 1.210 09/08/04 29,493,174
33,000,000 Federal Home Loan Bank Discount Note 1.411 09/09/04 32,989,807
27,000,000 Federal Home Loan Bank Discount Note 1.044 09/10/04 26,993,081
20,000,000 Federal Home Loan Bank Discount Note 1.171 09/13/04 19,992,333
30,000,000 Federal Home Loan Bank Discount Note 1.503 09/14/04 29,983,967
17,000,000 Federal Home Loan Bank Discount Note 1.181 09/15/04 16,992,331
15,000,000 Federal Home Loan Bank Discount Note 1.216 09/15/04 14,993,029
25,000,000 Federal Home Loan Bank Discount Note 1.482 09/16/04 24,984,792
30,000,000 Federal Home Loan Bank Discount Note 1.131 09/17/04 29,985,200
30,000,000 Federal Home Loan Bank Discount Note 1.321 09/20/04 29,979,417
20,000,000 Federal Home Loan Bank Discount Note 1.392 09/22/04 19,984,017
14,975,000 Federal Home Loan Bank Discount Note 1.444 09/22/04 14,962,596
40,000,000 Federal Home Loan Bank Discount Note 1.482 09/23/04 39,964,311
25,000,000 Federal Home Loan Bank Discount Note 1.445 09/24/04 24,977,319
25,000,000 Federal Home Loan Bank Discount Note 1.463 09/27/04 24,974,000
25,000,000 Federal Home Loan Bank Discount Note 1.493 09/28/04 24,972,437
30,978,000 Federal Home Loan Bank Discount Note 1.162 09/29/04 30,950,533
35,000,000 Federal Home Loan Bank Discount Note 1.493 09/30/04 34,958,554
30,178,000 Federal Home Loan Bank Discount Note 1.435 10/01/04 30,142,541
25,000,000 Federal Home Loan Bank Discount Note 1.445 10/05/04 24,966,472
29,065,000 Federal Home Loan Bank Discount Note 1.172 10/06/04 29,032,504
35,000,000 Federal Home Loan Bank Discount Note 1.514 10/07/04 34,947,850
30,000,000 Federal Home Loan Bank Discount Note 1.455 10/08/04 29,955,908
37,000,000 Federal Home Loan Bank Discount Note 1.514 10/12/04 36,937,213
35,000,000 Federal Home Loan Bank Discount Note 1.476 10/13/04 34,940,792
21,350,000 Federal Home Loan Bank Discount Note 1.465 10/15/04 21,312,424
33,907,000 Federal Home Loan Bank Discount Note 1.356 10/20/04 33,845,619
14,370,000 Federal Home Loan Bank Discount Note 1.522 10/22/04 14,339,565
20,000,000 Federal Home Loan Bank Discount Note 1.591 10/22/04 19,955,658
40,000,000 Federal Home Loan Bank Discount Note 1.351 10/27/04 39,917,556
40,000,000 Federal Home Loan Bank Discount Note 1.588 10/29/04 39,899,467
23,000,000 Federal Home Loan Bank Discount Note 1.607 11/01/04 22,938,424
45,000,000 Federal Home Loan Bank Discount Note 1.413 11/03/04 44,890,931
20,000,000 Federal Home Loan Bank Discount Note 1.414 11/05/04 19,949,986
10,000,000 Federal Home Loan Bank Discount Note 1.557 11/10/04 9,970,250
22,000,000 Federal Home Loan Bank Discount Note 1.608 11/10/04 21,932,411
See notes to financial statements.
3
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS--continued
August 31, 2004
Cash
Principal Equivalent Maturity
Amount Yield Date Value
- ----------- ---------- -------- --------------
$15,000,000 Federal Home Loan Bank Discount Note 1.409% 11/12/04 $ 14,958,600
10,772,000 Federal Home Loan Bank Discount Note 1.674 11/12/04 10,736,668
23,453,000 Federal Home Loan Bank Discount Note 1.608 11/17/04 23,373,742
30,000,000 Federal Home Loan Bank Discount Note 1.685 11/19/04 29,891,375
40,000,000 Federal Home Loan Bank Discount Note 1.609 11/23/04 39,854,289
17,000,000 Federal Home Loan Bank Discount Note 1.675 11/24/04 16,934,748
24,000,000 Federal Home Loan Bank Discount Note 1.685 11/26/04 23,905,113
30,000,000 Federal Home Loan Bank Discount Note 1.635 12/01/04 29,878,667
17,245,000 Federal Home Loan Bank Discount Note 1.696 12/03/04 17,171,048
35,000,000 Federal Home Loan Bank Discount Note 1.759 12/08/04 34,836,122
19,897,000 Federal Home Loan Bank Discount Note 1.738 12/10/04 19,803,042
15,000,000 Federal Home Loan Bank Discount Note 1.743 12/10/04 14,928,958
25,000,000 Federal Home Loan Bank Discount Note 1.763 12/15/04 24,874,219
16,327,000 Federal Home Loan Bank Discount Note 1.880 02/18/04 16,185,291
20,000,000 Federal Home Loan Bank Discount Note 1.895 02/25/04 19,817,886
--------------
TOTAL U. S. GOVERNMENT AGENCY OBLIGATIONS
(at amortized cost--$1,428,927,367) 1,428,927,367
--------------
TOTAL INVESTMENTS (100.1%)
(at amortized cost--$1,428,927,367***) $1,428,927,367
==============
* Obligations of U.S. Government sponsored entities 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.
See notes to financial statements.
4
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2004
ASSETS
Investments, (at amortized cost which approximates market value (identified and tax
cost--$1,428,927,367)............................................................ $1,428,927,367
Cash............................................................................... 911
Prepaid expenses................................................................... 7,764
--------------
TOTAL ASSETS................................................................. 1,428,936,042
--------------
LIABILITIES
Dividends payable.................................................................. 432,521
Due to affiliates--Note B
Investment advisory fee.......................................................... 279,886
Shareholder servicing fee........................................................ 306,390
Administrative fee............................................................... 220,601
Accrued directors' fees............................................................ 12,121
Accrued expenses................................................................... 141,446
--------------
TOTAL LIABILITIES............................................................ 1,392,965
--------------
NET ASSETS......................................................................... $1,427,543,077
==============
Shares of beneficial interest outstanding.......................................... 1,427,543,077
==============
Net asset value, offering and redemption price per share $1.00
(net assets / shares of beneficial interest outstanding)......................... =====
See notes to financial statements.
5
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF OPERATIONS
For the year ended August 31, 2004
INVESTMENT INCOME
Interest............................................ $17,084,274
-----------
EXPENSES
Investment advisory fee--Note B..................... 4,488,592
Shareholder servicing fee--Note B................... 3,863,591
Administrative fee--Note B.......................... 2,781,786
Printing and other expenses......................... 244,921
Insurance expense................................... 189,382
Custodian fees and expenses......................... 208,550
Registration fees................................... 95,000
Legal and audit fees................................ 90,644
Transfer agent fees and expenses.................... 44,825
Directors' fees..................................... 38,150
-----------
Total expenses.................................... 12,045,441
Less waiver of investment advisory fee--Note B...... (3,077,313)
-----------
Total net expenses.................................. 8,968,128
-----------
Net investment income............................... 8,116,146
-----------
Net increase in net assets resulting from operations $ 8,116,146
===========
See notes to financial statements.
6
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the year ended August 31,
--------------------------------
2004 2003
--------------- ---------------
FROM OPERATIONS
Net investment income...................................... $ 8,116,146 $ 10,635,655
--------------- ---------------
Net increase in net assets resulting from operations..... 8,116,146 10,635,655
--------------- ---------------
DIVIDENDS TO SHAREHOLDERS FROM
Net investment income...................................... ( 8,116,146) ( 10,635,655)
--------------- ---------------
Total dividends.......................................... ( 8,116,146) ( 10,635,655)
--------------- ---------------
FROM CAPITAL SHARE TRANSACTIONS
Net capital share transactions (at $1.00 per share)--Note C ( 179,691,327) ( 60,010,826)
--------------- ---------------
NET ASSETS
Beginning of year.......................................... 1,607,234,404 1,667,245,230
--------------- ---------------
End of year................................................ $ 1,427,543,077 $ 1,607,234,404
=============== ===============
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. 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 and 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 year ended August 31,
----------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Net asset value, beginning of
year....................... $1.00 $1.00 $1.00 $1.00 $1.00
---------- ---------- ---------- ---------- ----------
Net investment income........ --(a)* .01(a) .05 .05 .05
---------- ---------- ---------- ---------- ----------
Net increase in net assets
from operations........... --* .01 .05 .05 .05
---------- ---------- ---------- ---------- ----------
Less dividends:
From net investment
income.................... --* (.01) (.05) (.05) (.05)
---------- ---------- ---------- ---------- ----------
Total dividends............. --* (.01) (.05) (.05) (.05)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year. $1.00 $1.00 $1.00 $1.00 $1.00
========== ========== ========== ========== ==========
Total investment return...... .53% .63% 1.44% 5.14% 5.52%
========== ========== ========== ========== ==========
SUPPLEMENTAL DATA
Net assets, end of year
(000's omitted)........... $1,427,543 $1,607,234 $1,667,245 $1,930,645 $1,366,422
RATIOS TO AVERAGE NET
ASSETS
Operating expenses.......... .58%(b) .69%(c) .65% .44% .48%
Net investment income....... .53%(b) .65%(c) 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 .78% and .33%,
respectively, for the year ended August 31, 2004.
(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 .77% and .57%,
respectively, for the year ended August 31, 2003.
* Amount less than $.005
See notes to financial statements.
8
HILLIARD-LYONS GOVERNMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2004
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 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, 2004. The Adviser voluntarily agreed to waive a portion of its
advisory fee beginning April 1, 2003. The Adviser may discontinue or modify any
such voluntary waiver at its discretion. The Adviser waived $3,077,313 for the
period September 1, 2003 through August 31, 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; the audit committee chairman an annual retainer of
$3,000; and a fee of $2,000 for each board or committee meeting attended. Total
fees paid to directors for the year ended August 31, 2004 were $42,000.
Transfer agent fees are paid to State Street Bank & Trust Co.
NOTE C--CAPITAL STOCK
At August 31, 2004, there were 2,500,000,000 shares of $.01 par value Common
Stock authorized, and capital paid in aggregated $1,413,267,646. 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 year ended August 31,
------------------------------
2004 2003
-------------- --------------
Shares sold.................. 5,491,302,031 5,290,394,643
Shares issued to shareholders
in reinvestment of dividends 7,844,117 10,741,531
Less shares repurchased...... (5,678,837,475) (5,361,147,000)
-------------- --------------
Net decrease in
capital shares.............. (179,691,327) (60,010,826)
============== ==============
9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors 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, 2004 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
three 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 audit. The financial highlights of the Fund for the periods ended
August 31, 2000 and August 31, 2001 were audited by other auditors whose report
dated October 2, 2001 expressed an unqualified opinion on those financial
highlights.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits 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. Our procedures
included confirmation of securities owned as of August 31, 2004, 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, 2004, the results of its operations, the changes in its
net assets, and its financial highlights for the respective stated periods, in
conformity with accounting principles generally accepted in the United States
of America.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
October 8, 2004
10
HILLIARD-LYONS GOVERNMENT FUND, INC.
MANAGEMENT INFORMATION CHART
Number of
Portfolios in Other
Term of Office Fund Complex Directorships
Name and Address Positions Held and Length of Principal Occupation(s) Overseen by Held by
Independent Directors Age With The Fund Time Served During Past Five Years Director Director
--------------------- --- -------------- ----------------- --------------------------------- ------------- -------------
J. Robert Shine**....... 80 Director Indefinite; since Chairman and Certified 1 None
222 East Market Street October 17,1989 Public Accountant,
New Albany, IN 47150 Monroe Shine & Co., Inc.
Samuel G. Miller**...... 79 Director Indefinite; since Retired, Chairman of 1 None
402 Wynfield Close Court March 26, 1987 Vineyard Village
Louisville, KY 40206
Lindy B. Street**....... 58 Director Indefinite; since Retired, former Senior 1 None
406 Wynfield Close Court November 2, 1999 Vice President of Marketing
Louisville, KY 40206 & Public Affairs of Columbia/
HCA Healthcare Corporation
Joseph C. Curry, Jr.*... 59 President Annually Senior Vice President, N/A N/A
Hilliard Lyons Center J.J.B. Hilliard, W.L. Lyons, Inc.
Louisville, KY 40202
Dianna P. Wengler*...... 44 Vice Annually Vice President, N/A N/A
Hilliard Lyons Center President and J.J.B. Hilliard, W.L. Lyons, Inc.
Louisville, KY 40202 Treasurer
Edward J. Veilleux...... 61 Vice Annually President, N/A N/A
5 Brook Farm Court President and EJV Financial Services, LLC
Hunt Valley, MD 21030 Chief
Compliance
Officer
Stephanie J. Ferree*.... 26 Secretary Annually Mutual Fund Administration N/A N/A
Hilliard Lyons Center J.J.B. Hilliard, W.L. Lyons, Inc.
Louisville, KY 40202
* An "interested person", as defined by the Investment Company Act of 1940
**Member of Audit Committee
Additional information about the Fund's directors is contained in the Statement
of Additional Information ("SAI") constituting Part B of the Fund's
Registration Statement on Form N-1A filed with the SEC. The most recent
post-effective amendment to that Registration Statement is available
electronically at the SEC's Internet web site, www.sec.gov and at the Adviser's
web site, www.hilliard.com. The Fund will also furnish a copy of the SAI
portion of the Registration Statement, without charge, to any shareholder who
requests by calling the administrator at (888) 878 -7845 (toll-free).
- --------
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities as well as a copy of the
Fund's proxy voting record is available without charge, upon request, by
calling toll-free 1-888-878-7845 or is available on the Adviser's website,
www.hilliard.com. This information is also available on the SEC's website,
www.sec.gov.
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.
Annual Report
August 31, 2004
[LOGO] BEAR AND BULL(R)
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to its
principal executive officer and principal financial officer. A
copy of the registrant's code of ethics is filed herewith as
exhibit (a)(1).
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's Board of Directors has determined that there is
a financial expert serving on the audit committee. Mr. J. Robert
Shine is the audit committee financial expert and is considered
to be independent in accordance with Commission rules.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit fees for fiscal years ended August 31, 2004 and August
31, 2003 were $18,000.00 and $18,000.00, respectively.
(b) Audit-related fees for fiscal years ended August 31, 2004
and August 31, 2003 were $3,225.00 and $1,500.00, respectively.
All fees are for out-of-pocket expenses.
(c) Tax fees for fiscal years ended August 31, 2004 and August
31, 2003 were $5,600.00 and $ 1,900.00, respectively. All fees
are for preparation of the U.S. income tax returns Form 1120-RIC
and tax excise review.
(d) There were no other fees for the periods covered by this
report.
"Audit fees" are fees billed for professional services rendered
by the principal accountant for the audit of the registrant's
annual financial statements that are normally provided by the
principal accountant in connection with statutory and regulatory
filings or engagements. "Audit-related fees" are fees billed for
assurance and related services by the principal accountant that
are reasonably related to the performance of the audit of the
registrant's financial statements. "Tax fees" are fees billed
for professional services rendered by principal accountant for
tax compliance, tax advice and tax planning.
The audit committee had adopted pre-approval policies and
procedures that require the audit committee to pre-approve all
audit and non-audit services of the registrant, including
services provided to any entity affiliated with the registrant
with respect to any engagement that directly relates to the
operations and financial reporting of the registrant.
In accordance with its pre-approval policies and procedures, the
audit committee pre-approved all audit and tax services provided
by the principal accountant during fiscal years 2004 and 2003.
During the last two fiscal years, there were no non-audit
services rendered by the principal accountant to registrant's
investment adviser or any entity controlling, controlled by or
under common control with the investment adviser that provides
ongoing services to the registrant.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to open-end investment companies.
ITEM 6. SCHEDULE OF INVESTMENTS.
Refer to the Annual Report to Stockholders for this information.
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.
The registrant does not currently have procedures by which
shareholders may recommend nominees to the registrant's board of
directors. The registrant's directors, all of whom are
independent, serve as its nominating committee.
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-2(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 effectively
designed to ensure that information required to be
disclosed by the registrant in this report is recorded,
processed, summarized and reported by the filing date,
including ensuring that information required to be
disclosed in this report is accumulated and communicated
to the registrant's management, including the
registrant's Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions
regarding required disclosure.
(b) There have been no changes in the registrant's internal
control over financial reporting (as defined in rule
30a-3(d)) under the Investment Company Act of 1940 that
occurred 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. Filed herewith.
(a)(2) Certification pursuant to Rule 30a-2(a) under the
Investment Company Act of 1940. Filed herewith.
(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: October 29, 2004
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: October 29, 2004
By (Signature and Title) /s/ Joseph C. Curry Jr.
------------------------------------
Joseph C. Curry Jr.
President
Date: October 29, 2004