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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