<PAGE>
March 28, 1996
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 29, 1996.
Net assets grew $118 million during the six months and $210 million during the
year ended February 29, 1996. Net assets have since increased to a new record
high of $462 million on March 27, 1996. This compares to net assets of $244
million one year ago. The average seven day yield ranged from 4.72% to 5.06%
during the six months. Distributions of $.024817 were paid, equivalent to an
annualized yield of 4.98%. For those shareholders in the dividend reinvestment
plan, the distributions paid equate to a compound annual yield of 5.03%. As of
the date of this letter, the seven day yield was 4.62%.
For the calendar year ended December 31, 1995, 100% of the dividends paid by
the Fund were exempt from state income tax in all states. This is the first
year in the history of the Fund that all the dividends paid in a year were
fully exempt. While the percentage of dividends eligible for exemption will
vary from year to year, the dividends paid by HLGF would be partially exempt
from state income tax under current tax laws.
According to IBC/Donoghue Inc., the total return for the average taxable money
market fund decreased 62 basis points from February 1995 to February 1996
including a 23 basis point drop in January alone. Interest rates fell in
response to three quarter point rate cuts by the Federal Reserve ("Fed")
during that time, the last in January 1996. During this same time period,
total assets of taxable money market funds increased 30% to $687 billion while
HLGF's assets increased 86%.
We feel investor concern for investment safety has contributed to HLGF's above
average increase in assets. Headlines such as the Orange County, California
bankruptcy brought the issue of credit safety into public view. In the past
year, several money market funds have had to scramble to maintain their net
asset value of $1.00 per share because of losses both realized and unrealized
from owning troubled securities. While memories of particular incidents such
as Orange County are fading, investors are wise to remember that all money
market funds do not invest in the same types of securities.
As shown on the enclosed Schedule of Investments, on February 29, 1996 HLGF
was fully invested in U.S. government agency discount note obligations with
maturity dates of less than three months. The Fund has followed the same
investment strategy as outlined in our letter last year. Investments are
concentrated in discount notes with short maturities issued by the Federal
Home Loan Banks, Federal Farm Credit Banks and the Student Loan Marketing
Association. This investment strategy has allowed HLGF to provide its
shareholders a competitive return coupled with a high degree of credit safety
and income that is partially and in 1995, fully exempt from state income tax
in all states.
1995 was an eventful year for financial markets. The Dow Jones Industrial
Average ("DJIA") rose 33% in 1995 and reached several new highs. Before 1995,
a DJIA of 4000 seemed improbable to many but that level was reached and then
surpassed by the end of the first quarter. 1996 started out where 1995 left
off. With its fifth largest one day point gain on March 18, 1996, the DJIA
closed at a record level of 5683.
After over a year of advance we would expect considerable volatility in both
stock and bond markets as they struggle to reflect investor hopes and fears
for the months ahead. We have lowered our expectations for 1996 (compared to
1995). It seems sensible to do so.
What happens next? The strength and direction of the economy are not clear
despite certain indicators such as February's strong employment numbers.
Further rate cuts that had once seemed certain are for now less likely. The
Federal Reserve took no action at its most recent meeting. If the Fed does
remain on the sidelines, short term interest rates may rise slightly.
Good health and luck to you all.
/s/ DONALD F. KOHLER /s/ JOSEPH C. CURRY, JR.
DONALD F. KOHLER JOSEPH C. CURRY, JR.
Chairman President
/s/ DIANNA P. WENGLER
DIANNA P. WENGLER
Vice President and Treasurer
1
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS
(UNAUDITED)
FEBRUARY 29, 1996
<TABLE>
<CAPTION>
PRINCIPAL PURCHASE MATURITY
AMOUNT YIELD DATE VALUE
----------- -------- -------- ------------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS --
100.1%
$ 8,500,000 Federal Home Loan Bank 5.644% 03/01/96 $ 8,500,000
10,570,000 Federal Home Loan Bank 5.440 03/01/96 10,570,000
8,000,000 Federal Home Loan Bank 5.684 03/04/96 7,996,340
11,000,000 Federal Home Loan Bank 5.639 03/05/96 10,993,314
10,000,000 Federal Farm Credit Bank 5.448 03/06/96 9,992,625
10,500,000 Federal Farm Credit Bank 5.598 03/07/96 10,490,480
14,000,000 Federal Farm Credit Bank 5.467 03/08/96 13,985,491
8,000,000 Federal Farm Credit Bank 5.479 03/11/96 7,988,133
4,500,000 Federal Home Loan Bank 5.256 03/11/96 4,493,563
8,000,000 Federal Farm Credit Bank 5.465 03/13/96 7,985,787
12,000,000 Federal Home Loan Bank 5.607 03/14/96 11,976,427
8,000,000 Federal Farm Credit Bank 5.389 03/15/96 7,983,636
10,000,000 Federal Home Loan Bank 5.636 03/18/96 9,974,264
5,170,000 Federal Home Loan Bank 5.193 03/19/96 5,156,868
9,500,000 Federal Home Loan Bank 5.211 03/20/96 9,474,429
9,000,000 Federal Farm Credit Bank 5.190 03/21/96 8,974,650
12,000,000 Federal Home Loan Bank 5.498 03/22/96 11,962,620
7,500,000 Federal Farm Credit Bank 5.354 03/25/96 7,473,900
14,000,000 Federal Farm Credit Bank 5.341 03/26/96 13,949,347
8,000,000 Federal Home Loan Bank 5.466 03/27/96 7,969,320
Student Loan Marketing
15,500,000 Association 5.204 03/29/96 15,438,758
5,000,000 Federal Home Loan Bank 5.424 04/01/96 4,977,310
13,500,000 Federal Home Loan Bank 5.210 04/02/96 13,439,040
7,500,000 Federal Home Loan Bank 5.408 04/03/96 7,463,906
8,000,000 Federal Farm Credit Bank 5.192 04/04/96 7,961,618
9,000,000 Federal Home Loan Bank 5.389 04/05/96 8,954,150
10,000,000 Federal Farm Credit Bank 5.204 04/08/96 9,946,378
6,555,000 Federal Farm Credit Bank 5.190 04/09/96 6,519,068
14,500,000 Federal Farm Credit Bank 5.195 04/11/96 14,416,275
9,000,000 Federal Farm Credit Bank 5.197 04/12/96 8,946,660
10,000,000 Federal Farm Credit Bank 5.240 04/16/96 9,934,578
9,000,000 Federal Home Loan Bank 5.388 04/17/96 8,938,548
4,000,000 Federal Home Loan Bank 5.387 04/17/96 3,972,688
5,000,000 Federal Farm Credit Bank 5.390 04/18/96 4,965,133
10,000,000 Federal Home Loan Bank 5.164 04/22/96 9,927,344
10,000,000 Federal Home Loan Bank 5.335 04/24/96 9,922,300
8,365,000 Federal Home Loan Bank 5.343 04/24/96 8,299,878
5,500,000 Federal Farm Credit Bank 5.181 04/26/96 5,456,794
5,000,000 Federal Farm Credit Bank 5.198 04/29/96 4,958,454
10,000,000 Federal Home Loan Bank 5.081 05/01/96 9,916,294
10,000,000 Federal Farm Credit Bank 5.129 05/02/96 9,914,061
9,500,000 Federal Home Loan Bank 5.104 05/03/96 9,417,540
7,040,000 Federal Home Loan Bank 5.114 05/06/96 6,975,854
6,500,000 Federal Home Loan Bank 5.113 05/07/96 6,439,877
8,500,000 Federal Home Loan Bank 5.106 05/08/96 8,420,364
17,000,000 Federal Home Loan Bank 5.114 05/17/96 16,819,285
6,000,000 Federal Home Loan Bank 5.137 05/22/96 5,931,803
8,000,000 Federal Home Loan Bank 5.134 05/22/96 7,909,071
11,500,000 Federal Home Loan Bank 5.096 05/23/96 11,368,756
9,000,000 Federal Home Loan Bank 5.242 05/28/96 8,888,460
------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(amortized cost -- $454,331,439) 454,331,439
------------
TOTAL INVESTMENTS (100.1%) (cost --
$454,331,439*) $454,331,439
============
</TABLE>
- -------
*Also represents cost for federal income tax purposes.
The percentage shown for each investment category is the total value of that
category as a percentage of the total net assets of the Fund.
See notes to financial statements.
2
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
FEBRUARY 29, 1996
<TABLE>
<S> <C>
ASSETS
Investments in money market instruments, at value:
United States Government Agency Obligations, at value (amortized
cost--$454,331,439)............................................ $454,331,439
------------
Total Investments.............................................. 454,331,439
Cash............................................................. 597,550
Prepaid expenses................................................. 23,143
------------
TOTAL ASSETS................................................... 454,952,132
LIABILITIES
Dividends payable................................................ 817,682
Due to J.J.B. Hilliard, W.L. Lyons, Inc.--Note B................. 137,256
Miscellaneous accrued expenses................................... 6,201
------------
TOTAL LIABILITIES.............................................. 961,139
------------
NET ASSETS (equivalent to $1.00 per share; 500,000,000 shares
authorized and 453,990,993 shares issued and outstanding)--Note
C............................................................... $453,990,993
============
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
FEBRUARY 29, 1996
INVESTMENT INCOME
Interest income.................................................. $ 10,673,391
EXPENSES
Investment Advisory fee--Note B.................................. 788,239
Transfer agent fees.............................................. 268,905
Filing fees...................................................... 49,140
Custodian fees................................................... 40,950
Insurance expense................................................ 16,674
Legal and Audit fees............................................. 15,834
Printing and other expenses...................................... 12,986
Directors' fees.................................................. 6,734
------------
Total expenses.................................................. 1,199,462
------------
Net investment income........................................... 9,473,929
------------
Net increase in net assets resulting from operations............ $ 9,473,929
============
</TABLE>
See notes to financial statements.
3
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
ENDED FOR THE YEAR
FEBRUARY ENDED
29, 1996 AUGUST 31,
INCREASE IN NET ASSETS: (UNAUDITED) 1995
------------- -------------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................ $ 9,473,929 $ 13,049,588
------------- -------------
Net increase in net assets resulting from
operations..................................... 9,473,929 13,049,588
Dividends to shareholders ($.024817 and $.049286
per share, respectively)........................ ( 9,473,929) ( 13,049,588)
------------- -------------
Undistributed net investment income.............. 0 0
------------- -------------
FROM CAPITAL SHARE TRANSACTIONS
Net capital share transactions (at $1.00 per
share)--Note C.................................. 118,214,516 125,124,834
NET ASSETS
Beginning of period.............................. 335,776,477 210,651,643
------------- -------------
End of period.................................... $453,990,993 $335,776,477
============= =============
</TABLE>
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. It should be read in conjunction with the
financial statements and notes thereto.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY
29, 1996 YEAR ENDED AUGUST 31,
(UNAUDITED) 1995 1994 1993 1992 1991
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
Beginning of Period.... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-------- -------- -------- -------- -------- --------
Net Investment income... .03 .05 .03 .03 .04 .06
-------- -------- -------- -------- -------- --------
Total From Investment
Operations............ .03 .05 .03 .03 .04 .06
Less Distributions:
Dividend Distributions. ( .03) ( .05) ( .03) ( .03) ( .04) ( .06)
-------- -------- -------- -------- -------- --------
Total Distributions.... ( .03) ( .05) ( .03) ( .03) ( .04) ( .06)
-------- -------- -------- -------- -------- --------
Net asset value, End of
Period................. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
======== ======== ======== ======== ======== ========
Number of shares
outstanding (000's
omitted)............... 453,991 335,776 210,652 221,050 234,600 232,660
Total Investment Return. 5.03%(a) 5.04% 2.85% 2.54% 3.87% 6.19%
SIGNIFICANT RATIOS AND
SUPPLEMENTAL DATA
Net assets, End of
Period (000's
omitted).............. $453,991 $335,776 $210,652 $221,050 $234,600 $232,660
Operating expenses to
average net assets.... .63%(a) .72% .75% .71% .68% .70%
Net investment income
to average net assets. 4.97%(a) 4.97% 2.80% 2.51% 3.80% 6.01%
</TABLE>
(a) Annualized
See notes to financial statements.
4
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A--ACCOUNTING POLICIES
Hilliard-Lyons Government Fund, Inc. (the "Fund") is a diversified open-end
management investment company registered under the Investment Company Act of
1940, as amended. The following is a summary of significant accounting poli-
cies followed by the Fund in the preparation of its financial statements.
SECURITY VALUATION: The Fund employs the amortized cost method of security
valuation for U.S. Government securities which, in the opinion of the Board of
Directors, represents fair value of the particular security. The Board moni-
tors deviations between net asset value per share as determined by using
available market quotations and the amortized cost method of security valua-
tion. If the deviation in the ag- gregate is significant, the Board considers
what action, if any, should be initiated to provide fair valuation.
The Fund values repurchase agreements at cost and accrues interest into inter-
est receivable. Normally, repurchase agreements are not subject to trading.
Repurchase agreements are fully collateralized by U.S. Treasury and U.S. Gov-
ernment Agency obligations valued at bid prices plus accrued interest. U.S.
Treasury and U.S. Government Agency obligations pledged as collateral for re-
purchase agree- ments are held by the Fund's custodian bank until maturity of
the repurchase agreements. Provisions of the agreements provide that the mar-
ket 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 le-
gal proceedings.
FEDERAL INCOME TAXES: It is the policy of the Fund to continue to qualify un-
der the Internal Revenue Code as a regulated investment company and to dis-
tribute all of its taxable income to shareholders, thereby relieving the Fund
of federal income tax liability.
DIVIDENDS TO SHAREHOLDERS: The net investment income of the Fund is determined
on each business day and is declared as a dividend payable to shareholders of
record immediately prior to the time of determination of net asset value on
each such day. Dividends declared since the preceding dividend payment date
are distributed monthly.
The Fund's net investment income for dividend purposes includes accrued inter-
est and accretion of original issue and market discounts earned and amortiza-
tion of premiums, plus or minus any net realized gain or loss on portfolio se-
curities, if any, occurring since the previous dividend declaration, less the
accrued expenses of the Fund for such period.
INVESTMENT TRANSACTIONS: Investment transactions are accounted for on the date
the securities are bought or sold. Net realized gains and losses on sales of
investments, if any, are determined on the basis of identified cost.
The Fund may enter into repurchase agreements with financial institutions,
deemed to be credit worthy by J.J.B. Hilliard, W.L. Lyons, Inc. (the "Advis-
er"), subject to the seller's agreement to repurchase and the Fund's agreement
to sell such security at a mutually agreed upon date and price.
NOTE B--INVESTMENT ADVISORY AGREEMENT
On September 21, 1995, the Fund renewed its investment advisory agreement with
the Adviser. Under the investment advisory agreement, the Adviser supervises
investment operations of the Fund and the composition of its portfolio, and
furnishes advice and recommendations with respect to investments and the pur-
chase and sale of securities in accordance with the Fund's investment objec-
tives, policies and restrictions; subject, however, to the general supervision
and control of the Fund's Board of Directors. For the services the Adviser
renders, the Fund has agreed to pay the Adviser an annual advisory fee of 1/2
of 1% of the first $200 million of average daily net assets, 3/8 of 1% of the
next $100 million of average daily net assets, and 1/4 of 1% of the average
daily net assets in excess of $300 million. Such fee is accrued daily and paid
monthly. The Adviser has agreed to reimburse the Fund if total operating ex-
penses 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 29, 1996.
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 $2,000, a fee of $500 for each Board of Directors or com-
mittee meeting attended, and all expenses the Directors incur in attending
meetings.
NOTE C--CAPITAL STOCK
The Fund was incorporated in June 1980 under the laws of the state of Mary-
land. At February 29, 1996, there were 500,000,000 shares of $.01 par value
Common Stock authorized, and capital paid in aggregated $453,990,993. Transac-
tions in Fund shares at $1.00 per share were as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
FEBRUARY 29, AUGUST 31,
1996 1995
------------ --------------
<S> <C> <C>
Shares sold 692,136,559 1,027,556,685
Shares issued to shareholders in reinvestment of
dividends 9,235,782 12,403,090
------------ --------------
701,372,341 1,039,959,775
Less shares repurchased (583,157,825) ( 914,834,941)
------------ --------------
Net increase in capital shares 118,214,516 125,124,834
============ ==============
</TABLE>
5
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
Hilliard Lyons Center
Louisville, Kentucky 40202
(502) 588-8400
Investment Adviser and Distributor
J.J.B. Hilliard, W.L. Lyons, Inc.
Hilliard Lyons Center
Louisville, Kentucky 40202
(502) 588-8400
Custodian and Transfer Agent
State Street Bank and Trust Company
225 Franklin Street
P.O. Box 1912
Boston, Massachusetts 02105
Legal Counsel
Greenebaum Doll & McDonald
3300 First National Tower
Louisville, Kentucky 40202
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Joseph C. Curry, Jr.
J. Henning Hilliard
Donald F. Kohler
Samuel G. Miller
Gilbert L. Pamplin
Dillman A. Rash
J. Robert Shine
OFFICERS
Donald F. Kohler
Chairman
Joseph C. Curry, Jr.
President
Gilbert L. Pamplin
Vice President
Dianna P. Wengler
Vice President and Treasurer
Michael L. Howard
Secretary
<PAGE>
HILLIARD-LYONS
GOVERNMENT FUND, INC.
SEMI-ANNUAL REPORT
FEBRUARY 29, 1996
LOGO
