<PAGE>
March 14, 1997
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, 1997.
Net assets of the Fund on February 28, 1997 were $519 million. This is a 21%
increase over net assets of $428 million six months ago and a 54% increase
over net assets of $336 million one year ago. The Fund has since gone on to a
new record net asset level of $525 million in March. The average seven day
yield ranged from 4.60% to 4.82% during the six months. Distributions of
$.023724 were paid which is equivalent to a 4.78% yield. For those
shareholders in the dividend reinvestment plan, this equates to a compound
annual yield of 4.83%. As of the date of this letter, the current seven day
yield was 4.76%.
For the calendar year ended December 31, 1996, 100% of the dividends paid by
the Fund were exempt from state income tax in all states. This is the second
year in a row that all dividends paid were fully exempt. The percentage of
dividends eligible for exemption will vary as it is dependent on the
investments of the Fund. However, given the current investment strategy of the
Fund, we believe the dividends paid will be substantially exempt from state
income tax under current tax laws.
The Fund's narrow yield spread of 22 basis points during the six months
reflects the recent stability of short term interest rates. Fears of inflation
had many believing the Federal Reserve ("Fed") would raise the discount rate
and target rate for federal funds but the Fed has not changed those rates in
over a year. It still may.
Federal Reserve chairman, Alan Greenspan, did rattle financial markets
recently with remarks made during his congressional testimony in February. He
warned of unwarranted investor exuberance in the stock market. And in an
uncharacteristic comment about bond prices, he said that an overly optimistic
attitude was evident in the quality spreads on high-yield corporate bonds. He
later moderated his comments on the stock market stating that if corporate
earnings are what analysts expect, stock prices may not be too high.
The Fed's long and seemingly successful campaign against inflation has been a
major factor in the advance of financial markets. Inflation has not been as
low as it is now since the early 1960's. Companies have increased their profit
margins by cutting costs rather than raising prices.
Investors have continued to put money into taxable money market funds though
not nearly at the rate they have invested in stock mutual funds. Assets of
taxable money market funds rose 17% during the period January 1996-January
1997. During this same period, HLGF's net assets rose 20%. HLGF's greater than
average increase in net assets is attributable to the Fund's investment
strategy which offers its shareholders a competitive yield with the safety and
tax advantages of U.S. government securities.
As shown on the enclosed Schedule of Investments, HLGF was 100% invested in
short term discount notes issued by the Federal Farm Credit Banks and the
Federal Home Loan Banks. HLGF is one of only a few money market funds to
invest exclusively in such high quality securities. Some money market fund
advisors have once again had to buy troubled securities from their money
market funds to keep their net asset value per share from falling below $1.00
per share.
We do not intend for this ever to happen in the Hilliard-Lyons Government
Fund. With us, quality and safety are primary objectives, and if we have to
give up a little yield to meet these objectives, we shall do so. Because the
U.S. Government is the largest and most frequent borrower, yields on
government and government agency securities have been about as high as non-
government short term paper, and the Fund has been a beneficiary of this
market condition.
/s/ DONALD F. KOHLER
/s/ JOSEPH C. CURRY, JR. /s/ DIANNA P. WENGLER
DONALD F. KOHLER
Chairman JOSEPH C. CURRY, JR. DIANNA P. WENGLER
President Vice President and
Treasurer
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS
(UNAUDITED)
FEBRUARY 28, 1997
<TABLE>
<CAPTION>
PRINCIPAL PURCHASE MATURITY
AMOUNT YIELD DATE VALUE
----------- -------- -------- ------------
<C> <S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY
OBLIGATIONS--100.2%
$ 8,480,000 Federal Home Loan Bank 5.346% 03/03/97 $ 8,477,517
12,000,000 Federal Home Loan Bank 5.364 03/03/97 11,996,533
10,000,000 Federal Home Loan Bank 5.479 03/04/97 9,995,542
5,000,000 Federal Farm Credit Bank 5.350 03/05/97 4,997,094
10,000,000 Federal Farm Credit Bank 5.334 03/06/97 9,992,792
6,000,000 Federal Farm Credit Bank 5.342 03/07/97 5,994,760
4,000,000 Federal Farm Credit Bank 5.334 03/10/97 3,994,810
9,000,000 Federal Farm Credit Bank 5.426 03/11/97 8,986,775
9,000,000 Federal Farm Credit Bank 5.353 03/12/97 8,985,673
8,000,000 Federal Home Loan Bank 5.363 03/13/97 7,986,080
15,000,000 Federal Home Loan Bank 5.276 03/14/97 14,972,213
5,000,000 Federal Home Loan Bank 5.404 03/17/97 4,988,311
6,000,000 Federal Home Loan Bank 5.403 03/18/97 5,985,097
15,000,000 Federal Farm Credit Bank 5.415 03/19/97 14,960,475
14,000,000 Federal Home Loan Bank 5.395 03/20/97 13,961,208
12,000,000 Federal Home Loan Bank 5.283 03/24/97 11,960,670
8,000,000 Federal Home Loan Bank 5.365 03/26/97 7,971,167
6,300,000 Federal Home Loan Bank 5.400 03/27/97 6,276,295
9,000,000 Federal Home Loan Bank 5.327 03/31/97 8,961,225
5,000,000 Federal Home Loan Bank 5.355 04/01/97 4,977,525
9,000,000 Federal Farm Credit Bank 5.337 04/02/97 8,958,320
14,000,000 Federal Home Loan Bank 5.335 04/03/97 13,933,010
18,000,000 Federal Home Loan Bank 5.382 04/04/97 17,910,920
8,600,000 Federal Farm Credit Bank 5.358 04/07/97 8,553,861
8,000,000 Federal Farm Credit Bank 5.331 04/08/97 7,956,089
9,000,000 Federal Home Loan Bank 5.332 04/09/97 8,949,398
10,000,000 Federal Home Loan Bank 5.353 04/10/97 9,942,111
5,785,000 Federal Farm Credit Bank 5.333 04/11/97 5,750,674
4,975,000 Federal Home Loan Bank 5.355 04/11/97 4,945,367
10,200,000 Federal Farm Credit Bank 5.362 04/14/97 10,134,924
8,000,000 Federal Farm Credit Bank 5.353 04/15/97 7,947,800
5,900,000 Federal Farm Credit Bank 5.359 04/16/97 5,860,572
9,000,000 Federal Home Loan Bank 5.374 04/17/97 8,938,548
9,000,000 Federal Farm Credit Bank 5.352 04/21/97 8,933,573
8,000,000 Federal Home Loan Bank 5.374 04/24/97 7,937,240
8,000,000 Federal Farm Credit Bank 5.353 04/25/97 7,936,322
10,000,000 Federal Farm Credit Bank 5.362 04/28/97 9,916,061
8,000,000 Federal Home Loan Bank 5.259 04/29/97 7,932,609
10,000,000 Federal Home Loan Bank 5.449 04/30/97 9,912,000
10,000,000 Federal Home Loan Bank 5.395 05/01/97 9,911,042
13,000,000 Federal Home Loan Bank 5.342 05/05/97 12,877,944
5,000,000 Federal Home Loan Bank 5.342 05/06/97 4,952,333
</TABLE>
2
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
(UNAUDITED)
FEBRUARY 28,1997
<TABLE>
<CAPTION>
PRINCIPAL PURCHASE MATURITY
AMOUNT YIELD DATE VALUE
---------- -------- -------- ------------
<C> <S> <C> <C> <C>
10,000,000 Federal Home Loan Bank 5.342 05/07/97 9,903,222
13,000,000 Federal Home Loan Bank 5.363 05/08/97 12,871,820
7,500,000 Federal Home Loan Bank 5.331 05/12/97 7,422,150
6,000,000 Federal Farm Credit Bank 5.331 05/13/97 5,936,855
11,000,000 Federal Home Loan Bank 5.334 05/14/97 10,882,648
6,000,000 Federal Farm Credit Bank 5.333 05/15/97 5,935,125
8,000,000 Federal Farm Credit Bank 5.298 05/16/97 7,912,853
5,465,000 Federal Home Loan Bank 5.267 05/19/97 5,403,478
5,000,000 Federal Home Loan Bank 5.267 05/20/97 4,943,000
5,000,000 Federal Home Loan Bank 5.320 05/20/97 4,942,444
15,000,000 Federal Farm Credit Bank 5.269 05/21/97 14,826,863
10,000,000 Federal Farm Credit Bank 5.340 05/22/97 9,881,783
10,000,000 Federal Home Loan Bank 5.278 05/23/97 9,881,494
11,000,000 Federal Home Loan Bank 5.417 05/28/97 10,858,833
9,000,000 Federal Farm Credit Bank 5.291 05/29/97 8,885,412
8,310,000 Federal Home Loan Bank 5.327 06/05/97 8,195,433
5,000,000 Federal Home Loan Bank 5.297 06/06/97 4,930,618
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(amortized cost -- $520,126,511) 520,126,511
------------
TOTAL INVESTMENTS (100.2%) (cost -- $520,126,511*) $520,126,511
============
</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.
3
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
FEBRUARY 28, 1997
<TABLE>
<S> <C>
ASSETS
Investments in money market instruments, at value:
United States Government Agency Obligations, at value (amortized
cost--$520,126,511)............................................ $520,126,511
------------
Total Investments.............................................. 520,126,511
Cash............................................................. 179,512
Prepaid expenses................................................. 33,595
------------
TOTAL ASSETS................................................... 520,339,618
LIABILITIES
Dividends payable................................................ 872,333
Due to J.J.B. Hilliard, W.L. Lyons, Inc.--Note B................. 146,210
Miscellaneous accrued expenses................................... 102,214
------------
TOTAL LIABILITIES.............................................. 1,120,757
------------
NET ASSETS (equivalent to $1.00 per share; 800,000,000 shares
authorized and 519,218,861 shares issued and outstanding)--Note
C............................................................... $519,218,861
============
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997
INVESTMENT INCOME
Interest income.................................................. $ 12,445,327
EXPENSES
Investment Advisory fee--Note B.................................. 889,463
Transfer agent fees.............................................. 347,520
Custodian fees................................................... 47,640
Printing and other expenses...................................... 22,207
Insurance expense................................................ 17,924
Legal and audit fees............................................. 16,717
Directors' fees.................................................. 6,291
Filing fees...................................................... 5,818
------------
Total expenses.................................................. 1,353,580
------------
Net investment income........................................... 11,091,747
------------
Net increase in net assets resulting from operations............ $ 11,091,747
============
</TABLE>
See notes to financial statements.
4
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE
FEBRUARY 28, YEAR ENDED
1997 AUGUST 31,
INCREASE IN NET ASSETS: (UNAUDITED) 1996
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income.............................. $ 11,091,747 $ 19,948,761
------------ ------------
Net increase in net assets resulting from
operations....................................... 11,091,747 19,948,761
Dividends to shareholders ($.023724 and $.048527
per share, respectively).......................... ( 11,091,747) ( 19,948,761)
------------ ------------
Undistributed net investment income................ 0 0
------------ ------------
FROM CAPITAL SHARE TRANSACTIONS
Net capital share transactions (at $1.00 per
share)--Note C.................................... 91,724,477 91,717,907
NET ASSETS
Beginning of period................................ 427,494,384 335,776,477
------------ ------------
End of period...................................... $519,218,861 $427,494,384
============ ============
</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
28, 1997 YEAR ENDED AUGUST 31,
(UNAUDITED) 1996 1995 1994 1993 1992
----------- -------- -------- -------- -------- --------
<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... .02 .05 .05 .03 .03 .04
-------- -------- -------- -------- -------- --------
Total From Investment
Operations............ .02 .05 .05 .03 .03 .04
Less Distributions:
Dividend Distributions. ( .02) ( .05) ( .05) ( .03) ( .03) ( .04)
-------- -------- -------- -------- -------- --------
Total Distributions.... ( .02) ( .05) ( .05) ( .03) ( .03) ( .04)
-------- -------- -------- -------- -------- --------
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)............... 519,219 427,494 335,776 210,652 221,050 234,600
Total Investment Return. 4.83%(a) 4.96% 5.04% 2.85% 2.54% 3.87%
SIGNIFICANT RATIOS AND
SUPPLEMENTAL DATA
Net assets, End of
Period (000's
omitted).............. $519,219 $427,494 $335,776 $210,652 $221,050 $234,600
Operating expenses to
average net assets.... .58%(a) .61% .72% .75% .71% .68%
Net investment income
to average net assets. 4.78%(a) 4.84% 4.97% 2.80% 2.51% 3.80%
</TABLE>
- -------
(a) Annualized
See notes to financial statements.
5
<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 aggregate is significant, the Board considers
what action, if any, should be initiated to provide fair valuation.
The Fund values repurchase agreements at cost and accrues interest into 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 agreements 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.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and ex-
penses during the reporting period. Actual results could differ from those es-
timates.
NOTE B--INVESTMENT ADVISORY AGREEMENT
On October 1, 1996, 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 28, 1997.
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 28, 1997, there were 800,000,000 shares of $.01 par value
Common Stock authorized, and capital paid in aggregated $519,218,861. Transac-
tions in Fund shares at $1.00 per share were as follows:
<TABLE>
<CAPTION>
---
SIX MONTHS
ENDED YEAR ENDED
FEBRUARY 28, AUGUST 31,
1997 1996
------------ --------------
<S> <C> <C> <C>
Shares sold 789,737,805 1,341,481,777
Shares issued to
shareholders
in reinvestment of
dividends 10,928,970 19,471,857
------------ --------------
800,666,775 1,360,953,634
Less shares repurchased (708,942,298) (1,269,235,727)
------------ --------------
Net increase in capital shares 91,724,477 91,717,907
============ ==============
</TABLE>
6
<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
Brown, Todd & Heyburn PLLC
3200 Providian Center
Louisville, Kentucky 40202
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Joseph C. Curry, Jr.
J. Henning Hilliard
Donald F. Kohler
Samuel G. Miller
Gilbert L. Pamplin
Dillman A. Rash
J. Robert Shine
OFFICERS
Donald F. Kohler
Chairman
Joseph C. Curry, Jr.
President
Dianna P. Wengler
Vice President and Treasurer
Michael L. Howard
Secretary
<PAGE>
HILLIARD-LYONS
GOVERNMENT FUND, INC.
SEMI-ANNUAL REPORT
FEBRUARY 28, 1997
LOGO
