<PAGE>
April 6, 1998
Dear Shareholder:
We are pleased to present this report on the Hilliard-Lyons Government Fund,
Inc. ("HLGF" of the "Fund") for the six months ended February 28, 1998.
Net assets of the Fund on February 28, 1998 were $810 million. This is a 38%
increase over net assets of $587 million six months ago and a 56% increase
over net assets of $519 million one year ago. The Fund has since gone on to a
new record net asset level of $847 million in March. The average seven day
yield ranged from 4.94% to 5.13% during the six months. Distributions of
$.024912 were paid which is equivalent to a 5.05% yield. For those
shareholders in the dividend reinvestment plan, this equates to a compound
annual yield of 5.08%. As of the date of this letter, the current seven day
yield was 4.95%.
For the calendar year ended December 31, 1997, 100% of the dividends paid by
the Fund were exempt from state income tax in all states. This is the third
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 19 basis points during the six months
reflects the continuing stability of short term interest rates. The Federal
Reserve ("Fed") has not changed either the discount rate or the federal funds
rate, two benchmark short term rates, in over one year.
The Fed typically uses its control over short term interest rates as a tool to
manage economic growth. Indications are the economy is strong and growing. The
unemployment rate of 4.6% in February is at a 24 year low and there were
record sales of new and existing homes. With the economy as strong as it is
currently, the Fed might be expected to raise short term rates in an effort to
thwart inflation. But inflation has not yet become an imminent problem.
Inflationary pressures have been offset in part by the financial turmoil in
Asia. Currency devaluations in Asia have lowered the prices of imported
manufactured goods while simultaneously there have been reduced export sales
to Asia. But the financial problems in Asia have so far had less impact on the
U.S. economy than originally forecast. Investors have taken money out of Asia
and put it into the U.S. tending to push long term interest rates lower. Many
economists now believe the problems in Asia will not be severe enough to slow
the U.S. economy, forcing the Fed to raise rates possibly at their next
meeting in May.
The Dow Jones Industrial Average ("DJIA") has continued its record setting
pace. It was 1995 before the DJIA ever closed above 4000 but from then it took
only two more years to close above 8000 and is now over 9000. Concern over
rising U.S. stock prices and whether they can be maintained has continued but
stock prices have been supported by low interest rates, low inflation and
solid earnings. If earnings estimates falter these prices may not be
sustainable.
The short term interest rate market has been largely unaffected by the
excitement in other markets. The Fund continues to concentrate its investments
in short term discount notes issued by the Federal Farm Credit and Federal
Home Loan Banks and, as shown on the enclosed Schedule of Investments, was
100% invested in these securities on February 28, 1998. HLGF is one of only a
few money market funds investing exclusively in such high quality securities.
We are excited about the growth in assets of the Hilliard-Lyons Government
Fund and the confidence our shareholders have placed in us and will continue
to do our best to offer a competitive, high quality product.
/s/ DONALD F. KOHLER /s/ JOSEPH C. CURRY, JR /s/ DIANNA P. WENGLER
DONALD F. KOHLER JOSEPH C. CURRY, JR. DIANNA P. WENGLER
Chairman President Vice President and
Treasurer
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS
(UNAUDITED)
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
PRINCIPAL PURCHASE MATURITY
AMOUNT YIELD DATE VALUE
---------- -------- -------- ----------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AGENCY
OBLIGATIONS--100.2%
$8,000,000 Federal Farm Credit Bank 5.578% 03/02/98 $7,998,800
6,000,000 Federal Home Loan Bank 5.650 03/02/98 5,999,080
260,000 Federal Home Loan Bank 5.670 03/02/98 259,960
5,000,000 Federal Home Loan Bank 5.720 03/03/98 4,998,453
5,000,000 Federal Home Loan Bank 5.742 03/03/98 4,998,447
9,000,000 Federal Home Loan Bank 5.737 03/04/98 8,995,815
8,000,000 Federal Home Loan Bank 5.728 03/04/98 7,996,280
19,000,000 Federal Home Loan Bank 5.492 03/05/98 18,988,664
5,000,000 Federal Home Loan Bank 5.632 03/06/98 4,996,222
10,000,000 Federal Home Loan Bank 5.733 03/06/98 9,992,257
16,000,000 Federal Home Loan Bank 5.716 03/09/98 15,980,231
11,000,000 Federal Home Loan Bank 5.704 03/10/98 10,984,710
13,000,000 Federal Home Loan Bank 5.608 03/11/98 12,980,428
10,000,000 Federal Farm Credit Bank 5.455 03/12/98 9,983,683
14,000,000 Federal Home Loan Bank 5.728 03/13/98 13,974,007
10,000,000 Federal Farm Credit Bank 5.734 03/16/98 9,976,792
19,000,000 Federal Farm Credit Bank 5.446 03/17/98 18,954,907
8,000,000 Federal Farm Credit Bank 5.735 03/18/98 7,978,958
9,000,000 Federal Home Loan Bank 5.738 03/18/98 8,976,285
19,000,000 Federal Farm Credit Bank 5.385 03/19/98 18,950,030
2,000,000 Federal Home Loan Bank 5.471 03/20/98 1,994,353
11,000,000 Federal Home Loan Bank 5.718 03/20/98 10,967,721
16,000,000 Federal Home Loan Bank 5.718 03/23/98 15,945,636
12,000,000 Federal Farm Credit Bank 5.459 03/24/98 11,958,983
7,000,000 Federal Home Loan Bank 5.718 03/25/98 6,974,053
23,000,000 Federal Farm Credit Bank 5.452 03/26/98 22,914,868
15,000,000 Federal Home Loan Bank 5.715 03/27/98 14,939,767
9,000,000 Federal Home Loan Bank 5.410 03/30/98 8,961,575
19,000,000 Federal Home Loan Bank 5.500 03/31/98 18,914,817
10,000,000 Federal Home Loan Bank 5.491 04/01/98 9,953,801
7,000,000 Federal Home Loan Bank 5.422 04/02/98 6,966,960
5,000,000 Federal Home Loan Bank 5.463 04/03/98 4,975,525
7,000,000 Federal Home Loan Bank 5.462 04/03/98 6,965,735
13,000,000 Federal Home Loan Bank 5.443 04/06/98 12,930,840
14,000,000 Federal Home Loan Bank 5.476 04/07/98 13,923,307
14,000,000 Federal Home Loan Bank 5.514 04/08/98 13,920,717
8,000,000 Federal Home Loan Bank 5.471 04/09/98 7,953,807
4,068,000 Federal Home Loan Bank 5.478 04/09/98 4,044,467
8,000,000 Federal Home Loan Bank 5.455 04/13/98 7,949,260
6,000,000 Federal Home Loan Bank 5.480 04/13/98 5,961,802
21,000,000 Federal Home Loan Bank 5.462 04/15/98 20,860,481
18,826,000 Federal Home Loan Bank 5.484 04/16/98 18,697,544
10,000,000 Federal Home Loan Bank 5.507 04/17/98 9,930,153
5,000,000 Federal Home Loan Bank 5.518 04/17/98 4,965,011
</TABLE>
2
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
(UNAUDITED)
FEBRUARY 28,1998
<TABLE>
<CAPTION>
PRINCIPAL PURCHASE MATURITY
AMOUNT YIELD DATE VALUE
----------- -------- -------- ------------
<C> <S> <C> <C> <C>
$10,000,000 Federal Home Loan Bank 5.444% 04/20/98 $ 9,926,111
12,190,000 Federal Home Loan Bank 5.705 04/22/98 12,092,629
4,810,000 Federal Home Loan Bank 5.703 04/22/98 4,771,579
12,000,000 Federal Home Loan Bank 5.488 04/24/98 11,903,880
10,000,000 Federal Home Loan Bank 5.447 04/27/98 9,915,767
12,000,000 Federal Home Loan Bank 5.487 04/28/98 11,896,953
10,000,000 Federal Home Loan Bank 5.509 04/29/98 9,912,156
9,500,000 Federal Farm Credit Bank 5.454 04/30/98 9,415,925
19,000,000 Federal Home Loan Bank 5.467 05/01/98 18,828,725
11,750,000 Federal Farm Credit Bank 5.454 05/05/98 11,637,135
5,000,000 Federal Home Loan Bank 5.483 05/06/98 4,951,142
7,000,000 Federal Home Loan Bank 5.477 05/06/98 6,931,598
12,000,000 Federal Home Loan Bank 5.395 05/08/98 11,881,227
7,000,000 Federal Home Loan Bank 5.490 05/08/98 6,929,261
8,000,000 Federal Home Loan Bank 5.395 05/11/98 7,917,482
14,000,000 Federal Home Loan Bank 5.467 05/12/98 13,851,040
4,000,000 Federal Home Loan Bank 5.499 05/13/98 3,956,605
10,000,000 Federal Home Loan Bank 5.509 05/13/98 9,891,311
21,105,000 Federal Home Loan Bank 5.411 05/14/98 20,877,242
9,100,000 Federal Home Loan Bank 5.509 05/15/98 8,998,383
9,000,000 Federal Home Loan Bank 5.455 05/18/98 8,896,455
15,000,000 Federal Farm Credit Bank 5.433 05/20/98 14,824,333
16,000,000 Federal Home Loan Bank 5.499 05/22/98 15,805,022
6,155,000 Federal Home Loan Bank 5.489 05/26/98 6,076,777
9,000,000 Federal Farm Credit Bank 5.489 05/27/98 8,884,072
11,000,000 Federal Home Loan Bank 5.540 05/27/98 10,856,716
17,000,000 Federal Farm Credit Bank 5.515 06/17/98 16,727,150
10,000,000 Federal Home Loan Bank 5.454 06/30/98 9,822,533
16,000,000 Federal Home Loan Bank 5.460 07/06/98 15,701,973
15,000,000 Federal Home Loan Bank 5.464 07/07/98 14,718,400
15,000,000 Federal Farm Credit Bank 5.529 07/17/98 14,692,950
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(amortized cost -- $811,027,724) 811,027,724
------------
TOTAL INVESTMENTS (100.2%) (cost -- $811,027,724*) $811,027,724
============
</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, 1998
<TABLE>
<S> <C>
ASSETS
Investments in money market instruments, at value:
United States Government Agency Obligations, at value (amortized
cost--$811,027,724)............................................ $811,027,724
------------
Total Investments.............................................. 811,027,724
Cash............................................................. 148,026
Prepaid expenses................................................. 31,425
------------
TOTAL ASSETS................................................... 811,207,175
LIABILITIES
Dividends payable................................................ 1,449,870
Due to J.J.B. Hilliard, W.L. Lyons, Inc.--Note B................. 199,109
Miscellaneous accrued expenses................................... 21,562
------------
TOTAL LIABILITIES.............................................. 1,670,541
------------
NET ASSETS (equivalent to $1.00 per share; 1,500,000,000 shares
authorized and 809,536,634 shares issued and outstanding)--Note
C............................................................... $809,536,634
============
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998
INVESTMENT INCOME
Interest income.................................................. $ 18,248,226
EXPENSES
Investment Advisory fee--Note B.................................. 1,133,962
Transfer agent fees.............................................. 398,200
Custodian fees................................................... 50,680
Printing and other expenses...................................... 27,292
Filing fees...................................................... 25,340
Insurance expense................................................ 15,390
Legal and audit fees............................................. 16,109
Directors' fees.................................................. 9,050
------------
Total expenses.................................................. 1,676,023
------------
Net investment income........................................... 16,572,203
------------
Net increase in net assets resulting from operations............ $ 16,572,203
============
</TABLE>
See notes to financial statements.
4
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE
FEBRUARY 28, YEAR ENDED
1998 AUGUST 31
(UNAUDITED) 1997
INCREASE IN NET ASSETS: ------------- -------------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................ $ 16,572,203 $ 24,409,576
------------- -------------
Net increase in net assets resulting from
operations..................................... 16,572,203 24,409,576
Dividends to shareholders ($.024912 and $.048529
per share, respectively)........................ ( 16,572,203) ( 24,409,576)
------------- -------------
Undistributed net investment income.............. 0 0
------------- -------------
FROM CAPITAL SHARE TRANSACTIONS
Net capital share transactions (at $1.00 per
share)--Note C.................................. 222,456,791 159,585,459
NET ASSETS
Beginning of period.............................. 587,079,843 427,494,384
------------- -------------
End of period.................................... $809,536,634 $587,079,843
============= =============
</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>
FOR THE SIX
MONTHS
ENDED
FEBRUARY
28, 1998 FOR THE YEAR ENDED AUGUST 31,
(UNAUDITED) 1997 1996 1995 1994 1993
----------- -------- -------- -------- -------- --------
<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 .05 .05 .03 .03
-------- -------- -------- -------- -------- --------
Total from investment
operations............ .03 .05 .05 .05 .03 .03
Less distributions:
Dividend distributions. ( .03) ( .05) ( .05) ( .05) ( .03) ( .03)
-------- -------- -------- -------- -------- --------
Total distributions.... ( .03) ( .05) ( .05) ( .05) ( .03) ( .03)
-------- -------- -------- -------- -------- --------
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)............... 809,537 587,080 427,494 335,776 210,652 221,050
Total investment return. 5.08%(a) 4.96% 4.96% 5.04% 2.85% 2.54%
SIGNIFICANT RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period (000's
omitted).............. $809,537 $587,080 $427,494 $335,776 $210,652 $221,050
Operating expenses to
average net assets.... .51%(a) .57% .61% .72% .75% .71%
Net investment income
to average net assets. 5.03%(a) 4.86% 4.84% 4.97% 2.80% 2.51%
</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 23, 1997, 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, 1998.
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 $3,000, a fee of $750 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, 1998, there were 1,500,000,000 shares of $.01 par value
Common Stock authorized, and capital paid in aggregated $801,441,268. Transac-
tions in Fund shares at $1.00 per share were as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
FEBRUARY 28, AUGUST 31,
1998 1997
-------------- --------------
<S> <C> <C>
Shares sold.................................... 1,345,230,956 1,740,443,413
Shares issued to shareholders in reinvestment
of dividends.................................. 16,112,650 23,618,228
-------------- --------------
1,361,343,606 1,764,061,641
Less shares repurchased........................ (1,138,886,815) (1,604,476,182)
-------------- --------------
Net increase in capital shares................. 222,456,791 159,585,459
============== ==============
</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
Penny L. Wellinghurst
Secretary
<PAGE>
HILLIARD-LYONS
GOVERNMENT FUND, INC.
SEMI-ANNUAL REPORT
FEBRUARY 28, 1998
LOGO
