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[HILLIARD-LYONS LOGO]
HILLIARD-LYONS GOVERNMENT FUND, INC.
Hilliard-Lyons Government Fund, Inc. (the "Fund") is an open-ended,
diversified management investment company. Its goal is to provide investors
with liquidity and the highest possible level of current income consistent
with the preservation of capital. The Fund seeks to achieve its goals by
investing exclusively in short-term securities issued or guaranteed by the
U.S. Government, its agencies and instrumentalities or in repurchase
agreements collateralized by such securities, or in a combination of both.
As with all mutual funds, the Securities and Exchange Commission ("SEC") has
not approved or disapproved the Fund's shares, nor has the SEC determined that
this prospectus is complete or accurate. It is a criminal offense to state
otherwise.
This prospectus is dated December 1, 1999.
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Table of Contents
<TABLE>
<CAPTION>
Page
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<S> <C>
Risk/Return Summary........................................................ 3
Annual Performance......................................................... 4
Average Annual Total Returns............................................... 5
Fees and Expenses of the Fund.............................................. 5
Investment Objectives, Policies and Risks.................................. 6
Investment Objectives.................................................... 6
Investment Policies...................................................... 6
Investment Risks......................................................... 7
Management of the Fund..................................................... 7
Directors................................................................ 7
Investment Adviser....................................................... 7
Distributor.............................................................. 8
Portfolio Management..................................................... 8
Shareholder Information.................................................... 8
Pricing of the Fund's Shares............................................. 8
Purchasing Shares........................................................ 9
Redemption of Shares..................................................... 10
Dividends and Distributions.............................................. 11
Taxes.................................................................... 11
Financial Highlights....................................................... 13
</TABLE>
No dealer, sales person or any other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus in connection with the offer contained in this Prospectus and, if
given or made, such other information or representations must not be relied
upon as having been authorized by the Fund, the Fund's investment adviser or
the Fund's distributor. This Prospectus does not constitute an offer by the
Fund or by the Fund's distributor to sell or a solicitation of an offer to buy
any of the securities offered hereby in any jurisdiction to any person to whom
it is unlawful for the Fund to make such an offer in such jurisdiction.
2
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Risk/Return Summary
This section highlights key information about the Hilliard-Lyons Government
Fund, Inc., which we refer to as "the Fund." Additional information follows
this summary.
Fund Investment Objectives. The Fund seeks preservation of capital,
liquidity and the highest possible level of current income consistent with
these objectives. Its goal is to provide investors with liquidity and the
highest possible level of current income consistent with the preservation of
capital.
Principal Investment Strategies. The Fund seeks to meet its investment
objectives by investing its assets under normal circumstances, exclusively in
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities (which, except for securities covered by repurchase
agreements, will mature in six months or less) or in repurchase agreements
collateralized by such securities or in a combination of both.
Principal Investment Risks. The Fund is subject to credit risk, which is the
chance that the issuer of a security will fail to pay interest and principal
in a timely manner. Credit risk, which has the potential to hurt the Fund's
performance, should be low for the Fund. The Fund is also subject to interest
rate risk, which is the risk that prices of money market securities generally
decrease when interest rates increase. The Fund is also subject to redemption
risk, which is the risk that due to the high demand for redemptions, some of
the Fund's portfolio may be liquidated prior to maturity.
Although the Fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Fund. An
investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
3
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Annual Performance
A number of factors--including risk--affect how the Fund performs. The
following bar chart shows the Fund's performance for the past ten calendar
years. The table following the bar chart shows the average annual total
returns of the Fund for the periods shown. The bar chart and table demonstrate
how the Fund's performance has varied and gives some indication of the risk of
investing in the Fund./1/ Past performance does not mean that the Fund will
achieve similar results in the future.
[BAR CHART APPEARS HERE]
1989...... 8.66%
1990...... 7.70%
1991...... 5.40%
1992...... 3.14%
1993...... 2.49%
1994...... 3.48%
1995...... 5.29%
1996...... 4.84%
1997...... 5.05%
1998...... 5.02%
During the ten year period shown in the bar chart, the highest quarterly
return was 2.26% (for the quarter ended June 30, 1989) and the lowest
quarterly return was .61% (for the quarter ended June 30, 1993).
- --------
/1/The Fund's returns are after deduction of expenses. The total return of the
Fund's shares from January 1, 1999 to September 30, 1999 was 3.40%.
4
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Average Annual Total Returns
<TABLE>
<CAPTION>
Average Annual Total
Returns for the
Periods Ended December 31, Past One Past Three Past Five Past Ten
1998 Year Years Years Years
-------------------------- -------- ---------- --------- --------
<S> <C> <C> <C> <C>
Hilliard-Lyons Government Fund, Inc. 5.02% 4.97% 4.73% 5.09%
</TABLE>
The Fund's 7-day yield on August 31, 1999 was 4.62%. For the Fund's current
yield, call toll-free (800) 444-1854.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<S> <C>
Annual Fund Operating Expenses:
(as a percentage of average net assets)
Management Fees...................................................... .31%
Distribution (Rule 12b-1) Fee........................................ None
Other Expenses....................................................... .15%
----
Total Operating Expenses............................................. .46%
====
</TABLE>
----------------
Example. You would pay the following total expenses on a $1,000 investment,
assuming 5% annual return and redemption at the end of each time period.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
$ 5 $15 $26 $58
</TABLE>
This table is provided to assist an investor in understanding the various
costs and expenses that an investor will bear, directly or indirectly, as a
shareholder of the Fund. It should not be considered a representation of past
or future expenses, as actual expenses fluctuate and may be greater or less
than these shown. While the example assumes a 5% annual return, the Fund's
actual performance will vary and may result in an actual return greater or
less than 5%.
5
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Investment Objectives, Policies and Risks
Investment Objectives. The Fund seeks preservation of capital, liquidity and
the highest possible level of current income consistent with these objectives.
The Fund can change these objectives only with prior shareholder approval.
There is no guarantee that the Fund's objectives will be attained.
Investment Policies. The Fund has adopted a policy of investing its assets
exclusively in securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities (which, except for securities covered by
repurchase agreements, will mature in six months or less) or in repurchase
agreements collateralized by such securities or in a combination of both.
Securities subject to repurchase agreements may bear maturities in excess of
six months, but the term of the repurchase agreement is normally not more than
a few days. The Fund will not enter into a repurchase agreement having a
duration of more than seven business days if, as a result, more than 10% of
the value of the Fund's total assets would be so invested.
The types of U.S. Government securities in which the Fund may invest include
a variety of U.S. Treasury obligations, which differ primarily in their
interest rates and lengths of maturities, and obligations issued or guaranteed
by the U.S. Government or its agencies or instrumentalities, including
mortgage-related securities.
Obligations of certain of these agencies and instrumentalities are supported
by the full faith and credit of the U.S. Treasury; others are supported by the
right of the issuer to borrow from the Treasury; others are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; and still others, are supported only by the credit of the
instrumentality. The Fund normally holds its portfolio securities to maturity.
Historically, securities issued or guaranteed by the U.S. Government or its
agencies and instrumentalities have involved minimal risk of loss of principal
or interest, if held to maturity.
The Fund may purchase the above-described debt securities outright or invest
in securities by means of repurchase agreements with any member bank of the
Federal Reserve System and dealers with which the Federal Reserve conducts
open market transactions. A repurchase agreement is an instrument under which
the purchaser (i.e., the Fund) acquires ownership of an obligation (debt
security) and the seller agrees, at the time of sale, to repurchase the
obligation at a mutually agreed upon time and price. The term of such an
agreement is generally quite short, possibly overnight or a few days, although
it may extend over a number of months not to exceed six months from its
delivery. The resale price is in excess of the purchase price, reflecting an
agreed upon rate of interest, which is effective for the period of time the
Fund holds the purchased security and is not related to the coupon rate on the
purchased security. Repurchase agreements may be considered loans to the
sellers collateralized by the underlying securities.
In pursuing its objectives, the Fund may engage in trading activity in order
to take advantage of opportunities to enhance yield, protect principal or
improve liquidity. This trading activity, and the relatively short maturity of
the obligations purchased by the Fund, may result in high portfolio turnover,
but such turnover should not increase the Fund's expenses since there are
normally no brokerage commissions paid in connection with the purchase or sale
of the types of securities in which the Fund invests.
The yield differential between the securities the Fund invests in and other
high quality, short-term investments such as certificates of deposit, bankers'
acceptances and high-grade commercial paper is normally quite small. Should
this differential widen to in excess of 1 3/4%, management may recommend to
the Fund's
6
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Board of Directors that it consider authorizing investments in securities
other than those issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or in repurchase agreements collateralized by such
securities.
At all times during its most recent fiscal year ended August 31, 1999, the
Fund's net assets were invested exclusively in securities issued by the U.S.
Government, its agencies or instrumentalities, or in repurchase agreements
collateralized by such securities, or a combination of both. Under normal
circumstances, the Fund exclusively invests its net assets in such securities
and repurchase agreements.
The Fund is managed so that the average maturity of all its investments does
not exceed 90 days. The average maturity of the Fund's investments at any
specific point in time is determined by Hilliard-Lyons based on an assessment
of existing and prospective money market conditions. The weighted average
maturity of the portfolio on August 31, 1999 was 56 days.
Investment Risks. The Fund endeavors to exercise due care in the selection
of its portfolio securities, and the risks associated with the securities the
Fund purchases are nominal. Nevertheless, an investment in the Fund is not
completely risk-free. Under a repurchase agreement, the Fund's risk is limited
to the ability of the seller to pay the agreed upon sum on the delivery date.
In the opinion of management, however, such risk is not material because in
the event of default the securities underlying the repurchase agreement serve
as collateral for the seller's repurchase obligation and the market value of
such underlying securities will at all times equal or exceed the face amount
of the seller's obligation, including the accrued interest earned thereon. The
Fund's portfolio can depreciate in value if short-term interest rates
increase. There is also a risk that demand for redemptions may require that
some of the Fund's portfolio be liquidated prior to maturity at a price less
than original cost, face amount or maturity value. If these events occur, they
could cause a reduction in the net asset value ("NAV") of the Fund's shares
and a loss to the Fund's shareholders.
The Fund, like any business, could be affected if the computer systems on
which it relies do not properly process information beginning on January 1,
2000. While Year 2000 issues could have a negative effect on the Fund,
Hilliard-Lyons, the Fund's investment advisor, is currently working to avoid
such problems. Hilliard-Lyons is also working with other systems providers and
vendors to determine their systems' ability to handle Year 2000 problems.
There is no guarantee, however, that systems will work properly on January 1,
2000. Year 2000 problems may also hurt issuers whose securities the Fund holds
or securities markets generally.
Management Of The Fund
Directors. The business and affairs of the Fund are managed under the
direction of its Board of Directors. The Statement of Additional Information
contains general background information about each director and officer of the
Fund.
Investment Adviser. Hilliard-Lyons serves as the Fund's investment adviser.
Hilliard-Lyons is a wholly owned subsidiary of PNC Bank Corp. ("PNC").
Hilliard-Lyons has its principal offices at Hilliard Lyons Center, Louisville,
Kentucky 40202. PNC, a multi-bank holding company headquartered in Pittsburgh,
Pennsylvania, is
7
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one of the largest financial service organizations in the United States. PNC's
address is One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-
2707. Hilliard-Lyons has been retained by the Fund as its investment adviser
under an Investment Advisory Agreement (the "Agreement"). Under the Agreement,
Hilliard-Lyons supervises investment operations of the Fund and the
composition of its portfolio and furnishes advice and recommendations with
respect to investments and the purchase and sale of securities in accordance
with the Fund's investment objectives, policies and restrictions; subject,
however, to the general supervision and control of the Fund's Board of
Directors. The Agreement also requires Hilliard-Lyons to furnish office
facilities to the Fund at its own expense and to pay certain other expenses of
the Fund.
Hilliard-Lyons is a registered broker-dealer and a member of the New York,
American and Chicago Stock Exchanges, the Chicago Board Options Exchange and
the National Association of Securities Dealers, Inc. Hilliard-Lyons maintains
an Investment Advisory Department and is registered with the Securities and
Exchange Commission as an investment adviser, rendering advice to both
individual and institutional clients. Assets under management in this
department on October 31, 1999 were over $5,200,000,000.
For the services Hilliard-Lyons renders, and the facilities it furnishes,
the Fund pays Hilliard-Lyons an annual advisory fee. The annual advisory fee
paid for the fiscal year ended August 31, 1999 was .31% of the Fund's average
daily net assets for that fiscal year.
Certain affiliated persons of the Fund are also affiliated persons of
Hilliard-Lyons. Mr. Donald F. Kohler, Chairman of the Board of Directors of
the Fund, is a former Executive Vice President and Director of Hilliard-Lyons.
Mr. Joseph C. Curry, Jr., President of the Fund, is a Senior Vice President of
Hilliard-Lyons. Ms. Dianna P. Wengler, Vice President and Treasurer of the
Fund, is a Vice President of Hilliard-Lyons.
Distributor. Provident Distributors, Inc. (the "Distributor"), Four Falls
Corporate Center, 6th Floor, West Conshohocken, Pennsylvania 19428, acts as
the principal distributor of the Fund's shares. PNC Brokerage Corp. ("PNC
Brokerage") and Hilliard-Lyons, a wholly owned subsidiary of PNC, have entered
into Broker-Dealer Agreements to sell shares of the Fund.
Portfolio Management. Dianna P. Wengler is the portfolio manager of the
Fund. Ms. Wengler is Vice President and Treasurer of the Fund, as well as a
Vice President of Hilliard-Lyons. Ms. Wengler has managed the Fund for the
past sixteen years.
Shareholder Information
Pricing of the Fund's Shares. The price of the Fund's shares is based on its
NAV. The NAV per share of the Fund for purposes of pricing orders for both the
purchase and redemption of Fund shares is determined once daily on each day
except Saturdays, Sundays and certain legal holidays. NAV is determined as of
12:00 noon Boston time for the purpose of pricing orders received prior to
that time. NAV per share is calculated by adding the value of all securities
in the portfolio and other assets, subtracting liabilities and dividing by the
number of shares outstanding. Expenses, including the fees payable to
Hilliard-Lyons, are accrued daily.
Portfolio securities are valued using the amortized cost method.
8
<PAGE>
Since realized and unrealized changes in the value of the Fund's portfolio
securities are ordinarily reflected in dividends rather than NAV per share,
such NAV per share will ordinarily be maintained at $1.00.
Purchasing Shares. The Fund's shares are offered in all 50 states and the
District of Columbia. Shareholders may purchase shares of the Fund through
Hilliard-Lyons or PNC Brokerage. For information on how to purchase shares of
the Fund through PNC Brokerage, please contact a PNC broker. Orders for the
Fund's shares may be placed through Hilliard-Lyons as follows:
Initial Investment. To open an account, complete and mail to
J. J. B. Hilliard, W. L. Lyons, Inc., Hilliard Lyons Center,
Louisville, Kentucky 40202, an application together with a
check made payable to Hilliard-Lyons. The minimum initial
investment is $1000. An account with the Fund can also be
opened in person at any office of Hilliard-Lyons. To shorten
the time before the purchase becomes effective, payment may be
made with immediately available funds on account at Hilliard-
Lyons, including the proceeds of a trade that has completely
settled on a prior day which therefore are immediately
available to Hilliard-Lyons.
For assistance in opening an account, contact a financial
consultant of Hilliard-Lyons. For convenience in effecting
purchases and redemptions of Fund shares, an account will
automatically be opened at Hilliard-Lyons for each investor
opening an account with the Fund.
Subsequent Investments. Subsequent investments may be made
by sending a check payable to Hilliard-Lyons, accompanied by a
letter indicating the dollar value of the shares to be
purchased and identifying the Fund, the account number, and
the name or names in which the account is registered to
Hilliard-Lyons, P.O. Box 32760, Louisville, Kentucky 40232. A
shareholder also may deliver a check payable to the Fund to
any office of Hilliard-Lyons and thereby add to his account,
or may instruct Hilliard-Lyons in writing, by telephone or in
person to purchase Fund shares with immediately available
funds on account at Hilliard-Lyons. Shareholders who have
brokerage accounts with Hilliard-Lyons may participate in a
"sweep" program whereby Hilliard-Lyons automatically invests
their account dividends and interest income in Fund shares on
a daily basis, thus avoiding loss of interest from idle cash.
To participate in the "sweep" program, shareholders should
contact a financial consultant of Hilliard-Lyons.
If a shareholder does not have an account with Hilliard-Lyons, they may
call: (800) 444-1854.
To enable its shareholders to take advantage of the tax laws governing
retirement plans, the Fund has established an Individual Retirement Account
Plan ("IRA Plan"). For the purpose of investing in the IRA Plan, the initial
minimum investment in Fund shares is $1,000; minimum subsequent investments
are $100. For more information about the IRA Plan, see the Fund's Statement of
Additional Information or contact a financial consultant of Hilliard-Lyons.
The Fund is offering its shares without sales charge at a public offering
price equal to the NAV next determined after receipt of a purchase order. If
Federal funds are available to Hilliard-Lyons before 12:00 noon Boston time on
any business day, the purchase order will be effective on that day. If Federal
funds are available to Hilliard-Lyons after 12:00 noon on any business day,
the purchase order will be effective on the next business day. (For purposes
of this prospectus, the term "business day" means every day except Saturdays,
Sundays and certain legal holidays.)
9
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Checks delivered to Hilliard-Lyons for investment in shares of the Fund
normally do not become converted into Federal funds available to Hilliard-
Lyons until approximately two business days after the check is deposited. If
Hilliard-Lyons is instructed to purchase shares with immediately available
funds on account at Hilliard-Lyons, Federal funds will be available to
Hilliard-Lyons at the time it receives the instruction. A wire transfer of
Federal funds will be available to Hilliard-Lyons at the time the Custodian
receives the wire transfer. Each order accepted will be fully invested in
whole and fractional shares.
Each investment is confirmed by a monthly statement which provides the
details of any transactions that took place that month. The information
furnished includes the dollar amount invested, the number of shares purchased
or redeemed, the price per share, and the aggregate shares owned.
The shares which a shareholder purchases are held in an open account,
thereby relieving the shareholder of the responsibility of providing for the
safekeeping of a negotiable share certificate. Shareholders have the same
rights of ownership with respect to such shares as if certificates had been
issued.
If an order to purchase shares must be canceled due to non-payment, the
purchaser will be responsible for any loss incurred by the Fund arising out of
such cancellation. To recover any such loss, the Fund reserves the right to
redeem shares owned by any purchaser whose order is canceled, and such
purchaser may be prohibited from or restricted in the manner of placing
further orders.
The Fund reserves the right in its sole discretion to withdraw all or any
part of the offering made by this prospectus or to reject purchase orders
when, in the judgment of management, such withdrawal or rejection is in the
best interest of the Fund and its shareholders. The Fund also reserves the
right at any time to waive or increase the minimum requirements applicable to
initial or subsequent investments with respect to any person or class of
persons.
Redemption of Shares. Shareholders may redeem shares of the Fund at their
NAV. A shareholder may elect to use either the telephone or mail redemption
procedures or, if checks have been issued in respect of the shareholder's
account, redemption by check. If a shareholder desires to utilize check
redemption procedures this should be indicated on the shareholder's Fund
application. The redemption price will be the NAV per share of the Fund next
determined after receipt by the Custodian of a redemption request in proper
form or, with respect to redemption by telephone, at the NAV per share next
determined after receipt of a redemption request by Hilliard-Lyons.
Redemption by Telephone. A shareholder may withdraw any
amount in excess of $100 from his account by calling Hilliard-
Lyons at (800) 444-1854. If the redemption request is received
at any office of Hilliard-Lyons before 12:00 noon Boston time
on any business day, the redemption order will be forwarded to
the Custodian and the redemption will be effective as of 12:00
noon Boston time on that day. If the redemption request is
received at any office of Hilliard-Lyons after 12:00 noon
Boston time, the redemption will be effective on the following
business day.
Redemption by Mail. To redeem shares by mail, a shareholder
must submit a written redemption request to Hilliard-Lyons,
P.O. Box 32760, Louisville, Kentucky 40232, in proper form,
specifying the number of shares to be redeemed and signed by
the shareholder(s) in the same way as the account is
registered, with signature(s) guaranteed
10
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by a member firm of the New York Stock Exchange or by a
commercial bank or trust company (not a savings bank) which is
a member of the Federal Deposit Insurance Corporation.
Redemption by Check. The Fund will provide shareholders,
upon request, with forms of checks drawn on the State Street
Bank and Trust Company (the "Bank"). The Bank will establish a
checking account for the shareholder. These checks may be made
payable to any person in any amount of not more than
$5,000,000. When such a check is presented to the Bank for
payment, the Bank, as the shareholder's agent, will request
the Fund to redeem a sufficient number of full and fractional
shares in the shareholder's account to cover the amount of the
check. The shareholder will continue earning daily income
dividends until the check is cleared and such shares are
redeemed.
Redemption by Systematic Withdrawal Plan. A systematic
withdrawal plan (the "Withdrawal Plan") is available for
shareholders of the Fund. The Withdrawal Plan allows for
monthly or quarterly payments to the participating shareholder
in amounts not less than $100. Shareholders desiring to
utilize the Withdrawal Plan procedure should so indicate on
their Fund application.
Redemption by the Fund. The Fund reserves the right to
redeem shares of your account if you do not maintain a total
investment value of more than $1. The Fund may redeem these
shares without your permission and will send you the proceeds
if these shares are redeemed.
Redemption by check or by telephone is not available for shares purchased by
personal or corporate checks which have been on the books of the Fund for less
than 2 business days.
If a shareholder has any questions concerning the procedures for redeeming
shares the shareholder should call Hilliard-Lyons or contact their financial
consultant prior to submitting a redemption request.
Dividends and Distributions. The net income of the Fund is determined as of
12:00 noon Boston time on each day on which the NAV is determined and is
declared as a dividend payable to holders of record immediately prior to the
time of determination of NAV on such day. Dividends declared since the
preceding dividend payment date are distributed monthly. Monthly dividend
distributions may be reinvested in additional shares or paid in cash, as the
shareholder requests, and are payable to shareholders as of the fifteenth day
of each month if the fifteenth is a day on which the net asset value is
determined, or, if not, as of the preceding day on which the net asset value
is determined. A monthly statement summarizing account activity will be mailed
to each shareholder who has elected to receive dividends in additional shares
of the Fund. Shareholders who have not elected to invest their dividends in
shares of the Fund will receive a check with an attached statement providing
information on that dividend and on recent transactions in their account.
Shares begin earning income at 12:00 noon Boston time on the date the purchase
becomes effective. Income earned on weekends, holidays, and other days which
are not business days, will be declared as a dividend on the next business
day.
Taxes. The Fund has elected to qualify under the Internal Revenue Code of
1986, as amended ("Code"), as a regulated investment company and to distribute
all of its taxable income to shareholders, thereby relieving it of Federal
income tax liability. To qualify for this treatment, it is necessary for the
Fund to derive at least 90%
11
<PAGE>
of its gross income from dividends, interest and gain from the sale or other
disposition of securities and certain other types of passive income; invest in
securities within certain limits; and distribute to its shareholders at least
90% of its net income earned in any year.
Since all net income is being distributed as dividends, it is taxable to
shareholders as ordinary income, except for such portion as may exceed a
shareholder's ratable share of the Fund's earnings and profits as determined
for tax purposes, which excess will be applied against and reduce the
shareholder's cost or other tax basis for his shares. If the excess described
above were to exceed the shareholder's tax basis for his shares, the amount
would be treated as gain from the sale or exchange of such shares.
Dividends paid by the Fund from its net investment income, and distributions
of the Fund's net realized short-term capital gains, are taxable to the
shareholder whether they are paid in cash or additional shares. The Fund
intends to make distributions, most of which will be taxed as ordinary income
although the Fund may occasionally make distributions which will be taxed as
capital gains as well. At present, no portion of the dividends paid by the
Fund is expected to qualify for the dividends received deduction for
corporations. To avoid being subject to a 31% Federal withholding tax on
taxable dividends, capital gains distributions and proceeds of redemptions,
shareholders' taxpayer identification numbers must be furnished and certified
as to accuracy.
Information concerning the tax status of dividends and distributions is
mailed to shareholders annually.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury Regulations promulgated thereunder. The Code and these
Regulations are subject to change by legislative or administrative action,
respectively.
The Fund may be subject to state or local tax in certain jurisdictions where
the Fund may be deemed to be doing business. Shareholders are urged to consult
their own tax advisers regarding specific questions as to Federal, state or
local taxes.
12
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the Fund's
financial performance for the last five years. Certain information reflects
financial results for a single Fund share. 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). This
information has been audited by Ernst & Young LLP, whose report, along with
the Fund's financial statements, are included in the Statement of Additional
Information, which is available upon request.
<TABLE>
<CAPTION>
Year Ended August 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------- --------- --------- --------- ---------
Net investment income... .05 .05 .05 .05 .05
Net realized and change
on unrealized gain on
investments............ -- -- -- -- --
----------- --------- --------- --------- ---------
Total from investment
operations............ .05 .05 .05 .05 .05
Less Distributions:
Less dividends from net
investment income..... ( .05) ( .05) ( .05) ( .05) ( .05)
Less dividends from net
realized capital
gains................. -- -- -- -- --
----------- --------- --------- --------- ---------
Total distributions.... ( .05) ( .05) ( .05) ( .05) ( .05)
----------- --------- --------- --------- ---------
Net asset value, end of
year................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========== ========= ========= ========= =========
Total investment return. 4.65% 5.11% 4.96% 4.96% 5.04%
SIGNIFICANT RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of year
(000's omitted)....... $1,108,817 $944,966 $587,080 $427,494 $335,776
Operating expenses to
average net assets.... .46% .51% .57% .61% .72%
Net investment income
to average net assets. 4.55% 4.99% 4.86% 4.84% 4.97%
</TABLE>
13
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FOR MORE INFORMATION
Existing Shareholders or Prospective Investors
Call your financial consultant or (800) 444-1854
from 8:30 a.m. to 5:00 p.m. eastern standard time, Monday through Friday.
Hilliard-Lyons Government Fund, Inc.
Hilliard Lyons Center
Louisville, Kentucky 40202
Investment Advisor
J. J. B. Hilliard, W. L. Lyons, Inc.
Hilliard Lyons Center
Louisville, Kentucky 40202-2517
Distributor
Provident Distributors, Inc.
Four Falls Corporate Center
6th Floor
West Conshohocken, Pennsylvania 19428
Custodian and Transfer Agent
State Street Bank and Trust Company
225 Franklin Street
P.O. Box 1912
Boston, Massachusetts 02266
Legal Counsel
Brown, Todd & Heyburn, PLLC
400 West Market Street
Louisville, Kentucky 40202
Independent Auditors
Ernst & Young LLP
400 West Market Street
Louisville, Kentucky 40202
<PAGE>
[HILLIARD LYONS LOGO]
Hilliard-Lyons Government Fund, Inc.
Prospectus
December 1, 1999
A Statement of Additional Information, which contains more details about the
Fund, is incorporated by reference in its entirety into this Prospectus.
You will find additional information about the Fund in its annual and semi-
annual reports, which explain the market conditions and the investment
strategies significantly affecting the Fund's performance for its last fiscal
year.
You can ask questions or obtain a free copy of the Fund's reports or its
Statement of Additional Information by calling (800) 444-1854 from 8:30 a.m.
to 5:00 p.m., eastern standard time, Monday through Friday.
Information about the Fund, including its reports and statement of additional
information, has been filed with the Securities and Exchange Commission (SEC).
It can be reviewed and copied at the SEC's Public Reference Room in
Washington, D.C. This information is also available online at the SEC's
website (http://www.sec.gov). For more information, please call the SEC at
(800) SEC-0330. You can also request these materials by writing the Public
Reference Section of the SEC, Washington, DC 20549-6009, and paying a
duplication fee.
Hilliard-Lyons Government Fund
Investment Company Act File # 811-3070
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Dated December 1, 1999
- -------------------------------------------------------------------------------
HILLIARD-LYONS GOVERNMENT FUND, INC.
Hilliard Lyons Center
Louisville, Kentucky 40202
(502) 588-8400
Hilliard-Lyons Government Fund, Inc. is an open-end, diversified management
investment company. Its goal is to provide investors with liquidity and the
highest possible level of current income consistent with the preservation of
capital. The Fund seeks to achieve its goals by investing exclusively in
short-term securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities or in repurchase agreements collateralized by
such securities, or in a combination of both.
This Statement of Additional Information is not a prospectus. It contains
information in addition to that set forth in the prospectus for the Fund dated
December 1, 1999 and is to be read in conjunction with such prospectus (the
"Prospectus"). A copy of the Prospectus may be obtained from the Fund at no
cost from Hilliard-Lyons by calling toll free 1-800-444-1854.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FUND HISTORY............................................................... 3
INVESTMENT OBJECTIVES AND POLICIES......................................... 3
Investment Objectives..................................................... 3
Investment Restrictions................................................... 3
Change in Investment Policies............................................. 4
MANAGEMENT................................................................. 5
INVESTMENT ADVISORY AND OTHER SERVICES..................................... 6
Investment Adviser........................................................ 6
Distributor............................................................... 8
Custodian................................................................. 8
Independent Auditors...................................................... 8
PORTFOLIO TRANSACTIONS..................................................... 9
INDIVIDUAL RETIREMENT ACCOUNTS............................................. 10
NET ASSET VALUE............................................................ 11
REDEMPTION................................................................. 11
Redemption by Telephone................................................... 12
Redemption by Mail........................................................ 13
Redemption by Check....................................................... 13
Redemption by Systematic Withdrawal Plan.................................. 13
YIELD INFORMATION.......................................................... 13
ADDITIONAL INFORMATION..................................................... 14
FINANCIAL STATEMENTS....................................................... 17
REPORT OF INDEPENDENT AUDITORS............................................. 20
</TABLE>
2
<PAGE>
FUND HISTORY
The Fund was incorporated under the laws of Maryland on June 5, 1980, and
has an authorized capital consisting of 1,500,000,000 shares of common stock,
$.01 par value per share. All shares have equal non-cumulative voting rights
and equal rights with respect to dividends, distributions, redemptions and
liquidation. The shares are fully paid and non-assessable when issued and have
no preemptive, conversion or exchange rights.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion under~ "Investment
Objectives, Policies and Risks" in the Fund's prospectus.
Investment Objectives
Some of the government agencies and instrumentalities which issue or
guarantee securities in which the Fund may invest include the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage
Association, General Services Administration, Federal Farm Credit Banks,
Federal Home Loan Banks, Federal National Mortgage Association, Federal Home
Loan Mortgage Corporation, Federal Intermediate, Credit Banks, Federal Land
Banks, Maritime Administration, Student Loan Marketing Association, The
Tennessee Valley Authority and the International Bank for Reconstruction and
Development.
Investment Restrictions
The Fund may not purchase a security if, as a result: (a) more than 5% of
the value of the Fund's total assets would be invested in the securities of a
single issuer, except securities issued or guaranteed by the U.S. Government,
or any of its agencies or instrumentalities, and repurchase agreements
collateralized by such securities; (b) 10% or more of the outstanding
securities of any class of any issuer would be held by the Fund (for this
purpose, all indebtedness of an issuer is deemed to be of a single class),
except securities issued or guaranteed by the U.S. Government, or any of its
agencies or instrumentalities, and repurchase agreements collateralized by
such securities; (c) 25% or more of the value of the Fund's total assets would
be invested in the securities of issuers having their principal business
activities in the same industry, provided that this limitation does not apply
to obligations issued or guaranteed by the U.S. Government, or its agencies or
instrumentalities, or to repurchase agreements collateralized by such
securities, or to certificates of deposit or domestic bankers' acceptances;
(d) more than 5% of the value of the Fund's total assets would be invested in
the securities (taken at cost) of issuers which, at the time of purchase, had
been in operation less than three years, including predecessors and
unconditional guarantors, except investments in obligations issued or
guaranteed by the U.S. Government, or any of its agencies or
instrumentalities, and repurchase agreements collateralized by such
securities.
The Fund may not: (1) purchase any common stock or other equity securities,
or securities convertible into equity securities; (2) purchase securities with
legal or contractual restrictions on resale (except repurchase agreements) or
securities which are otherwise not readily marketable; (3) purchase or sell
real estate (although it may purchase money market securities secured by real
estate or interests therein, or issued by companies which invest in real
estate or interests therein); (4) purchase securities of other investment
companies, except in connection with a merger, consolidation, acquisition, or
reorganization; (5) purchase or sell commodities or commodity contracts; (6)
purchase participations or other direct interests in oil, gas, or other
mineral exploration
3
<PAGE>
or development programs; (7) purchase securities on margin, except for use of
short-term credit necessary for clearance of purchases of portfolio
securities; (8) make loans, although it may purchase money market securities
and enter into repurchase agreements; (9) borrow money, except as a temporary
measure for extraordinary or emergency purposes, and then only from banks in
amounts not exceeding the lesser of 10% of its total assets valued at cost or
5% of its total assets valued at market; (10) mortgage, pledge, hypothecate,
or in any other manner transfer as security for indebtedness any security
owned by the Fund, except as may be necessary in connection with permissible
borrowings mentioned in (9) above, and then such mortgaging, pledging, or
hypothecating may not exceed 15% of the Fund's assets, taken at cost;
provided, however, that as a matter of operating policy, the Fund will limit
any such mortgaging, pledging or hypothecating to 10% of its net assets, taken
at market; (11) underwrite securities issued by other persons; (12) purchase
or retain the securities of any issuer if, to the knowledge of the Fund's
management, those officers and directors of the Fund, and of its investment
adviser, each of whom owns beneficially more than .5% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
securities; (13) invest in companies for the purpose of exercising management
or control; or (14) invest in puts, calls, straddles, spreads or any
combination thereof. The Fund will not borrow in order to increase income
(leveraging), but only to facilitate redemption requests which might otherwise
require untimely disposition of portfolio securities. Accordingly, the Fund
will not purchase securities while borrowings are outstanding.
All of these investment restrictions, except that described as an operating
policy in (10), are fundamental policies and may not be changed without the
approval of at least a majority of the outstanding shares of the Fund or, if
it is less, 67% of the shares represented at a meeting of shareholders at
which the holders of 50% or more of the shares are represented. Operating
policies are subject to change by the Board of Directors without shareholder
approval. However, the operating policy of investing exclusively in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements collateralized by such securities, which securities
(except those covered by repurchase agreements) will mature in six months or
less, may be changed by the Board of Directors only if 30 days written notice
is forwarded to shareholders. Likewise, such notice must be given if the Fund
is to change its policy of investing not more than 10% of its total assets in
repurchase agreements maturing in more than seven business days.
Change in Investment Policies
Should the yield differential between the securities in which the Fund
invests and other high quality, short-term investments widen to in excess of 1
3/4%, management may recommend to the Fund's Board of Directors that it
consider authorizing investments in securities other than those issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, or in
repurchase agreements collateralized by such securities. The Board of
Directors may, at its discretion, but only after 30 days written notice to the
shareholders, authorize this change in investment policy, provided such
investments are not prohibited by the Fund's investment restrictions or by
applicable law. If such policy is changed (after 30 days written notice to
shareholders) the Fund will only invest in the following: (i) short-term
(maturing in one year or less) debt obligations which are payable in dollars,
issued or guaranteed by the Federal government, Federal governmental agencies
or instrumentalities, or certain banks, savings and loan associations, and
corporations; (ii) certificates of deposit issued by domestic banks (but not
foreign branches thereof) and savings and loan associations which have total
assets in excess of $1 billion; (iii) bankers' acceptances or letters of
credit guaranteed by U.S. commercial banks having total assets in excess of $1
billion; (iv) commercial paper which is rated A-2 or higher by Standard &
Poor's Corporation ("Standard & Poor's") or rated P-2 or higher by Moody's
Investors Service, Inc. ("Moody's") or, if not rated, will be issued by a
corporation having an existing debt security rated AA or higher by Standard &
Poor's or Aa or higher by Moody's; (v) other debt instruments (including
bonds) issued by domestic corporations which either mature
4
<PAGE>
within one year or have been called for redemption by the issuer, with such
redemption to be effective within one year, and which are rated AA or higher
by Standard & Poor's or Aa or higher by Moody's; (vi) obligations issued by
other entities, if the obligation is accompanied by a guarantee of principal
and interest of a bank or corporation whose certificates of deposit or
commercial paper may otherwise be purchased by the Fund; and (vii) repurchase
agreements collateralized by any of the foregoing types of securities.
Although securities underlying the repurchase agreements may have maturities
longer than one year, no repurchase agreements will be entered into with a
duration of more than seven business days, if as a result more than 10% of the
Fund's total assets would be so invested. The Fund has no present plans to
change its policy with regard to the types or maturities of the securities in
which it invests, and the Fund's prospectus will be supplemented to give
further information should the Fund's Board of Directors authorize such a
change.
MANAGEMENT
Directors and officers of the Fund, together with information as to their
principal occupations during the past five years and affiliations, if any,
with Hilliard-Lyons, are set forth below.
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation(s)
Name and Address Age With the Fund During Past 5 Years
---------------- --- ---------------- -----------------------
<S> <C> <C> <C>
Donald F. Kohler* 68 Chairman of the Board Retired, former Executive
Hilliard Lyons Center Vice President and
Louisville, Kentucky Director, J. J. B.
40202 Hilliard, W. L. Lyons, Inc.
J. Henning Hilliard+ 83 Director Retired, former Senior
4506 River Road Executive and Director, J.
Louisville, Kentucky J. B. Hilliard, W. L.
40207 Lyons, Inc.
J. Robert Shine+ 75 Director Chairman and Certified
222 East Market Street Public Accountant, Monroe
New Albany, Indiana Shine & Co., Inc.
47150
Samuel G. Miller+ 74 Director Retired, former Chairman of
402 Wynfield Close Vineyard Village
Court
Louisville, Kentucky
40206
Lindy B. Richardson 53 Director Retired, former Senior Vice
406 Wynfield Close President of Marketing &
Court Public Affairs of
Louisville, Kentucky Columbia/HCA Healthcare
40206 Corporation
Joseph C. Curry, Jr.* 54 President Senior Vice President, J. J.
Hilliard Lyons Center B. Hilliard, W. L. Lyons,
Louisville, Kentucky Inc.
40202
Dianna P. Wengler* 39 Vice President and Treasurer Vice President, J. J. B.
Hilliard Lyons Center Hilliard, W. L. Lyons, Inc.
Louisville, Kentucky
40202
Penny L. Wellinghurst* 43 Secretary Investment Advisory
Hilliard Lyons Center Department, J. J. B.
Louisville, Kentucky Hilliard, W. L. Lyons, Inc.
40202
</TABLE>
- --------
*An "interested person", as defined by the Investment Company Act of 1940.
+Member of Audit Committee.
No compensation is paid by the Fund to officers of the Fund and directors
who are affiliated with Hilliard-Lyons. The Fund pays each unaffiliated
director an annual retainer of $3,000, a fee of $750 for each meeting of
5
<PAGE>
the Board of Directors and of the Audit Committee attended and all expenses
the directors incur in attending meetings. For the year ended August 31, 1999,
unaffiliated directors received, in the aggregate, $20,250 from the Fund,
excluding reimbursed expenses.
The Fund's officers and directors together own less than 1% of its
outstanding shares.
The following table sets forth the aggregate compensation paid by the Fund
to the Directors of the Fund for the fiscal year ended August 31, 1999.
<TABLE>
<CAPTION>
PENSION OR ESTIMATED
RETIREMENT ANNUAL TOTAL COMPENSATION
AGGREGATE BENEFITS BENEFITS FROM FUND AND FUND
COMPENSATION ACCRUED AS PART UPON COMPLEX PAID TO
FROM FUND OF FUND EXPENSES RETIREMENT DIRECTORS
NAME OF PERSON ------------ ---------------- ---------- ------------------
<S> <C> <C> <C> <C>
Donald F. Kohler(1)..... $ 0 0 0 $ 0
Gilbert L.
Pamplin(1)(2).......... $ 0 0 0 $ 0
Joseph C. Curry,
Jr.(1)(2).............. $ 0 0 0 $ 0
J. Henning Hilliard..... $5,250 0 0 $5,250
Samuel J. Miller........ $7,500 0 0 $7,500
J. Robert Shine......... $7,500 0 0 $7,500
Lindy B. Richardson(3).. $ 0 0 0 $ 0.00
</TABLE>
- --------
(1) Directors who are "interested" do not receive compensation from the Fund.
(2) Directors who resigned from the Fund prior to the end of the fiscal year
ended August 31, 1999.
(3) Appointed to the Fund following the end of the fiscal year ended August
31, 1999.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Adviser
Hilliard-Lyons has been retained by the Fund as its investment adviser under
an Investment Advisory Agreement (the "Agreement") dated December 1, 1998.
The Agreement was approved by the Board of Directors, including a majority
of the directors who are not interested persons of Hilliard-Lyons, on
September 17, 1998 and by the shareholders of the Fund, on November 23, 1998.
The Agreement will be in effect for two years from December 1, 1998 through
December 1, 2000
and will continue in effect from year to year thereafter, provided that such
continuance is approved at least annually (a) by a majority of the Fund's
directors who are not interested persons of Hilliard-Lyons and (b) by either
the Fund's Board of Directors or by the vote of a majority of the outstanding
voting securities of the Fund (as defined in the Investment Company Act of
1940).
The Agreement may be terminated by Hilliard-Lyons at any time without
penalty upon giving the Fund 60 days' written notice and may be terminated by
the Fund at any time without penalty upon giving Hilliard-Lyons 60 days'
written notice, provided that such termination by the Fund is directed or
approved by the vote of a majority of the Board of Directors of the Fund or by
the vote of a majority of the outstanding voting securities of the Fund (as
defined in the Investment Company Act of 1940). The Agreement will
automatically terminate in the event of its assignment.
6
<PAGE>
The Agreement requires Hilliard-Lyons at its own expense to furnish office
space to the Fund and all necessary office facilities, equipment, and
personnel for managing the assets of the Fund. Hilliard-Lyons pays all other
expenses incurred by it in connection with managing the assets of the Fund,
including, but not limited to, the cost and expense of research, analysis and
supervision of the investment portfolio. Hilliard-Lyons pays the expense of
determining the daily price of shares of the Fund and the related bookkeeping
expenses (other than for such services as are provided by the Fund's
Custodian) and one-half of the fees of any trade association of which the Fund
may be a member. Hilliard-Lyons paid all costs and expenses incurred in
connection with the Fund's organization, the initial registration for offer
and sale of the Fund's shares under the Securities Act of 1933 and under
applicable state securities laws and the initial registration of the Fund
under the Investment Company Act of 1940, including legal, accounting and
printing expenses.
Under the Agreement, the Fund pays all charges of depositories, custodians,
and other agencies for the safekeeping and servicing of its cash, securities,
and other property, and of its transfer, shareholder record- keeping, dividend
disbursing, and redemption agents. The Fund pays all charges of legal counsel
and of independent auditors, other than those described in the preceding
paragraph. The Fund is responsible for all interest expense. The expense of
notices, proxy solicitation material, reports to its shareholders and of all
prospectuses furnished from time to time to existing shareholders or used for
regulatory purposes are the Fund's responsibility. The Fund pays for any bond
and insurance coverage required by law, all brokers' commissions and other
normal charges incident to the purchase and sale of portfolio securities. The
Fund pays all taxes and corporate fees payable to Federal, state, or other
governmental agencies and all stamp or other transfer taxes. The Fund bears
all expenses of complying with Federal, state, and other laws regulating the
issue or sale of shares except for those expenses that were attributable to
initial Federal and state securities law compliance and those deemed to be
sales or promotional expenses. The Fund also bears one-half of the fees of any
trade association of which the Fund may be a member and all of the Fund's
extraordinary expenses as may arise including expenses incurred in connection
with litigation, proceedings and claims and expenses incurred in connection
with the legal obligation of the Fund to indemnify its directors, employees,
shareholders and agents with respect to any claims or litigation. In general,
the Fund bears all expenses incidental to its operations not assumed by
Hilliard-Lyons, with the exception of sales and promotional expenses which are
borne by Hilliard-Lyons.
For the services Hilliard-Lyons renders and facilities it furnishes pursuant
to the Agreement, the Fund has agreed to pay Hilliard-Lyons 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
average daily net assets in excess of $300 million. The fee accrues daily and
is paid monthly. For the fiscal years ended August 31, 1997, 1998 and 1999
Hilliard-Lyons earned advisory fees, based on the formula described above,
totalling $1,880,981, $2,550,536, and $3,309,576 respectively.
Hilliard-Lyons has agreed to reimburse the Fund if total operating expenses
of the Fund, excluding taxes, interest and extraordinary expenses, exceed on
an annual basis 1 1/2% of the first $30,000,000 of average daily net assets
and 1% of average daily net assets over $30,000,000. Hilliard-Lyons reimburses
the Fund for such excess expenses monthly as an offset against any amounts
receivable from the Fund. All such reimbursements and offsets are subject to
adjustments as of the end of each fiscal year. There were no reimbursements
necessary in the fiscal years ended August 31, 1997, 1998, or 1999.
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard for its obligations thereunder,
Hilliard-Lyons is not liable for any act or omission in the course of or in
7
<PAGE>
connection with its rendering of services thereunder. Hilliard-Lyons has
reserved the right to grant its name to other mutual funds and if the
Agreement is terminated to withdraw its consent to the continuing use of its
name by the Fund.
Mr. Donald F. Kohler, Chairman of the Board of Directors of the Fund, is a
former Executive Vice President and a Director of Hilliard-Lyons. Mr. Joseph
C. Curry, Jr., President of the Fund, is a Senior Vice President of Hilliard-
Lyons. Ms. Dianna P. Wengler, Vice-President and Treasurer of the Fund, is a
Vice-President of Hilliard-Lyons. Ms. Penny Wellinghurst, Secretary of the
Fund, is an employee of Hilliard-Lyons.
The senior officers and directors of Hilliard-Lyons are: James W. Stuckert,
Chairman and Chief Executive Officer; James R. Allen, Executive Vice President
and Director; E. Neal Cory II, Executive Vice President and Director; James M.
Rogers, Executive Vice President, Chief Operating Officer, and Director; Ralph
S. Michael III, Director, Chief Executive Officer--Corporate Banking PNC,
Executive Vice President--PNC Bank; Thomas K. Whitford, Director, Chief
Executive Officer--PNC Advisors, Executive Vice President--PNC Bank; Paul J.
Moretti, Senior Vice President and Chief Financial Officer, and Kenneth L.
Wagner, Senior Vice President and Secretary.
The directors and officers of Hilliard-Lyons, including the aforementioned
officers and directors of the Fund, may be deemed to control Hilliard-Lyons by
reason of their position with Hilliard-Lyons.
Distributor
The Fund entered into a Distribution Agreement dated as of June 25, 1999
(the "Distribution Agreement") with Provident Distributors, Inc. (the
"Distributor"). The terms of the Distribution Agreement were approved on June
25, 1999, by unanimous written action of the Board of Directors of the Fund,
including a majority of the directors of the Fund who are not "interested
persons" (as such term is defined in the Investment Company Act of 1940) of
any party thereto. Pursuant to the terms of the Distribution Agreement, the
Distributor serves as the principal underwriter and distributor of the Fund's
shares. Pursuant to an agreement with the Distributor, Hilliard-Lyons has
agreed to pay the Distributor a fee of $2,000 per month for services it
renders to the Fund. There is no fee payable by the Fund pursuant to the
Distribution Agreement. The agreement also provides that Hilliard-Lyons bears
the cost of all sales and promotional expenses, including the expenses of
printing all sales literature and prospectuses, other than those utilized for
regulatory purposes and those furnished from time to time to existing
shareholders of the Fund. The continuance of the Distribution Agreement must
be approved by a majority of the Fund's Board of Directors including a
majority of the directors, who are not "interested persons". The Agreement
will terminate automatically if assigned by either party thereto and is
terminable upon 60 days written notice by the Fund and/or the Distributor.
Custodian
State Street Bank and Trust Company, 225 Franklin Street, P.O. Box 1912,
Boston, Massachusetts 02105, is the Fund's custodian. As such, it is
responsible for maintaining books and records with respect to the Fund's
portfolio transactions and holds the Fund's portfolio securities and cash
pursuant to a Custodian Agreement with the Fund. It also maintains the Fund's
accounting and portfolio transaction records and computes the Fund's net asset
value, net income and dividends daily. State Street Bank and Trust Company
may, for settlement purposes, enter into sub-custodian agreements with other
banks.
Independent Auditors
Ernst & Young LLP, 400 West Market Street, Louisville, Kentucky 40202, have
been selected as independent auditors of the Fund, and such firm also prepares
the Fund's Federal income tax returns.
8
<PAGE>
PORTFOLIO TRANSACTIONS
Hilliard-Lyons, as investment adviser, places orders for all purchases and
sales of portfolio securities. As a consequence of its investment policies and
restrictions, the Fund does not generally purchase securities for which a
brokerage commission is paid, but purchases securities from dealers at current
market prices, or directly from the issuer. Purchases from underwriters of
portfolio securities will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers serving as market makers
will include a dealer's mark-up.
Although the Fund does not seek but may nonetheless make profits through
short-term trading, Hilliard-Lyons may, on behalf of the Fund, dispose of any
portfolio security prior to its maturity if it believes such disposition
advisable. The Fund's policy of generally investing in securities with
maturities of six months or less results in high portfolio turnover.
Portfolio securities are not purchased from or through or sold to or through
Hilliard-Lyons or any affiliated person (as defined in the Investment Company
Act of 1940) of Hilliard-Lyons when Hilliard-Lyons is acting as principal.
Hilliard-Lyons is a frequent dealer in U.S. Treasury and U.S. agency
securities. In addition, the Fund does not purchase securities during the
existence of any underwriting or selling group related thereto of which
Hilliard-Lyons is a member. As a result, substantially all of the Fund's
purchases of Federal agency securities are made in the secondary market. Such
limitation, in the opinion of the Fund, does not affect the Fund's ability to
pursue its investment objectives. However, under certain circumstances, the
Fund may be at a disadvantage because of this limitation in comparison with
other funds with similar investment objectives but not subject to such
limitation.
No affiliated person of the Fund, including Hilliard-Lyons, may serve as a
dealer in connection with transactions with the Fund. However, affiliated
persons of the Fund may serve as its broker in any transactions conducted on
an agency basis.
The Adviser's overriding objective in placing orders for the purchase and
sale of the Fund's portfolio securities with a particular bank, dealer or
broker is to seek to obtain the best combination of price and execution. The
best net price, giving effect to transaction and other costs, is normally an
important factor in this decision, but a number of other judgmental
considerations also enter into the decision. These considerations include, but
are not limited to: (1) trading and operational capability; (2) financial
condition and stability; and (3) reliability and integrity. Accordingly, the
Fund may not necessarily be paying the lowest spread or commission available.
When more than one broker or dealer is believed to be capable of providing the
best combination of price and execution with respect to a particular portfolio
transaction, Hilliard-Lyons may select a broker or dealer primarily on the
basis of its ability to furnish research, statistical or similar services to
Hilliard-Lyons. Since such information and services will be only supplementary
to Hilliard-Lyons' own research efforts, the receipt of research information
is not expected to significantly reduce Hilliard-Lyons' expenses. Research
information furnished by brokers or dealers may be useful to Hilliard-Lyons in
serving other clients, as well as the Fund. Conversely, the Fund may benefit
from research information obtained by Hilliard-Lyons from the placement of
portfolio transactions of other clients.
INDIVIDUAL RETIREMENT ACCOUNTS
To enable its shareholders to take advantage of the tax laws governing
retirement plans, the Fund has established an Individual Retirement Account
Plan ("IRA Plan"). Under certain circumstances, cash
9
<PAGE>
contributions to an IRA can be deductible from gross income, and investment
earnings accumulated will be tax-free. In the case of contributions made for
the 1999 and 2000 tax year, an individual is not permitted to make a
deductible IRA contribution if the individual has adjusted gross income that
exceeds an applicable dollar amount or if the individual is an active
participant in an employer maintained defined benefit retirement plan for any
part of the plan year ending with or within the individual's taxable year or,
in the case of a defined contribution plan, if an employer contribution or any
forfeiture is allocated to the individual's account with respect to the
individual's taxable year. Withdrawals from the IRA constitute regular taxable
income, but are subject to penalties in addition to the normal tax under
certain conditions. The Fund recommends that you consult with your tax adviser
or other professional to determine whether or not contributions for 1999 and
2000 will be deductible. The Fund uses the Individual Retirement Custodian
Account Agreement of the Internal Revenue Service (Form 5305-A), in which
provisions have been incorporated directing the Custodian, State Street Bank
and Trust Company, to invest in shares of the Fund.
For the purpose of investing in the IRA Plan, the initial minimum investment
in Fund shares is $1,000; minimum subsequent investments are $100. Individuals
are eligible to contribute to IRAs even if they currently participate in
qualified pension plans, although, as indicated above, the contribution may
not be deductible. Contribution limits are the lesser of 100% of compensation
or $2,000. An individual may contribute and deduct $2,000 to an IRA for the
individual's non-working spouse if a joint return is filed and the combined
spousal IRA contributions (subject to a maximum limit of $2,000 each) do not
exceed the spouses' combined income. Amounts contributed above these limits
may be subject to a 6% excise tax. Under certain conditions, lump sums and
partial distributions of any size received as distributions from other
retirement plans m~ay be "rolled over" into the IRA Plan without a penalty.
State Street Bank and Trust Company, the Plan Trustee and Custodian, charges
$5 to open an IRA and $10 as an annual maintenance fee. A fee of $10 is
charged for a lump sum distribution.
If you want to participate in the Fund's IRA Plan, contact Hilliard-Lyons.
You will be sent Form 5305-A and designation of beneficiary forms. You should
fill out the Form and send it to the Fund along with one beneficiary form and
a check for your initial contribution (including $5 as the fee for opening the
account).
The Fund will review your application and forward it to the Custodian after
a required seven day waiting period. You may revoke your investment by mail or
by telegram during this period. Subsequent investments ($100 minimum) are sent
directly to the Custodian, who will buy full and fractional Fund shares at the
net asset value next determined after your check clears and the Custodian
receives Federal funds.
The Fund recommends that you consult with your tax adviser before investing
in the IRA Plan.
10
<PAGE>
NET ASSET VALUE
As stated in the Fund's prospectus, net asset value ("NAV") per share as of
a given date is calculated by adding the value of all securities in the
portfolio and other assets of the Fund, subtracting liabilities and dividing
by the number of shares outstanding. Expenses, including the fees payable to
Hilliard-Lyons, are accrued daily.
Portfolio securities are valued by use of the amortized cost method of
valuation. The amortized cost method of valuation involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact
of fluctuating interest rates on the market value of the instrument. While
this method provides certainty in valuation, it may result in periods during
which value, as determined by this method, is higher or lower than the price
the Fund would receive if it sold the instrument. During such periods the
yield to investors in the Fund may differ somewhat from that obtained in a
similar company which uses other methods to determine the fair market value of
its portfolio securities.
The relationship between the amortized cost value per share and the NAV per
share based upon available indications of market value is monitored. The Board
of Directors will decide what, if any, steps should be taken if there is a
difference of more than 1/2 of 1% between the two. The Board of Directors will
take any steps they consider appropriate to minimize any material dilution or
other unfair results arising from differences between the two methods of
determining net asset value.
In connection with its attempt to maintain its NAV per share of $1.00, the
Fund has received an order of exemption from the Securities and Exchange
Commission permitting the Fund to round its NAV per share to the nearest one
cent. In connection with the order of exemption, the Fund has agreed: (i) that
its Board of Directors will undertake to assure, to the extent reasonably
practicable, taking into account current market conditions affecting its
investment objectives, that the Fund's price per share, rounded to the nearest
one cent, will not deviate from $1.00; (ii) that it will maintain a dollar-
weighted average portfolio maturity appropriate to its objective of
maintaining a stable price per share and not, in any event, in excess of 90
days; and (iii) that its purchases of portfolio securities will be limited to
those United States dollar denominated instruments which its Board of
Directors determines present minimal credit risks and which are of high
quality as determined by any major rating service or, in the case of any
instrument that is not so rated, of comparable quality as determined by its
Board of Directors.
REDEMPTION
The redemption price will be the NAV per share of the Fund next determined
after receipt by the Custodian of a redemption request in proper form or, with
respect to redemption by telephone, at the NAV per share next determined after
receipt of a redemption request by Hilliard-Lyons.
In no event will payment be delayed more than seven days, except payment may
be delayed (generally not in excess of 15 days) if the check in payment of all
or a portion of the shares being redeemed has not cleared at the time the
redemption request is received. The Fund may suspend the right of redemption
or delay payment more than seven days during any period when the New York
Stock Exchange is closed (other than customary weekend or holiday closings),
when trading in the markets customarily utilized by the Fund is restricted or
when an emergency exists so that disposal of investments or determination of
net asset value is not reasonably practicable, or for such other period as the
Securities and Exchange Commission by order may permit for protection of
shareholders.
11
<PAGE>
Although the Fund will attempt to maintain a consistent share price of
$1.00, it is possible that the value of the shares upon redemption may be more
or less than the shareholder's cost, depending upon the market value of the
Fund's portfolio securities at the time of redemption.
The Board of Directors has authorize redemption of all of the shares in any
account which does not maintain a total investment value of more than $1.
Redemption by Telephone
The following information regarding redemption by telephone is for
shareholders with Hilliard-Lyons' accounts. If your account was established
through PNC Brokerage, please contact your PNC broker for information
regarding redemption by telephone.
Depending upon what was specified in the shareholder's application, the
proceeds of a telephone redemption will be wired either to the shareholder's
account at Hilliard-Lyons or to the shareholder's bank account. Shareholders
desiring to utilize the redemption by telephone procedure should so indicate
on their Fund application. Further documentation may be required from
corporations, fiduciaries and institutional investors. If a shareholder should
desire the Fund to wire the proceeds of any telephone redemption request
directly to the shareholder's bank and he has not so indicated on his Fund
application, the shareholder will be required to furnish to the Fund, in
advance of or concurrently with the request, a new Fund application
identifying the bank and indicating the shareholder's account number. The
signature(s) on any such instructions must be guaranteed by a member firm of
the New York Stock Exchange or by a commercial bank or trust company (not a
savings bank) which is a member of the Federal Deposit Insurance Corporation.
Notaries Public are not acceptable guarantors. There will be a $10.00 charge
for each wiring of proceeds over $5,000 and a $25.00 charge for each wiring of
proceeds under $5,000, of redeemed shares if wired otherwise than to a
shareholder's account at Hilliard-Lyons. This charge will be deducted from the
proceeds to be wired and will be paid to Hilliard-Lyons to cover the
administrative expenses of processing the redemption.
Funds will normally be transmitted on the business day on which the
redemption becomes effective and credited to the shareholder's Hilliard-Lyons
account on the same day. If a shareholder so desires, a check representing the
proceeds of such redemption will be available to the shareholder at Hilliard-
Lyons after such proceeds have been credited to the shareholder's Hilliard-
Lyons account. Alternatively, and normally no later than the next business
day, Hilliard-Lyons will mail a check representing such proceeds to the
shareholder if so instructed.
The Fund and Hilliard-Lyons reserve the right to reject a telephone request
and the Fund, at its option, may limit the frequency or amount of such
redemptions. The Fund in its discretion may honor telephonic withdrawal
requests in amounts less than $100.
12
<PAGE>
Redemption by Mail
When redeeming shares by mail, notaries Public are not acceptable
guarantors. A shareholder should also include any documents required by
special situations. Shareholders may request that proceeds from the redemption
of shares be wired to their brokerage account at Hilliard-Lyons. Normally,
payment will be made by check mailed within one business day after receipt of
a redemption request in proper form.
Redemption by Check
When redeeming shares by check, shareholders will be subject to all
applicable Bank rules and regulations including the right of the Bank not to
honor checks in amounts exceeding the value of the account at the time the
check is presented for payment. The Fund and the Bank each reserve the right
to modify or terminate this service at any time after giving notice to the
shareholders. If a shareholder wishes to use this method of redemption this
should be indicated on the shareholder's Fund application. Checks should not
be used to close a shareholder's account since the amount in the account,
including accrued dividends, may not equal the amount of the check.
Shareholders will receive their canceled checks for record keeping purposes
monthly.
Redemption by Systematic Withdrawal Plan
Dividend distributions on shares held under the Withdrawal Plan are
reinvested in additional full and fractional shares of the Fund at net asset
value. The Transfer Agent acts as agent for the shareholder in redeeming
sufficient full and fractional shares to provide the amount of the systematic
withdrawal payment. The Withdrawal Plan may be terminated by any time.
Withdrawal payments should not be considered to be dividends or income. If
periodic withdrawals continuously exceed reinvested dividend distributions,
the shareholder's original investment will be correspondingly reduced and
ultimately exhausted. Furthermore, each withdrawal constitutes a redemption of
shares, and any gain or loss realized must be reported for federal and state
income tax purposes. Shareholders should consult their tax adviser regarding
the tax consequences of participating in the Withdrawal Plan.
YIELD INFORMATION
The Fund's yield is its current net investment income expressed in
annualized terms. Yield is computed by dividing the Fund's average per share
net investment income for a current period (for example, seven calendar days)
by the Fund's average per share NAV for the same period and annualizing the
result on a 365-day basis. The Fund's net investment income changes in
response to fluctuations in interest rates and in the expenses of the Fund.
Any given yield quotation should not be considered as representative of what
the Fund's yield may be for any specified period in the future. Because the
yield will fluctuate, it cannot be compared with yields on savings accounts or
other investment alternatives that provide an agreed to or guaranteed fixed
yield for a stated period of time. However, yield information may be useful to
an investor considering temporary investments in money market instruments. In
comparing the yield of one money market fund to another, consideration should
be given to each fund's investment policies, including the types of
investments made, lengths of maturities of the portfolios, the method used by
each fund to compute the yield (which may differ) and whether there are any
special account charges which may reduce the effective yield.
13
<PAGE>
The following is an example of the yield calculation. The yield shown
represents the average annualized net investment income per share for the
seven calendar days ended August 31, 1999.
<TABLE>
<S> <C>
Total dividends per share from net investment income (seven
days ended August 31, 1999)................................... $ .00089
Annualized (365 day basis)..................................... $ .04624
Average NAV per share.......................................... $1.00
Annualized net yield per share for seven calendar days ended
August 31, 1999............................................... 4.62%
</TABLE>
ADDITIONAL INFORMATION
The prospectus and this Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 with
respect to the securities offered hereby, certain portions of which have been
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The Registration Statement, including the exhibits filed
therewith, may be examined at the office of the Securities and Exchange
Commission in Washington, D.C. and is also available online at the SEC's
website (http://www.sec.gov). For more information, please call the SEC at
(800)-SEC-0330. You can also request these materials by writing the Public
Reference Section of the SEC, Washington, DC 20549-6009, and paying a
duplication fee.
Statements contained in the prospectus and this Statement of Additional
Information as to the contents of any contract or other document referred to
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement of which the prospectus and this Statement of
Additional Information form a part, each such statement being qualified in all
respects by such reference.
14
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS
August 31, 1999
<TABLE>
<CAPTION>
Principal Purchase Maturity
Amount Yield Date Value
----------- -------- -------- -----------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS--100.2%
$15,000,000 Federal Home Loan Bank 4.989% 09/01/99 $15,000,000
12,145,000 Federal Home Loan Bank 5.476 09/01/99 12,145,000
20,000,000 Federal Home Loan Bank 4.804 09/02/99 19,997,411
13,000,000 Federal Home Loan Bank 4.922 09/03/99 12,996,577
19,000,000 Federal Home Loan Bank 4.766 09/07/99 18,985,370
23,000,000 Federal Home Loan Bank 4.978 09/08/99 22,978,310
17,000,000 Federal Home Loan Bank 4.797 09/09/99 16,982,433
7,000,000 Federal Farm Credit Bank 4.822 09/10/99 6,991,810
16,000,000 Federal Home Loan Bank 5.051 09/10/99 15,980,320
15,000,000 Federal Home Loan Bank 5.075 09/13/99 14,975,250
19,000,000 Federal Farm Credit Bank 5.073 09/14/99 18,965,969
12,000,000 Federal Farm Credit Bank 5.031 09/15/99 11,977,133
25,000,000 Federal Home Loan Bank 5.059 09/16/99 24,948,333
12,000,000 Federal Home Loan Bank 5.072 09/17/99 11,973,653
20,000,000 Federal Home Loan Bank 4.906 09/20/99 19,949,756
12,000,000 Federal Home Loan Bank 4.951 09/21/99 11,967,867
17,000,000 Federal Home Loan Bank 5.114 09/22/99 16,950,615
17,000,000 Federal Home Loan Bank 4.983 09/24/99 16,947,432
20,000,000 Federal Home Loan Bank 5.013 09/27/99 19,929,222
13,000,000 Federal Home Loan Bank 5.123 09/29/99 12,949,546
8,268,000 Federal Home Loan Bank 5.135 09/29/99 8,235,847
14,000,000 Federal Home Loan Bank 5.082 09/30/99 13,944,175
12,000,000 Federal Home Loan Bank 5.166 10/01/99 11,949,700
8,800,000 Federal Home Loan Bank 5.197 10/01/99 8,762,893
17,000,000 Federal Home Loan Bank 5.133 10/04/99 16,922,083
17,000,000 Federal Home Loan Bank 5.120 10/05/99 16,919,883
25,000,000 Federal Home Loan Bank 5.176 10/06/99 24,877,500
17,000,000 Federal Home Loan Bank 5.134 10/07/99 16,915,000
6,000,000 Federal Home Loan Bank 4.983 10/08/99 5,970,215
14,500,000 Federal Home Loan Bank 5.136 10/08/99 14,425,486
13,000,000 Federal Farm Credit Bank 5.222 10/12/99 12,924,344
23,000,000 Federal Home Loan Bank 5.155 10/13/99 22,865,297
11,000,000 Federal Farm Credit Bank 5.197 10/14/99 10,933,254
17,000,000 Federal Home Loan Bank 5.008 10/15/99 16,899,228
18,000,000 Federal Farm Credit Bank 5.284 10/18/99 17,878,505
14,000,000 Federal Farm Credit Bank 5.258 10/19/99 13,904,053
18,000,000 Federal Home Loan Bank 5.134 10/20/99 17,877,500
13,736,000 Federal Home Loan Bank 5.081 10/22/99 13,640,260
12,000,000 Federal Farm Credit Bank 5.298 10/25/99 11,906,760
17,000,000 Federal Home Loan Bank 5.145 10/26/99 16,869,879
17,000,000 Federal Home Loan Bank 5.166 10/27/99 16,866,984
14,150,000 Federal Home Loan Bank 5.141 10/29/99 14,036,014
</TABLE>
See notes to financial statements.
15
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS (continued)
August 31, 1999
<TABLE>
<CAPTION>
Principal Purchase Maturity
Amount Yield Date Value
----------- -------- -------- --------------
<C> <S> <C> <C> <C>
$15,000,000 Federal Home Loan Bank 5.111% 11/01/99 $ 14,873,679
12,000,000 Federal Home Loan Bank 5.197 11/02/99 11,895,427
18,000,000 Federal Home Loan Bank 5.197 11/03/99 17,840,610
19,000,000 Federal Farm Credit Bank 5.227 11/04/99 18,828,071
10,000,000 Federal Home Loan Bank 4.920 11/05/99 9,914,417
8,000,000 Federal Home Loan Bank 5.280 11/05/99 7,925,756
13,000,000 Federal Farm Credit Bank 5.232 11/08/99 12,875,012
11,000,000 Federal Home Loan Bank 5.163 11/08/99 10,895,903
9,000,000 Federal Farm Credit Bank 5.280 11/09/99 8,911,335
19,550,000 Federal Home Loan Bank 4.962 11/10/99 19,368,294
13,000,000 Federal Home Loan Bank 5.332 11/12/99 12,865,060
10,000,000 Federal Farm Credit Bank 5.332 11/15/99 9,891,667
14,000,000 Federal Farm Credit Bank 5.300 11/16/99 13,847,493
18,000,000 Federal Home Loan Bank 5.049 11/17/99 17,812,505
5,000,000 Federal Farm Credit Bank 5.322 11/18/99 4,943,883
11,000,000 Federal Farm Credit Bank 5.321 11/18/99 10,876,543
20,000,000 Federal Home Loan Bank 5.158 11/19/99 19,780,556
17,000,000 Federal Home Loan Bank 5.077 11/24/99 16,806,030
21,000,000 Federal Home Loan Bank 5.335 11/29/99 20,730,553
14,902,000 Federal Home Loan Bank 5.335 11/30/99 14,708,647
7,000,000 Federal Home Loan Bank 5.354 12/01/99 6,907,812
10,000,000 Federal Farm Credit Bank 5.301 12/03/99 9,866,958
11,810,000 Federal Home Loan Bank 5.174 12/06/99 11,651,903
10,000,000 Federal Home Loan Bank 5.176 12/09/99 9,861,950
19,000,000 Federal Home Loan Bank 5.191 12/13/99 18,726,564
5,000,000 Federal Farm Credit Bank 5.357 12/15/99 4,924,167
15,000,000 Federal Home Loan Bank 5.246 12/23/99 14,760,817
22,000,000 Federal Home Loan Bank 5.305 01/10/00 21,591,717
12,000,000 Federal Home Loan Bank 5.347 01/12/00 11,772,127
25,315,000 Federal Home Loan Bank 5.347 01/14/00 24,827,053
16,000,000 Federal Home Loan Bank 5.482 01/19/00 15,672,089
20,000,000 Federal Home Loan Bank 5.401 01/21/00 19,590,566
17,000,000 Federal Home Loan Bank 5.558 01/26/00 16,629,314
--------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(amortized cost -- $1,111,491,345) 1,111,491,345
--------------
TOTAL INVESTMENTS (100.2%) (cost --
$1,111,491,345*) $1,111,491,345
==============
</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.
16
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1999
<TABLE>
<S> <C>
ASSETS
Investments in money market instruments, at value:
United States Government Agency Obligations, at value
(amortized cost--$1,111,491,345)............................. $1,111,491,345
--------------
Total Investments............................................ 1,111,491,345
Cash........................................................... 2,380
Prepaid expenses............................................... 4,785
--------------
TOTAL ASSETS................................................. 1,111,498,510
--------------
</TABLE>
<TABLE>
<S> <C>
LIABILITIES
Dividends payable.............................................. 2,282,430
Due to J.J.B. Hilliard, W.L. Lyons, Inc.--Note B............... 293,498
Miscellaneous accrued expenses................................. 105,626
--------------
TOTAL LIABILITIES............................................ 2,681,554
--------------
NET ASSETS (equivalent to $1.00 per share; 1,500,000,000 shares
authorized and 1,108,816,956 shares issued and outstanding)--
Note C........................................................ $1,108,816,956
==============
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF OPERATIONS
For the year ended August 31, 1999
INVESTMENT INCOME
Interest income................................................ $ 53,725,891
EXPENSES
Investment Advisory fee--Note B................................ 3,309,576
Shareholder servicing fees--Note B............................. 1,185,377
Transfer agent fees............................................ 11,323
Custodian fees................................................. 145,610
Printing and other expenses.................................... 110,996
Filing fees.................................................... 55,800
Insurance expense.............................................. 32,737
Legal and audit fees........................................... 38,545
Directors' fees................................................ 24,510
--------------
Total expenses................................................ 4,914,474
Net investment income......................................... 48,811,417
--------------
Net increase in net assets resulting from operations.......... $ 48,811,417
==============
</TABLE>
See notes to financial statements.
17
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the year ended August 31,
1999 1998
-------------- -------------
INCREASE IN NET ASSETS:
<S> <C> <C>
FROM OPERATIONS
Net investment income........................... $ 48,811,417 $ 38,414,949
-------------- -------------
Net increase in net assets resulting from
operations.................................... 48,811.417 38,414,949
Dividends to shareholders ($.045545 and $.049903
per share, respectively)....................... (48,811 417) (38,414,949)
-------------- -------------
Undistributed net investment income............. 0 0
-------------- -------------
FROM CAPITAL SHARE TRANSACTIONS
Net capital share transactions (at $1.00 per
share)--Note C................................. 163,851,133 357,885,980
NET ASSETS
Beginning of year............................... 944,965,823 587,079,843
-------------- -------------
End of year..................................... $1,108,816,956 $944,965,823
============== =============
</TABLE>
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share of capital stock
outstanding throughout each year and other performance information derived
from the financial statements. It should be read in conjunction with the
financial statements and notes thereto.
<TABLE>
<CAPTION>
For the year ended August 31,
1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year................... $1.00 $1.00 $1.00 $1.00 $1.00
---------- -------- -------- -------- --------
Net investment income...... .05 .05 .05 .05 .05
---------- -------- -------- -------- --------
Total from investment
operations............... .05 .05 .05 .05 .05
Less distributions:
Dividend distributions.... (.05) (.05) (.05) (.05) (.05)
---------- -------- -------- -------- --------
Total distributions....... (.05) (.05) (.05) (.05) (.05)
---------- -------- -------- -------- --------
Net asset value, end of
year...................... $1.00 $1.00 $1.00 $1.00 $1.00
========== ======== ======== ======== ========
Number of shares
outstanding (000's
omitted).................. 1,108,817 944,966 587,080 427,494 335,776
Total investment return.... 4.65% 5.11% 4.96% 4.96% 5.04%
SIGNIFICANT RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of year
(000's omitted).......... $1,108,817 $944,966 $587,080 $427,494 $335,776
Operating expenses to
average net assets....... .46% .51% .57% .61% .72%
Net investment income to
average net assets....... 4.55% 4.99% 4.86% 4.84% 4.97%
</TABLE>
See notes to financial statements
18
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
August 31, 1999
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
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 which, in the opinion of the Board of
Directors, represents fair value of the particular security. 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.
The Fund values repurchase agreements at cost and accrues interest into
interest receivable. Normally, repurchase agreements are not subject to
trading. Repurchase agreements are fully collateralized by U.S. Treasury and
U.S. Government Agency obligations valued at bid prices plus accrued interest.
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 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
interest and accretion of original issue and market discounts earned and
amortization of premiums, plus or minus any net realized gain or loss on
portfolio securities, 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
"Adviser"), 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
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE B--INVESTMENT ADVISORY FEES & OTHER TRANSACTIONS WITH AFFILIATES
On November 23, 1998, Shareholders approved a new investment advisory
agreement at a Special Shareholders Meeting. Under the investment advisory
agreement, the Adviser supervises investment operations of the Fund and the
composition of its portfolio, and furnishes advice and recommendations with
respect to investments and the purchase and sale of securities in accordance
with the Fund's investment objectives, policies and restrictions; subject,
however, to the general supervision and control of the Fund's Board 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 expenses of the Fund, excluding taxes,
interest and extraordinary expenses (as defined), exceed on an annual basis 1
1/2% of the first $30 million of average daily net assets and 1% of average
daily net assets over $30 million. There was no reimbursement required for the
year ended August 31, 1999.
The Fund contracted with the Adviser to provide shareholder accounting
services. The Adviser is paid a fee of $1.00 per open account each month.
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
committee 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
Maryland. At August 31, 1999, there were 1,500,000,000 shares of $.01 par
value Common Stock authorized, and capital paid in aggregated $1,097,728,786.
Transactions in Fund shares at $1.00 per share were as follows:
<TABLE>
<CAPTION>
For the year ended August 31,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Shares sold.................................... 3,681,335,182 2,979,565,610
Shares issued to shareholders in reinvestment
of dividends.................................. 47,633,042 36,974,418
-------------- --------------
3,728,968,224 3,016,540,028
Less shares repurchased........................ (3,565,117,091) (2,658,654,048)
-------------- --------------
Net increase in capital shares................. 163,851,133 357,885,980
============== ==============
</TABLE>
19
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Hilliard-Lyons Government Fund, Inc.
We have audited the accompanying statement of assets and liabilities, including
the schedule of portfolio investments, of the Hilliard-Lyons Government Fund,
Inc. (the Fund) as of August 31, 1999, and the related statement of operations
for the year then ended, statement of changes in net assets for each of the two
years in the period then ended and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of August 31, 1999, by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of August 31, 1999, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and its financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
Louisville, Kentucky
September 17, 1999
20
<PAGE>
PART C: OTHER INFORMATION
ITEM 23. EXHIBITS
(A) EXHIBITS
(1) Restated Articles of Incorporation of Registrant.*
(1.1) Articles Supplementary to Articles of Incorporation.*
(2) Amended By-Laws of Registrant.*
(3) Not applicable.
(4) Form of Investment Advisory Agreement between Registrant and
J.J.B. Hilliard, W.L. Lyons, Inc.*
(5) Form of Distribution Agreement between Registrant and Provident
Distributors, Inc.*
(5) (a) Distribution Fee Letter Agreement between J.J.B. Hilliard, W.L.
Lyons, Inc. and the Registrant.
(5) (b) Letter Agreement between J.J.B. Hilliard, W.L. Lyons, Inc. and
Provident Distributors, Inc.
(6) Not applicable.
(7) Form of Custodian Agreement between Registrant and State Street
Bank and Trust Company.*
(8) Form of Transfer Agent's Agreement between Registrant and State
Street Bank and Trust Company.*
(9) Consent of Ernst & Young LLP, independent auditors.
(10) Not applicable.
(11) Individual Retirement Custodial Account Agreement of the Internal
Revenue Service, Form 5305-A; Application Information; and
Designation of Beneficiary Form.*
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
C-1
<PAGE>
(19) Consent of Brown, Todd & Heyburn PLLC.
(20) Powers of Attorney executed by J. Henning Hilliard, Samuel G. Miller
and J. Robert Shine.*
-----------
* Previously filed
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 25. INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling person of Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Pursuant to the Distribution Agreement, between the Fund and Provident
Distributors, Inc. (the "Distributor"), the Fund is required to indemnify and
hold harmless the Distributor and each person, if any, who controls the
Distributor against any loss, liability, claim, damage or expense (including the
reasonable cost of investigating or defending any alleged loss, liability,
claim, damage or expense and reasonable counsel fees incurred in connection
therewith), arising by reason of any person acquiring any shares of the Fund,
which may be based upon the Securities Act of 1933, or on any other statute or
at common law, on the ground that the Fund's Registration Statement or related
Prospectus and Statement of Additional Information, as from time to time amended
and supplemented, or an annual or interim report to stockholders of the Fund,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading, unless such statement or omission was made in reliance
upon, and in conformity with, information furnished to the Fund in connection
therewith by or on behalf of the Distributor.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
J.J.B. Hilliard, W.L. Lyons, Inc., the Investment Adviser of the Registrant
("Hilliard-Lyons"), is an investment banking and securities brokerage firm
headquartered in Louisville, Kentucky. Hilliard-Lyons is a registered broker-
dealer and is a member of the National Association of Securities Dealers,
Inc., the New York Stock Exchange, the American Stock Exchange, the AMEX
Commodities Exchange, the Midwest Stock Exchange, the Chicago Board Options
Exchange and the New York Futures Exchange. It has 112 offices and more than 592
financial consultants doing business in 49 states. Hilliard-Lyons maintains an
investment advisory department and is registered under the Investment Advisers
Act of 1940. For information as to the business, profession, vocation or
employment of a substantial nature of each of the directors and officers of
Hilliard-Lyons, reference is made to Part I, Schedule D and Part II, Item 6,
Schedule F of Form ADV (revised July 31, 1999) filed on or about July 31,
1999 for Hilliard-Lyons.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Provident Distributors, Inc. is Registrant's principal underwriter.
Provident Distributors, Inc. currently serves as distributor and principal
underwriter of Hilliard Lyons Growth Fund, Inc., an open-end non-diversified
mutual fund.
(b) Set forth below is certain information pertaining to the directors and
officers of Provident Distributors, Inc., the Registrant's principal
underwriter:
<TABLE>
<CAPTION>
POSITION WITH
NAME AND PRINCIPAL UNDERWRITER POSITION WITH
BUSINESS ADDRESS (DISTRIBUTOR) REGISTRANT
------------------ ------------- -------------
<S> <C> <C>
Philip H. Rinnander................. President None
Four Falls Corporate Center, 6th Floor
West Conshohocken, Pennsylvania 19428-2961
Jane Haegele.................... Director None
Four Falls Corporate Center, 6th Floor
West Conshohocken, Pennsylvania 19428-2961
Barbara A. Rice..................... Vice President None
Four Falls Corporate Center, 6th Floor
West Conshohocken, Pennsylvania 19428-2961
Jason A. Greim...................... Vice President None
Four Falls Corporate Center, 6th Floor
West Conshohocken, Pennsylvania 19428-2961
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
</TABLE>
(c) The principal underwriter receives $2,000.00 per month as compensation for
the duties or services rendered to the Registrant pursuant to the Distribution
Agreement.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act and rules
promulgated thereunder are in the possession of State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02105 and J.J.B. Hilliard,
W.L. Lyons, Inc., Hilliard Lyons Center, Louisville, KY 40202.
ITEM 29. MANAGEMENT SERVICES
Registrant is not a party to any management related service contract not
discussed in Parts A or B of this Form.
ITEM 30. UNDERTAKINGS
Not Applicable.
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<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT, HILLIARD-LYONS GOVERNMENT
FUND, INC., CERTIFIES THAT IT MEETS ALL OF THE REQUIREMENTS FOR EFFECTIVENESS
OF THIS REGISTRATION STATEMENT PURSUANT TO RULE 485 (a)(1) UNDER THE SECURITIES
ACT OF 1933 AND HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT
TO BE SIGNED ON BEHALF OF THE UNDERSIGNED, THERETO DULY AUTHORIZED, IN THE
CITY OF LOUISVILLE AND THE STATE OF KENTUCKY ON THE 27 DAY OF SEPTEMBER,
1997.
HILLIARD-LYONS GOVERNMENT FUND, INC.
By: /s/ DONALD F. KOHLER
-----------------------------------
Donald F. Kohler, Chairman of the
Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
OF THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS
IN SUCH CAPACITIES AND ON THE DATE INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DONALD F. KOHLER Chairman of the Board September 27, 1999
- ------------------------------------ (Principal Executive
Donald F. Kohler Officer)
Director* September 27, 1999
- ------------------------------------
J. Henning Hilliard
Director* September 27, 1999
- ------------------------------------
J. Robert Shine
Director* September 27, 1999
- ------------------------------------
Samuel G. Miller
*By: /s/ DONALD F. KOHLER
--------------------------------
Donald F. Kohler
Attorney-in-Fact
</TABLE>
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