<PAGE>
March 25, 1999
Dear Shareholder:
We are pleased to present this report on the Hilliard-Lyons Government Fund,
Inc. ("HLGF" or the "Fund") for the six months ended February 28, 1999.
The Fund reached a new milestone on November 17, 1998 with net assets reaching
the $1 billion mark for the first time. Net assets on February 28, 1999 were
$1.087 billion versus net assets of $945 million six months ago and $811
million one year ago. The average seven day yield ranged from a low of 4.41%
to a high of 4.98% during the six months. Distributions of $.023083 were paid,
equivalent to an annualized yield of 4.65%. For those shareholders in the
dividend reinvestment plan, this equates to a compound annual yield of 4.70%.
Money market fund assets reached a record level of $1.4 trillion at the end of
January with the largest single month increase ever of $68.5 billion. The
increase in assets in HLGF has greatly surpassed that of the industry which
has seen assets double in the last three years and triple in the last ten
years.
The Federal Reserve (the "Fed") cut the federal funds rate by 1/4% on
September 29, 1998 and quickly followed with another 1/4% cut on October 15,
1998. This was the first action by the Fed since March 1997. The federal funds
rate is what member banks charge each other for overnight loans and is a
determining factor for other rates from credit cards to mortgages. Federal
Reserve Chairman Alan Greenspan indicated he believed the U.S. economy was
feeling the effects of the financial turmoil in Asia and Latin America and
said he would use Fed control over interest rates to strengthen the world
economy. Opinions appear mixed on what will happen at the next meeting of the
Federal Reserve scheduled for March 30, 1999. Most believe that recent
economic data suggest little or no inflationary pressures and that the Fed
will leave interest rates unchanged for now.
The Dow Jones Industrial Average ("DJIA" or the "Dow") has also entered record
territory. The Dow surpassed the 10000, milestone hitting an intraday high of
10085.31 on March 19, 1999 but has yet to close at or above the 10000 level.
Intraday crossings of round number milestones such as 3000 and 4000 took place
several months before the Dow actually closed above those levels. Closings
above 7000, 8000 and 9000 were each quickly followed by several months of
market decline.
As shown on the attached Schedule of Investments, the Fund was 100% invested
in U.S. government agency obligations on February 28, 1999. These discount
notes of the Federal Home Loan and Federal Farm Credit Banks, while offering a
high degree of credit safety, have allowed the Funds to offer a competitive
yield and an added advantage of income which is exempt from state income tax.
This is the fourth year in a row that all dividends paid by the Fund were
fully exempt from state income tax in all states. The percentage of dividends
eligible for exemption will vary as it is dependent on the investments of the
Fund, but given the current investment strategy, we believe the dividends paid
will be substantially exempt from state income tax under current tax laws.
This is the second year that dividend information from the Fund was included
on your Form 1099-Div from J.J.B. Hilliard, W.L. Lyons, Inc.
The merger between Hilliard-Lyons, Inc. and PNC Bank Corp. became effective on
December 1, 1998. The process of integrating the two entities is just
beginning but is not expected to have any adverse effects on the Fund. The
merger constituted an assignment of the Investment Advisory Agreement (the
"Agreement") and shareholders approved a new Agreement at a Special
Shareholders Meeting held November 23, 1998. Directors were also elected at a
Special Shareholders Meeting held November 6, 1998. As a result of the merger,
it became necessary for the Fund to observe certain banking laws, one of which
mandates that 75% of its directors be "unaffiliated". This required a
reorganization of the Board and as a consequence Gilbert L. Pamplin and Joseph
C. Curry, Jr. (both of whom are employees of Hilliard Lyons) resigned as
directors. Mr. Curry remains as President. Mrs. Marianne R. Rowe also
resigned. Mr. Kohler remains Chairman and Messrs. Hilliard, Shine and Miller
remain directors. The Board now is in compliance with the law affecting bank
affiliated funds.
/s/ Donald F. Kohler /s/ Joseph C. Curry, Jr. /s/ Dianna P. Wengler
DONALD F. KOHLER JOSEPH C. CURRY, JR. DIANNA P. WENGLER
Chairman President Vice President and
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS
(UNAUDITED)
February 28, 1999
<TABLE>
<CAPTION>
Principal Purchase Maturity
Amount Yield Date Value
----------- -------- -------- -----------
<C> <S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY
OBLIGATIONS--100.2%
$13,240,000 Federal Home Loan Bank 4.747% 3/01/99 $13,240,000
15,000,000 Federal Home Loan Bank 5.020 3/01/99 15,000,000
11,280,000 Federal Home Loan Bank 5.068 3/02/99 11,278,452
24,000,000 Federal Home Loan Bank 5.092 3/03/99 23,993,387
15,000,000 Federal Home Loan Bank 5.026 3/04/99 14,993,875
20,000,000 Federal Home Loan Bank 5.082 3/05/99 19,989,000
9,000,000 Federal Home Loan Bank 5.072 3/08/99 8,991,355
9,000,000 Federal Home Loan Bank 4.767 3/09/99 8,990,640
24,000,000 Federal Home Loan Bank 5.062 3/10/99 23,970,420
16,000,000 Federal Farm Credit Bank 4.825 3/11/99 15,979,022
9,000,000 Federal Home Loan Bank 5.062 3/12/99 8,986,443
27,000,000 Federal Home Loan Bank 5.030 3/15/99 26,948,550
22,000,000 Federal Farm Credit Bank 5.029 3/16/99 21,955,083
24,000,000 Federal Home Loan Bank 5.062 3/17/99 23,947,413
20,000,000 Federal Farm Credit Bank 4.914 3/18/99 19,954,950
15,000,000 Federal Home Loan Bank 5.072 3/19/99 14,962,950
19,000,000 Federal Home Loan Bank 5.024 3/22/99 18,945,803
16,000,000 Federal Home Loan Bank 5.036 3/23/99 15,951,991
18,000,000 Federal Home Loan Bank 5.062 3/24/99 17,943,305
17,000,000 Federal Farm Credit Bank 4.988 3/25/99 16,945,147
20,000,000 Federal Home Loan Bank 5.091 3/26/99 19,931,111
13,000,000 Federal Home Loan Bank 5.056 3/29/99 12,950,253
17,000,000 Federal Home Loan Bank 4.725 3/30/99 16,936,732
16,000,000 Federal Home Loan Bank 5.074 3/31/99 15,934,533
11,000,000 Federal Home Loan Bank 4.814 4/01/99 10,955,481
13,000,000 Federal Home Loan Bank 4.812 4/05/99 12,940,724
14,000,000 Federal Home Loan Bank 4.988 4/06/99 13,932,520
17,000,000 Federal Home Loan Bank 4.875 4/07/99 16,917,007
21,000,000 Federal Home Loan Bank 4.812 4/08/99 20,896,038
11,892,000 Federal Home Loan Bank 5.017 4/09/99 11,829,517
11,000,000 Federal Home Loan Bank 4.760 4/12/99 10,940,325
6,000,000 Federal Home Loan Bank 4.678 4/14/99 5,966,927
13,000,000 Federal Home Loan Bank 4.836 4/14/99 12,924,846
10,421,000 Federal Farm Credit Bank 4.908 4/15/99 10,359,125
12,000,000 Federal Home Loan Bank 4.802 4/16/99 11,928,240
15,000,000 Federal Home Loan Bank 4.783 4/19/99 14,904,654
10,000,000 Federal Farm Credit Bank 4.831 4/20/99 9,934,306
18,000,000 Federal Home Loan Bank 4.791 4/21/99 17,880,915
12,000,000 Federal Home Loan Bank 4.771 4/22/99 11,919,400
12,302,000 Federal Farm Credit Bank 4.978 4/23/99 12,214,704
25,000,000 Federal Home Loan Bank 4.749 4/26/99 24,819,944
25,000,000 Federal Farm Credit Bank 4.965 4/27/99 24,809,208
25,000,000 Federal Home Loan Bank 4.791 4/28/99 24,811,903
14,500,000 Federal Home Loan Bank 4.888 4/29/99 14,387,834
</TABLE>
See notes to financial statements.
2
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS (continued)
(UNAUDITED)
February 28,1999
<TABLE>
<CAPTION>
Principal Purchase Maturity
Amount Yield Date Value
----------- -------- -------- --------------
<C> <S> <C> <C> <C>
$20,000,000 Federal Home Loan Bank 04.890% 4/30/99 $ 19,842,667
12,000,000 Federal Farm Credit Bank 04.758 5/03/99 11,902,770
20,000,000 Federal Home Loan Bank 04.787 5/04/99 19,833,956
11,000,000 Federal Farm Credit Bank 04.763 5/05/99 10,907,844
17,000,000 Federal Farm Credit Bank 04.831 5/06/99 16,853,828
16,000,000 Federal Home Loan Bank 04.833 5/07/99 15,859,747
11,000,000 Federal Farm Credit Bank 04.774 5/11/99 10,899,121
10,914,000 Federal Farm Credit Bank 04.767 5/12/99 10,812,936
14,000,000 Federal Home Loan Bank 04.565 5/14/99 13,863,593
8,000,000 Federal Farm Credit Bank 04.825 5/17/99 7,919,578
20,000,000 Federal Home Loan Bank 04.823 5/18/99 19,796,333
22,000,000 Federal Home Loan Bank 04.854 5/19/99 21,771,646
19,000,000 Federal Home Loan Bank 04.843 5/21/99 18,798,220
15,000,000 Federal Home Loan Bank 04.852 5/24/99 14,834,450
19,000,000 Federal Home Loan Bank 04.921 5/26/99 18,784,403
14,000,000 Federal Home Loan Bank 04.895 5/28/99 13,836,760
19,000,000 Federal Home Loan Bank 04.777 6/02/99 18,772,253
21,000,000 Federal Home Loan Bank 04.843 6/04/99 20,738,988
15,762,000 Federal Farm Credit Bank 04.809 6/07/99 15,561,621
16,000,000 Federal Home Loan Bank 04.852 6/15/99 15,777,871
15,000,000 Federal Home Loan Bank 04.858 6/16/99 14,789,567
1,000,000 Federal Home Loan Bank 04.770 6/23/99 985,433
14,000,000 Federal Home Loan Bank 04.767 6/23/99 13,796,067
14,000,000 Federal Home Loan Bank 04.820 6/30/99 13,781,192
13,000,000 Federal Home Loan Bank 04.731 7/07/99 12,788,764
12,245,000 Federal Farm Credit Bank 04.771 7/29/99 12,010,304
--------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(amortized cost -- $1,089,513,945) 1,089,513,945
--------------
TOTAL INVESTMENTS (100.2%) (cost -- $1,089,513,945*) $1,089,513,945
==============
</TABLE>
* Also represents cost for federal income tax purposes.
The percentage shown for each investment category is the total value of that
category as a percentage of the total net assets of the Fund.
See notes to financial statements.
3
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
February 28, 1999
<TABLE>
<S> <C>
ASSETS
Investments in money market instruments, at value:
United States Government Agency Obligations, at value
(amortized cost--$1,089,513,945)............................. $1,089,513,945
--------------
Total Investments............................................ 1,089,513,945
Cash........................................................... 4,439
Prepaid expenses............................................... 39,119
--------------
TOTAL ASSETS................................................. 1,089,557,503
--------------
LIABILITIES
Dividends payable.............................................. 1,724,782
Due to J.J.B. Hilliard, W.L. Lyons, Inc.--Note B............... 257,433
Miscellaneous accrued expenses................................. 250,794
--------------
TOTAL LIABILITIES............................................ 2,233,009
--------------
NET ASSETS (equivalent to $1.00 per share; 1,500,000,000 shares
authorized and 1,087,324,494 shares issued and outstanding)--
Note C........................................................ $1,087,324,494
==============
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
For the six months ended February 28, 1999
INVESTMENT INCOME
Interest income................................................ $ 26,023,309
EXPENSES
Investment Advisory fee--Note B................................ 1,575,602
Shareholder servicing fees--Note B............................. 537,791
Transfer agent fees............................................ 56,009
Custodian fees................................................. 80,250
Printing and other expenses.................................... 46,635
Filing fees.................................................... 141,300
Insurance expense.............................................. 32,664
Legal and audit fees........................................... 24,435
Directors' fees................................................ 12,550
--------------
Total expenses................................................ 2,507,236
--------------
Net investment income......................................... 23,516,073
--------------
Net increase in net assets resulting from operations.......... $ 23,516,073
==============
</TABLE>
See notes to financial statements.
4
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six
Months Ended For the
February 28, Year Ended
1999 August 31
(UNAUDITED) 1998
INCREASE IN NET ASSETS: -------------- -------------
<S> <C> <C>
FROM OPERATIONS
Net investment income........................... $ 23,516,073 $ 38,414,949
-------------- -------------
Net increase in net assets resulting from
operations.................................... 23,516,073 38,414,949
Dividends to shareholders ($.023083 and $.049903
per share, respectively)....................... ( 23,516,073) ( 38,414,949)
-------------- -------------
Undistributed net investment income............. 0 0
-------------- -------------
FROM CAPITAL SHARE TRANSACTIONS
Net capital share transactions (at $1.00 per
share)--Note C................................. 142,358,671 357,885,980
NET ASSETS
Beginning of period............................. 944,965,823 587,079,843
-------------- -------------
End of period................................... $1,087,324,494 $944,965,823
============== =============
</TABLE>
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share of capital stock
outstanding throughout each period and other performance information derived
from the financial statements. It should be read in conjunction with the
financial statements and notes thereto.
<TABLE>
<CAPTION>
For the Six
Months
Ended
February
28, 1999 For the Year Ended August 31,
(UNAUDITED) 1998 1997 1996 1995 1994
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
---------- -------- -------- -------- -------- --------
Net investment income... .02 .05 .05 .05 .05 .03
---------- -------- -------- -------- -------- --------
Total from investment
operations............ .02 .05 .05 .05 .05 .03
Less distributions:
Dividend distributions. ( .02) ( .05) ( .05) ( .05) ( .05) ( .03)
---------- -------- -------- -------- -------- --------
Total distributions.... ( .02) ( .05) ( .05) ( .05) ( .05) ( .03)
---------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
========== ======== ======== ======== ======== ========
Number of shares
outstanding (000's
omitted)............... 1,087,324 944,966 587,080 427,494 335,776 210,652
Total investment return. 2.31% 5.11% 4.96% 4.96% 5.04% 2.85%
SIGNIFICANT RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period (000's
omitted).............. $1,087,324 $944,966 $587,080 $427,494 $335,776 $210,652
Operating expenses to
average net assets.... .50% .51% .57% .61% .72% .75%
Net investment income
to average net assets. 4.65% 4.99% 4.86% 4.84% 4.97% 2.80%
</TABLE>
See notes to financial statements
5
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A--ACCOUNTING POLICIES
Hilliard-Lyons Government Fund, Inc. (the "Fund") is a diversified open-end
management investment company registered under the Investment Company Act of
1940, as amended. The following is a summary of significant accounting poli-
cies followed by the Fund in the preparation of its financial statements.
Security Valuation: The Fund employs the amortized cost method of security
valuation for U.S. Government securities which, in the opinion of the Board of
Directors, represents fair value of the particular security. The Board moni-
tors deviations between net asset value per share as determined by using
available market quotations and the amortized cost method of security valua-
tion. If the deviation in the aggregate is significant, the Board considers
what action, if any, should be initiated to provide fair valuation.
The Fund values repurchase agreements at cost and accrues interest into inter-
est receivable. Normally, repurchase agreements are not subject to trading.
Repurchase agreements are fully collateralized by U.S. Treasury and U.S. Gov-
ernment Agency obligations valued at bid prices plus accrued interest. U.S.
Treasury and U.S. Government Agency obligations pledged as collateral for re-
purchase agreements are held by the Fund's custodian bank until maturity of
the repurchase agreements. Provisions of the agreements provide that the mar-
ket value of the collateral plus accrued interest on the collateral is greater
than or equal to the repurchase price plus accrued interest at all times. In
the event of default or bankruptcy by the other party to the agreements, the
Fund maintains the right to sell the underlying securities at market value;
however, realization and/or retention of the collateral may be subject to le-
gal proceedings.
Federal Income Taxes: It is the policy of the Fund to continue to qualify un-
der the Internal Revenue Code as a regulated investment company and to dis-
tribute all of its taxable income to shareholders, thereby relieving the Fund
of federal income tax liability.
Dividends to Shareholders: The net investment income of the Fund is determined
on each business day and is declared as a dividend payable to shareholders of
record immediately prior to the time of determination of net asset value on
each such day. Dividends declared since the preceding dividend payment date
are distributed monthly.
The Fund's net investment income for dividend purposes includes accrued inter-
est and accretion of original issue and market discounts earned and amortiza-
tion of premiums, plus or minus any net realized gain or loss on portfolio se-
curities, if any, occurring since the previous dividend declaration, less the
accrued expenses of the Fund for such period.
Investment Transactions: Investment transactions are accounted for on the date
the securities are bought or sold. Net realized gains and losses on sales of
investments, if any, are determined on the basis of identified cost.
The Fund may enter into repurchase agreements with financial institutions,
deemed to be credit worthy by J.J.B. Hilliard, W.L. Lyons, Inc. (the "Advis-
er"), subject to the seller's agreement to repurchase and the Fund's agreement
to sell such security at a mutually agreed upon date and price.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and ex-
penses during the reporting period. Actual results could differ from those es-
timates.
NOTE B--INVESTMENT ADVISORY FEES & OTHER TRANSACTIONS WITH AFFILIATES
On November 23, 1998, the Fund renewed its investment advisory agreement with
the Adviser. Under the investment advisory agreement, the Adviser supervises
investment operations of the Fund and the composition of its portfolio, and
furnishes advice and recommendations with respect to investments and the pur-
chase and sale of securities in accordance with the Fund's investment objec-
tives, policies and restrictions; subject, however, to the general supervision
and control of the Fund's Board of Directors. For the services the Adviser
renders, the Fund has agreed to pay the Adviser an annual advisory fee of 1/2
of 1% of the first $200 million of average daily net assets, 3/8 of 1% of the
next $100 million of average daily net assets, and 1/4 of 1% of the average
daily net assets in excess of $300 million. Such fee is accrued daily and paid
monthly. The Adviser has agreed to reimburse the Fund if total operating ex-
penses of the Fund, excluding taxes, interest and extraordinary expenses (as
defined), exceed on an annual basis 1 1/2% of the first $30 million of average
daily net assets and 1% of average daily net assets over $30 million. There
was no reimbursement required for the six months ended February 28, 1999. On
August 20, 1998, PNC Bank Corp. entered into an Agreement and Plan of Merger
with Hilliard-Lyons, Inc. (the "Merger") pursuant to which the Adviser will
become a subsidiary of PNC Bank Corp. The Merger became effective on December
1, 1998. This Merger constitutes an assignment of the Investment Advisory
Agreement (the "Agreement") as defined in the Investment Company Act of 1940.
Shareholders approved a new Agreement at a Special Shareholders Meeting held
November 23, 1998. The following are the results of the voting at the Meeting:
<TABLE>
<CAPTION>
New Investment Advisory Agreement
- ---------------------------------
<S> <C>
For................................................................. 481,431,634
Against............................................................. 7,234,652
Abstain............................................................. 17,359,505
</TABLE>
Shareholders elected directors at a Special Shareholders Meeting held November
6, 1998. The following are the results of the voting at the Meeting:
<TABLE>
<CAPTION>
Election of Directors For Against Abstain
- --------------------- ----------- ------- ---------
<S> <C> <C> <C>
Donald F. Kohler.................................. 392,961,150 0 4,737,019
Gilbert L. Pamplin................................ 392,971,993 0 4,726,176
Joseph C. Curry, Jr............................... 392,853,378 0 4,844,791
J. Henning Hilliard............................... 391,205,410 0 6,492,759
J. Robert Shine................................... 391,853,850 0 5,844,319
Samuel G. Miller.................................. 392,576,258 0 5,121,911
Marianne R. Rowe.................................. 390,687,888 0 7,010,281
</TABLE>
6
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(UNAUDITED)
The Fund contracted with the Adviser to provide shareholder accounting servic-
es. 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 commit-
tee meeting attended, and all expenses the Directors incur in attending meet-
ings.
NOTE C--CAPITAL STOCK
The Fund was incorporated in June 1980 under the laws of the state of Maryland.
At February 28, 1999, there were 1,500,000,000 shares of $.01 par value Common
Stock authorized, and capital paid in aggregated $1,076,451,249. Transactions
in Fund shares at $1.00 per share were as follows:
<TABLE>
<CAPTION>
Six months
ended Year ended
February 28, August 31,
1999 1998
-------------- --------------
<S> <C> <C>
Shares sold.................................... 1,721,986,392 2,979,565,610
Shares issued to shareholders in reinvestment
of dividends.................................. 23,361,934 36,974,418
-------------- --------------
1,745,348,326 3,016,540,028
Less shares repurchased........................ (1,602,989,655) (2,658,654,048)
-------------- --------------
Net increase in capital shares................. 142,358,671 357,885,980
============== ==============
</TABLE>
7
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
Hilliard Lyons Center
Louisville, Kentucky 40202
(502) 588-8400
Investment Adviser
J.J.B. Hilliard, W.L. Lyons, Inc.
Hilliard Lyons Center
Louisville, Kentucky 40202
(502) 588-8400
Distributor
Provident Distributors, Inc.
Four Falls Corporate Center, 6th Floor
West Conshohocken, Pennsylvania 19428-2961
Custodian and Transfer Agent
State Street Bank and Trust Company
225 Franklin Street
P.O. Box 1912
Boston, Massachusetts 02105
Legal Counsel
Brown, Todd & Heyburn PLLC
3200 Providian Center
Louisville, Kentucky 40202
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
J. Henning Hilliard
Donald F. Kohler
Samuel G. Miller
J. Robert Shine
OFFICERS
Donald F. Kohler - Chairman
Joseph C. Curry, Jr. - President
Dianna P. Wengler - Vice President and Treasurer
Penny L. Wellinghurst - Secretary
Hilliard-Lyons
Government Fund, Inc.
Semi-Annual Report
February 28, 1999
[LOGO APPEARS HERE]
