<PAGE>
September 29, 1999
Dear Shareholder:
We are pleased to present this report on the Hilliard-Lyons Government Fund,
Inc. ("HLGF" or the "Fund") for the year ended August 31, 1999.
The Fund ended the year with net assets of $1.1 billion compared to $945
million a year ago. Net assets have been $1 billion plus since first crossing
that threshold last November. The average seven day yield ranged from a low of
4.37 % to a high of 4.65% during the year. Distributions of $.045545 were
paid, equivalent to an annualized yield of 4.55%. For those shareholders in
the dividend reinvestment plan, this equates to a compound annual yield of
4.65%.
The Federal Reserve (the "Fed") raised interest rates by raising the federal
funds rate 1/4 of 1% twice so far this year in an effort to keep the economy
from overheating and in an attempt to control inflation. These were the first
interest rate hikes since 1995. 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. Consumer confidence slipped in September
for the third consecutive month suggesting that the Fed's higher interest rate
strategy is working to cool off the economy. Even at lower levels, consumer
confidence levels are still at historically high levels with consumers
generally optimistic about both the economy and job prospects.
Growth in the U.S. economy slowed to an annual rate of 1.6% in the second
quarter as measured by the gross domestic product (the total output of goods
and services)--the slowest growth since the spring of 1995. Figures for the
third quarter are not available yet but many expect a rebound to 4% or higher.
These economic signals leave opinions mixed as to what if any further actions
the Fed will take this year.
This uncertainty about the interest rate plans of the Fed has weighed heavily
on the stock and bond markets. Stock prices also have been affected by concern
about corporate earnings. The Dow Jones Industrial Average ("DJIA"), peaked at
over 11,000 in August but has since fallen to the low to mid 10,000 range.
Falling stock prices generally increase the appeal of bond investments but
fear of rising interest rates has kept the bond market somewhat bearish.
Treasury prices have been sharply lower despite the weakness in the DJIA.
As shown on the attached Schedule of Investments, the Fund was 100% invested
in U.S. government agency obligations on August 31, 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 Fund to offer a competitive yield
and an added advantage of income which is exempt from state income tax. The
percentage of dividends eligible for exemption varies as it is dependent on
the investments of the Fund, but given the current investment strategy, we
believe the dividends paid this year will be substantially exempt from state
income tax under current tax laws.
The Fund has maintained an asset base over $1 billion since first crossing
that threshold last November. This increase in asset size has led to a
corresponding increase in the number of shareholders. HLGF recently became
registered for sale in all 50 states in order to accommodate shareholders and
prospective shareholders nationwide.
As we approach the next millennium we are committed to following the same
investment strategy that has served us so well. Quality and safety are our top
priorities. We will continue to do our best to offer a competitive product
without sacrificing these priorities.
/s/ Donald F. Kohler
/s/ Joseph C. Curry, Jr.
/s/ Dianna P. Wengler
DONALD F. KOHLER JOSEPH C. CURRY, JR. DIANNA P. WENGLER
Chairman President Vice President and
Treasurer
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS
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.
2
<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.
3
<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.
4
<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
5
<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>
6
<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
7
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
Hilliard Lyons Center
Louisville, Kentucky 40202
(502) 588-8400
Investment Adviser and Distributor
J.J.B. Hilliard, W.L. Lyons, Inc.
Hilliard Lyons Center
Louisville, Kentucky 40202
(502) 588-8400
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
400 West Market Street, 32nd Floor
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.
Annual Report
August 31, 1999
