<PAGE>
March 16, 2000
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 29, 2000.
Assets of the Fund increased to $1,291.0 billion from $1,108.8 billion during
the six months and $1,087.3 billion a year ago. The Fund now holds just over
80% of the money market assets held in accounts of Hilliard Lyons' customers.
The average seven day yield ranged from a low of 4.62 % to a high of 5.28 %
during the six months. Distributions of $.024882 were paid, equivalent to an
annualized yield of 5.00 %. For those shareholders in the dividend
reinvestment plan, this equates to a compound annual yield of 5.06 %.
For the calendar year ended December 31, 1999, 100% of the dividends paid by
the Fund were exempt from state income tax in all states. This makes the fifth
consecutive year that all dividends paid were fully exempt. The percentage of
dividends paid eligible for exemption can vary as it is dependent on the
investments of the Fund. However, given the current investment strategy of the
Fund which is to invest primarily in short term U.S. government agency
obligations, we believe the dividends paid will be substantially exempt from
state income tax under current tax laws. As shown on the following Schedule of
Investments at February 29, 2000, the Fund was 100% invested in such
securities.
The Federal Reserve (the "Fed") has raised interest rates by raising the
federal funds rate 1/4 of 1% four times since last June 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 now
at 5.75%. This rate is what member banks charge each other for overnight loans
and is a determining factor for other rates from credit cards to mortgages.
Commercial banks' prime lending rate is also up a full percentage point to
8.75%, its highest level in almost five years. This rate is a benchmark for
business and consumer loans.
The U.S. economy is now in its longest expansion ever. In its recently
released survey of regional economic conditions, the Fed indicated the U.S.
economy grew strongly at the start of 2000. The labor market has grown
increasingly tight causing widespread labor shortages and increased wage
pressures for various types of labor both skilled and entry level. Federal
Reserve Chairman Alan Greenspan has publicly reiterated his desire to slow
economic growth and thereby avoid a resurgence of inflation. His remarks seem
to be a clear indication that he is prepared to continue to raise interest
rates until economic growth slows to a more sustainable level.
Stock and bond markets continue to be volatile. The first week in March, the
Dow Jones Industrial Average (the "DJIA") had its largest one day drop of 375
points in over one year. But even as blue chip stocks fell, technology stocks
kept the Nasdaq Index relatively strong with its first advent over 5000 even
though it failed to close the day at that level. The DJIA is about 16% below
its record close on January 14, 2000. A drop of 20% is widely thought to
signal the beginning of a bear market.
There has been some strength in the bond market in reaction to the volatility
of the stock market. Short term Treasury securities have seen increased demand
with some investors taking money out of stocks in a "flight to quality".
The Fund is proud to introduce its newest director, Lindy Richardson. Ms.
Richardson was appointed to the board on November 30, 1999. She has many years
of business experience and we welcome the new ideas and knowledge she brings
to the Fund.
We would like to take this opportunity to emphasize to you some of the
advantages HLGF offers its shareholders. As discussed above, the Fund invests
primarily in short term securities issued by U.S. government agencies which
allows the Fund to pay dividends that are substantially to fully free of state
income tax. Even though HLGF is one of the few money market funds to follow
such a high quality investment strategy, it offers a competitive yield. The
Fund also offers completely free checkwriting with no minimum investment nor
minimum check amount required.
We are committed to offering a high quality money market fund that meets the
needs of today's investor. We will offer new services as they become needed
and/or available.
/s/ Donald F. Kohler /s/ Joseph C. Curry, Jr. /s/ Dianna P. Wengler
DONALD F. KOHLER JOSEPH C. CURRY, JR. DIANNA P. WENGLER
Chairman President Vice President and
Treasurer
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS
(UNAUDITED)
February 29, 2000
<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 5.649% 03/01/00 $15,000,000
6,430,000 Federal Home Loan Bank 5.816 03/01/00 6,430,000
22,038,000 Federal Home Loan Bank 5.717 03/02/00 22,034,621
17,000,000 Federal Home Loan Bank 5.786 03/03/00 16,994,702
11,000,000 Federal Home Loan Bank 5.642 03/06/00 10,991,674
20,000,000 Federal Home Loan Bank 5.666 03/07/00 19,981,733
12,000,000 Federal Home Loan Bank 5.765 03/08/00 11,986,957
10,000,000 Federal Home Loan Bank 5.883 03/08/00 9,988,897
14,000,000 Federal Home Loan Bank 5.650 03/09/00 13,983,013
25,000,000 Federal Home Loan Bank 5.786 03/10/00 24,964,938
19,000,000 Federal Home Loan Bank 5.662 03/13/00 18,965,357
18,000,000 Federal Home Loan Bank 5.663 03/14/00 17,964,445
19,000,000 Federal Home Loan Bank 5.710 03/15/00 18,959,213
14,000,000 Federal Home Loan Bank 5.684 03/16/00 13,967,975
15,000,000 Federal Home Loan Bank 5.723 03/17/00 14,963,000
10,000,000 Federal Home Loan Bank 5.937 03/17/00 9,974,356
23,000,000 Federal Home Loan Bank 5.726 03/20/00 22,932,872
18,000,000 Federal Home Loan Bank 5.763 03/21/00 17,944,300
8,000,000 Federal Home Loan Bank 5.858 03/22/00 7,973,447
9,000,000 Federal Home Loan Bank 5.959 03/22/00 8,969,655
17,000,000 Federal Home Loan Bank 5.883 03/23/00 16,940,783
28,000,000 Federal Home Loan Bank 5.720 03/24/00 27,901,253
15,000,000 Federal Home Loan Bank 5.732 03/27/00 14,939,875
20,000,000 Federal Farm Credit Bank 5.943 03/28/00 19,913,600
5,531,000 Federal Home Loan Bank 5.762 03/28/00 5,508,019
15,000,000 Federal Home Loan Bank 5.688 03/29/00 14,935,367
7,120,000 Federal Home Loan Bank 5.885 03/29/00 7,088,379
17,000,000 Federal Home Loan Bank 5.900 03/30/00 16,921,805
17,000,000 Federal Home Loan Bank 5.787 03/31/00 16,920,383
18,000,000 Federal Farm Credit Bank 5.773 04/03/00 17,907,930
14,000,000 Federal Farm Credit Bank 5.764 04/04/00 13,926,484
25,000,000 Federal Home Loan Bank 5.859 04/05/00 24,861,944
13,000,000 Federal Home Loan Bank 5.818 04/06/00 12,927,070
20,000,000 Federal Home Loan Bank 5.772 04/07/00 19,885,506
19,000,000 Federal Home Loan Bank 5.783 04/10/00 18,882,200
15,000,000 Federal Home Loan Bank 5.781 04/11/00 14,904,333
15,000,000 Federal Home Loan Bank 5.781 04/12/00 14,902,000
14,000,000 Federal Home Loan Bank 5.954 04/13/00 13,903,847
20,000,000 Federal Home Loan Bank 5.548 04/14/00 19,869,956
10,000,000 Federal Home Loan Bank 5.893 04/17/00 9,925,583
20,000,000 Federal Home Loan Bank 5.787 04/18/00 19,850,667
16,000,000 Federal Home Loan Bank 5.786 04/19/00 15,878,044
12,000,000 Federal Home Loan Bank 5.781 04/19/00 11,908,533
15,000,000 Federal Farm Credit Bank 5.830 04/20/00 14,883,125
20,000,000 Federal Home Loan Bank 5.831 04/24/00 19,830,500
</TABLE>
See notes to financial statements.
2
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS
(UNAUDITED)
February 29, 2000
<TABLE>
<CAPTION>
Principal Purchase Maturity
Amount Yield Date Value
----------- -------- -------- --------------
<C> <S> <C> <C> <C>
$23,000,000 Federal Home Loan Bank 5.794% 04/25/00 $ 22,802,168
16,000,000 Federal Home Loan Bank 5.869 04/26/00 15,858,382
9,000,000 Federal Home Loan Bank 5.889 04/26/00 8,920,060
20,000,000 Federal Farm Credit Bank 5.880 04/27/00 19,819,500
15,000,000 Federal Home Loan Bank 5.911 04/28/00 14,862,492
6,000,000 Federal Home Loan Bank 5.880 05/01/00 5,942,050
9,000,000 Federal Home Loan Bank 5.942 05/01/00 8,912,160
18,000,000 Federal Farm Credit Bank 5.817 05/02/00 17,826,710
23,000,000 Federal Home Loan Bank 5.821 05/03/00 22,774,600
15,000,000 Federal Home Loan Bank 5.965 05/04/00 14,845,867
18,000,000 Federal Home Loan Bank 5.901 05/05/00 17,814,100
15,000,000 Federal Home Loan Bank 5.853 05/08/00 14,839,917
15,000,000 Federal Home Loan Bank 5.853 05/09/00 14,837,563
20,000,000 Federal Home Loan Bank 5.828 05/10/00 19,780,667
24,000,000 Federal Home Loan Bank 5.853 05/11/00 23,732,567
12,516,000 Federal Home Loan Bank 5.855 05/12/00 12,374,319
10,000,000 Federal Home Loan Bank 5.930 05/12/00 9,884,800
22,000,000 Federal Home Loan Bank 5.839 05/15/00 21,741,500
10,000,000 Federal Home Loan Bank 5.829 05/16/00 9,880,933
12,000,000 Federal Home Loan Bank 5.932 05/17/00 11,852,417
15,000,000 Federal Home Loan Bank 5.876 05/18/00 14,815,725
18,000,000 Federal Home Loan Bank 5.887 05/19/00 17,775,640
16,000,000 Federal Home Loan Bank 5.870 05/22/00 15,792,996
12,000,000 Federal Home Loan Bank 5.881 05/23/00 11,842,577
10,000,000 Federal Home Loan Bank 5.974 05/24/00 9,864,900
12,000,000 Federal Home Loan Bank 5.983 05/24/00 11,837,600
18,000,000 Federal Home Loan Bank 5.984 05/26/00 17,750,600
14,000,000 Federal Home Loan Bank 5.963 05/30/00 13,797,700
13,000,000 Federal Farm Credit Bank 6.001 06/05/00 12,800,320
21,000,000 Federal Home Loan Bank 5.975 06/06/00 20,674,080
19,000,000 Federal Farm Credit Bank 5.962 06/08/00 18,699,563
12,000,000 Federal Home Loan Bank 5.962 06/12/00 11,802,583
16,000,000 Federal Home Loan Bank 5.961 06/14/00 15,731,667
21,000,000 Federal Home Loan Bank 5.993 06/15/00 20,642,603
14,000,000 Federal Home Loan Bank 6.001 06/16/00 13,759,072
16,000,000 Federal Home Loan Bank 6.028 07/06/00 15,672,622
12,000,000 Federal Home Loan Bank 6.083 07/14/00 11,736,750
20,000,000 Federal Home Loan Bank 6.115 07/24/00 19,527,944
--------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(amortized cost--$1,294,116,052) 1,294,116,052
--------------
TOTAL INVESTMENTS (100.2%) (cost--
$1,294,116,052*) $1,294,116,052
==============
</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 29, 2000
<TABLE>
<S> <C>
ASSETS
Investments in money market instruments, at value:
United States Government Agency Obligations, at value
(amortized cost--$1,294,116,052)............................. $1,294,116,052
--------------
Total Investments............................................ 1,294,116,052
Cash........................................................... 1,989
Prepaid expenses............................................... 41,695
--------------
TOTAL ASSETS................................................. 1,294,159,736
--------------
LIABILITIES
Dividends payable.............................................. 2,631,623
Due to J.J.B. Hilliard, W.L. Lyons, Inc.--Note B............... 307,795
Miscellaneous accrued expenses................................. 196,470
--------------
TOTAL LIABILITIES............................................ 3,135,888
--------------
NET ASSETS (equivalent to $1.00 per share; 1,500,000,000 shares
authorized and 1,291,023,848 shares issued and outstanding)--
Note C........................................................ $1,291,023,848
==============
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
For the six months ended February 29, 2000
INVESTMENT INCOME
Interest income................................................ $ 33,532,850
EXPENSES
Investment Advisory fee--Note B................................ 1,836,936
Shareholder servicing fees--Note B............................. 779,744
Transfer agent fees............................................ 45,656
Custodian fees................................................. 116,720
Printing and other expenses.................................... 63,700
Filing fees.................................................... 91,000
Insurance expense.............................................. 35,957
Legal and audit fees........................................... 32,320
Directors' fees................................................ 11,830
--------------
Total expenses................................................ 3,013,863
--------------
Net investment income......................................... 30,518,987
--------------
Net increase in net assets resulting from operations.......... $ 30,518,987
==============
</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 29 Year Ended
2000 August 31
(UNAUDITED) 1999
INCREASE IN NET ASSETS: -------------- --------------
<S> <C> <C>
FROM OPERATIONS
Net investment income.......................... $ 30,518,987 $ 48,811,417
-------------- --------------
Net increase in net assets resulting from
operations................................... 30,518,987 48,811,417
Dividends to shareholders ($.024882 and
$.045545 per share, respectively)............. ( 30,518,987) ( 48,411,417)
-------------- --------------
Undistributed net investment income............ 0 0
-------------- --------------
FROM CAPITAL SHARE TRANSACTIONS
Net capital share transactions (at $1.00 per
share)--Note C................................ 182,206,892 163,851,133
NET ASSETS
Beginning of period............................ 1,108,816,956 944,965,823
-------------- --------------
End of period.................................. $1,291,023,848 $1,108,816,956
============== ==============
</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 29,
2000 For the year ended August 31,
(UNAUDITED) 1999 1998 1997 1996 1995
------------ ---------- -------- -------- -------- --------
<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 .05
---------- ---------- -------- -------- -------- --------
Total from investment
operations............ .02 .05 .05 .05 .05 .05
Less distributions:
Dividend distributions. (.02) (.05) (.05) (.05) (.05) (.05)
---------- ---------- -------- -------- -------- --------
Total distributions.... (.02) (.05) (.05) (.05) (.05) (.05)
---------- ---------- -------- -------- -------- --------
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)........ 1,291,024 1,108,817 944,966 587,080 427,494 335,776
Total investment return. 2.51% 4.65% 5.11% 4.96% 4.96% 5.04%
SIGNIFICANT RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period
(000's omitted)....... $1,291,024 $1,108,817 $944,966 $587,080 $427,494 $335,776
Operating expenses to
average net assets.... .50%(a) .46% .51% .57% .61% .72%
Net investment income
to average net assets. 5.02%(a) 4.55% 4.99% 4.86% 4.84% 4.97%
</TABLE>
(a) Annualized
See notes to financial statements
5
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A--ACCOUNTING POLICIES
Hilliard-Lyons Government Fund, Inc. (the "Fund") is a diversified open-end
management investment company registered under the Investment Company Act of
1940, as amended. The following is a summary of significant accounting
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, 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
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 six months ended
February 29, 2000.
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.
6
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTE C--CAPITAL STOCK
The Fund was incorporated in June 1980 under the laws of the state of Maryland.
At February 29, 2000, there were 1,500,000,000 shares of $.01 par value Common
Stock authorized, and capital paid in aggregated $1,278,113,610. Transactions
in Fund shares at $1.00 per share were as follows:
<TABLE>
<CAPTION>
Six months
ended Year ended
February 29, August 31,
2000 1999
-------------- --------------
<S> <C> <C>
Shares sold.................................... 2,420,485,526 3,681,335,182
Shares issued to shareholders in reinvestment
of dividends.................................. 29,497,704 47,633,042
-------------- --------------
1,745,348,326 3,728,968,224
Less shares repurchased........................ (2,267,776,338) (3,565,117,091)
-------------- --------------
Net increase in capital shares................. 182,206,892 163,851,133
============== ==============
</TABLE>
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.
3200 Horizon Drive
King of Prussia, Pennsylvania 19406
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
Lindy B. Richardson
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 29, 2000
[HILLARD LYONS LOGO APPEARS HERE]
