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STATEMENT OF ADDITIONAL INFORMATION
Dated December 1, 2000
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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, 2000 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.
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TABLE OF CONTENTS
<TABLE>
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Page
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<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
CODE OF ETHICS............................................................. 9
NET ASSET VALUE............................................................ 10
REDEMPTION................................................................. 10
Redemption by Telephone................................................... 11
Redemption by Mail........................................................ 12
Redemption by Check....................................................... 12
Redemption by Systematic Withdrawal Plan.................................. 12
YIELD INFORMATION.......................................................... 12
ADDITIONAL INFORMATION..................................................... 13
FINANCIAL STATEMENTS....................................................... 14
REPORT OF INDEPENDENT AUDITORS............................................. 19
</TABLE>
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FUND HISTORY
The Fund was incorporated under the laws of Maryland on June 5, 1980, and
has an authorized capital consisting of 2,000,000,000 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
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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
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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* 69 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+ 84 Director Retired, former Senior
4506 River Road Executive and Director, J.
Louisville, Kentucky J. B. Hilliard, W. L.
40207 Lyons, Inc.
J. Robert Shine+ 76 Director Chairman and Certified
222 East Market Street Public Accountant, Monroe
New Albany, Indiana Shine & Co., Inc.
47150
Samuel G. Miller+ 75 Director Retired, former Chairman of
402 Wynfield Close Vineyard Village
Court
Louisville, Kentucky
40206
Lindy B. Richardson+ 54 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.* 55 President Senior Vice President, J. J.
Hilliard Lyons Center B. Hilliard, W. L. Lyons,
Louisville, Kentucky Inc.
40202
Dianna P. Wengler* 40 Vice President and Treasurer Vice President, J. J. B.
Hilliard Lyons Center Hilliard, W. L. Lyons, Inc.
Louisville, Kentucky
40202
Penny L. Wellinghurst* 44 Secretary Investment Advisory
Hilliard Lyons Center Department, J. J. B.
Louisville, Kentucky Hilliard, W. L. Lyons, Inc.
40202
</TABLE>
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*An "interested person", as defined by the Investment Company Act of 1940.
+Member of Audit Committee.
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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 $5,000, a fee of $1,000 for each meeting
of 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, 2000,
unaffiliated directors received, in the aggregate, $26,385 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, 2000.
<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
J. Henning Hilliard..... $7,750 0 0 $7,750
Samuel J. Miller........ $7,750 0 0 $7,750
J. Robert Shine......... $7,750 0 0 $7,750
Lindy B. Richardson(2).. $3,135 0 0 $3,135
</TABLE>
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(1) Directors who are "interested" do not receive compensation from the Fund.
(2) 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 was reapproved for one year on October 4, 2000, by the Board of
Directors, including a majority of the directors who are not interested
persons of Hilliard-Lyons. The Agreement will continue in effect from year to
year, 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 of 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.
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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, 1998, 1999 and 2000,
Hilliard-Lyons earned advisory fees, based on the formula described above,
totalling $2,550,536, $3,309,576 and $3,804,254, 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, 1998, 1999, or 2000.
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
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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 Financial Services Group, Inc.; Thomas K.
Whitford, Director, Chief Executive Officer--PNC Advisors, Executive Vice
President--PNC Financial Services Group Inc.; 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 April 30, 2000
(the "Distribution Agreement") with Hilliard-Lyons (the "Distributor"). The
terms of the Distribution Agreement were approved on April 27, 2000, 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) or 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.
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.
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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.
CODE OF ETHICS
Pursuant to Rule 17j-1(b)(1) of the Investment Company Act of 1990, the Fund
has adopted a Code of Ethics (the "Code") that governs the conduct of
directors and officers who may have access to information about the Fund's
securities transactions. The Code recognizes that such persons owe a fiduciary
duty to the Fund's shareholders and must place the interests of shareholders
ahead of their own interests. Under the Code, officers and directors may
purchase or sell directly or indirectly, securities held or to be acquired by
the Fund.
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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.
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<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 $1.00.
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.
11
<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.
12
<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, 2000.
<TABLE>
<S> <C>
Total dividends per share from net investment income (seven
days ended August 31, 2000)................................... $ .00117
Annualized (365 day basis)..................................... $ .06117
Average NAV per share.......................................... $1.00
Annualized net yield per share for seven calendar days ended
August 31, 2000............................................... 6.12%
</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.
13
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS
August 31, 2000
<TABLE>
<CAPTION>
Principal Purchase Maturity
Amount Yield Date Value
----------- -------- -------- -----------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS--100.3%
$15,000,000 Federal Home Loan Bank 6.629% 09/01/00 $15,000,000
15,000,000 Federal Home Loan Bank 6.386 09/01/00 15,000,000
9,690,000 Federal Home Loan Bank 6.620 09/01/00 9,690,000
24,000,000 Federal Home Loan Bank 6.639 09/05/00 23,982,880
20,000,000 Federal Home Loan Bank 6.635 09/06/00 19,982,167
14,796,000 Federal Home Loan Bank 6.617 09/07/00 14,780,218
10,166,000 Federal Home Loan Bank 6.419 09/08/00 10,153,863
12,000,000 Federal Home Loan Bank 6.656 09/08/00 11,984,973
27,000,000 Federal Home Loan Bank 6.600 09/11/00 26,952,150
15,000,000 Federal Home Loan Bank 6.620 09/12/00 14,970,667
18,000,000 Federal Home Loan Bank 6.656 09/13/00 17,961,360
9,000,000 Federal Home Loan Bank 6.633 09/13/00 8,980,680
17,000,000 Federal Home Loan Bank 6.748 09/14/00 16,960,097
15,000,000 Federal Home Loan Bank 6.666 09/15/00 14,962,375
15,000,000 Federal Home Loan Bank 6.680 09/15/00 14,962,258
14,000,000 Federal Home Loan Bank 6.752 09/18/00 13,957,028
30,000,000 Federal Home Loan Bank 6.633 09/19/00 29,903,850
16,000,000 Federal Home Loan Bank 6.677 09/20/00 15,945,449
12,000,000 Federal Home Loan Bank 6.688 09/20/00 11,958,960
15,000,000 Federal Home Loan Bank 6.612 09/21/00 14,946,750
25,000,000 Federal Home Loan Bank 6.687 09/22/00 24,905,646
25,000,000 Federal Home Loan Bank 6.622 09/25/00 24,893,333
25,000,000 Federal Farm Credit Bank 6.547 09/26/00 24,889,410
30,000,000 Federal Home Loan Bank 6.713 09/27/00 29,859,275
17,000,000 Federal Farm Credit Bank 6.540 09/28/00 16,919,038
18,000,000 Federal Home Loan Bank 6.656 09/29/00 17,909,840
15,000,000 Federal Farm Credit Bank 6.573 10/02/00 14,917,592
22,000,000 Federal Farm Credit Bank 6.564 10/03/00 21,875,236
18,000,000 Federal Home Loan Bank 6.621 10/04/00 17,894,565
23,000,000 Federal Home Loan Bank 6.610 10/06/00 22,856,889
10,000,000 Federal Farm Credit Bank 6.694 10/10/00 9,930,017
28,000,000 Federal Home Loan Bank 6.603 10/11/00 27,801,200
18,000,000 Federal Farm Credit Bank 6.578 10/12/00 17,869,210
20,000,000 Federal Home Loan Bank 6.614 10/13/00 19,850,667
24,000,000 Federal Home Loan Bank 6.518 10/16/00 23,809,800
13,000,000 Federal Farm Credit Bank 6.534 10/17/00 12,894,519
34,000,000 Federal Home Loan Bank 6.645 10/18/00 33,714,579
10,000,000 Federal Farm Credit Bank 6.531 10/19/00 9,915,200
24,000,000 Federal Home Loan Bank 6.635 10/20/00 23,790,280
18,000,000 Federal Home Loan Bank 6.582 10/23/00 17,834,380
18,000,000 Federal Home Loan Bank 6.613 10/25/00 17,827,470
25,000,000 Federal Home Loan Bank 6.852 10/27/00 24,745,667
29,000,000 Federal Farm Credit Bank 6.560 10/30/00 28,696,773
19,000,000 Federal Home Loan Bank 6.650 11/01/00 18,792,829
27,000,000 Federal Home Loan Bank 6.739 11/02/00 26,698,913
</TABLE>
See notes to financial statements.
14
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS
August 31, 2000
<TABLE>
<CAPTION>
Principal Purchase Maturity
Amount Yield Date Value
----------- -------- -------- --------------
<C> <S> <C> <C> <C>
$20,000,000 Federal Home Loan Bank 6.614% 11/03/00 $ 19,776,000
24,000,000 Federal Home Loan Bank 6.716 11/06/00 23,716,200
18,000,000 Federal Farm Credit Bank 6.567 11/07/00 17,786,605
25,000,000 Federal Home Loan Bank 6.582 11/08/00 24,699,194
18,000,000 Federal Home Loan Bank 6.582 11/10/00 17,777,050
22,000,000 Federal Farm Credit Bank 6.583 11/13/00 21,714,935
20,000,000 Federal Home Loan Bank 6.603 11/15/00 19,733,750
21,000,000 Federal Farm Credit Bank 6.578 11/16/00 20,717,153
16,000,000 Federal Home Loan Bank 6.603 11/17/00 15,781,320
30,000,000 Federal Home Loan Bank 6.712 11/20/00 29,570,667
15,000,000 Federal Home Loan Bank 6.557 11/21/00 14,786,025
24,000,000 Federal Home Loan Bank 6.603 11/22/00 23,650,680
29,000,000 Federal Home Loan Bank 6.582 11/24/00 28,568,963
16,000,000 Federal Farm Credit Bank 6.586 11/28/00 15,751,644
23,000,000 Federal Home Loan Bank 6.624 11/29/00 22,635,520
15,000,000 Federal Farm Credit Bank 6.587 12/04/00 14,750,900
12,000,000 Federal Farm Credit Bank 6.656 12/08/00 11,791,260
20,000,000 Federal Home Loan Bank 6.632 12/11/00 19,643,694
10,000,000 Federal Home Loan Bank 6.668 12/12/00 9,818,950
11,000,000 Federal Home Loan Bank 6.690 12/12/00 10,800,533
10,000,000 Federal Home Loan Bank 6.699 01/02/01 9,782,017
8,000,000 Federal Home Loan Bank 6.735 01/03/01 7,822,542
10,000,000 Federal Home Loan Bank 6.798 01/03/01 9,777,144
24,415,000 Federal Home Loan Bank 6.737 01/05/01 23,864,686
20,000,000 Federal Home Loan Bank 6.674 01/12/01 19,527,850
15,000,000 Federal Home Loan Bank 6.666 01/16/01 14,635,808
26,000,000 Federal Home Loan Bank 6.709 01/24/01 25,329,778
23,000,000 Federal Home Loan Bank 6.749 01/26/01 22,396,115
--------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(amortized cost--$1,370,735,036) 1,370,735,036
--------------
TOTAL INVESTMENTS (100.3%) (cost--
$1,370,735,036*) $1,370,735,036
==============
</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.
15
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2000
<TABLE>
<S> <C>
ASSETS
Investments in money market instruments, at value:
United States Government Agency Obligations, at value
(amortized cost--$1,370,735,036)............................. $1,370,735,036
--------------
Total Investments............................................ 1,370,735,036
Cash........................................................... 2,961
Prepaid expenses............................................... 5,027
--------------
TOTAL ASSETS................................................. 1,370,743,024
--------------
LIABILITIES
Dividends payable.............................................. 3,685,797
Due to J.J.B. Hilliard, W.L. Lyons, Inc.--Note B............... 343,600
Miscellaneous accrued expenses................................. 291,503
--------------
TOTAL LIABILITIES............................................ 4,320,900
--------------
NET ASSETS (equivalent to $1.00 per share; 1,500,000,000 shares
authorized and 1,366,422,124 shares issued and outstanding)--
Note C........................................................ $1,366,422,124
==============
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF OPERATIONS
For the year ended August 31, 2000
INVESTMENT INCOME
Interest income................................................ $ 74,648,995
EXPENSES
Investment Advisory fee--Note B................................ 3,804,254
Shareholder servicing fees--Note B............................. 1,608,934
Transfer agent fees............................................ 94,066
Custodian fees................................................. 213,390
Printing and other expenses.................................... 156,477
Filing fees.................................................... 127,700
Insurance expense.............................................. 30,467
Legal and audit fees........................................... 71,880
Directors' fees................................................ 26,930
--------------
Total expenses................................................ 6,134,098
--------------
Net investment income......................................... 68,514,897
--------------
Net increase in net assets resulting from operations.......... $ 68,514,897
==============
</TABLE>
See notes to financial statements.
16
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the year ended August 31,
------------------------------
2000 1999
INCREASE IN NET ASSETS: -------------- --------------
<S> <C> <C>
FROM OPERATIONS
Net investment income.......................... $ 68,514,897 $ 48,811,417
-------------- --------------
Net increase in net assets resulting from
operations................................... 68,514,897 48,811,417
Dividends to shareholders ($.053838 and
$.045545 per share, respectively)............. ( 68,514,897) ( 48,811,417)
-------------- --------------
Undistributed net investment income............ 0 0
-------------- --------------
FROM CAPITAL SHARE TRANSACTIONS
Net capital share transactions (at $1.00 per
share)--Note C................................ 257,605,168 163,851,133
NET ASSETS
Beginning of year.............................. 1,108,816,956 944,965,823
-------------- --------------
End of year.................................... $1,366,422,124 $1,108,816,956
============== ==============
</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,
----------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- -------- -------- --------
<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)................ 1,366,422 1,108,817 944,966 587,080 427,494
Total investment return.. 5.52% 4.65% 5.11% 4.96% 4.96%
SIGNIFICANT RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of year
(000's omitted)........ $1,366,422 $1,108,817 $944,966 $587,080 $427,494
Operating expenses to
average net assets..... .48% .46% .51% .57% .61%
Net investment income to
average net assets..... 5.41% 4.55% 4.99% 4.86% 4.84%
</TABLE>
See notes to financial statements.
17
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
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
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, 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 $5,000, a fee of $1,000 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, 2000, there were 1,500,000,000 shares of $.01 par
value Common Stock authorized, and capital paid in aggregated $1,352,757,903.
Transactions in Fund shares at $1.00 per share were as follows:
<TABLE>
<CAPTION>
For the year ended August 31,
------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Shares sold.................................... 5,027,027,063 3,681,335,182
Shares issued to shareholders in reinvestment
of dividends.................................. 65,686,096 47,633,042
-------------- --------------
5,092,713,159 3,728,968,224
Less shares repurchased........................ (4,835,107,991) (3,565,117,091)
-------------- --------------
Net increase in capital shares................. 257,605,168 163,851,133
============== ==============
</TABLE>
18
<PAGE>
Report of 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, 2000, 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 auditing standards generally
accepted in the United States. 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, 2000, 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, 2000, 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 accounting principles generally accepted
in the United States.
[SIGNATURE LOGO FOR ERNST & YOUNG]
September 26, 2000
Louisville, Kentucky
19
<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.*
(1.2) 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 J.J.B. Hilliard,
W.L. Lyons, 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) Not applicable.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Code of Ethics
C-1
<PAGE>
(19) Consent of Frost Brown Todd LLC.
(20) Power of Attorney executed by Lindy B. Richardson
-----------
* 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 J.J.B. Hillard,
W.L. Lyons, 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 113 offices and more than 648
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 August 30, 2000) filed on or about August 30,
2000 for Hilliard-Lyons.
<TABLE>
<CAPTION>
Name and Address of Company
Name and Title of Officers of J.J.B. with which officer or Director
Hilliard, W.L. Lyons, Inc. is connected Capacity
<S> <C> <C>
James W. Stuckert Royal Gold, Inc. Director
Chairman and Chief Executive Officer 1600 Wynkoop Street, Suite 1000
Chief Executive Officer Denver, CO 80202
James W. Stuckert Thomas Transportation Group, Inc. Director
3600 Chamberlain Lane, Suite 610
Louisville, KY 40241
James M. Rogers None
Executive Vice President,
Chief Operating Officer and Director
James R. Allen None
Executive Vice President,
and Director
E. Neal Cory, II None
Executive Vice President,
and Director
Paul J. Moretti None
Senior Vice President and Chief
Financial Officer
Kenneth L. Wagner None
Senior Vice President and Secretary
Ralph S. Michael III T.H.E., Inc. Director
Director, Chief Executive Officer- 2545 E. 11th Street
Corporate Banking PNC, Executive Tulsa, OK 74104
Vice President-PNC Financial
Services Group, Inc.
Thomas K. Whitford, Director, None
Chief Executive Officer-PNC Advisors,
Executive Vice President-PNC
Financial Services Group, Inc.
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) J.J.B. Hilliard, W.L. Lyons Inc. is Registrant's principal underwriter.
J.J.B. Hilliard, W.L. Lyons 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 J.J.B. Hilliard, W.L. Lyons Inc., the Registrant's principal
underwriter:
<TABLE>
<CAPTION>
POSITION WITH
NAME AND PRINCIPAL UNDERWRITER POSITION WITH
BUSINESS ADDRESS (DISTRIBUTOR) REGISTRANT
------------------ ------------- -------------
<S> <C> <C>
James M. Rogers Executive Vice President, None
Hilliard Lyons Center Chief Operating Officer,
Louisville, KY 40202 Director
---------------------------------------------------------------------
James R. Allen Executive Vice President, None
Hilliard Lyons Center Director, Branch and
Louisville, KY 40202 Marketing Administration,
Director
---------------------------------------------------------------------
James W. Stuckert Chief Executive Officer, None
Hilliard Lyons Center Chairman
Louisville, KY 40202
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
E. Neal Cory, II Executive Vice President, None
Hilliard Lyons Center Director Investment
Louisville, KY 40202 Management Group, Director
---------------------------------------------------------------------
Paul J. Moretti Senior Vice President None
Hilliard Lyons Center and Chief Financial
Louisville, KY 40202 Officer
---------------------------------------------------------------------
Kenneth L. Wagner Senior Vice President None
Hilliard Lyons Center and Secretary
Louisville, KY 40202
---------------------------------------------------------------------
Ralph S. Michael III Director None
One PNC Plaza
Pittsburgh, PA 15222
---------------------------------------------------------------------
Thomas K. Whitford Director None
One PNC Plaza
Pittsburgh, PA 15222
---------------------------------------------------------------------
</TABLE>
C-2
<PAGE>
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.
C-3
<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 (b) 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/th/ DAY OF NOVEMBER,
2000.
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 November 27, 2000
------------------------------------ (Principal Executive
Donald F. Kohler Officer)
/s/ J. Henning Hilliard Director* November 27, 2000
------------------------------------
J. Henning Hilliard
/s/ J. Robert Shine Director* November 27, 2000
------------------------------------
J. Robert Shine
/s/ Samuel G. Miller Director* November 27, 2000
------------------------------------
Samuel G. Miller
/s/ Lindy B. Richardson Director* November 27, 2000
------------------------------------
Lindy B. Richardson
*By: /s/ DONALD F. KOHLER
--------------------------------
Donald F. Kohler
Attorney-in-Fact
</TABLE>
C-4
