<PAGE>
September 19, 2000
Dear Shareholder:
We are pleased to present this report on the Hilliard-Lyons Government Fund
("HLGF" or the "Fund") for the year ended August 31, 2000.
Net assets of the Fund continued to increase and were $1,366.4 billion at year
end compared to $1,108.8 billion last year, an increase of 23.2%. The average
seven day yield ranged from a low of 4.62% to a high of 6.12% during the year.
Distributions of $.053838 were paid to shareholders, equivalent to an
annualized return of 5.38%. For those shareholders reinvesting their
dividends, this equates to a compound annual return of 5.52%. The current
yield is 6.10%.
As shown in the Schedule of Investments beginning on the next page, the Fund
continued to invest exclusively in short-term discount notes issued by the
Federal Home Loan and Federal Farm Credit Banks. We believe these securities
offer an attractive yield with a high degree of credit safety. Investments in
these securities have the added benefit of allowing the Fund to pay dividends
that pass through to our shareholders as income and this income is free of
state income taxes in all states under current tax laws.
The Fund's expense ratio of 0.48% is its second lowest in the past ten years
and is significantly lower than the average for similar money market funds.
Dividends paid to shareholders are derived from the Fund's income net of
expenses, so this lower than average expense ratio directly benefits our
shareholders. The larger asset size of the Fund has had a significant impact
on the expenses of the Fund. In the past five years, assets of the Fund have
increased more than $1 billion, a greater than 300% increase while the number
of shareholder accounts more than quadrupled. The increase in fees for
shareholder services has been offset by the lower management fee paid on
assets over $300 million. At its current size, the Fund would pay an
investment advisory fee of approximately 0.30%. The calculation of the amount
of the investment advisory fee is detailed in the Notes to Financial
Statements on page six of this report.
The higher dividends paid by the Fund this year are a reflection of actions
taken by the Federal Reserve (the "Fed") to boost interest rates in an effort
to slow economic growth enough to ward off inflation. The Fed has raised
interest rates by raising the federal funds rate, the rate banks charge one
another for overnight loans. The latest rate increase of 1/2 of 1% in May 2000
was the largest in the past five years and followed five 1/4 of 1% rate
increases since June 1999. However, not all interest rates that affect
consumers have kept up with the Fed increases. The prime rate has moved in
tandem with the Fed action taking with it certain rates tied to it such as
rates on home equity loans. Others such as 30 year mortgage rates are barely
higher than they were one year ago. The Fed has left rates unchanged at its
last two meetings, leading some economists to believe that Fed officials
believe the economy has slowed enough to ward off inflation. Others believe
that while there is no doubt that the economy has slowed, it remains to be
seen whether it is only a temporary pause.
The rise in interest rates is a contributing factor to a lackluster year so
far for equity markets. Stock prices had picked up somewhat in response to the
Fed's halt in raising rates but have since been affected by the very same
reason for the Fed's inaction--slower economic growth. Questions about the
impact of slower economic growth on corporate profits are weighing on equity
markets. Any hint that a company will not meet its earnings projections
quickly ignites selling, sending prices down. The upcoming November elections
are gradually being discounted by the equity markets. Amid this uncertainty
some investors are developing a wait and see attitude.
HLGF remains the number one choice for temporary client funds at Hilliard
Lyons. We are committed to delivering a high quality money market fund which
meets the needs and expectations of our customers.
DONALD F. KOHLER JOSEPH C. CURRY, JR. DIANNA P. WENGLER
Chairman President Vice President and
Treasurer
<PAGE>
HILLIARD-LYONS GOVERNMENT FUND, INC.
SCHEDULE OF INVESTMENTS
August 31, 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.
2
<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.
3
<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.
4
<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
5
<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>
6
<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
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
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.
Annual Report
August 31, 2000
