<PAGE>
October 30, 1996
Dear Shareholder:
The Hilliard Lyons Growth Fund made good headway in the third quarter of
1996, advancing 4.3%. This progress surpassed that of the S&P 500 which grew
at a rate of 3.1%. For the year, the Fund was moderately behind the S&P 500.
It advanced by 11.7% compared to 13.5% for the index for the nine months.
Also, we are pleased to report that at the Fund's third quarter Board meeting,
Hilliard Lyons Investment Advisors volunteered to reimburse the Fund for
annual expenses incurred which exceed 1.30% of the Fund's net assets. This has
the effect of capping the expense ratio at this level. We think this is
appropriate in light of the increased asset size of the Fund which has grown
from $20.5 million at the beginning of 1995 to $33.5 million today.
THIRD QUARTER FUND DEVELOPMENTS
Though the steady progress in the market continued for the quarter, this
period was unusual. It was punctuated by a severe and rapid decline in July.
At one point during the month, the general market was down 10%. The Growth
Fund held up well during this period and, as the third quarter results show,
has participated fully in the recovery. We are glad to see this as it
validates our view that the Fund's holdings tend to hold up better in
declines, but do not give up the upside in good markets. We hope this
characteristic of the Fund continues to be true moving forward. The business
progress of the Fund's companies has generally been in line with expectations,
though there are some notable exceptions both positive and negative. The
earnings of Synovus Financial Corporation have increased in an outstanding
fashion, growing more rapidly than we would have guessed. The same has been
true for Dover, Donaldson, and Johnson & Johnson. On the downside, we have
seen some disappointments in PepsiCo and International Flavors. We continue to
believe that we have a portfolio of truly outstanding enterprises with
business characteristics far better than the average U.S. company.
We are taking advantage of our ability to concentrate more heavily since
becoming a non-diversified fund. Most notable is a sizable position in
Cincinnati Financial Corporation. We have become increasingly comfortable with
this business, which reminds us somewhat of Warren Buffett's Berkshire
Hathaway. Its growth, like Berkshire's, comes from both full ownership of
operating businesses plus large investments in outstanding growth stocks. In
Cincinnati's case, the single business holding is ownership in what we believe
to be a very sound insurance company. It holds in its investment portfolio 20%
of Fifth Third Bank plus large positions in Exxon, Procter & Gamble, National
City Corp., Merck and some other fine companies. We hope that Cincinnati
Financial will make a fine contribution to our returns.
OUTLOOK--SHIFTING SANDS
A new science developed several years ago and was given the peculiar name
"complexity". This science was to deal with "complex adaptive systems". You
are a complex adaptive system, being a very complicated biological machine and
adapting regularly to the environment. One of the major, and perhaps not so
original, thoughts in this science is that too rapid change creates chaos and
is disastrous. Equally bad is no change at all which creates rot. A second
observation of the science is that often major change occurs inexplicably
rapidly when in fact unseen tensions were preparing the change all along. The
example of continuously dropping one grain of sand onto a pile which
eventually leads to a sudden shift is given.
Continued . . . . .
1
<PAGE>
There is applicability of this framework continuously in the financial
markets and the economy. For example, in the aftermath of the Gulf War when
the aggressor Iraq was subdued, oil prices settled in a very narrow range and
remained there for several years. This is surprising since it is a commodity
which is subject to the laws of supply and demand and, also, much of the
world's oil comes from politically unstable areas. No doubt the specter of
America's military might suggested a peaceful Middle East for years to come.
The complacency in oil markets since that time has subtly led to behavior
which created greater and greater potential for these placid markets to erupt,
which, indeed, they have recently. In the United States, for example, we
became progressively more dependent on foreign oil to satisfy our needs. Also,
all along the distribution pipeline from refiners to chemical companies to
petroleum marketers the assumption was that supply would be readily available,
and inventories were allowed to dwindle to extremely low levels. The oil
industry's response to these events, naturally, was to hold back on capital
expenditures and development of speculative fields. All the while, however,
the demand for oil and petroleum based products was increasing, setting up a
situation which progressively became more fragile.
It is our sense that tensions beneath the surface may be rising in other
sectors of the economy. In the consumer lending area delinquencies have been
rising rapidly and bankruptcies have reached the highest level in years.
Though much of this is due to the expanded use of credit cards, it is unusual
to be experiencing such problems in a good economy. Also, based on our
research with the companies we follow, earnings progress has become more
labored and deviations from expectations are more severely punished by stock
market participants. These are straws in the wind that we see portending
change ahead from the smooth trends which are extrapolated into the future by
so many.
The Hilliard Lyons Growth Fund is not a complex adaptive system. It is a
simple adaptive system. We embrace several core principles and beyond that
anything goes. We want to own companies with managers of first rate integrity
and intelligence. We want companies with earning power upon which we can rely
in good times and bad. We want sound finances. We want to make our investments
at reasonable prices; otherwise, the stock market returns may disappoint even
though a company's business lives up to our expectations. We are imminently
adaptable once these criteria are satisfied, and hence, we feel well prepared
for change which we believe is likely to be upon us in the year ahead.
As always, we appreciate your support and welcome your thoughts and
comments.
DONALD F. KOHLER
---------------------
DONALD F. KOHLER
Chairman
SAMUEL C. HARVEY
---------------------
SAMUEL C. HARVEY
President
2
<PAGE>
HILLIARD LYONS GROWTH FUND, INC.
STATEMENT OF NET ASSETS
(UNAUDITED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Market
Shares Company Value
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 91.8%
-------------------------------------------------------------------------------
CAPITAL GOODS -- 17.4%
-----------------------------------------------------------------------
33,000 Dover Corp............................................... $ 1,575,750
14,000 General Electric Co...................................... 1,274,000
16,800 Hubbell Inc. CL B........................................ 621,600
38,000 Lydall Inc............................................... 926,250
25,000 Nordson Corp............................................. 1,393,750
-----------
5,791,350
CONSUMER DURABLE -- 4.1%
-----------------------------------------------------------------------
49,500 Donaldson Inc............................................ 1,367,437
-----------
1,367,437
CONSUMER NON-DURABLE -- 11.7%
-----------------------------------------------------------------------
32,500* Bush Boake Allen Inc..................................... 775,938
5,500 CPC International Inc.................................... 411,812
14,000 International Flavors & Fragrances....................... 610,750
48,000 PepsiCo Inc.............................................. 1,356,000
7,500 Procter & Gamble Co...................................... 731,250
-----------
3,885,750
FINANCIAL -- 33.5%
-----------------------------------------------------------------------
18,000 American International Group Inc......................... 1,813,500
23* Berkshire Hathaway Inc................................... 739,450
65,000 Cincinnati Financial Corp................................ 3,721,250
12,000 Federal Home Loan Mortgage Corp.......................... 1,174,500
14,000 Fifth Third Bancorp...................................... 813,750
77,250 Synovus Financial Corp................................... 2,008,500
18,000 Wachovia Corp............................................ 891,000
-----------
11,161,950
HEALTH CARE -- 9.8%
-----------------------------------------------------------------------
38,500 Allergan Inc............................................. 1,467,813
35,000 Johnson & Johnson........................................ 1,793,750
-----------
3,261,563
</TABLE>
<TABLE>
<CAPTION>
Market
Shares Company Value
- --------------------------------------------------------------------------------
<C> <S> <C>
RETAIL & SERVICES -- 12.2%
------------------------------------------------------------------------
26,500 Brady WH Co............................................... 665,812
12,000 Gannett Inc............................................... 844,500
15,000 May Department Stores Co.................................. 729,375
49,000 Walgreen Co............................................... 1,813,000
-----------
4,052,687
UTILITY -- 3.1%
------------------------------------------------------------------------
30,500 Century Telephone Enterprises............................. 1,048,438
-----------
1,048,438
TOTAL COMMON STOCKS -- (COST -- $20,591,545) 30,569,175
-----------
</TABLE>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 8.7%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Description
---------- -----------
<C> <S> <C>
$2,915,000 Federal Home Loan
Bank Purchase Yield
5.78%,
due 10/01/96........ 2,915,000
------------
TOTAL U.S.
GOVERNMENT
AGENCY OBLIGATIONS
(AMORTIZED COST --
$2,915,000)........ 2,915,000
------------
OTHER ASSETS LESS LIABILI-
TIES -- (0.5%)................ ( 181,838)
------------
NET ASSETS
(equivalent to $22.56 per share
of common stock based on
1,475,849 shares of $.001 par
value common stock outstanding,
authorized 150,000,000 shares). $ 33,302,337
============
</TABLE>
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.
* Non-income producing security.
3
<PAGE>
DIRECTORS
William A. Blodgett, Jr.
Gilbert L. Pamplin
Donald F. Kohler Dillman A. Rash
John C. Owens
OFFICERS
Donald F. Kohler--Chairman
Samuel C. Harvey--President
Thomas A. Corea--Vice President
Joseph C. Curry, Jr.--Vice President, Treasurer and Secretary
Dianna P. Wengler--Vice President
DISTRIBUTOR
J.J.B. Hilliard, W.L. Lyons, Inc.
Hilliard Lyons Center
P.O. Box 32760
Louisville, Kentucky 40232-2760
(502) 588-9145
(800) 444-1854
TRANSFER AGENT AND CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02266
AUDITORS
Ernst & Young LLP
400 West Market Street
Louisville, Kentucky 40202
LEGAL COUNSEL
Brown, Todd & Heyburn PLLC
3200 Providian Center
Louisville, Kentucky 40202
This report is intended for the information of shareholders of the Hilliard
Lyons Growth Fund, Inc., but it may also be used as sales literature when pre-
ceded or accompanied by the current prospectus, which gives details about
charges, expenses, investment objectives and operating policies of the Fund.
THIRD QUARTER REPORT
SEPTEMBER 30, 1996
--------------------------------------
LOGO
THIRD QUARTER REPORT
SEPTEMBER 30, 1996
J.J.B. HILLIARD, W.L. LYONS, INC.
HILLIARD LYONS CENTER
LOUISVILLE, KENTUCKY 40202
(502) 588-8400
(800) 444-1854
--------------------------------------
