<PAGE>
May 12, 1998
Dear Shareholder:
In an excellent quarter for domestic stocks, the Hilliard Lyons Growth Fund
again posted a strong absolute gain, advancing 6.5%. The Fund trailed the S&P
500 which gained 13.9% but it is important, for perspective, to recall that in
the prior quarter the Fund outperformed the index 13.2% to 2.9%. One thing is
clear. The Hilliard Lyons Growth Fund portfolio is constructed in a way that
is far different from the S&P 500 Index and the Dow Jones Industrial Average.
More on that later.
The Fund's outstanding performance in 1997 has attracted significant inflows
of new money. It ended the March quarter with $81 million in assets versus $38
million at the end of the same quarter in 1997. This doubling is due to market
appreciation of the assets held and a very significant inflow of new money. We
continue to feel that our current assets and inflows, modest compared to many
funds, are quite manageable. The small size of the Fund continues to be an
advantage, as we are able to move in and out of stocks in a timely way even
when liquidity is limited.
At its October 23, 1997 quarterly meeting the Board of Directors of the Fund
approved the creation of Class B shares of the Fund. The fundamental purpose
of such shares is to allow a buyer to spread the sales charge over several
years rather than to incur it at the time of purchase. Details of the
economics of purchasing shares this way are described in detail in the Fund's
new prospectus. If you are interested in learning more about the B shares, you
should call your Hilliard Lyons financial consultant to review the prospectus.
The Fund
Since the Fund's inception, we have sought three goals. First, to achieve an
absolute return that significantly surpasses inflation and the rate of
interest that can be earned on riskless long-term Treasury securities. Second,
to achieve a return over the long run which exceeds that of the S&P 500 Index.
Third, to achieve these goals while assuming significantly less risk than an
investor would in an index fund tracking the S&P 500. Over a period of years
we believe these goals are compatible and achievable given our resources.
Sometimes, however, we are compelled to trade off one objective for another.
We are in such a period now.
In 1997, a confluence of events led to extraordinary performance by many of
our stocks, particularly our largest holdings. For a variety of reasons,
investors chose to make these important holdings prized assets propelling the
gain in stock prices far faster than the gain in business value. This is quite
evident when one considers that the Fund's net asset value increased by more
than 40% while we estimate that the earnings of the underlying companies
increased at a mid-teens rate. This is what we hoped would happen. Over the
course of the year, however, it struck us that we would be hard pressed to
continue achieving high absolute returns given the sharp runups in many of our
stocks. We made the decision to sell some of our more extravagantly priced
securities to move into others where we felt more confident of strong returns
over the next two to three years.
Our moves were certain to create a variance between our results and those of
the S&P 500 Index, and indeed the variance has been wide on a quarter to
quarter basis over the last year. In return for our willingness to look
sometimes brilliant and sometimes dumb, we believe we have a portfolio of
stocks valued more sensibly than the big index companies that are so immensely
Continued . . . . .
1
<PAGE>
popular. We believe our returns will be more consistent for this reason.
Perhaps most important, in a market which shows some of the traditional signs
of excessive speculation, we are comfortable that most of our holdings are
reasonably priced in relation to their business values. We note also that the
Fund currently has approximately 20% of its assets in cash. That is both a
function of the difficulty in finding attractively priced securities in
today's markets and our transition away from some of our excessively valued
holdings. Our goal is to be 100% invested but on terms which are clearly
favorable to us.
Outlook
For the past couple of years, we have been able to crow about how perfect
the investment climate has been. Repeatedly we pointed out that there were few
excesses in the economy and that well-balanced growth was a great positive to
equity investors. The broadest and most often cited economic measures for
growth and inflation would suggest that such conditions continue. Beneath the
statistics, however, turbulence and tension are roiling. The smaller Pacific
Rim countries as well as mighty Japan and Korea are experiencing vicious
declines in their economies. In Europe, though there is healthy growth,
unemployment is stuck at extremely high levels. Domestically while the
inflation statistics remain well controlled, housing activity is booming along
with property values. Money supply growth has accelerated to double digits
and, of course, there is the stock market, the phenomenal stock market.
We're of no mind to rain on anybody's parade, but the wilder things get in
the market place the more often we remember there are periods of time,
sometimes lengthy, when matching the Index is a dubious achievement. The
exuberance of the crowd can cause vast expansion of paper profits and also
vast shrinkage. We are being especially careful to invest where performance
will be driven by particular business circumstances--in stocks which may have
missed the blessings of mass psychology, but may also miss its unwarranted
condemnation. In horse racing parlance, we will be racing with an equipment
change. Blinkers on to avoid distractions.
Thank you for your patience and long term view.
LOGO
DONALD F. KOHLER
Chairman
LOGO
SAMUEL C. HARVEY
President
2
<PAGE>
HILLIARD LYONS GROWTH FUND, INC.
STATEMENT OF NET ASSETS
(UNAUDITED)
MARCH 31, 1998
<TABLE>
<CAPTION>
Market
Shares Company Value
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 76.2%
-------------------------------------------------------------------------------
BASIC INDUSTRY -- 1.9%
----------------------------------------------------------------------
40,000 Sigma-Aldrich........................................... $ 1,490,000
-----------
1,490,000
CAPITAL GOODS -- 12.9%
----------------------------------------------------------------------
74,000 Dover Corp.............................................. 2,812,000
21,000 General Electric Co..................................... 1,809,938
16,800 Hubbell Inc. CL B....................................... 846,300
41,500 Nordson Corp............................................ 2,069,813
69,000 Raychem Corp............................................ 2,867,812
-----------
10,405,863
CONSUMER DURABLE -- 5.8%
----------------------------------------------------------------------
106,000 Donaldson Co. Inc....................................... 2,729,500
58,000 Harley-Davidson Inc..................................... 1,914,000
-----------
4,643,500
CONSUMER NON-DURABLE -- 5.8%
----------------------------------------------------------------------
53,900* Bush Boake Allen Inc.................................... 1,718,062
35,000 Nike Inc. CL B.......................................... 1,548,750
33,000 PepsiCo Inc............................................. 1,408,687
-----------
4,675,499
FINANCIAL -- 24.1%
----------------------------------------------------------------------
31,000 American International Group............................ 3,904,063
23* Berkshire Hathaway Inc.................................. 1,545,600
60,000 Cincinnati Financial Corp............................... 7,515,000
48,000 Federal Home Loan Mortgage Corp......................... 2,277,000
12,000 Fifth Third Bancorp..................................... 1,026,000
50,875 Synovus Financial Corp.................................. 1,888,734
15,000 Wachovia Corp........................................... 1,272,188
-----------
19,428,585
HEALTH CARE -- 8.3%
----------------------------------------------------------------------
38,500 Allergan Inc............................................ 1,463,000
37,000 Johnson & Johnson....................................... 2,712,563
65,550 Life Technologies Inc................................... 2,523,675
-----------
6,699,238
</TABLE>
<TABLE>
<CAPTION>
Market
Shares Company Value
- --------------------------------------------------------------------------------
<C> <S> <C>
RETAIL & SERVICES -- 16.3%
------------------------------------------------------------------------
80,000 Brady WH Co................................................ 2,680,000
33,000 Gannett Co................................................. 2,371,875
68,000 G & K Services Inc. CL A................................... 2,983,500
69,000 Walgreen Co................................................ 2,427,937
77,000 Wallace Computer Services Inc.............................. 2,666,125
----------
13,129,437
UTILITY -- 1.1%
------------------------------------------------------------------------
15,000 Century Telephone Enterprises.............................. 916,875
----------
916,875
TOTAL COMMON STOCKS -- (COST --$34,725,755) 61,388,997
----------
</TABLE>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 21.6%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Description
----------- -----------
<C> <S> <C> <C> <C>
$17,415,000 Federal Home Loan Bank
Purchase Yield 5.983%,
due 04/01/98............ 17,415,000
-----------
TOTAL U.S. GOVERNMENT
AGENCY OBLIGATIONS (AM-
ORTIZED COST --
$17,415,000)............ 17,415,000
OTHER ASSETS LESS LIABILITIES -- 1,798,165
2.2%............................... -----------
NET ASSETS
(equivalent to $32.25 per share of
common stock based on 2,495,615
shares of $.001 par value common
stock outstanding, authorized $80,602,162
150,000,000 shares)................. ===========
</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>
----------------------------------
LOGO
FIRST QUARTER REPORT
MARCH 31, 1998
J.J.B. HILLIARD, W.L. LYONS, INC.
HILLIARD LYONS CENTER
LOUISVILLE, KENTUCKY 40202
(502) 588-8400
(800) 444-1854
----------------------------------
DIRECTORS
William A. Blodgett, Jr.
Gilbert L. Pamplin
Donald F. KohlerDillman 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.
FIRST QUARTER REPORT
MARCH 31, 1998
