<PAGE>
September 30, 1999
Dear Shareholder:
The stock market experienced rough sledding in the 3rd quarter of 1999. The
Standard & Poor's 500 Index retreated by -6.2% and the Hilliard Lyons Growth
Fund experienced a comparable decline of -7.1%. At the nine-month mark for
1999 the Fund showed a small decline of less than 1%. The comparable nine-
month number for the S & P 500 Index was +5.4%. Both the Index and the
Hilliard Lyons Growth Fund experienced sharp rallies toward the end of October
and the Fund was ahead 3% at month-end.
The Hilliard Lyons Growth Fund closes its books on capital gains and losses
for the year on October 31st. We can report to you for tax planning purposes
that we expect to report a gain of approximately $843,000, or $.27 per share
long-term capital gain. We are mindful of the tax consequences our actions
create for shareholders. The low turnover of the Fund's assets and its long-
term orientation should result in a less onerous tax burden for shareholders
than may be found in many growth funds.
The Sweet Spot
It goes without saying that there has been a proliferation of mutual funds in
the last 15 years. As might be expected, a cottage industry has grown up to
categorize and evaluate the various funds. As fund managers, we are interested
in the industry, its development, and many of the individual funds. Some are
managed by outstanding investment thinkers. When we see a new fund or money
manager, we initially categorize it in one of three groups. First, there are
funds which are designed to mirror exactly the performance of the S & P 500
Index. They own stocks in concentrations that are identical to those in the
Index. Other funds are quasi Index funds. They do not want their performance
to vary much from the Index but do have small over-and under-weightings
relative to those of the Index. They hope to modestly outperform the Index
with small sector bets. The last category is funds with an attitude. They have
a point of view and their portfolios are quite different than the Index. Their
results are likely to vary quite significantly from the Index in any given
year.
A Fund with a point of view sometimes finds itself in the sweet spot. Its
particular style can be just right for where the economy is in the business
cycle. It can be just right for existing monetary conditions, the emotional
tenor of the marketplace, and the prevailing secular attitude toward stocks in
general. And, of course, if there is a sweet spot there is also a sour one.
What is not practical in our judgment is for a fund manager to continually
change his point of view as the fop changes his suit of clothes with the
fashion. The point of view fund must add value by pursuing its independent
course. Otherwise, the Index fund will suffice.
The Hilliard Lyons Growth Fund has a point of view. We believe that superior
investment results flow from blending excellent judgment in three areas. The
first is accurately sizing up the characteristics of a business; the second,
evaluating management talent accurately; the third, paying a sensible price in
light of factors one and two. We believe if we do our work well in these
areas, we have a good chance of delivering superior results with reduced
absolute risk of losing money.
A couple of years ago, we were definitely in the sweet spot, widely
outperforming the market in 1997. We are not in the sweet spot now, having
lagged the market for the past eighteen months. Part of this is due to the
business cycle. We have a concentration in financial service companies which
benefited greatly from the long decline in interest rates. They have been hurt
by this year's sharp rise in rates. Also, the discipline we apply to price a
stock carefully in relation to our estimate of its value is not fashionable
today. Michael Lewis, author of the popular book Liar's
Continued . . . . .
1
<PAGE>
Poker, has written a new biography of a Silicon Valley hero James Clark,
founder of Netscape. The name of the book is The New New Thing. Lewis asserts
in the book that in today's markets "The most appealing companies became those
in a state of pure possibility." Speaking of one of Clark's new ventures, he
adds, "Like other Internet companies, it said to the stock market, our future
will look nothing like our present; ergo you cannot determine our value by
looking at the present. You must close your eyes and imagine a new world. In
this new world skepticism was not a sign of intelligence. It was a sin."
Needless to say, with our disciplines, our sweet spot is unlikely to exist
when such market attitudes are prevalent.
We believe it is one of the investment world's great ironies that there is a
constant migration from funds outside the sweet spot to funds inside the sweet
spot. If a fund's security analysts are sound practitioners, earnings of their
companies will grow and the fund will occasionally have its day in the sun.
More importantly, it is likely to have a successful five to ten year record.
We believe the migration to hot funds is self-destructive, and if an investor
is going to jump around he'd be better served avoiding the guy with the hot
hand. We believe that the Hilliard Lyons Growth Fund currently owns the
strongest stable of companies it has ever held. We expect them to deliver
outstanding long-term results as the sweet spots come and go.
The Hot Spot
Rising interest rates cast a pall over the stock market in the third quarter.
We experienced some blessed relief in late October but interest rates remain
much higher than they were at the beginning of the year. It appears that the
long expansion, eight years and running, has finally exhausted capacity in key
areas. Most visible are tight labor conditions, tight oil, metal raw materials
markets, and housing inflation. As revealing is the enormous deficit we are
generating with our trade partners throughout the world. We are buying much
more from them than they are from us, and it is a significant amount relative
to the overall productive capacity of the U.S. Our deficit leaves our trade
partners with more dollars than we have of their currency, and we are quite
dependent on their goodwill toward our financial markets. It is an
increasingly fragile situation which has already led to the higher interest
rates we see and some faltering in the trade value of the dollar. The solution
to the problem, which Fed Chairman Alan Greenspan is so anxiously seeking, is
a cooling off of consumer optimism and a bit of cutback in our consumption. He
thinks the optimism is intertwined tightly with the bull market in stocks.
Managing optimism down is a ticklish business. If it worries the maestro
Greenspan, it worries us.
We wish the very best for you over the Thanksgiving and December holidays.
DONALD F. KOHLER
Chairman
SAMUEL C. HARVEY
President
2
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Company Value
- --------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 88.6%
-------------------------------------------------------------------------------
BASIC INDUSTRY -- 5.7%
---------------------------------------------------------------------
53,200 Ecolab Inc............................................. $ 1,815,450
126,000 Sigma-Aldrich.......................................... 4,000,500
-----------
5,815,950
CAPITAL GOODS -- 9.0%
---------------------------------------------------------------------
162,000 Dover Corp............................................. 6,621,750
21,000 General Electric Co.................................... 2,489,813
-----------
9,111,563
CONSUMER DURABLE -- 6.4%
---------------------------------------------------------------------
83,000 Donaldson Inc.......................................... 1,924,562
91,000 Harley-Davidson Inc.................................... 4,555,687
-----------
6,480,249
CONSUMER NON-DURABLE -- 9.9%
---------------------------------------------------------------------
21,700** Bush Boake Allen Inc................................... 572,338
103,100 Gillette Co............................................ 3,498,956
84,000 Lauder Estee Cos. Inc. CL A............................ 3,281,250
142,000 Mattel Inc............................................. 2,698,000
-----------
10,050,544
FINANCIAL -- 31.0%
---------------------------------------------------------------------
71,875 American International Group Inc....................... 6,248,633
100** Berkshire Hathaway Inc................................. 5,500,000
221,000 Cincinnati Financial Corp.............................. 8,294,406
72,500 Federal Home Loan Mortgage Corp........................ 3,770,000
34,000 Fifth Third Bancorp.................................... 2,068,688
210,112 Synovus Financial Corp................................. 3,926,468
21,000 Wachovia Corp.......................................... 1,651,125
-----------
31,459,320
HEALTH CARE -- 9.6%
---------------------------------------------------------------------
75,000 Abbott Labs............................................ 2,756,250
26,500 Allergan Inc........................................... 2,915,000
44,000 Johnson & Johnson...................................... 4,042,500
-----------
9,713,750
</TABLE>
<TABLE>
<CAPTION>
Market
Shares Company Value
- --------------------------------------------------------------------------------
<C> <S> <C>
RETAIL & SERVICES -- 13.5%
-----------------------------------------------------------------------
134,400 Brady WH Co. CL A......................................... 4,300,800
59,000 Gannett Inc............................................... 4,082,062
89,000 G & K Services Inc. CL A.................................. 3,604,500
68,000 Walgreen Co............................................... 1,725,500
----------
13,712,862
TECHNOLOGY -- 3.5%
-----------------------------------------------------------------------
89,500 Teleflex Inc.............................................. 3,535,250
----------
3,535,250
Total Common Stocks -- (Cost -- $62,006,922) 89,879,488
----------
</TABLE>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 12.8%
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Description
----------- -----------
<C> <S> <C>
$12,930,000 Federal Home Loan
Bank Purchase
Yield 5.243%, due
10/01/99......... 12,930,000
------------
Total U.S. Gov-
ernment Agency
Obligations (Am-
ortized Cost--
$12,930,000)..... 12,930,000
------------
OTHER ASSETS LESS LIABILI-
TIES --
(-1.4%)....................... (1,384,327)
------------
TOTAL NET ASSETS.............. $101,425,161
============
Net assets
Investor A
shares........... $ 88,402,430
Investor B
shares........... 13,022,731
------------
$101,425,161
Shares of capital stock
Investor A
shares........... 2,701,344
Investor B
shares........... 402,145
------------
3,103,489
Net asset value
Investor A
shares--redemp-
tion price per
share............ $ 32.73
------------
Investor B
shares--offering
price per share*. $ 32.38
------------
</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.
* Redemption price of Investor B shares varies based on length of time shares
are held.
** Non-income producing security.
HILLIARD LYONS GROWTH FUND, INC.
STATEMENT OF NET ASSETS
(UNAUDITED)
September 30, 1999
3
<PAGE>
----------------------------------
Third Quarter Report
September 30, 1999
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.
Donald F. Kohler
Stewart E. Conner
John C. Owens
OFFICERS
Donald F. Kohler -- Chairman
Samuel C. Harvey -- President
Joseph C. Curry, Jr. -- Treasurer and Secretary
Dianna P. Wengler -- Asst. Secretary
DISTRIBUTOR
Provident Distributors, Inc.
Four Falls Corporate Center, 6th Floor
West Conshohocken, Pennsylvania
19428-2961
(610) 260-6533
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, 1999
