MESSAGE To Our Shareholders
The first three months of 1995 ended favorably for the stock and bond
markets and for shareholders of Buffalo Balanced Fund. The Fund generated
a total return (price change and reinvested distributions) of 6.16% for
the March 31 quarter, slightly outpacing the return for the average
balanced fund as measured by Lipper Analytical Services. The Fund ended
the period with just over $38 million in assets and continues to experience
positive cashflow from new and existing investors. On March 31, 1995, a
$0.15 dividend was paid, the second quarterly dividend since inception.
For corporate shareholders, 8.56% of ordinary income distributions qualify
for the corporate dividends received deduction.
<TABLE>
<CAPTION>
Investment Results - Total Return
Quarter Ended 3/31/95
<S> <C>
BUFFALO BALANCED FUND 6.16%
Lipper Balanced Fund Index 5.98%
Merrill Lynch High Yield
Convertible Index 8.54%
S&P 500 Index* 9.73%
*unmanaged
</TABLE>
Since the end of 1994, both stock and bond investors responded
enthusiastically to evidence of a slowing U.S. economy. The first quarter
showed clear signs of weakening auto, housing and general retail sales, as
well as an involuntary build-up of inventories. The reason for this weakness
was likely due to a combination of factors, including the steep rise in
interest rates in 1994, larger income tax bills and increased consumer debt
burdens after a strong holiday buying season. Regardless of the reason,
investors cheered because it greatly lessens the chance for further
interest rate hikes by the Federal Reserve.
Because we see little chance
for a U.S. recession or a major resurgence in inflation, we remain very
optimistic for the financial markets for the remainder of 1995 and into
1996. Job growth continues at a reasonable pace and it appears that retail
sales have softened just enough to relieve some of the pricing pressure
taking place in numerous intermediate goods and commodities. Despite all
the naysayers and experts who say it can't happen, the U.S. does indeed
appear to be on a path toward modest GDP growth and moderate inflation in
1995. Additionally, with a cheap dollar and extremely cost competitive
U.S. corporations, it seems reasonable that exports will improve and help
offset the current softening in U.S. domestic demand. Under this scenario,
the outlook for corporate profits remains very positive.
Given that the
unmanaged Standard & Poor's 500 index was up nearly 10% in the first quarter,
investors may already be noticing some portion of the very positive scenario
we have outlined. For the remainder of 1995 we expect the stock market will
follow a more gradual upward path and could experience one or more mild
corrections. In this environment, the Fund should be well positioned.
When the stock market is rising the Fund should share in some portion of
the move given its roughly 31% position in common stocks and 35% position
in convertible bonds. During periods when the market is flat or correcting,
the portfolio should be cushioned by its healthy 6.4% net current yield
(annual cash income less Fund expenses divided by the market price).
We look forward to tracking the progress of the Fund and financial markets
with you in future letters. We thank you again for your confidence as an
early shareholder and will continue to work hard to earn your trust.
Sincerely,
LARRY D. ARMEL
Larry D. Armel
President
<PAGE>
MESSAGE TO OUR SHAREHOLDERS
Buffalo Balanced Fund versus Lipper Balanced Fund Index
CHART
Annualized total return for the life of the Fund (inception August 12, 1994)
as of March 31, 1995, was 4.63%. Performance data contained in this report is
for past periods only. Past performance is not predictive of future
performance. Investment return and share value will fluctuate, and redemption
value may be more or less than original cost.
<PAGE>
STATEMENT OF NET ASSETS March 31, 1995
<TABLE>
<CAPTION>
S&P**
RANKING** SHARES COMPANY COST MARKET VALUE
<S> <C> <C> <C> <C>
COMMON STOCKS - 31.35%
BASIC MATERIALS - 4.93%
B- 5,000 ASARCO, Inc. $ 136,125 $ 131,875
C 100,000 Bethlehem Steel Corp.* 1,687,000 1,612,500
NR 5,000 Cyprus Amax Minerals Co. 141,500 141,875
1,964,625 1,886,250
CAPITAL GOODS - 2.64%
B+ 5,000 AlliedSignal, Inc. 166,825 196,250
B- 5,000 Mead Corp. 262,750 268,125
B- 10,000 Tenneco Inc. 435,854 471,250
B+ 2,000 Trinity Industries Inc. 63,925 74,750
929,354 1,010,375
CONSUMER CYCLICAL - 7.65%
B- 32,000 Chrysler Corp. 1,547,893 1,340,000
B- 1,500 Ford Motor Credit Co. 43,138 40,500
B- 10,000 General Motors Acceptance Corp. 412,013 442,500
B 30,000 Goodyear Tire & Rubber Co. 1,014,500 1,102,500
3,017,544 2,925,500
CONSUMER STAPLES - 3.32%
B+ 7,000 Baxter International Inc. 204,975 229,250
A+ 10,000 PepsiCo, Inc. 354,700 390,000
A+ 10,000 Philip Morris Companies Inc. 590,375 652,500
1,150,050 1,271,750
ENERGY - 6.44%
C 161,000 Maxus Energy Corp. 604,450 885,500
B 5,000 Texaco, Inc. 306,625 332,500
C 20,300 Triton Energy Corp.* 732,152 776,475
B- 20,500 Union Texas Petroleum Holdings Inc. 379,600 471,500
2,022,827 2,465,975
FINANCIAL - 0.20%
A- 1,000 AmSouth Bancorp. 27,675 31,500
A 1,000 First Union Corp. 39,809 43,375
67,484 74,875
TECHNOLOGY - 3.82%
A- 17,000 A T & T Corp. 840,250 879,750
A+ 6,000 General Electric Co. 283,828 324,750
NR 1,000 General Instrument Corp. New* 28,425 34,750
B+ 1,000 General Motors Corp. Cl. H 34,300 41,250
A+ 5,000 Pitney Bowes Inc. 168,530 180,000
1,355,333 1,460,500
TRANSPORTATION AND SERVICES - 0.72%
A- 5,000 Union Pacific Corp. 247,709 275,000
UTILITIES - 1.63%
B+ 4,000 Nevada Power Co. 84,313 80,500
B- 11,000 Pacific Enterprises 236,300 272,250
A- 4,000 Questar Corp. 108,700 120,000
B 5,000 Sonat, Inc. 135,125 150,000
564,438 622,750
TOTAL COMMON STOCKS - 31.35% 11,319,364 11,992,975
CONVERTIBLE PREFERRED STOCKS - 2.01%
NR 5,000 ICO Inc., dep. shrs. repstg.
1/4 pfd. cv. 97,500 92,500
B- 11,400 Maxus Energy Corp., $4.00 378,419 369,075
B- 13,500 Maxus Energy Corp., $2.50 269,288 259,875
NR 700 Noble Drilling Corp. 15,596 14,262
B 1,000 Santa Fe Energy 16,925 18,875
C 1,000 Westmoreland Coal Co., dep. shrs.
repstg. 1/4 pfd. cv., Series A 17,050 14,500
TOTAL CONVERTIBLE PREFERRED STOCKS - 2.01% 794,778 769,087
</TABLE>
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING** DESCRIPTION AMOUNT COST MARKET VALUE
<S> <C> <C> <C> <C>
CORPORATE BONDS - 19.74%
Ba3 American Standard Inc.,
9.25% debenture, due December 1, 2016 $ 200,000 $ 185,850 $ 191,500
B2 Armco, Inc.,
9.375% senior note, due November 1, 2000 175,000 161,000 161,000
B1 Blount Inc.,
9.00% senior subordinated note, due June 15, 2003 650,000 632,450 646,782
B2 Color Tile Inc.,
10.75% senior note, due December 15, 2001 865,000 766,118 683,350
B3 CompUSA, Inc.,
9.50% guaranteed senior subordinated note,
due June 15, 2000 675,000 563,927 612,563
Ba2 Continental Cablevision Inc.,
9.50% senior debenture, due August 1, 2013 150,000 137,250 144,750
B3 Dual Drilling Co.,
9.875% senior subordinated note,
due January 15, 2004 1,500,000 1,314,338 1,237,500
B1 Energy Ventures Inc.,
10.25% senior note, due March 15, 2004 110,000 106,612 108,075
B1 H.S. Resources Inc.,
9.875% senior subordinated note,
due December 1, 2003 560,000 519,125 537,600
Ba3 Navistar Financial Corp.,
8.875% senior subordinated note,
due November 15, 1998 250,000 242,125 245,000
Ba3 Noble Drilling Corp.,
9.25% senior note, due October 1, 2003 100,000 98,000 97,500
B3 Nortek Inc.,
9.875% senior subordinated note, due March 1, 2004 165,000 150,175 150,975
B1 Payless Cashways Inc.,
9.125% senior subordinated note, due April 15, 2003 25,000 22,875 22,250
Baa3 RJR Nabisco Inc.,
8.75% guaranteed senior note, due April 15, 2004 535,000 497,368 523,631
Baa3 RJR Nabisco Inc.,
8.75% note, due August 15, 2005 353,000 326,066 345,057
Ba3 Rohr Inc.,
11.625% senior note, due May 15, 2003 350,000 356,125 357,000
B2 Santa Fe Energy Resources, Inc.,
11.00% senior subordinated debenture,
due May 15, 2004 805,000 792,200 833,175
B1 Stone Container Corp.,
10.75% 1st mortgage note, due October 1, 2002 250,000 248,382 259,688
Baa3 TCI Communications Inc.,
8.65% senior note, due September 15, 2004 200,000 198,932 199,439
B2 Triangle Pacific Corp. Delaware,
10.50% senior note, due August 1, 2003 100,000 99,500 99,000
B2 Tuboscope Vetco International, Inc.,
10.75% guaranteed senior subordinated note,
due April 15, 2003 75,000 74,392 75,937
NR URS Corp.,
8.625% senior subordinated debenture,
due January 15, 2004 5,000 4,050 4,175
B3 Wainoco Oil Corp.,
10.75% subordinated debenture, due October 1, 1998 16,000 16,000 15,880
TOTAL CORPORATE BONDS - 19.74% 8,114,000 7,512,860 7,551,827
CONVERTIBLE CORPORATE BONDS - 34.90%
B3 Air & Water Technologies Corp.,
8.00% subordinated debenture, due May 15, 2015 2,020,000 1,216,473 1,343,300
B2 Allwaste Inc.,
7.25% subordinated debenture, due June 1, 2014 180,000 153,300 151,650
B3 Argosy Gaming Co.,
12.00% subordinated note, due June 1, 2001 700,000 691,488 702,625
Caa Bally Entertainment Corp.,
10.00% subordinated debenture, due
December 15, 2006 1,050,000 851,364 888,562
B1 Beverly Enterprises Inc.,
7.625% subordinated debenture, due March 15, 2003 750,000 716,250 723,750
B2 Conner Peripherals Inc.,
6.75% subordinated debenture, due March 1, 2001 200,000 158,293 153,000
B2 Conner Peripherals Inc.,
6.50% subordinated debenture, due March 1, 2002 1,065,000 841,300 820,050
B3 Hudson General Corp.,
7.00% subordinated debenture, due July 15, 2011 110,000 85,910 81,813
B3 M/A Com Inc.,
9.25% subordinated debenture, due May 15, 2006 1,668,000 1,545,780 1,672,170
B1 Moog Inc.,
9.875% subordinated debenture, due January 15, 2006 41,000 40,590 41,871
B2 OHM Corp.,
8.00% subordinated debenture, due October 1, 2006 1,805,000 1,396,700 1,592,913
B2 Oryx Energy Co.,
7.50% subordinated debenture, due May 15, 2014 25,000 19,688 19,687
B2 Pogo Producing Co.,
8.00% subordinated debenture, due December 31, 2005 69,000 68,379 68,655
Ca Presidio Oil Co.,
9.00% subordinated debenture, due March 15, 2015 2,800,000 1,072,500 644,000
NR Quixote Corp.,
8.00% subordinated debenture, due April 15, 2011 280,000 285,600 238,700
Ba3 Rohr Inc.,
7.00% subordinated debenture, due October 1, 2012 1,747,000 1,219,580 1,310,250
B2 Sanifill Inc.,
7.50% subordinated debenture, due June 1, 2006 35,000 34,400 35,437
NR Swift Energy Co.,
6.50% subordinated debenture, due June 30, 2003 100,000 100,150 95,000
Ba3 Time Warner Inc.,
8.75% subordinated debenture, due January 10, 2015 200,000 199,975 201,000
B2 UNC Inc.,
7.50% subordinated debenture, due March 31, 2006 110,000 89,470 89,925
B3 Wainoco Oil Corp.,
7.75% subordinated debenture, due June 1, 2014 1,513,000 1,403,338 1,342,788
B3 Western Company North American,
7.25% subordinated debenture, due January 15, 2015 185,000 191,800 226,394
B3 Western Digital Corp.,
9.00% subordinated debenture, due June 1, 2014 100,000 111,850 110,125
B2 Weston (Roy F.) Inc.,
7.00% subordinated debenture, due April 15, 2002 1,000,000 795,000 798,750
TOTAL CONVERTIBLE CORPORATE BONDS - 34.90% 17,753,000 13,289,178 13,352,415
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
DESCRIPTION AMOUNT COST MARKET VALUE
<S> <C> <C> <C>
REPURCHASE AGREEMENT - 10.46%
UMB Bank, n.a.,
5.71%, due April 3, 1995
(Collateralized by $4,080,058 U.S. Treasury Notes,
10.50%, due August 15, 1995) $ 4,000,000 $ 4,000,000 $ 4,000,000
TOTAL INVESTMENTS - 98.46% $ 36,916,180 37,666,304
Other assets less liabilities - 1.54 % 589,602
TOTAL NET ASSETS - 100.00%
(equivalent to $10.06 per share; 10,000,000 shares
of $1.00 par value capital shares authorized;
3,803,820 shares outstanding) $ 38,252,531
</TABLE>
For federal income tax purposes, the identified cost of investments owned
at March 31, 1995 was $36,916,180.
Net unrealized appreciation for federal income tax purposes was $750,124,
which is comprised of unrealized appreciation of $1,807,326 and unrealized
depreciation of $1,057,202.
*Securities on which no cash dividends were paid during the preceding twelve
months.
**Standard & Poor's rankings and Moody's ratings are derived from statistical
measurements of past earnings and dividend stability and growth.
NR - indicates no ranking/rating is available. Rankings/ratings are not
covered by the report of independent auditors.
Covered Call Options Written as of March 31, 1995
<TABLE>
<CAPTION>
Shares Subject
Common Stocks/Expiration Date/Exercise Price to Call Value
<S> <C> <C>
AT&T Corp./April/55 17,000 $ 2,125
Chrysler Corp./April/55 10,000 625
Chrysler Corp./April/60 20,000 1,250
Goodyear Tire & Rubber Co./April/40 30,000 3,750
Pacific Enterprises/April/22.5 11,000 25,438
PepsiCo, Inc./April/40 10,000 3,750
Sonat, Inc./July/30 5,000 6,250
Tenneco Inc./May/50 10,000 4,375
Triton Energy Corp./May/40 20,000 20,000
Total (premiums received $60,203) (Note 4) $ 67,563
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investment securities:
Common stocks, at market value (identified cost $11,319,364) $ 11,992,975
Convertible preferred stocks, at market value (identified cost $794,778) 769,087
Corporate bonds, at market value (identified cost $7,512,860) 7,551,827
Convertible corporate bonds, at market value (identified cost $13,289,178) 13,352,415
Repurchase agreement, at cost - approximates market value 4,000,000
Total investments 37,666,304
Cash 207,961
Dividends receivable 59,628
Interest receivable 664,218
Receivable for investments sold 505,608
Total assets 39,103,719
LIABILITIES AND NET ASSETS:
Payable for investments purchased 783,625
Call options written 67,563
Total liabilities 851,188
NET ASSETS $ 38,252,531
NET ASSETS CONSIST OF:
Capital (capital stock and paid-in capital) $ 37,132,778
Accumulated undistributed income:
Undistributed net investment income 92,893
Accumulated net realized gain on investment transactions 284,096
Net unrealized appreciation in value of investments 242,764
NET ASSETS APPLICABLE TO OUTSTANDING SHARES $ 38,252,531
Capital shares, $1.00 par value
Authorized 10,000,000
Outstanding 3,803,820
NET ASSET VALUE PER SHARE $ 10.06
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
STATEMENT OF OPERATIONS
Period From August 12, 1994 (Inception Date)
to March 31, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends $ 208,246
Interest 1,082,877
1,291,123
Expenses (Note 2):
Management fees 128,020
Registration fees and expenses 9,455
137,475
Net investment income 1,153,648\
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain from investment transactions
(excluding repurchase agreements):
Proceeds from sales of investments 6,203,190
Cost of investments sold 5,919,094
Net realized gain from investment transactions 284,096
Unrealized appreciation on investments:
Beginning of period --
End of period 742,764
Increase in net unrealized appreciation on investments 742,764
Net gain on investments 1,026,860
Increase in net assets resulting from operations $ 2,180,508
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
Period From August 12, 1994 (Inception Date)
to March 31, 1995
<TABLE>
<S> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income $ 1,153,648
Net unrealized gain from investment transactions 284,096
Unrealized appreciation of investments during the period 742,764
Net increase in net assets resulting from operations 2,180,508
DISTRIBUTIONS TO SHAREHOLDERS FROM:*
Net investment income (1,060,755)
Net realized gain from investment transactions
Total distributions to shareholders (1,060,755)
INCREASE FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from 3,784,559 shares sold 36,952,975
Net asset value of 101,936 shares issued for
reinvestment of distributions 993,105
37,946,080
Cost of 92,675 shares redeemed (913,964)
Net increase from capital share transactions 37,032,116
Total increase in net assets 38,151,869
NET ASSETS:
Beginning of period 100,662
End of period (including undistributed net investment
income of $92,893) $ 38,252,531
*Distributions to shareholders:
Income dividends per share $ .30
Capital gains distribution per share $ --
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The Fund is registered under the Investment Company Act of 1940, as amended,
as a diversified open-end management investment company. The following is
a summary of significant accounting policies consistently followed by the
Fund in the preparation of its financial statements.
A. Security Valuation -- Corporate stocks, bonds and options traded on a
national securities exchange or national market are valued at the latest
sales price thereof, or if no sale was reported on that date, the mean
between the closing bid and asked price is used.
Securities which are traded over-the-counter are priced at the mean between
the latest bid and asked price. Securities not currently traded are valued
at fair value as determined by the Board of Directors.
B. Federal and State Taxes -- The Fund complied with the requirements of
the Internal Revenue Code applicable to regulated investment companies and
therefore, no provision for federal or state tax is required.
C. Options -- In order to produce incremental earnings and protect gains,
the Fund may write covered call options on portfolio securities. When the
Fund writes an option, an amount equal to the premium received by the Fund
is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the current market
value of the option written. If an option which the Fund has written either
expires on its stipulated expiration date, or if the Fund enters into a
closing purchase transaction, the Fund realizes a gain (or loss if the cost
of a closing purchase transaction exceeds the premium received when the
option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is extinguished.
If a call option which the Fund has written is exercised, the Fund realizes
a capital gain or loss from the sale of the underlying security and the
proceeds from such sale are increased by the premium originally received.
D. Other -- As is common in the industry, security transactions are
accounted for on the date the securities are purchased or sold. Dividend
income and distributions to shareholders are recorded on the ex-dividend
date. Realized gains and losses from investment transactions and unrealized
appreciation and depreciation of investments are reported on the identified
cost basis.
2. MANAGEMENT FEES: Management fees were paid to Jones & Babson,
Inc. at the rate of 1% per annum of the average daily net asset value of the
Fund for services which include administration, and all other operating
expenses of the Fund except the cost of acquiring and disposing of portfolio
securities, the taxes, if any, imposed directly on the Fund and its shares
and the cost of qualifying the Fund's shares for sale in any jurisdiction.
Certain officers and/or directors of the Fund are also officers and/or
directors of Jones & Babson, Inc.
3. INVESTMENT TRANSACTIONS: Investment
transactions for the period ended March 31, 1995 (excluding maturities of
short-term commercial notes and repurchase agreements) are as follows:
Purchases $ 38,834,346
Proceeds from sales 6,203,190
4. COVERED CALL OPTIONS WRITTEN: As of March 31, 1995, portfolio securities
valued at $5,287,000 were held in escrow by the custodian in connection
with covered call options written by the Fund. Transactions in call options
written for the period ended March 31, 1995 were as follows:
<TABLE>
<CAPTION>
Number of Premium
Contracts Amount
<S> <C> <C>
Balance at beginning of period -- $ --
Opened 2,630 89,544
Closed and expired (1,300) (29,341)
Balance at March 31, 1995 1,330 $ 60,203
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
Condensed data for a share of capital stock
outstanding throughout the period.
For Period From August 12, 1994
(Inception Date) to March 31, 1995*
<TABLE>
<S> <C>
Net asset value, beginning of period $ 10.07
Income from investment operations:
Net investment income .32
Net gains or losses on securities (both realized and unrealized) (.03 )
Total from Investment Operations .29
Less distributions:
Dividends from net investment income (.30)
Distributions from capital gains --
Total Distributions (.30)
Net asset value, end of period $ 10.06
Total Return 3%
Ratios/Supplemental Data Net assets, end of year (in millions) $ 38
Ratio of expenses to average net assets 1.06%
Ratio of net investment income to average net assets 8.89%
Portfolio turnover rate 33%
</TABLE>
*The Fund was capitalized on June 6, 1994 with $100,000, representing
10,000 shares at a net asset value of $10.00 per share.
Initial public offering was made on August 12, 1994, at which time net
asset value was $10.07 per share.
Ratios for this initial period of operations are annualized.
Total return is not annualized.
See accompanying Notes to Financial Statements.
<PAGE>
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
The Board of Directors and Shareholders of Buffalo Balanced Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the statement of net assets, of Buffalo Balanced Fund, Inc.
(the Fund) as of March 31, 1995, and the related statements of operations
and changes in net assets, and the financial highlights for the period from
August 12, 1994 (date of inception) to March 31, 1995. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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. Our procedures included confirmation of
investments owned as of March 31, 1995, by correspondence with the custodian.
As to securities relating to uncompleted transactions, we performed other
auditing procedures. 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 audit provides 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
Buffalo Balanced Fund, Inc. at March 31, 1995, the results of its operations,
the changes in its net assets, and the financial highlights for the period
from August 12, 1994 (date of inception) to March 31, 1995, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Kansas City, Missouri
April 26, 1995
<PAGE>
This report has been prepared for the information of the Shareholders of
Buffalo Balanced Fund, Inc., and is not to be construed as an offering of
the shares of the Fund. Shares of this Fund are offered only by the Prospectus,
a copy of which may be obtained from Jones & Babson, Inc.
