CASTLE |
CONVERTIBLE | Meeting the challenge
FUND, | of investing
INC. |
Annual Report
October 31, 1996
Dear Shareholder:
After rebounding in the second quarter, the U.S. economy began to slow by
the end of the summer. Employment gains continued into the third quarter but the
rate of increase dropped well below the robust rate of the first half of the
year. Solid growth in employment, together with wage gains and low inflation,
boosted consumer sentiment. Retail sales, however, slowed during the summer and
the rate of growth in installment debt also continued to decelerate. Despite the
favorable outlook for consumer income and consumer sentiment, the weak pattern
in retail sales this summer is likely to persist. Consumers have largely caught
up on any purchases they might have put off, so we do not anticipate a surge in
spending. Households will continue to pare back on debt. In the face of sluggish
final demand, manufacturers and retailers will likely remain cautious so
inventory rebuilding will proceed slowly. While capital spending will advance as
companies upgrade operations to improve productivity in response to unrelenting
competitive pressures, most firms will be cautious in adding new capacity.
Because of these factors, we believe that the economy will remain soft through
the end of the year and into 1997.
Once the economic statistics started to confirm that the economic growth
was indeed moderating, investors' fears of higher inflation and the risk of
tighter Federal Reserve monetary policy began to recede. The yield on 30-year
Treasury bonds, for example, dropped from a high of 7.17% reached in early
September to 6.65% by the end of October. The Lehman Brothers
Government/Corporate Bond Index, a conventional measure of the bond market,
posted a total return of 3.90% for the three months ended October 31st. The
stock market began to rally as well and went on to reach new highs by late
October. The stock market, as measured by the S&P 500, generated a total return
of 10.87% for the three month period ended October 31st. Castle Convertible Fund
posted a total return of 6.63% on a NAV basis during the same three month
period. The Fund's total return, again on a NAV basis, amounted to 10.85% for
the first ten months of 1996.
Upcoming reports supporting our outlook for moderate economic growth and
modest inflation should keep long-term interest rates below 7% for the balance
of the year. We believe that the stock market rally still has a ways to go.
Given the favorable outlook for the bond and stock markets, we expect that
Castle should continue to provide positive returns for its shareholders.
Respectfully submitted,
/s/ DAVID D. ALGER
----------------------------------------
David D. Alger
President
November 13, 1996
CASTLE CONVERTIBLE FUND, INC.
SCHEDULE OF INVESTMENTS
October 31, 1996
<TABLE>
<CAPTION>
Principal Corporate Convertible
Amount Bonds--55.5% Value
- -------------------------------------------------------------------
<C> <S> <C>
AEROSPACE--3.6%
$ 500,000 Diagnostic/Retrieval Systems,
Inc., Sr. Sub. Cv. Notes, 9.00%,
10/1/03(a) $ 635,000
2,000,000 Rohr Industries Inc., Cv. Sub.
Deb., 7.00%, 10/1/12 1,730,000
------------
2,365,000
------------
BUILDING & CONSTRUCTION--1.4%
1,000,000 Masco Corp., Cv. Sub. Deb.,
5.25%, 2/15/12 965,000
------------
COMPUTER RELATED & BUSINESS
EQUIPMENT--7.2%
750,000 National Semiconductor, Cv. Sub.
Notes, 6.50%, 10/1/02(a) 702,188
500,000 S3 Inc., Cv. Sub. Notes,
5.75%, 10/1/03(a) 592,500
1,850,000 Seagate Technologies, Inc., Cv.
Sub. Deb., 6.75%, 3/1/01 2,072,000
650,000 3Com Corporation, Cv. Sub. Notes,
10.25%, 11/1/01(a) 1,347,938
------------
4,714,626
------------
ENERGY--9.2%
2,100,000 Ashland Inc., Cv. Sub. Deb.,
6.75%, 7/1/14 2,144,625
1,850,000 Consolidated Natural Gas, Cv. Sub.
Deb., 7.25%, 12/15/15 1,988,750
2,000,000 Enserch, (Eurodollar), Cv. Sub.
Deb., 6.375%, 4/1/02 1,955,000
------------
6,088,375
------------
FINANCIAL SERVICES--1.7%
1,000,000 Leasing Solutions, Inc., Cv. Sub.
Notes, 6.875%, 10/1/03 1,111,250
------------
HEALTHCARE--13.4%
3,050,000 Beverly Enterprises, Cv. Sub. Deb.,
7.625%, 3/15/03 2,897,500
1,450,000 Centocor, Inc., (Eurodollar), Cv.
Sub. Deb., 6.75%, 10/16/01 1,384,750
1,250,000 Ciba Geigy Corp., Exch. Sub.
Deb., 6.25%, 3/15/16 1,259,375
1,000,000 Medical Care International , Cv.
Sub. Deb., 6.75%, 10/1/06 1,012,500
1,000,000 Medical Care International,
(Eurodollar), Cv. Sub. Deb.,
6.75%, 10/1/06 1,012,500
500,000 Sepracor Inc., Cv. Sub. Deb.,
7.00%, 12/1/02(a) 525,000
500,000 U.S. Diagnostic Labs, Inc., Cv.
Sub. Deb., 9.00%, 3/31/03(a) 755,000
------------
8,846,625
------------
MACHINERY--.8%
500,000 Robbins & Myers, Inc., Cv. Sub.
Notes, 6.50%, 9/1/03 520,000
------------
MANUFACTURING--1.9%
$ 1,250,000 Quanex Corp., Cv. Sub. Deb.,
6.88%, 6/30/07 $ 1,290,625
------------
METALS--2.8%
1,750,000 Inco Limited, Cv. Sub. Deb.,
7.75%, 3/15/16 1,837,500
------------
POLLUTION CONTROL--1.4%
500,000 U.S. Filter Corporation, Cv. Sub.
Notes, 6.00%, 9/15/05(a) 952,500
------------
RETAILING--8.6%
1,240,000 Fabri-Centers of America, Inc.,
Cv. Sub. Deb., 6.25%, 3/1/02 1,091,200
500,000 Nine West Group Inc., Cv. Sub.
Notes, 5.50%, 7/15/03(a) 516,875
1,800,000 Price/Costco Inc., Cv. Sub. Deb.,
6.75%, 3/1/01 1,892,250
2,000,000 Waban Inc., Cv. Sub. Deb., 6.50%,
7/1/02 2,197,500
------------
5,697,825
------------
TRANSPORTATION--3.5%
2,000,000 Laidlaw Corp., Cv. Sub. Notes,
8.00%, 5/1/01 2,280,000
------------
Total Corporate Convertible Bonds
(Cost $33,467,105) 36,669,326
------------
Convertible Preferred
Shares Stocks--19.4%
- -------------------------------------------------------------------
BUILDING & CONSTRUCTION--2.3%
30,000 Southdown Corp., Cv. 2.875%
Pfd., Series D 1,500,000
------------
COMMUNICATIONS--1.9%
15,000 Evergreen Media Corp., Cv. 6.00%
Exch. Pfd. 1,252,500
------------
COMPUTER RELATED & BUSINESS
EQUIPMENT--.8%
10,000 Wang Laboratories, $6.50 Cv. Pfd.,
Series B(a) 526,250
------------
ENERGY--2.7%
28,500 NorAm Financing I, 6.25% Cv.
Pfd. 1,816,875
------------
PAPER PACKAGING & FOREST
PRODUCTS--4.6%
60,000 James River Corp., Dep. Shrs.,
$3.50 Exch. Pfd., Series L 3,007,500
------------
RAW MATERIAL PROCESSING--2.8%
20,000 Bethlehem Steel Corporation, $5.00
Cum. Pfd 1,030,000
15,000 Howell Corp., $3.50 Cum. Pfd. 791,250
------------
1,821,250
------------
REAL ESTATE--1.5%
40,000 Security Capital Investment Trust,
7.00%, Cv. Pfd. 995,000
------------
MISCELLANEOUS--2.8%
20,000 SCI Finance LLC, $3.125 Term Cv.
Shares, Series A $ 1,880,000
------------
Total Convertible Preferred Stocks
(Cost $10,415,011) 12,799,375
------------
Mandatory Convertible
Securities--8.6%
COMMUNICATIONS--1.3%
30,000 AirTouch Communications, 6.00%
Cv. Pfd., Class B, 8/16/99(d) 851,250
------------
PAPER PACKAGING & FOREST
PRODUCTS--1.6%
12,000 Alco Standard, Dep. Shrs., $5.04
Cv. Pfd., Series BB, 10/1/98(d) 1,041,000
------------
PUBLISHING--2.7%
20,000 Houghton Mifflin Company,
6.00% Exch. Notes, 8/1/99(c) 1,820,000
------------
ENERGY--1.2%
30,100 MCN Corp., 8.75%, Pfd.,
4/30/99(d) 827,750
------------
FINANCIAL SERVICES--1.8%
45,000 The Money Store Inc., $1.72
Cv. Pfd., 12/1/99(d) 1,170,000
------------
Total Mandatory Convertible
Securities (Cost $5,244,460) 5,710,000
------------
REAL ESTATE--1.1%
30,000 General Growth Properties Inc. $ 757,500
------------
UTILITIES--9.2%
52,000 American Electric Power Co., Inc. 2,158,000
38,000 Oklahoma Gas & Electric Co. 1,486,750
65,000 Public Service Colorado 2,405,000
------------
6,049,750
------------
Total Common Stocks
(Cost $4,952,625) 6,807,250
------------
Principal Short-Term Corporate
Amount Notes--7.1%
- --------------
$ 518,000 Dynamic Funding Corp., Series A,
5.35%, 11/6/96 517,615
369,000 Merrill Lynch & Co., Inc., 5.23%,
11/4/96 368,839
500,000 New England Power Co., 5.24%,
11/4/96 499,782
3,269,000 SunAmerica Inc., 5.28%, 11/6/96 3,266,602
------------
Total Short-Term Corporate Notes
(Cost $4,652,838) 4,652,838
------------
Total Investments
(Cost $58,732,039)........................ 100.9 % 66,638,789
Liabilities in Excess of Other Assets...... (.9)% (588,556)
----------------------
Total Net Assets........................... 100.0% $ 66,050,233
======================
<FN>
<F1> (a) Pursuant to Securities and Exchange Commission Rule 144A, these securities
may be sold prior to their maturity only to qualified institutional
buyers.
<F2> (b) At October 31, 1996, the net unrealized appreciation on investments, based
on cost for federal income tax purposes of $58,732,039, amounted to
$7,906,750, which consisted of aggregate gross unrealized appreciation of
$8,091,645 and aggregate gross unrealized depreciation of $184,895.
<F3> (c) Convertible into common stock of INSO Corporation.
<F4> (d) These securities are required to be converted on the date listed; they
generally may be converted prior to this date at the option of the holder.
</FN>
</TABLE>
-------------------
CASTLE CONVERTIBLE FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities, at value (cost $58,732,039),
see accompanying schedule of investments.................... $ 66,638,789
Cash ....................................................... 57,381
Dividends and interest receivable............................ 652,760
Prepaid expenses............................................. 948
------------
Total Assets............................................. 67,349,878
LIABILITIES:
Payable for investment securities purchased.................. $ 1,192,500
Investment advisory fees payable............................. 42,152
Directors' fees payable...................................... 3,370
Accrued expenses............................................. 61,623
-----------
Total Liabilities........................................ 1,299,645
------------
NET ASSETS applicable to 2,236,003 outstanding shares of $0.01
par value (10,000,000 shares authorized)...................... $ 66,050,233
============
NET ASSET VALUE PER SHARE...................................... $ 29.54
=============
</TABLE>
See Notes to Financial Statements.
CASTLE CONVERTIBLE FUND, INC.
STATEMENT OF OPERATIONS
for the year ended October 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest................................................. $ 2,612,534
Dividends................................................ 1,522,747
------------
Total Income........................................... 4,135,281
Expenses:
Investment advisory fees--Note 2(a)...................... $ 479,510
Directors' fees.......................................... 40,000
Custodian and transfer agent fees........................ 37,628
Shareholder reports...................................... 30,371
Professional fees........................................ 19,892
Bookkeeping fees......................................... 18,000
Miscellaneous............................................ 34,038
-----------
Less, earnings credits--Note 1(e)........................ (6,962)
-----------
Total Net Expenses..................................... 652,477
-----------
NET INVESTMENT INCOME........................................ 3,482,804
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments........................... 3,485,300
Net increase in unrealized appreciation of investments..... 747,343
-----------
Net realized and unrealized gain on investments............ 4,232,643
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS......... $ 7,715,447
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1996 October 31, 1995
---------------- ----------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net investment income......................................... $ 3,482,804 $ 3,897,234
Net realized gain on investments.............................. 3,485,300 1,733,615
Net change in unrealized appreciation of investments......... 747,343 5,622,436
---------------------------------
Net increase in net assets resulting from operations...... 7,715,447 11,253,285
---------------------------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income......................................... (3,555,247) (3,571,203)
Net realized gains............................................ (1,587,562) (1,798,201)
---------------------------------
Total dividends........................................... (5,142,809) (5,369,404)
---------------------------------
FROM CAPITAL SHARE TRANSACTIONS:
Shares issued to shareholders from reinvestment of dividends
(0 shares and 16,002 shares, respectively)................... -- 386,445
--------------------------------
Net increase in net assets................................ 2,572,638 6,270,326
--------------------------------
NET ASSETS:
Beginning of year............................................. 63,477,595 57,207,269
--------------------------------
End of year (including undistributed net investment income of
$779,674 and $852,117, respectively)......................... $ 66,050,233 $ 63,477,595
================================
</TABLE>
See Notes to Financial Statements.
CASTLE CONVERTIBLE FUND, INC.
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period
<TABLE>
<CAPTION>
Four
Year Year Months
Ended Ended Ended
October 31, October 31, October 31, Year Ended June 30,
----------- ----------- ----------- --------------------------
1996 1995 1994* 1994 1993 1992
----------- ----------- ----------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period........... $28.39 $25.77 $25.07 $27.29 $24.20 $22.18
------------------------------------------------------------------
Net investment income.......................... 1.56 1.74 0.52 1.62 1.68 1.70
Net realized and unrealized gain (loss) on
investments................................... 1.89 3.29 0.58 (1.60) 3.23 2.02
------------------------------------------------------------------
Total from investment operations............... 3.45 5.03 1.10 0.02 4.91 3.72
------------------------------------------------------------------
Dividends from net investment income........... (1.59) (1.60) (0.40) (1.67) (1.82) (1.70)
Distributions from net realized gains.......... (0.71) (0.81) -- (0.57) -- --
------------------------------------------------------------------
Total Distributions...................... (2.30) (2.41) (0.40) (2.24) (1.82) (1.70)
------------------------------------------------------------------
Net asset value, end of period................. $29.54 $28.39 $25.77 $25.07 $27.29 $24.20
==================================================================
Market value, end of period.................... $25.38 $25.63 $24.38 $22.25 $26.50 $21.25
==================================================================
Total investment return based on market
value per share............................... 8.14% 15.82% 11.28% (8.41%) 34.26% 22.78%
==================================================================
Ratios and Supplemental Data:
Net assets, end of period
(000's omitted)............................ $66,050 $63,478 $57,207 $55,665 $60,365 $53,537
==================================================================
Ratio of expenses to average net assets..... 1.03%** 1.05%** 1.04% 1.05% 1.06% 1.10%
==================================================================
Ratio of net investment income to average
net assets................................. 5.44% 6.62% 6.02% 6.02% 6.50% 7.24%
==================================================================
Portfolio Turnover Rate..................... 63.68% 52.80% 8.65% 29.38% 52.63% 68.69%
==================================================================
Average Commission Rate Paid................ $.0703
======
<FN>
- -------------------
<F1> * Ratios have been annualized; total return has not been annualized.
<F2> ** Reflects total expenses, including fees offset by earnings credits. The
expense ratio net of earnings credits would have been 1.02% and 1.03% for
the years ended October 31, 1996 and 1995, respectively.
</FN>
</TABLE>
See Notes to Financial Statements.
CASTLE CONVERTIBLE FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--Summary of Significant Accounting Policies:
Castle Convertible Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as a diversified, closed-end management
investment company. The Fund's investment adviser is Fred Alger Management, Inc.
(the "Adviser").
Effective October 31, 1994, the Fund changed its fiscal year end from June
30 to October 31.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
(a) Investment Valuation--Investments in securities are valued at 4:00 p.m.
Eastern time. Listed and unlisted securities for which such information is
regularly reported are valued at the last reported sales price or, in the
absence of reported sales, at the mean between the bid and asked price or, in
the absence of a recent bid or asked price, the equivalent as obtained from one
or more of the major market makers for the securities to be valued. Securities
for which market quotations are not readily available are valued at fair value,
as determined in good faith pursuant to procedures established by the Board of
Directors. Short-term corporate notes are valued at amortized cost which
approximates market value.
(b) Securities Transactions and Investment Income--Securities transactions are
recorded on a trade date basis. Realized gains and losses from securities
transactions are recorded on the basis of the first-in, first-out method.
Dividend income is recognized on the ex-dividend date and interest income is
recognized on the accrual basis.
(c) Dividends to Shareholders--Dividends payable to shareholders are recorded by
the Fund on the ex-dividend date. Dividends from net investment income are
declared and paid quarterly. Dividends from net realized gains are declared and
paid annually after the end of the fiscal year in which earned.
(d) Federal Income Taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income, including net realized
capital gains, to its shareholders. Therefore, no federal income tax provision
is required.
(e) Earnings Credits--The Fund's custodian fees have been reduced as a result of
earnings credits received on overnight cash balances. Balances left on deposit
with the custodian preclude their use elsewhere.
(f) Other--These financial statements have been prepared using estimates and
assumptions that affect the reported amounts therein. Actual results may differ
from those estimates.
NOTE 2--Investment Advisory Fees and Other Transactions with Affiliates:
(a) Investment Advisory Fees--Fees incurred by the Fund, pursuant to the
provisions of an Investment Advisory Contract (the "Contract") with the Adviser,
are payable monthly and computed at an annual rate of .75% based on the average
of the Fund's weekly net asset value.
The Contract further provides that if in any fiscal year the aggregate
expenses of the Fund (excluding interest, brokerage commissions, taxes and
extraordinary expenses) should exceed 1.5% of the first $30 million of average
net assets and 1.0% of the average net assets of the Fund over $30 million, the
Adviser will reimburse the Fund for such excess expenses. For the year ended
October 31, 1996, no reimbursement was required pursuant to the Contract. For
the year ended October 31, 1996, the total investment advisory fee charged to
the Fund amounted to $479,510, and the Adviser received $18,000 for bookkeeping
services supplied to the Fund at cost.
(b) Transfer Agent Fees--Alger Shareholder Services, Inc. ("Alger Services"), an
affiliate of the Adviser, serves as transfer agent for the Fund. During the year
ended October 31, 1996, the Fund incurred fees of approximately $16,300 for
services provided by Alger Services and reimbursed Alger Services approximately
$4,900 for transfer agent related expenses paid by Alger Services on behalf of
the Fund.
(c) Directors' Fees--Certain directors and officers of the Fund are directors
and officers of the Adviser and Alger Services. The Fund pays each director who
is not affiliated with the Adviser or its affiliates an annual fee of $8,000,
payable quarterly, which is reduced proportionately by any meetings not attended
during the quarter.
(d) Other Transactions With Affiliates--At October 31, 1996, the Adviser and its
affiliates owned 308,756 shares of the Fund.
NOTE 3--Securities Transactions:
During the year ended October 31, 1996, purchases and sales of investment
securities, excluding short-term securities, aggregated $37,722,931 and
$41,310,078, respectively.
NOTE 4--Components of Net Assets:
At October 31, 1996, the Fund's net assets consisted of:
<TABLE>
<S> <C>
Paid-in capital......................... $ 54,012,068
Undistributed net investment income..... 779,674
Undistributed net realized gain......... 3,351,741
Net unrealized appreciation............. 7,906,750
------------
NET ASSETS.............................. $ 66,050,233
============
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Castle Convertible Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
Castle Convertible Fund, Inc. (a Delaware Corporation), including the schedule
of investments, as of October 31, 1996, and the related statement of operations
for the year then ended, the 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
two years in the period then ended, for the four months in the period ended
October 31, 1994, and for each of the three years in the period ended June 30,
1994. These financial statements and financial highlights are the responsibility
of the Company'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 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 securities owned as of
October 31, 1996, by correspondence with the custodian and brokers. 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
Castle Convertible Fund, Inc. as of October 31, 1996, 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 the financial highlights for each of
the two years in the period then ended, for the four months in the period ended
October 31, 1994, and for each of the three years in the period ended June 30,
1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
November 19, 1996
CASTLE |
CONVERTIBLE | Meeting the challenge
FUND, | of investing
INC. |
Board of Directors
Fred M. Alger, Chairman
David D. Alger
Lester L. Colbert, Jr.
Arthur M. Dubow
Stephen E. O'Neil
Nathan E. Saint-Amand
John T. Sargent
- --------------------------------------------------------
Investment Adviser
Fred Alger Management, Inc.
75 Maiden Lane
New York, N.Y. 10038
- --------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Alger Shareholder Services, Inc.
30 Montgomery Street, Box 2001
Jersey City, N.J. 07302-9811
- --------------------------------------------------------
Independent Public Accountants
Arthur Andersen LLP
1345 Avenue of the Americas
New York, N.Y. 10105
- --------------------------------------------------------
Results of the Annual Meeting of Shareholders
The annual meeting of the shareholders of the Fund was
held on December 5, 1995. The following matters were
submitted to a shareholder vote and approved:
(i) the reelection of the following directors of the
Fund: Fred M. Alger, David D. Alger, Lester L. Colbert,
Jr., Arthur M. Dubow, Stephen E. O'Neil, Nathan E.
Saint-Amand, and John T. Sargent. Each of the directors
reelected received at least 2,023,459 affirmative votes
and no more than 28,335 votes were withheld for any
director.
(ii) the ratification of the selection of Arthur
Andersen LLP as the Fund's independent public
accountants for the fiscal year ending October 31, 1996:
For--2,023,873; Against--11,690; Abstain--16,229.
- --------------------------------------------------------
This report was prepared for distribution to
shareholders and to others who may be interested in
current information concerning the Fund. It was not
prepared for use, nor is it circulated in connection
with any offer to sell, or solicitation of any offer to
buy, any securities.
