CASTLE CONVERTIBLE FUND, INC. [LOGO]
Annual Report
October 31, 1995
Dear Shareholder:
After a promising pickup in activity in the third quarter, the U.S.
economy has slowed again. Long-term interest rates have fallen as signs of
weakness multiply and the outlook for inflation remains favorable. The 30-year
Treasury bond, as we write, yields 6.08%, nearly 180 basis points lower than
the yields prevailing a year ago. The yield on the 10-year bond during the
same period has fallen almost 200 basis points to around 5.75%. On the other
hand, short-term rates which are more influenced by Federal Reserve policy,
have barely budged. The yield on 3-month Treasury bills, for example, has
slipped a mere 25 basis points to 5.25%. As a result, the yield curve, which
traces the relationship between interest rates and lengths of time to
maturity, has flattened dramatically. In fact, the 10-year Treasury bond is
actually yielding less than the Fed Fund rate, a highly unusual development.
The implication is clear. Investors believe that monetary policy is too
restrictive given current economic conditions. When the Federal Reserve will
next cut rates may be debatable, but we share the market's expectation that
the Federal Reserve will ease policy in the months ahead.
The stock market, in our opinion, is still undervalued given the low
level of interest rates. We believe the economy will keep expanding at a slow
rate. The interest-sensitive sectors of the economy should begin to accelerate
in response to the drop in interest rates which has already occurred. Surveys
continue to show consumer confidence is high. The economy continues to create
new jobs, and the unemployment rate remains low. A great deal of wealth has
been created in the financial markets. All of these indicators point to slow,
steady growth. If corporate profits hold up, and on balance we expect they
will, the stock market should continue to advance, even after the strong
performance so far in 1995.
The stock market, as measured by the S & P 500 Index, produced a
spectacular total return of 8.4% in the three month period ended November
30th, resulting in a total return of 35.0% for the first eleven months of
1995. The gains for Castle were less dramatic, as would be expected given its
more conservative investment strategy. Still, for the eleven months ended
November 30th, Castle's total return reached 24.2% on a NAV basis, well ahead
of the 17.5% total return of the fixed-income market, as measured by the
Lehman Government/Corporate Bond Index.
Given our positive outlook for both the stock and bond markets, we
expect that Castle will continue to produce favorable returns for its
investors in the new year.
Dividends paid in December 1995 were $0.48 from net investment income,
$0.61 from short-term capital gains and $0.10 from long-term capital gains.
Respectfully submitted,
David D. Alger
President
December 15, 1995
CASTLE CONVERTIBLE FUND, INC.
SCHEDULE OF INVESTMENTS
October 31, 1995
<TABLE>
<CAPTION>
Principal
Amount Corporate Bonds--59.3% Value
- ---------------------------------------------------------------
<C> <S> <C>
BUILDING & CONSTRUCTION--2.2%
$1,500,000 Continental Homes Holding Corp.,
Cv. Notes, 6.875%, 3/15/02 $ 1,417,500
-----------
COMPUTER RELATED & BUSINESS
EQUIPMENT--8.7%
750,000 Bay Networks, Cv. Sub. Deb.,
5.25%, 5/15/03(a) 855,000
500,000 Diagnostic/Retrieval Systems,
Inc., Sr. Sub. Cv. Notes, 9.00%,
10/1/03 (a) 503,750
1,500,000 Seagate Technology Corp., Cv.
Sub. Deb., 6.75%, 5/1/12 1,680,000
500,000 Softkey International Inc., Sr. Cv.
Notes, 5.50%, 11/1/00 (a) 422,500
1,250,000 3 Com Corp., Cv. Sub. Notes,
10.25%, 11/1/01(a) 2,078,125
-----------
5,539,375
-----------
ENERGY--5.5%
1,600,000 Ashland Inc., Cv. Sub. Deb.,
6.75%, 7/1/14 1,592,000
1,850,000 Consolidated Natural Gas, Cv. Sub.
Deb., 7.25%, 12/15/15 1,924,000
-----------
3,516,000
-----------
HEALTH CARE--6.3%
3,050,000 Beverly Enterprises, Cv. Sub. Deb.,
7.625%, 3/15/03 2,966,125
1,000,000 Medical Care International,
Eurodollar, Cv. Sub. Deb., 6.75%,
10/1/06 992,500
-----------
3,958,625
-----------
INSURANCE--4.5%
2,000,000 Cigna Corp., Cv. Sub. Deb., 8.20%,
7/10/10 2,860,000
-----------
LEISURE & ENTERTAINMENT--2.5%
1,547,300 Time Warner Inc., Cv. Sub. Deb.,
8.75%, 1/10/15 1,611,126
-----------
MANUFACTURING--2.1%
1,400,000 VLSI Technology, Inc., Cv. Sub.
Notes, 8.25%, 10/1/05 1,333,500
-----------
METALS--.8%
500,000 Inco Limited, Cv. Sub. Deb.,
7.75%, 3/15/16 530,000
-----------
POLLUTION CONTROL--7.0%
2,250,000 Browning-Ferris Industries,
Eurodollar, Cv. Sub. Deb., 6.75%,
7/18/05 2,221,875
1,100,000 USA Waste Services, Inc., Cv. Sub.
Deb., 8.50%, 10/15/02 1,710,500
500,000 U.S. Filter Corp., Cv. Sub. Notes,
6.00%, 9/15/05 (a) 527,500
-----------
4,459,875
-----------
RETAILING--12.6%
$1,240,000 Fabri-Centers of America, Inc.,
Cv. Sub. Deb., 6.25%, 3/1/02 $ 1,091,200
1,800,000 Federated Dept. Stores, Sr. Cv.
Discount Notes, 9.72%, 2/15/04 1,800,000
1,800,000 Price/Costco Inc., Cv. Sub. Deb.,
6.75%, 3/1/01 1,831,500
1,500,000 Tiffany & Co., Eurodollar, Cv. Sub.
Deb., 6.375%, 3/15/01 1,530,000
1,750,000 Waban Inc., Cv. Sub. Deb., 6.50%,
7/1/02 1,662,500
-----------
7,915,200
-----------
SEMI-CONDUCTORS--4.3%
500,000 Altera Corp., Cv. Sub. Notes,
5.75%, 6/15/02 (a) 673,750
500,000 Integrated Device Technology, Inc.,
Cv. Sub. Notes, 5.50%, 6/1/02 478,125
1,500,000 Network Equipment Technologies,
Cv. Sub. Deb., 7.25%, 5/15/14 1,545,000
-----------
2,696,875
-----------
TRANSPORTATION--2.8%
1,800,000 Airborne Freight Corp., Cv. Sub.
Deb., 6.75%, 8/15/01 1,804,500
-----------
Total Corporate Bonds
(Cost $33,476,502) 37,642,576
-----------
</TABLE>
<TABLE>
<CAPTION>
Convertible Preferred
Shares Stocks--25.3%
- ----------
<C> <S> <C>
AIRLINES--.6%
7,000 Delta Air Lines Inc., $3.50 Dep.
Shrs., Series C. 388,500
-----------
COMMUNICATIONS--2.7%
15,000 Evergreen Media Corp., Cv. 6.00%
Exch. Pfd. 903,750
20,000 Mobile Telecommunication
Technologies Corp., $2.25 Conv.
Pfd.(a) 790,000
-----------
1,693,750
-----------
COMPUTER RELATED & BUSINESS
EQUIPMENT--3.2%
30,000 General Motors Corporation, $3.25
Series C Dep. Shrs. 2,010,000
-----------
PAPER PACKAGING & FOREST
PRODUCTS--2.4%
75,000 Stone Container Corp., $1.75 Cv.
Pfd., Series E 1,537,500
-----------
PUBLISHING--2.8%
25,000 Houghton Mifflin Company,
6% Exch Nts. 1,775,000
-----------
RAW MATERIAL PROCESSING--7.6%
20,000 Bethlehem Steel Corporation, $5.00
Cum. Pfd. $ 1,065,000
15,000 Howell Corp., $3.50 Cum. Pfd 757,500
60,000 James River Corp., Dep. Shrs.,
$3.50 Exch. Pfd., Series L. 3,000,000
-----------
4,822,500
-----------
REAL ESTATE--1.1%
35,400 Wellsford Residential Property
Trust, 7.00% Cum. Cv. Pfd.,
Series A 690,300
-----------
SAVINGS & LOANS--2.7%
30,000 Great Western Financial Corp.,
Dep. Shrs., 8.75% Cum. Cv.
Dep. Pfd. 1,751,250
-----------
MISCELLANEOUS--2.2%
20,000 SCI Finance LLC, $3.125 Term Cv.
Shares, Series A 1,410,000
-----------
Total Convertible Preferred Stocks
(Cost $14,669,998) 16,078,800
-----------
UTILITIES
52,000 American Electric Power Co., Inc. $ 1,982,500
35,000 Boston Edison Co. 958,125
38,000 Oklahoma Gas & Electric Co. 1,520,000
65,000 Public Service Colorado 2,218,125
40,000 Rochester Gas & Electric Corp. 940,000
-----------
Total Common Stocks
(Cost $6,034,219) 7,618,750
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal Short-Term Corporate
Amount Notes--1.7%
- ----------
<C> <S> <C>
$1,061,000 Ford Motor Credit Company,
5.7664%, 11/1/95
(Cost $1,061,000) 1,061,000
-----------
Total Investments
(Cost $55,241,719)(b) 98.3% 62,401,126
Other Assets in Excess of Liabilities 1.7% 1,076,469
---------------------
Total Net Assets 100.0% $63,477,595
=====================
____________________
<Fa> Pursuant to Securities and Exchange Commission Rule 144A, these
securities may be sold prior to their maturity only to qualified institutional
buyers.
<Fb> At October 31, 1995, the net unrealized appreciation on investments,
based on cost for federal income tax purposes of $55,241,719, amounted to
$7,159,407, which consisted of aggregate gross unrealized appreciation of
$7,980,002 and aggregate gross unrealized depreciation of $820,595.
</TABLE>
____________________
CASTLE CONVERTIBLE FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities, at value (cost $55,241,719), see accompanying
schedule of investments $62,401,126
Cash 554,351
Receivable for investment securities sold 292,964
Dividends and interest receivable 842,280
Prepaid expenses 3,780
Total Assets 64,094,501
LIABILITIES:
Payable for investment securities purchased $528,163
Investment advisory fees payable 41,793
Directors' fees payable 3,370
Accrued expenses 43,580
Total Liabilities 616,906
-----------
NET ASSETS applicable to 2,236,003 outstanding shares of $0.01 par value
(10,000,000 shares authorized) $63,477,595
===========
NET ASSET VALUE PER SHARE $ 28.39
===========
</TABLE>
See Notes to Financial Statements.
CASTLE CONVERTIBLE FUND, INC.
STATEMENT OF OPERATIONS
for the year ended October 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest $ 2,813,777
Dividends 1,690,886
-----------
Total Income 4,504,663
Expenses:
Investment advisory fees--Note 2(a) $ 441,656
Directors' fees 40,000
Custodian and transfer agent fees 35,135
Shareholder reports 29,029
Professional fees 25,260
Bookkeeping fees 18,000
Miscellaneous 28,929
----------
618,009
Less, earnings credits--Note 1(e) (10,580)
----------
Total Net Expenses 607,429
-----------
NET INVESTMENT INCOME 3,897,234
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 1,733,615
Net increase in unrealized appreciation of investments 5,622,436
----------
Net realized and unrealized gain on investments 7,356,051
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $11,253,285
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Four Months Ended Year Ended
October 31, 1995 October 31, 1994 June 30, 1994
----------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net investment income $ 3,897,234 $ 1,156,972 $ 3,602,809
Net realized gain (loss) on investments 1,733,615 (76,208) 2,327,503
Net change in unrealized appreciation (depreciation) of
investments 5,622,436 1,349,199 (5,888,039)
--------------------------------------------------
Net increase in net assets resulting from operations 11,253,285 2,429,963 42,273
--------------------------------------------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income (3,571,203) (888,000) (3,700,320)
Net realized gain (1,798,201) -- (1,260,762)
--------------------------------------------------
Total dividends (5,369,404) (888,000) (4,961,082)
--------------------------------------------------
FROM CAPITAL SHARE TRANSACTIONS:
Shares issued to shareholders from reinvestment of
dividends (16,002 shares, 0 shares and 8,138 shares,
respectively) 386,445 -- 219,312
--------------------------------------------------
Net increase (decrease) in net assets 6,270,326 1,541,963 (4,699,497)
NET ASSETS:
Beginning of period 57,207,269 55,665,306 60,364,803
--------------------------------------------------
End of period (including undistributed net investment in-
come of $852,117, $526,086 and $257,114, respectively) $63,477,595 $57,207,269 $55,665,306
==================================================
</TABLE>
See Notes to Financial Statements.
CASTLE CONVERTIBLE FUND, INC.
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period
<TABLE>
<CAPTION>
Four
Year Months
Ended Ended
October 31, October 31, Year Ended June 30,
----------------------------------------
1995 1994* 1994 1993 1992 1991
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $25.77 $25.07 $27.29 $24.20 $22.18 $21.65
------------------------------------------------------------------
Net investment income 1.74 0.52 1.62 1.68 1.70 1.61
Net realized and unrealized gain (loss) on
investments 3.29 0.58 (1.60) 3.23 2.02 0.58
------------------------------------------------------------------
Total from investment operations 5.03 1.10 0.02 4.91 3.72 2.19
------------------------------------------------------------------
Dividends from net investment income (1.60) (0.40) (1.67) (1.82) (1.70) (1.66)
Distributions from net realized gains (0.81) -- (0.57) -- -- --
------------------------------------------------------------------
Total Distributions (2.41) (0.40) (2.24) (1.82) (1.70) (1.66)
------------------------------------------------------------------
Net asset value, end of period $28.39 $25.77 $25.07 $27.29 $24.20 $22.18
==================================================================
Market value, end of period $25.63 $24.38 $22.25 $26.50 $21.25 $18.75
==================================================================
Total investment return based on market
value per share 15.82% 11.28% (8.41%) 34.26% 22.78% 9.00%
==================================================================
Ratios and Supplemental Data:
Net assets, end of period
(000's omitted) $63,478 $57,207 $55,665 $60,365 $53,537 $49,058
==================================================================
Ratio of expenses to average net
assets 1.05%** 1.04% 1.05% 1.06% 1.10% 1.15%
==================================================================
Ratio of net investment income to
average net assets 6.62% 6.02% 6.02% 6.50% 7.24% 7.79%
==================================================================
Portfolio Turnover Rate 52.80% 8.65% 29.38% 52.63% 68.69% 48.37%
==================================================================
- --------------------
<F*> Ratios have been annualized; total return has not been annualized.
<F**> Reflects total expenses, including fees offset by earnings credits. The
expense ratio net of earnings credits would have been 1.03%.
</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 gain 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.
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, 1995, no reimbursement was required pursuant to the
Contract. For the year ended October 31, 1995, the total investment advisory
fee charged to the Fund amounted to $441,656, 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, 1995, the Fund incurred fees of approximately $13,900
for services provided by Alger Services and reimbursed Alger Services
approximately $4,100 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, 1995, the Adviser and
its affiliates owned 308,756 shares of the Fund.
NOTE 3--Securities Transactions:
During the year ended October 31, 1995, purchases and sales of
investment securities, excluding short-term securities, aggregated $30,007,852
and $31,547,483, respectively.
NOTE 4--Components of Net Assets:
At October 31, 1995, the Fund's net assets consisted of:
<TABLE>
<S> <C>
Paid-in capital $54,012,068
Undistributed net investment income 852,117
Undistributed net realized gain 1,454,003
Net unrealized appreciation 7,159,407
-----------
NET ASSETS $63,477,595
===========
</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, 1995, and the related statement of
operations for the year then ended, the statement of changes in net assets for
the year then ended, for the four months in the period ended October 31, 1994,
and for the year ended June 30, 1994, and the financial highlights for the
year ended October 31, 1995, for the four months in the period ended October
31, 1994, and for each of the four 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, 1995, 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, 1995, the results
of its operations for the year then ended, the changes in its net assets for
the year then ended, for the four months in the period ended October 31, 1994,
and for the year ended June 30, 1994, and the financial highlights for the
year ended October 31, 1995, for the four months in the period ended October
31, 1994, and for each of the four years in the period ended June 30, 1994, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
December 14, 1995
CASTLE CONVERTIBLE FUND, INC. [LOGO]
Board of Directors
Fred M. Alger, Chairman
David D. Alger
Lester L. Colbert, Jr.
Arthur M. Dubow
Stephen E. O'Neil
Nathan 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
- ----------------------------------------------
Custodian
NatWest Bank National Association
10 Exchange Place
Jersey City, N.J. 07302
- ----------------------------------------------
Independent Public Accountants
Arthur Andersen LLP
1345 Avenue of the Americas
New York, N.Y. 10105
- ----------------------------------------------
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.
