Dear Shareholder:
The steady stream of statistics heralding the strength in the U.S.
economy forced the financial markets to abandon the view that a weak economy
and subdued inflation would induce the Federal Reserve to lower short term
interest rates. Now, concerns are mounting that the economy is so strong that
inflation will pick up and the Federal Reserve will have to hike short term
interest rates to rein in the economy. We do not accept the widely held view
that the economy is extremely robust. Nor do we think that the current
strength in the economy will result in heightened inflationary pressures.
Instead, we expect that the rise in long-term interest rates will cause
economic growth to slow to a more sustainable pace by the latter part of this
year. While the rate of expansion, in our estimation, will be sufficient to
generate continued gains in employment, the pace will not be strong enough to
support an acceleration in inflation.
The rise in long-term interest rates battered the bond market during the
three months ending April 30th. The Lehman Government/Corporate Bond Index, a
conventional measure of the bond market, posted a decline of 3.61% for the
period. The stock market which, in our judgment, was undervalued relative to
long-term interest rates, continued to advance. The market, as measured by the
S&P 500, generated a total return of 3.39% for the same three month period
ending April 30th. Castle Convertible Fund, because of its income orientation,
is also adversely affected by rising interest rates. However, its exposure to
the equity market helps buttress the fund when the fixed income markets
decline. Consequently, Castle produced a positive total return of 1.48% on a
net asset value basis during the second fiscal quarter.
We expect that the financial markets will continue to challenge
investors for the rest of the year, oscillating between the fear of recession
and the fear of inflation. Castle's conservative stance should serve its
shareholders well in the volatile months ahead.
Respectfully submitted,
David D. Alger
President
June 21, 1996
CASTLE CONVERTIBLE FUND, INC.
SCHEDULE OF INVESTMENTS
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Principal
Amount Corporate Bonds--53.4% Value
- - - ----------------------------------------------------------------------------
<C> <S> <C>
BUILDING & CONSTRUCTION--1.5%
$ 1,000,000 Masco Corp., Cv. Sub. Deb.,
5.25%, 2/15/12 $ 925,000
-----------
COMPUTER RELATED & BUSINESS EQUIPMENT--6.3%
1,850,000 Conner Peripherals Inc., Cv. Sub.
Deb., 6.75%, 3/1/01 1,979,500
500,000 Diagnostic/Retrieval Systems, Inc.,
Sub. Cv. Notes, 9.00%, 10/1/03 (a) 537,500
500,000 Softkey International Inc., Sr. Cv.
Notes, 5.50%, 11/1/00 (a) 436,250
650,000 3 Com Corp., Cv. Sub. Notes,
10.25%, 11/1/01(a) 1,027,000
-----------
3,980,250
-----------
ENERGY--9.4%
2,100,000 Ashland Inc., Cv. Sub. Deb., 6.75%, 7/1/14 2,142,000
1,850,000 Consolidated Natural Gas, Cv. Sub. Deb.,
7.25%, 12/15/15 1,914,750
2,000,000 Enserch, Eurodollar, Cv. Sub. Deb., 6.375%,
4/1/02 1,935,000
-----------
5,991,750
-----------
HEALTHCARE--12.2%
3,050,000 Beverly Enterprises, Cv. Sub. Deb.,
7.625%, 3/15/03 2,867,000
1,450,000 Centocor Inc., Eurodollar, Cv. Sub. Deb.,
6.75%, 10/16/01 1,352,125
500,000 Healthsource Inc., Cv. Sub. Deb., 5.00%,
3/1/03(a) 487,500
1,000,000 Medical Care International, Cv. Sub. Deb.,
6.75%, 10/1/06 1,027,500
1,000,000 Medical Care International, Eurodollar, Cv. Sub.
Deb., 6.75%, 10/1/06 1,027,500
500,000 Sepracor Inc., Cv. Sub. Deb., 7.00%,
12/1/02(a) 492,500
500,000 U.S. Diagnostic Labs, Inc., Cv. Sub. Deb.,
9.00%, 3/31/03(a) 530,000
-----------
7,784,125
-----------
METALS--2.1%
1,250,000 Inco Limited, Cv. Sub. Deb., 7.75%, 3/15/16 1,348,438
-----------
POLLUTION CONTROL--5.0%
2,000,000 Laidlaw, Inc., Cv. Sub. Notes, 8.00%, 5/1/01 2,240,000
750,000 U.S. Filter Corp., Cv. Sub. Notes, 6.00%,
9/15/05 (a) 948,750
-----------
3,188,750
-----------
RETAILING--10.7%
$ 1,240,000 Fabri-Centers of America, Inc., Cv. Sub. Deb.,
6.25%, 3/1/02 $ 1,018,350
1,800,000 Price/Costco Inc., Cv. Sub. Deb.,
6.75%, 3/1/01 1,836,000
1,500,000 Tiffany & Co., Eurodollar, Cv. Sub. Deb.,
6.375%, 3/15/01 1,755,000
2,000,000 Waban Inc., Cv. Sub. Deb., 6.50%, 7/1/02 2,180,000
-----------
6,789,350
-----------
SEMI-CONDUCTORS--3.4%
736,000 Network Equipment Technologies, Cv. Sub. Deb.,
7.25%, 5/15/14 739,680
750,000 VLSI Technology, Inc., Cv. Sub. Notes, 8.25%,
10/1/05 716,250
750,000 Xilinx Inc., Cv. Sub. Notes, 5.25%,
11/1/02(a) 744,375
-----------
2,200,305
-----------
TRANSPORTATION--2.8%
1,800,000 Airborne Freight Corp., Cv. Sub.
Deb., 6.75%, 8/15/01 1,800,000
-----------
Total Corporate Bonds (Cost $32,222,700) 34,007,968
-----------
<CAPTION>
Shares Convertible Preferred Stocks--23.5%
- - - -----------
<C> <S> <C>
AIRLINES--.7%
7,000 Delta Air Lines Inc., $3.50 Dep.
Shrs., Series C. 443,625
-----------
BUILDING & CONSTRUCTION--1.8
25,000 Southdown Inc., Cv. Pfd. $2.875,
Series D 1,159,375
-----------
COMMUNICATIONS-2.0%
15,000 Evergreen Media Corp., Cv. 6.00%
Exch. Pfd. 1,253,202
-----------
COMPUTER RELATED & BUSINESS EQUIPMENT--.9%
10,000 Wang Laboratories Inc., 6.50%, Cv. Pfd.
Series B(a) 550,000
-----------
PAPER PACKAGING & FOREST PRODUCTS--1.1%
34,900 Stone Container Corp., $1.75 Cv. Pfd.,
Series E 706,725
-----------
PUBLISHING--3.1%
20,000 Houghton Mifflin Company, 6.00% Exch. Nts. 1,980,000
-----------
RAW MATERIAL PROCESSING--7.3%
20,000 Bethlehem Steel Corporation, $5.00 Cum. Pfd. 1,060,000
15,000 Howell Corp., $3.50 Cum. Pfd 742,500
60,000 James River Corp., Dep. Shrs., $3.50 Exch.
Pfd., Series L. 2,857,500
-----------
4,660,000
-----------
REAL ESTATE--1.1%
35,400 Wellsford Residential Property Trust,
7.00% Cum. Cv. Pfd., Series A $ 694,725
-----------
SAVINGS & LOANS--2.7%
30,000 Great Western Financial Corp., Dep. Shrs.,
8.75% Cum. Cv. Dep. Pfd. 1,740,000
-----------
MISCELLANEOUS--2.8%
20,000 SCI Finance LLC, $3.125 Term Cv. Shares,
Series A 1,770,000
-----------
Total Convertible Preferred Stocks
(Cost $12,947,484) 14,957,652
-----------
Common Stocks--12.9%
UTILITIES
52,000 American Electric Power Co., Inc. 2,112,500
35,000 Boston Edison Co. 853,125
38,000 Oklahoma Gas & Electric Co. 1,434,500
65,000 Public Service Colorado 2,153,125
35,000 Puget Sound Power & Light Co. 831,250
40,000 Rochester Gas & Electric Corp. 820,000
-----------
Total Common Stocks (Cost $6,920,804) 8,204,500
-----------
<CAPTION>
Principal
Amount Short-Term Corporate Notes--8.8% Value
- - - ----------------------------------------------------------------------------
<C> <S> <C>
$ 232,000 Ameritech Corp., 5.22%, 5/7/96 $ 231,495
2,717,000 Barnett Bank, Corp., 5.33%, 5/7/96 2,711,771
2,441,000 Ford Motor Credit Company, 5.26%, 5/7/96 2,441,000
225,000 Lucent Technologies, Inc., 5.27%, 5/9/96 224,539
-----------
Total Short-Term Corporate Notes
(Cost $5,608,805) 5,608,805
-----------
</TABLE>
<TABLE>
<S> <C> <C>
Total Investments
(Cost $57,699,793) 98.6% 62,778,925
Other Assets in Excess of Liabilities 1.4 889,823
-------------------------
Total Net Assets 100.0% $63,668,748
=========================
- - - -------------------
<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 April 30, 1996, the net unrealized appreciation on investments, based
on cost for Federal income tax purposes of $57,699,793, amounted to
$5,079,132 which consisted of aggregate gross unrealized appreciation of
$5,959,199 and aggregate gross unrealized depreciation of $880,067.
</TABLE>
CASTLE CONVERTIBLE FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1996 (Unaudited)
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities, at value (cost $57,699,793),
see accompanying schedule of investments $62,778,925
Cash 77
Receivable for investment securities sold 299,775
Dividends and interest receivable 668,844
Prepaid expenses 7,177
-----------
Total Assets 63,754,798
LIABILITIES:
Investment advisory fees payable $38,896
Directors' fees payable 3,260
Accrued expenses 43,894
-------
Total Liabilities 86,050
-----------
NET ASSETS applicable to 2,236,003 outstanding shares
of $0.01 par value (10,000,000 shares authorized) $63,668,748
===========
NET ASSET VALUE PER SHARE $ 28.47
===========
</TABLE>
See Notes to Financial Statements.
CASTLE CONVERTIBLE FUND, INC.
STATEMENT OF OPERATIONS
for the six months ended April 30, 1996 (Unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest $1,295,290
Dividends 757,216
----------
Total Income 2,052,506
Expenses:
Investment advisory fees-Note 2(a) $ 234,869
Directors' fees 20,975
Custodian and transfer agent fees 19,419
Professional fees 12,873
Shareholder reports 12,754
Bookkeeping fees 9,000
Miscellaneous 15,897
-----------
325,787
Less, earnings credits-Note 1(e) (5,224)
-----------
Total Net Expenses 320,563
----------
NET INVESTMENT INCOME 1,731,943
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 4,027,651
Net decrease in unrealized appreciation of investments (2,080,275)
-----------
Net realized and unrealized gain on investments 1,947,376
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,679,319
==========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1996 Year Ended Four Months Ended
(Unaudited) October 31, 1995 October 31, 1994
------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net investment income $ 1,731,943 $ 3,897,234 $ 1,156,972
Net realized gain (loss) on investments 4,027,651 1,733,615 (76,208)
Net change in unrealized appreciation
(depreciation) of investments (2,080,275) 5,622,436 1,349,199
-------------------------------------------------
Net increase in net assets resulting from operations 3,679,319 11,253,285 2,429,963
-------------------------------------------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income (1,900,604) (3,571,203) (888,000)
Net realized gain (1,587,562) (1,798,201) --
-------------------------------------------------
Total dividends (3,488,166) (5,369,404) (888,000)
-------------------------------------------------
FROM CAPITAL SHARE TRANSACTIONS:
Shares issued to shareholders from reinvestment of
dividends (0 shares, 16,002 shares and 0 shares,
respectively) -- 386,445 --
-------------------------------------------------
Net increase in net assets 191,153 6,270,326 1,541,963
NET ASSETS:
Beginning of period 63,477,595 57,207,269 55,665,306
-------------------------------------------------
End of period (including undistributed net investment in-
come of $683,456, $852,117 and $526,086, respectively) $63,668,748 $63,477,595 $57,207,269
=================================================
</TABLE>
See Notes to Financial Statements.
CASTLE CONVERTIBLE FUND, INC.
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period:
<TABLE>
<CAPTION>
Six Four
Months Year Months
Ended Ended Ended Year Ended June 30,
April 30, October 31, October 31, ----------------------------------
1996(i)(ii) 1995 1994(ii) 1994 1993 1992 1991
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $28.39 $25.77 $25.07 $27.29 $24.20 $22.18 $21.65
------------------------------------------------------------------------------
Net investment income 0.78 1.74 0.52 1.62 1.68 1.70 1.61
Net realized and unrealized gain (loss)
on investments 0.86 3.29 0.58 (1.60) 3.23 2.02 0.58
------------------------------------------------------------------------------
Total from investment operations 1.64 5.03 1.10 0.02 4.91 3.72 2.19
------------------------------------------------------------------------------
Dividends from net investment income (0.85) (1.60) (0.40) (1.67) (1.82) (1.70) (1.66)
Distributions from net realized gains (0.71) (0.81) -- (0.57) -- -- --
------------------------------------------------------------------------------
Total Distributions (1.56) (2.41) (0.40) (2.24) (1.82) (1.70) (1.66)
------------------------------------------------------------------------------
Net asset value, end of period $28.47 $28.39 $25.77 $25.07 $27.29 $24.20 $22.18
==============================================================================
Market value, end of period $25.50 $25.63 $24.38 $22.25 $26.50 $21.25 $18.75
==============================================================================
Total investment return based on market
value per share 5.51% 15.82% 11.28% (8.41%) 34.26% 22.78% 9.00%
==============================================================================
Ratios and Supplemental Data:
Net assets, end of period (000's omitted) $63,669 $63,478 $57,207 $55,665 $60,365 $53,537 $49,058
==============================================================================
Ratio of expenses to average net assets 1.03%(iii) 1.05%(iii) 1.04% 1.05% 1.06% 1.10% 1.15%
==============================================================================
Ratio of net investment income to
average net assets 5.49% 6.62% 6.02% 6.02% 6.50% 7.24% 7.79%
==============================================================================
Portfolio Turnover Rate 29.69% 52.80% 8.65% 29.38% 52.63% 68.69% 48.37%
==============================================================================
Average Commission Rate Paid $.0700
======
- - - -------------------
<F1> (i) Unaudited.
<F2> (ii) Ratios have been annualized; total return has not been annualized.
<F3> (iii) Reflects total expenses, including fees offset by earnings credits. The
expense ratio net of earnings credits would have been 1.02% for the six
months ended April 30, 1996 and 1.03% for the year ended
October 31, 1995.
</TABLE>
See Notes to Financial Statements.
CASTLE CONVERTIBLE FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
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.
(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, 1995, no reimbursement was required pursuant to the
Contract. For the six months ended April 30, 1996, the total investment
advisory fee charged to the Fund amounted to $234,869, and the Adviser
received $9,000 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
six months ended April 30, 1996, the Fund incurred fees of approximately
$7,100 for services provided by Alger Services and reimbursed Alger Services
approximately $2,100 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 April 30, 1996, the Adviser and its
affiliates owned 308,756 shares of the Fund.
NOTE 3-Securities Transactions:
During the six months ended April 30, 1996, purchases and sales of
investment securities, excluding short-term securities, aggregated $17,375,173
and $23,492,725, respectively.
NOTE 4-Components of Net Assets:
At April 30, 1996, the Fund's net assets consisted of:
<TABLE>
<S> <C>
Paid-in capital $54,012,068
Undistributed net investment income 683,456
Undistributed net realized gain 3,894,092
Net unrealized appreciation 5,079,132
-----------
NET ASSETS $63,668,748
===========
</TABLE>
CASTLE CONVERTIBLE FUND, INC.
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
- - - ------------------------------------------------------------------------------
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.
CASTLE CONVERTIBLE FUND, INC.
Semi-Annual Report
April 30, 1996
