CASTLE
CONVERTIBLE Meeting the challenge
FUND, of investing
INC.
Semi-Annual Report
April 30, 1997
Dear Shareholder:
The exceptionally strong economy in the first quarter rekindled fears
that the economy was growing so rapidly that demand would outstrip supply,
leading to an acceleration in inflation. The Federal Reserve began to signal
its intent to raise short-term interest rates to prevent inflation from
taking hold. The rate increase on March 25, therefore, came as no surprise.
The real issue was how restrictive monetary policy would have to become to
slow down the economy and prevent a resurgence in inflation.
The steady stream of statistics measuring the economy's performance
now indicates that by the start of the second quarter the economy had slowed
from the rapid pace recorded in the first quarter of 1997. We expect that
the economy will generate a moderate 2.0 to 2.5% rate of growth in the
months ahead. Most measures of inflation continue to show little sign of
accelerating. Commodity prices are stable since most raw materials are in
ample supply. Despite the drop in the unemployment rate, wage gains still
remain moderate. Acute labor shortages resulting in higher wages remain
confined to certain industries and certain regions of the country. Intense
competitive pressures and a well-entrenched resistance to higher prices
still limit companies from passing through higher costs. We believe that
because of the prospect for moderate economic growth and limited inflation,
the Federal Reserve will not raise interest rates in the near future.
Fears about a stronger economy, higher inflation and weak corporate
profits began to worry investors in February. The S&P which reached an all-
time high of 816 on February 18 began to retreat in the face of growing
investor anxiety. By April 11, the S&P had fallen almost 10%. The fixed
income market also fared poorly. As evidence mounted that the economy had
slowed and the need for another round of tightening by the Federal Reserve
became less compelling, the markets began to turn up. By the end of April
the stock market had regained most of the ground it had lost.
Castle Convertible Fund did not fare as well, recording a loss of
3.22% on a NAV basis for the three months ended April 30. A few holdings in
the portfolio suffered price declines because of earnings shortfalls or
other disappointments, but most of the drop in the value reflected the
market pullback. We are pleased to report that Castle made excellent
progress through May and early June in recovering the ground lost in the
second fiscal quarter. The benign outlook for the financial markets should
permit Castle to continue to build on these returns.
Respectfully submitted,
/s/ David D. Alger
David D. Alger
President
June 18, 1997
CASTLE CONVERTIBLE FUND, INC.
SCHEDULE OF INVESTMENTS (Unaudited)
April 30, 1997
<TABLE>
<CAPTION>
Principal Corporate Convertible
Amount Bonds--53.2% Value
- - -----------------------------------------------------------------
<C> <S> <C>
AEROSPACE--3.7%
$ 400,000 Diagnostic/Retrieval Systems,
Inc., Sr. Sub. Cv. Notes, 9.00%,
10/1/03(a).......................... $ 488,000
2,000,000 Rohr Industries Inc., Cv. Sub.
Deb., 7.00%, 10/1/12................ 1,780,000
-----------
2,268,000
-----------
BUILDING & CONSTRUCTION--1.7%
1,000,000 Masco Corp., Cv. Sub. Deb.,
5.25%, 2/15/12...................... 1,025,000
-----------
COMPUTER RELATED & BUSINESS
EQUIPMENT--.5%
400,000 HMT Technology Corporation, Cv.
Sub. Notes, 5.75%, 1/15/04(a)....... 322,000
-----------
ENERGY--9.9%
2,100,000 Ashland Inc., Cv. Sub. Deb.,
6.75%, 7/1/14....................... 2,173,500
1,850,000 Consolidated Natural Gas, Cv. Sub.
Deb., 7.25%, 12/15/15............... 1,942,500
2,000,000 Enserch, (Eurodollar), Cv. Sub.
Deb., 6.375%, 4/1/02................ 1,980,000
-----------
6,096,000
-----------
FINANCIAL SERVICES--2.0%
250,000 Penn Treaty America Corp., Cv.
Sub. Notes, 6.25%, 12/1/03(a)....... 286,875
1,230,000 Southern Pacific Funding, Cv. Sub.
Notes, 6.75%, 10/15/06.............. 968,625
-----------
1,255,500
-----------
HEALTHCARE--12.5%
3,016,000 Beverly Enterprises, Cv. Sub. Deb.,
7.625%, 3/15/03..................... 3,008,460
1,450,000 Centocor, Inc., (Eurodollar), Cv.
Sub. Deb., 6.75%, 10/16/01.......... 1,428,250
1,000,000 Ciba Geigy Corp., Exch. Sub.
Deb., 6.25%, 3/15/16(a)............. 1,015,000
1,000,000 Medical Care International , Cv.
Sub. Deb., 6.75%, 10/1/06........... 967,500
1,000,000 Medical Care International,
(Eurodollar), Cv. Sub. Deb.,
6.75%, 10/1/06...................... 977,500
300,000 Sepracor Inc., Cv. Sub. Deb.,
7.00%, 12/1/02(a)................... 345,750
-----------
7,742,460
-----------
MANUFACTURING--2.0%
1,250,000 Quanex Corp., Cv. Sub. Deb.,
6.88%, 6/30/07...................... 1,268,750
-----------
METALS--3.0%
1,750,000 Inco Limited, Cv. Sub. Deb.,
7.75%, 3/15/16...................... 1,850,625
-----------
REAL ESTATE--1.8%
1,000,000 Developers Diversified Realty
Corp., Cv. Sub. Deb., 7.00%,
8/15/99............................. 1,092,500
-----------
RESTAURANTS & LODGING--2.4%
300,000 Boston Chicken Inc., Cv. Sub.
Deb., 7.75%, 5/1/04................. 322,500
$1,500,000 Signature Resorts Inc., Cv. Sub.
Notes, 5.75%, 1/15/07............... $ 1,160,625
-----------
1,483,125
-----------
RETAILING--10.6%
1,500,000 Costco Wholesale, Cv. Sub. Deb.,
5.75%, 5/15/02...................... 1,473,750
1,240,000 Fabri-Centers of America, Inc.,
Cv. Sub. Deb., 6.25%, 3/1/02........ 1,202,800
1,000,000 Men's Wearhouse Inc., Cv. Sub.
Notes, 5.25%, 3/1/03................ 977,500
1,500,000 Michaels Stores Inc., Cv. Sub.
Deb., 6.75%, 1/15/03................ 1,305,000
500,000 Nine West Group Inc., Cv. Sub.
Notes, 5.50%, 7/15/03(a)............ 456,875
1,250,000 Saks Holdings Inc., Cv. Sub.
Notes, 5.50%, 9/15/06............... 995,313
100,000 Waban Inc., Cv. Sub. Deb., 6.50%,
7/1/02.............................. 109,000
-----------
6,520,238
-----------
SEMICONDUCTOR--2.7%
750,000 National Semiconductor, Cv. Sub.
Notes, 6.50%, 10/1/02(a)............ 736,875
1,000,000 VLSI Technology Inc., Cv. Sub.
Notes, 8.25%, 10/1/05............... 950,000
-----------
1,686,875
-----------
TRANSPORTATION--.4%
200,000 Laidlaw Corp., Cv. Sub. Notes,
8.00%, 5/1/01....................... 247,000
-----------
Total Corporate Convertible Bonds
(Cost $32,065,202).................. 32,858,073
-----------
<CAPTION>
Convertible Preferred
Shares Stocks--15.8%
- - ----------
<C> <S> <C>
BUILDING & CONSTRUCTION--2.9%
30,000 Southdown Corp., Cv. $2.875
Pfd., Series D...................... 1,807,500
-----------
FOODS & BEVERAGES--1.2%
15,000 Chiquita Brands International Inc.,
$2.875 Cv. Pfd. A................... 716,250
-----------
LEISURE & ENTERTAINMENT--1.6%
17,000 Royal Caribbean Cruises Limited,
$3.625 Cv. Pfd. A................... 977,500
-----------
PAPER PACKAGING & FOREST
PRODUCTS--4.8%
60,000 James River Corp., Dep. Shrs.,
$3.50 Exch. Pfd., Series L.......... 3,000,000
-----------
RAW MATERIAL PROCESSING--3.6%
20,000 Bethlehem Steel Corporation, $5.00
Cum. Pfd............................ 1,015,000
15,000 Howell Corp., $3.50 Cum. Pfd......... 740,625
10,000 TIMET Capital Trust I, $3.3125
Cv. Pfd. (a)........................ 453,750
-----------
2,209,375
-----------
REAL ESTATE--1.7%
40,000 Security Capital Industrial Trust,
7.00%, Cv. Pfd...................... 1,045,000
-----------
Total Convertible Preferred Stocks
(Cost $8,770,573)................... 9,755,625
-----------
<CAPTION>
Mandatory Convertible
Shares Securities--5.7% Value
- - -----------------------------------------------------------------
<C> <S> <C>
COMMUNICATIONS--1.4%
30,000 AirTouch Communications, 6.00%
Cv. Pfd., Class B, 8/16/99(b)....... $ 836,250
-----------
ENERGY--1.3%
30,100 MCN Corp., 8.75%, Pfd.,
4/30/99(b).......................... 801,413
-----------
FINANCIAL SERVICES--1.7%
45,000 The Money Store Inc., $1.72
Cv. Pfd., 12/1/99(b)................ 1,035,000
-----------
PAPER PACKAGING & FOREST
PRODUCTS--1.3%
12,000 Ikon Office Solutions Inc., Dep.
Shrs., $5.04 Cv. Pfd., Series BB,
10/1/98(b).......................... 816,000
-----------
Total Mandatory Convertible
Securities (Cost $3,884,460)........ 3,488,663
-----------
Common Stocks--10.3%
UTILITIES
45,000 American Electric Power Co., Inc..... 1,822,500
38,000 OGE Energy Corp...................... 1,577,000
50,000 Public Service Colorado.............. 1,937,500
43,000 Puget Sound Energy................... 1,053,500
-----------
Total Common Stocks
(Cost $4,733,197)................... 6,390,500
-----------
<CAPTION>
Principal Short-Term Corporate
Amount Notes--13.7% Value
- - -----------------------------------------------------------------
<C> <S> <C>
$1,136,000 BAT Capital Corp., 5.50%,
5/7/97.............................. $ 1,133,570
1,401,000 Cooperative Association of Dealers,
Inc., 5.53%, 5/5/97................. 1,399,493
1,106,000 Countrywide Funding Corp., 5.47%,
5/1/97.............................. 1,104,319
174,000 Fingerhut Owner Trust, 5.56%,
5/7/97.............................. 173,812
173,000 Green Tree Financial Corp., 5.58%,
5/1/97.............................. 172,651
1,136,000 Green Tree Financial Corp., 5.57%,
5/5/97.............................. 1,133,891
867,000 Green Tree Financial Corp., 5.59%,
5/8/97.............................. 865,250
1,240,000 Merrill Lynch & Co., Inc., 5.50%,
5/14/97............................. 1,237,158
1,240,000 Philip Morris Cos., Inc., 5.48%,
5/14/97............................. 1,237,169
-----------
Total Short-Term Corporate Notes
(Cost $8,457,313)................... 8,457,313
-----------
Total Investments
(Cost $57,910,745)(c).................. 98.7% 60,950,174
Other Assets in Excess of Liabilities... 1.3 789,518
---------------------
Total Net Assets........................ 100.0% $61,739,692
=====================
- - --------------------
<Fa> Pursuant to Securities and Exchange Commission Rule 144A, these
securities may be sold prior to their maturity only to qualified
institutional buyers.
<Fb> 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.
<Fc> At April 30, 1997, the net unrealized appreciation on investments,
based on cost for federal income tax purposes of $57,910,745, amounted
to $3,039,429, which consisted of aggregate gross unrealized
appreciation of $4,450,130 and aggregate gross unrealized depreciation
of $1,410,701.
</TABLE>
--------------------
CASTLE CONVERTIBLE FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1997 (Unaudited)
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities, at value (cost $57,910,745),
see accompanying schedule of investments................ $60,950,174
Cash..................................................... 423
Receivable for investment securities sold................ 371,717
Dividends and interest receivable........................ 509,438
Prepaid expenses......................................... 10,619
-----------
Total Assets........................................... 61,842,371
LIABILITIES:
Investment advisory fees payable......................... $38,273
Directors' fees payable.................................. 3,260
Accrued expenses......................................... 61,146
-------
Total Liabilities...................................... 102,679
-----------
NET ASSETS applicable to 2,236,003 outstanding shares of
$0.01 par value (10,000,000 shares authorized)............ $61,739,692
===========
NET ASSET VALUE PER SHARE.................................. $ 27.61
===========
</TABLE>
See Notes to Financial Statements.
CASTLE CONVERTIBLE FUND, INC.
STATEMENT OF OPERATIONS
For the six months ended April 30, 1997 (Unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest................................................ $1,314,654
Dividends............................................... 704,124
----------
Total Income.......................................... 2,018,778
Expenses:
Investment advisory fees--Note 2(a)..................... $ 240,422
Directors' fees......................................... 19,836
Custodian and transfer agent fees....................... 18,049
Shareholder reports..................................... 15,911
Professional fees....................................... 6,326
Bookkeeping fees........................................ 9,000
Miscellaneous........................................... 9,057
-----------
Total Expenses........................................ 318,601
----------
NET INVESTMENT INCOME....................................... 1,700,177
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments.......................... 4,088,856
Net change in unrealized depreciation on investments...... (4,867,321)
-----------
Net realized and unrealized gain (loss) on investments.... (778,465)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 921,712
==========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1997 Year Ended
(Unaudited) October 31, 1996
---------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net investment income.................................................. $ 1,700,177 $ 3,482,804
Net realized gain on investments....................................... 4,088,856 3,485,300
Net change in unrealized appreciation (depreciation) on investments.... (4,867,321) 747,343
---------------------------
Net increase in net assets resulting from operations................. 921,712 7,715,447
---------------------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income.................................................. (1,922,965) (3,555,247)
Net realized gains..................................................... (3,309,288) (1,587,562)
---------------------------
Total dividends...................................................... (5,232,253) (5,142,809)
---------------------------
Net increase (decrease) in net assets................................ (4,310,541) 2,572,638
NET ASSETS:
Beginning of period.................................................... 66,050,233 63,477,595
---------------------------
End of period (including undistributed net investment income of $556,886
and $779,674, respectively)........................................... $61,739,692 $66,050,233
===========================
</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 Year Months
Ended Ended Ended Ended Year Ended June 30,
April 30, October 31, October 31, October 31, ----------------------------------------
1997(i)(ii) 1996 1995 1994(ii) 1994 1993 1992
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period........................ $29.54 $28.39 $25.77 $25.07 $27.29 $24.20 $22.18
----------------------------------------------------------------------------------------------
Net investment income............. 0.76 1.56 1.74 0.52 1.62 1.68 1.70
Net realized and unrealized gain
(loss) on investments............ (0.35) 1.89 3.29 0.58 (1.60) 3.23 2.02
----------------------------------------------------------------------------------------------
Total from investment operations.. 0.41 3.45 5.03 1.10 0.02 4.91 3.72
----------------------------------------------------------------------------------------------
Dividends from net investment
income........................... (0.86) (1.59) (1.60) (0.40) (1.67) (1.82) (1.70)
Distributions from net realized
gains............................ (1.48) (0.71) (0.81) -- (0.57) -- --
----------------------------------------------------------------------------------------------
Total Distributions......... (2.34) (2.30) (2.41) (0.40) (2.24) (1.82) (1.70)
----------------------------------------------------------------------------------------------
Net asset value, end of period.... $27.61 $29.54 $28.39 $25.77 $25.07 $27.29 $24.20
==============================================================================================
Market value, end of period....... $23.50 $25.38 $25.63 $24.38 $22.25 $26.50 $21.25
==============================================================================================
Total investment return based on
market value per share........... 1.19% 8.14% 15.82% 11.28% (8.41%) 34.26% 22.78%
==============================================================================================
Ratios and Supplemental Data:
Net assets, end of period
(000's omitted)................ $61,740 $66,050 $63,478 $57,207 $55,665 $60,365 $53,537
==============================================================================================
Ratio of expenses to average net
assets......................... 1.00% 1.03%(iii) 1.05%(iii) 1.04%(iii) 1.05%(iii) 1.06%(iii) 1.10%(iii)
==============================================================================================
Ratio of net investment income
to average net assets.......... 5.33% 5.44% 6.62% 6.02% 6.02% 6.50% 7.24%
==============================================================================================
Portfolio Turnover Rate......... 27.84% 63.68% 52.80% 8.65% 29.38% 52.63% 68.69%
==============================================================================================
Average Commission Rate Paid.... $.0708 $.0703
==================
- - --------------------
<Fi> Unaudited.
<Fii> Ratios have been annualized; total return has not been annualized.
<Fiii> Reflects total expenses, including custody fees offset by earnings
credits resulting from balances left on deposit. The expense ratios
net of earnings credits would have been 1.02% and 1.03% for the years
ended October 31, 1996 and 1995, respectively. Expense ratios for the
periods ended prior to October 31, 1995, have been reduced to reflect
the effect of custody fees offset by earnings credits, if any.
</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 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) 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 Fund's average weekly net assets.
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 six months ended April 30, 1997, no reimbursement was required pursuant
to the Contract. For the six months ended April 30, 1997, the total
investment advisory fee charged to the Fund amounted to $240,422, 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, 1997, the Fund incurred fees of
approximately $6,900 for services provided by Alger Services and reimbursed
Alger Services approximately $2,000 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, 1997, the Adviser and
its affiliates owned 308,756 shares of the Fund.
NOTE 3--Securities Transactions:
During the six months ended April 30, 1997, purchases and sales of
investment securities, excluding short-term securities, aggregated
$16,493,718 and $25,208,328, respectively.
NOTE 4--Components of Net Assets:
At April 30, 1997, the Fund's net assets consisted of:
<TABLE>
<S> <C>
Paid-in capital.......................... $54,012,068
Undistributed net investment income...... 556,886
Undistributed net realized gain.......... 4,131,309
Net unrealized appreciation.............. 3,039,429
-----------
NET ASSETS............................... $61,739,692
===========
</TABLE>
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
- - --------------------------------------------
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.
