CASTLE
CONVERTIBLE Meeting the challenge
FUND, of investing
INC.
Quarterly Report
July 31, 1997
Dear Shareholder:
With the release of economic data detailing the slowdown in consumer
spending during the second quarter, investors became increasingly confident
that the economy was not overheating. Of equal importance, inflation showed
no signs of accelerating. In fact, the year-over-year rate of inflation in
the Consumer Price Index (CPI) actually decelerated from 3.3% in December to
2.2% in July. The Product Price Index (PPI), which measures changes in
wholesale prices, displayed even more positive trends, falling in each of
the first seven months of the year. The financial markets which had feared
that the Federal Reserve would have to raise interest rates to prevent a
pickup in inflation, began to gain confidence that monetary policy would
instead remain steady. The Federal balanced budget agreement and better-
than-expected current year Federal budget deficit projections were also
welcome news for the markets. When the fixed-income market began to rally in
mid-April, 30-year Treasury bonds were yielding 7.17%. By the end of July,
the yield on 30-year bonds had fallen 87 basis points to yield 6.30%. Good
second quarter earnings reports reinforced the optimism in the stock market.
The market, as measured by the S&P 500, climbed an astonishing 29% from the
lows reached on April 11 to 954 by July 31.
Because of its income orientation, Castle cannot be expected to keep
pace with explosive moves in the stock market. However, its exposure to the
rally in the stock market did boost returns during the third fiscal quarter.
For the three months ended July 31, Castle produced a total return of 9.82%,
based on net asset value, well ahead of the 5.27% total return generated by
the fixed-income market, as measured by the Lehman Government/Corporate Bond
Index. We are pleased to report that your Fund added to those gains in
August, despite a slight rise in interest rates and renewed volatility in
the stock market.
The economic environment, in our view, should remain favorable in the
months ahead. We continue to project the economy will generate a moderate
2.0 to 2.5% rate of growth in the months ahead. Renewed strength in consumer
spending will be partially offset by slower inventory building and weaker
export demand. Inflation, in our opinion, should hold steady. 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. The positive outlook for the financial markets should permit Castle
to continue to produce further gains for its shareholders.
Respectfully submitted,
David D. Alger
President
September 19, 1997
CASTLE CONVERTIBLE FUND, INC.
SCHEDULE OF INVESTMENTS (Unaudited)
July 31, 1997
<TABLE>
<CAPTION>
Principal Corporate Convertible
Amount Bonds--53.3% Value
- ----------------------------------------------------------------------
<S> <C> <C>
AEROSPACE--4.5%
$ 500,000 Atlantic Coast Airlines, Inc., Cv.
Sub. Notes, 7.00%, 7/1/04(a) $ 590,000
400,000 Diagnostic/Retrieval Systems,
Inc., Sr. Sub. Cv. Notes, 9.00%,
10/1/03(a) 544,500
2,000,000 Rohr Industries Inc., Cv. Sub.
Deb., 7.00%, 10/1/12 1,870,000
-----------
3,004,500
-----------
APPAREL--.6%
500,000 Converse Inc., Cv. Sub. Notes,
7.00%, 6/1/04 430,000
-----------
BUILDING & CONSTRUCTION--1.7%
1,000,000 Masco Corp., Cv. Sub. Deb.,
5.25%, 2/15/12 1,120,000
-----------
COMPUTER RELATED & BUSINESS
EQUIPMENT--3.0%
1,000,000 Bay Networks Inc., Cv. Sub. Deb.,
5.25%, 5/15/03 992,500
1,000,000 Quantum Corp., Cv. Sub. Notes,
7.00%, 8/1/04 1,023,750
-----------
2,016,250
-----------
ENERGY--6.1%
1,850,000 Consolidated Natural Gas, Cv. Sub.
Deb., 7.25%, 12/15/15 2,058,125
2,000,000 Enserch, (Eurodollar), Cv. Sub.
Deb., 6.375%, 4/1/02 2,040,000
-----------
4,098,125
-----------
FINANCIAL SERVICES--.5%
250,000 Penn Treaty American Corp., Cv.
Sub. Notes, 6.25%, 12/1/03(a) 332,188
-----------
HEALTHCARE--13.5%
3,016,000 Beverly Enterprises, Cv. Sub. Deb.,
7.625%, 3/15/03 3,076,320
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) 1,053,750
1,000,000 Medical Care International , Cv.
Sub. Deb., 6.75%, 10/1/06 975,000
1,000,000 Medical Care International,
(Eurodollar), Cv. Sub. Deb.,
6.75%, 10/1/06 975,000
500,000 NeXstar Pharmaceuticals, Inc., Cv.
Sub. Deb., 6.25%, 8/1/04(a) 507,500
300,000 Sepracor Inc., Cv. Sub. Deb.,
7.00%, 12/1/02(a) 427,500
500,000 Sunrise Assisted Living Inc., Cv.
Sub. Notes, 5.50%, 6/15/02(a) 586,875
-----------
9,030,195
-----------
LEISURE & ENTERTAINMENT--1.3%
900,000 Outboard Marine Corp., Cv. Sub.
Deb., 7.00%, 7/1/02 895,500
-----------
MANUFACTURING--2.0%
1,250,000 Quanex Corp., Cv. Sub. Deb.,
6.88%, 6/30/07 1,343,750
-----------
METALS--2.7%
$1,750,000 Inco Limited, Cv. Sub. Deb.,
7.75%, 3/15/16 1,837,500
-----------
REAL ESTATE--1.8%
1,000,000 Developers Diversified Realty
Corp., Cv. Sub. Deb., 7.00%,
8/15/99 1,187,500
-----------
RESTAURANTS & LODGING--2.4%
1,500,000 Signature Resorts Inc., Cv. Sub.
Notes, 5.75%, 1/15/07 1,593,750
-----------
RETAILING--8.2%
1,500,000 Costco Wholesale, Cv. Sub. Deb.,
5.75%, 5/15/02 1,605,000
1,000,000 Men's Wearhouse Inc., Cv. Sub.
Notes, 5.25%, 3/1/03 1,210,000
1,500,000 Michaels Stores Inc., Cv. Sub.
Deb., 6.75%, 1/15/03 1,395,000
1,450,000 Saks Holdings Inc., Cv. Sub.
Notes, 5.50%, 9/15/06 1,301,375
-----------
5,511,375
-----------
SEMICONDUCTORS--5.0%
850,000 Micron Technology, Inc., Cv. Sub.
Notes, 7.00%, 7/1/04 912,688
750,000 National Semiconductor, Cv. Sub.
Notes, 6.50%, 10/1/02(a) 794,063
500,000 Photronics Inc., Cv. Sub. Notes,
6.00%, 6/1/04 606,250
1,000,000 VLSI Technology Inc., Cv. Sub.
Notes, 8.25%, 10/1/05 1,021,250
-----------
3,334,251
-----------
Total Corporate Convertible Bonds
(Cost $32,725,642) 35,734,884
-----------
<CAPTION>
Convertible Preferred
Shares Stocks--15.5%
- ----------
<S> <C> <C>
BUILDING & CONSTRUCTION--1.1%
10,000 Southdown Corp., Cv. $2.875
Pfd., Series D 771,250
-----------
CONSUMER STAPLES--6.3%
15,000 Chiquita Brands International Inc.,
$2.875 Cv. Pfd. A 727,500
60,000 James River Corp., Dep. Shrs.,
$3.50 Exch. Pfd., Series L 3,465,000
-----------
4,192,500
-----------
ENERGY--.9%
10,000 Hvide Capital Trust, $3.25 Cv.
Pfd.(a) 607,500
-----------
LEISURE & ENTERTAINMENT--1.7%
17,000 Royal Caribbean Cruises Limited,
$3.625 Cv. Pfd. A 1,156,000
-----------
RAW MATERIAL PROCESSING--3.7%
20,000 Bethlehem Steel Corporation, $5.00
Cum. Pfd. 1,081,250
5,000 Howell Corp., $3.50 Cv. Pfd 291,250
10,000 TIMET Capital Trust I, $3.3125
Cv. Pfd.(a) 546,250
10,000 TIMET Capital Trust I, $3.3125
Cv. Pfd. 546,250
-----------
2,465,000
-----------
REAL ESTATE--1.8%
40,000 Security Capital Industrial Trust,
7.00%, Cv. Pfd. B 1,180,000
-----------
Total Convertible Preferred Stocks
(Cost $8,375,324) 10,372,250
-----------
Mandatory Convertible
Securities--6.6%
COMMUNICATIONS--1.4%
30,000 AirTouch Communications, 6.00%
Cv. Pfd., Class B, 8/16/99(c) 952,500
-----------
ENERGY--1.3%
30,100 MCN Corp., 8.75%, Pfd.,
4/30/99(c) 872,900
-----------
FINANCIAL SERVICES--2.3%
45,000 The Money Store Inc., $1.72
Cv. Pfd., 12/1/99(c) 1,507,500
-----------
FOODS & BEVERAGES--1.6%
17,000 Ralston Purina Co., 7.00%
Exchangeable Notes(b) 1,058,250
-----------
Total Mandatory Convertible
Securities (Cost $3,925,283) 4,391,150
-----------
UTILITIES
45,000 American Electric Power Co., Inc. 2,013,750
38,000 OGE Energy Corp. 1,738,500
50,000 Public Service Colorado 2,081,250
43,000 Puget Sound Energy Inc. 1,147,563
-----------
Total Common Stocks
(Cost $4,733,197) 6,981,063
-----------
<CAPTION>
Principal Short-Term Corporate
Amount Notes--15.5%
- ----------
<S> <C> <C>
$2,400,000 Cooperative Association of
Tractor Dealers Inc., 5.60%,
8/11/97 2,395,147
2,201,000 GTE Corp., 5.53%, 8/12/97 2,196,238
789,000 Merrill Lynch & Co. Inc., 5.52%,
8/4/97 787,306
2,600,000 Merrill Lynch & Co. Inc., 5.57%,
8/11/97 2,594,770
1,300,000 OGE Energy Corp., 5.56%,
8/1/97 1,299,598
1,106,000 Sanwa Business Credit, 5.70%,
8/6/97 1,104,774
-----------
Total Short-Term Corporate Notes
(Cost $10,377,833) 10,377,833
-----------
Total Investments
(Cost $60,137,279) 101.3 % 67,857,180
Liabilities in Excess of Other Assets (1.3) (886,090)
--------------------------
Total Net Assets 100.0 % $66,971,090
==========================
Net Asset Value Per Share $29.95
===========
- --------------------
<Fa> Pursuant to Securities and Exchange Commission Rule 144A, these
securities may be sold prior to their maturity only to qualified
institutional buyers.
<Fb> Exchangeable into common stock of Interstate Bakeries Corporation.
<Fc> 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.
</TABLE>
CASTLE CONVERTIBLE FUND, INC.
SUMMARY OF OPERATIONS
For the nine months ended July 31, 1997 (Unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest $2,007,329
Dividends 1,014,036
----------
Total Income 3,021,365
Total Expenses 480,696
----------
NET INVESTMENT INCOME 2,540,669
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments $4,626,613
Net decrease in unrealized appreciation on investments (186,849)
----------
Net realized and unrealized gain on investments 4,439,764
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,980,433
==========
</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.
