Dear Shareholder:
By the end of 1996 the U.S. economy had bounced back from the summer
slowdown. Employment growth picked up speed. The upturn in the manufacturing
sector remained on course and consumer spending gained momentum. The
rebound, however, does not mark the start of a period of excessively strong
economic growth in the year ahead. We expect that the U.S. economy will grow
at a moderate 2.0% to 2.5% in 1997. Consumer spending is not likely to
strengthen despite the projected growth in personal income and high levels
of consumer confidence since consumers have largely caught up on any
purchases they might have previously put off. We expect housing will grow at
a slower rate, for example, and auto sales may fall. Because of the outlook
for moderate growth in demand, business will remain cautious in building
inventories. The strength of the U.S. dollar in the foreign exchange
markets, together with sluggish economic conditions in Europe and Japan,
will likely constrict growth in U.S. exports.
Consumer prices, as measured by the Consumer Price Index, rose a
moderate 3.3% in 1996. Excluding food and energy, the core rate of inflation
actually decelerated. We do not expect the rate of inflation to accelerate
in 1997. Because there are ample supplies for most raw materials, commodity
prices should remain stable. Wage gains have risen but the annual rate of
increase still remains moderate as job security continues to be the primary
concern for workers in large sectors of the economy. Acute labor shortages
resulting in higher wages appear to be confined to certain industries. Even
those companies paying higher wages to attract new employees remain
reluctant or unable to pass on added costs in the face of intense
competitive pressures and a well-entrenched resistance to higher prices.
Positive news about a stronger economy, low inflation and robust
corporate profits propelled the stock market to new highs, resulting in a
total return of 12.01% for the S&P 500 for the three months ended January
31st. The fixed income market did not fare as well. Bond prices rose in
November as investors gained confidence that the economy was slowing but
once signs of a stronger economy multiplied and fears of higher inflation
revived, bonds gave up their gains. As a result, the Lehman Brothers
Government/Corporate Bond Index, a measure of bond market performance,
posted a modest total return of 0.83%. Due to its income-oriented investment
style, Castle Convertible Fund could not keep pace with the stock market,
but its exposure to the stock market helped boost its total return to 5.22%
on a NAV basis.
Upcoming reports supporting our outlook for moderate economic growth
and modest inflation should alleviate the anxiety besetting the bond market.
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
March 5, 1997
CASTLE CONVERTIBLE FUND, INC.
SCHEDULE OF INVESTMENTS (Unaudited)
January 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Corporate Convertible Bonds-56.5% Value
- ----------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE-3.8%
$ 400,000 Diagnostic/Retrieval Systems, Inc.,
Sr. Sub. Cv. Notes, 9.00%, 10/1/03(a)...... $ 570,000
2,000,000 Rohr Industries Inc., Cv. Sub.
Deb., 7.00%, 10/1/12....................... 1,860,000
-----------
2,430,000
-----------
BUILDING & CONSTRUCTION-1.5%
1,000,000 Masco Corp., Cv. Sub. Deb.,
5.25%, 2/15/12............................ 1,000,000
-----------
COMPUTER RELATED & BUSINESS EQUIPMENT-5.3%
250,000 Adaptec Inc., Cv. Sub. Notes,
4.75%, 2/1/04(a)........................... 273,750
400,000 HMT Technology Corporation, Cv.
Sub. Notes, 5.75%, 1/15/04(a).............. 434,500
750,000 National Semiconductor, Cv. Sub.
Notes, 6.50%, 10/1/02(a)................... 762,188
500,000 S3 Inc., Cv. Sub. Notes, 5.75%, 10/1/03(a).. 567,500
200,000 3Com Corporation, Cv. Sub. Notes,
10.25%, 11/1/01(a)......................... 402,000
1,000,000 VLSI Technology Inc., Cv. Sub.
Notes, 8.25%, 10/1/05...................... 967,500
-----------
3,407,438
-----------
ENERGY-9.6%
2,100,000 Ashland Inc., Cv. Sub. Deb., 6.75%, 7/1/14.. 2,152,500
1,850,000 Consolidated Natural Gas, Cv. Sub.
Deb., 7.25%, 12/15/15...................... 2,025,750
2,000,000 Enserch, (Eurodollar), Cv. Sub.
Deb., 6.375%, 4/1/02....................... 2,010,000
-----------
6,188,250
-----------
FINANCIAL SERVICES-2.2%
1,000,000 Leasing Solutions, Inc., Cv. Sub.
Notes, 6.875%, 10/1/03..................... 1,111,250
250,000 Penn Treaty America Corp., Cv.
Sub. Notes, 6.25%, 12/1/03(a).............. 296,250
-----------
1,407,500
-----------
HEALTHCARE-13.0%
3,050,000 Beverly Enterprises, Cv. Sub. Deb.,
7.625%, 3/15/03............................ 3,072,875
1,450,000 Centocor, Inc., (Eurodollar), Cv.
Sub. Deb., 6.75%, 10/16/01................. 1,421,000
1,000,000 Ciba Geigy Corp., Exch. Sub.
Deb., 6.25%, 3/15/16(a).................... 1,027,500
1,000,000 Medical Care International , Cv.
Sub. Deb., 6.75%, 10/1/06.................. 1,017,500
1,000,000 Medical Care International, (Eurodollar),
Cv. Sub. Deb., 6.75%, 10/1/06.............. 1,017,500
300,000 Sepracor Inc., Cv. Sub. Deb.,
7.00%, 12/1/02(a).......................... 441,000
250,000 U.S. Diagnostic Labs, Inc., Cv.
Sub. Deb., 9.00%, 3/31/03(a)............... 390,000
-----------
8,387,375
-----------
MANUFACTURING-2.0%
1,250,000 Quanex Corp., Cv. Sub. Deb.,
6.88%, 6/30/07............................. 1,275,000
-----------
METALS-2.8%
1,750,000 Inco Limited, Cv. Sub. Deb., 7.75%, 3/15/16. 1,841,875
-----------
RESTAURANTS & LODGING-.8%
500,000 Signature Resorts Inc., Cv. Sub.
Notes, 5.75%, 1/15/07...................... 515,625
-----------
RETAILING-11.8%
1,500,000 Costco Wholesale, Cv. Sub. Deb.,
5.75%, 5/15/02............................. 1,464,375
1,240,000 Fabri-Centers of America, Inc.,
Cv. Sub. Deb., 6.25%, 3/1/02............... 1,143,900
1,000,000 Men's Wearhouse Inc., Cv. Sub.
Notes, 5.25%, 3/1/03....................... 1,020,000
500,000 Nine West Group Inc., Cv. Sub.
Notes, 5.50%, 7/15/03(a)................... 526,250
1,250,000 Saks Holdings Inc., Cv. Sub.
Notes, 5.50%, 9/15/06...................... 1,187,500
2,000,000 Waban Inc., Cv. Sub. Deb., 6.50%, 7/1/02.... 2,300,000
-----------
7,642,025
-----------
TRANSPORTATION-3.7%
2,000,000 Laidlaw Corp., Cv. Sub. Notes,
8.00%, 5/1/01.............................. 2,420,000
-----------
Total Corporate Convertible Bonds
(Cost $33,375,855)......................... 36,515,088
-----------
Shares Convertible Preferred Stocks-15.3%
- ----------
BUILDING & CONSTRUCTION-2.4%
30,000 Southdown Corp., Cv. 2.875%
Pfd., Series D............................. 1,571,250
-----------
ENERGY-2.9%
28,500 NorAm Financing I, 6.25% Cv. Pfd............ 1,841,813
-----------
PAPER PACKAGING & FOREST PRODUCTS-4.7%
60,000 James River Corp., Dep. Shrs.,
$3.50 Exch. Pfd., Series L................. 3,052,500
-----------
RAW MATERIAL PROCESSING-3.6%
20,000 Bethlehem Steel Corporation, $5.00
Cum. Pfd................................... 1,062,500
15,000 Howell Corp., $3.50 Cum. Pfd................ 783,750
10,000 TIMET Capital Trust I, $3.325 Cv. Pfd.(a)... 507,500
-----------
2,353,750
-----------
REAL ESTATE-1.7%
40,000 Security Capital Industrial Trust,
7.00%, Cv. Pfd............................. 1,100,000
-----------
Total Convertible Preferred Stocks
(Cost $8,566,461).......................... 9,919,313
-----------
Mandatory Convertible Securities-7.4%
COMMUNICATIONS-1.3%
30,000 AirTouch Communications, 6.00%
Cv. Pfd., Class B, 8/16/99(c).............. 832,500
-----------
PUBLISHING-1.1%
10,000 Houghton Mifflin Company,
6.00% Exch. Notes, 8/1/99(b)............... 700,000
-----------
ENERGY-1.4%
30,100 MCN Corp., 8.75%, Pfd., 4/30/99(c).......... 887,950
-----------
FINANCIAL SERVICES-1.8%
45,000 The Money Store Inc., $1.72
Cv. Pfd., 12/1/99(c)....................... 1,153,125
-----------
MISCELLANEOUS-1.8%
12,000 Ikon Office Solutions Inc., Dep. Shrs.,
$5.04 Cv. Pfd., Series BB, 10/1/98(c)....... 1,194,000
-----------
Total Mandatory Convertible
Securities (Cost $4,564,460)............... 4,767,575
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Common Stocks-13.8% Value
- ----------------------------------------------------------------------------
<S> <C> <C>
REAL ESTATE-3.3%
35,000 Cali Realty Corp............................ $ 1,155,000
30,000 General Growth Properties Inc............... 945,000
-----------
2,100,000
-----------
UTILITIES-10.5%
52,000 American Electric Power Co., Inc............ 2,151,500
38,000 OGE Energy Corp............................. 1,619,750
50,000 Public Service Colorado..................... 1,950,000
50,000 Washington Energy Co........................ 1,081,250
-----------
6,802,500
-----------
Total Common Stocks
(Cost $6,588,938).......................... 8,902,500
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Short-Term Corporate Notes-6.6%
- ----------
<S> <C> <C>
$ 614,000 Bank Austria Finance Inc., 5.35%, 2/3/97.... 613,635
1,747,000 Eksportfinans A/S, 5.30%, 2/12/97........... 1,743,656
195,000 MDV Resources Group Inc., 5.42%, 2/11/97.... 194,677
1,747,000 Philip Morris Cos. Inc., 5.33%, 2/3/97...... 1,745,189
-----------
Total Short-Term Corporate Notes
(Cost $4,297,157).......................... 4,297,157
-----------
Total Investments (Cost $57,392,871)............. 99.6% 64,401,633
Other Assets in Excess of Liabilities............ .4 238,320
-------------------------
Total Net Assets................................. 100.0% $64,639,953
=========================
Net Asset Value Per Share........................ $ 28.91
===========
- --------------------
<Fa> Pursuant to Securities and Exchange Commission Rule 144A, these
securities may be sold prior to their maturity only to qualified
institutional buyers.
<Fb> Convertible into common stock of INSO 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 three months ended January 31, 1997 (Unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest...................................................... $ 656,792
Dividends..................................................... 328,382
----------
Total Income................................................ 985,174
Total Expenses.............................................. 162,437
----------
NET INVESTMENT INCOME............................................. 822,737
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments................................ $3,069,902
Net decrease in unrealized appreciation of investments.......... (897,988)
-----------
Net realized and unrealized gain on investments............... 2,171,914
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $2,994,651
==========
</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.
CASTLE
CONVERTIBLE Meeting the challenge
FUND, of investing
INC.
Quarterly Report
January 31, 1997
