Dear Shareholder:
At the start of the year, there were signs that the financial crisis
in Asia was stabilizing. The outlook started to worsen in late spring. The
outbreak of rioting and labor unrest caused increased anxiety that political
and social unrest could worsen the already difficult process of restoring
economic and financial stability. The Japanese economy officially slipped
into a recession. The Japanese yen continued to lose value as investors lost
confidence in the Japanese government's ability to redress the problems
underlying the economy's malaise. The weakening Japanese economy, together
with the drop in the yen, was seen as accelerating the region's financial
and economic decline. Russia's financial difficulties intensified, leading
to a collapse in the ruble, a debt moratorium and deep economic
difficulties. Worries mounted that the financial crisis was threatening to
swamp Latin America and Eastern Europe as well.
These developments have had a decidedly negative impact on the U.S.
financial markets over the last four months. Stock prices for small to
midcap companies began to weaken in April, as investors sought to minimize
their risks. Smaller-cap stocks continued to lag even as the broad market
broke out of its trading range in mid-June. As events began to overwhelm the
global markets in July, the broad market peaked and quickly gave ground.
While the S&P 500 produced a negative total return of 13.4% for the four
month period ended August 31, the Russell 2000, an index used in measuring
the performance of smaller companies, fared far worse, plummeting roughly
29.8% during the same period. Companies which issue convertibles are often
smaller companies and the stocks underlying many convertible issues also
were pummeled. The index for stocks underlying the convertibles in the
Morgan Stanley Dean Witter Convertible Index, for example, fell 29.4%.
Convertible securities typically do not lose value as rapidly as stocks
because a convertible's fixed income feature acts as a price support. While
convertibles did not fall as rapidly as their underlying stocks, the
convertible market as a whole did not perform as well as expected. Investors
also grew more worried about creditworthiness as fears mounted that the U.S.
economy might weaken and corporate earnings would suffer. Prices for
corporate bonds fell even as prices for risk-free U.S. Treasury bonds rose;
noninvestment grade bonds fared the worst. This flight to quality had a
negative impact on the convertible market since only about one-third of all
convertible issues, by some estimates, receive an investment grade rating
from both major ratings agencies. Therefore, the bond value for many
convertibles dropped just as the decline in stock prices accelerated. As a
result, the total return in the convertible market, as measured by the
Morgan Stanley Dean Witter Convertible Index, was a negative total return of
15.1%, or roughly 50% of the corresponding stock's decline. As a consequence
of the difficult market environment, Castle Convertible Fund produced a
total negative return of 10.3% on an NAV basis.
At present, we believe that the outlook remains sound for the
economies of the U.S. and Western Europe although the rate of expansion is
likely to slow. The panic engulfing many emerging markets should subside in
coming months. At a minimum, however, the global financial markets are
likely to remain turbulent. We have reduced the Fund's exposure to companies
whose fundamentals could seriously deteriorate in a weak economy. Because of
the decline in stock prices for blue-chip companies, the proceeds of those
sales can now be reinvested in high-quality companies which should hold
steady even if the economy does weaken. As a consequence, the Fund's
conversion premium also has been brought down, enabling Castle to
participate in an eventual upturn in the markets.
Respectfully submitted,
/s/ David D. Alger
David D. Alger
President
September 16, 1998
CASTLE CONVERTIBLE FUND, INC.
SCHEDULE OF INVESTMENTS (Unaudited)
July 31, 1998
<TABLE>
<CAPTION>
Principal Corporate Convertible
Amount Bonds-35.2% Value
- ----------------------------------------------------------------
<C> <S> <C>
AEROSPACE-3.1%
$ 250,000 Atlantic Coast Airlines, Inc., Cv.
Sub. Notes, 7.00%, 7/1/04(a) $ 738,750
500,000 Kellstrom Industries Inc., Cv. Sub.
Notes, 5.75%, 10/15/02(a) 618,750
500,000 Kellstrom Industries Inc., Cv. Sub.
Notes, 5.50%, 6/15/03 563,750
-----------
1,921,250
-----------
COMPUTER RELATED & BUSINESS
EQUIPMENT-4.4%
300,000 Amkor Technologies, Inc., Cv.
Sub. Deb., 5.75%, 5/1/03 253,500
1,000,000 Bay Networks Inc., Cv. Sub. Deb.,
5.25%, 5/15/03 1,030,000
500,000 DSC Communications Corp., Cv.
Sub. Notes, 7.00%, 8/1/04(a) 525,000
1,000,000 Quantum Corporation, Cv. Sub.
Notes, 7.00%, 8/1/04 920,000
-----------
2,728,500
-----------
CONSUMER PRODUCTS
& SERVICES-1.6%
1,088,000 Fieldcrest Cannon Inc., Cv. Sub.
Deb., 6.00%, 3/15/12 957,440
-----------
ENERGY-.8%
650,000 Parker Drilling Corp., Cv. Sub.
Notes, 5.50%, 8/1/04 507,000
-----------
HEALTHCARE-1.3%
500,000 ESC Medical Systems Ltd., Cv.
Sub. Notes, 6.00%, 9/1/02(a) 457,500
400,000 NeXstar Pharmaceuticals, Inc., Cv.
Sub. Deb., 6.25%, 8/1/04(a) 326,000
-----------
783,500
-----------
LEISURE & ENTERTAINMENT-.4%
200,000 Family Golf Centers, Inc., Cv. Sub.
Notes, 5.75%, 10/15/04(a) 239,000
-----------
MANUFACTURING-2.1%
1,250,000 Quanex Corp., Cv. Sub. Deb.,
6.88%, 6/30/07 1,275,000
-----------
METALS-2.7%
1,750,000 Inco Limited, Cv. Sub. Deb.,
7.75%, 3/15/16 1,636,250
-----------
PRINTING-2.5%
1,400,000 World Color Press Inc., Cv. Sub.
Notes, 6.00%, 10/1/07 1,519,000
-----------
REAL ESTATE-1.8%
1,000,000 Developers Diversified Realty Corp.,
Cv. Sub. Deb., 7.00%, 8/15/99 1,135,000
-----------
RETAILING-7.8%
800,000 Baker (J.) Inc., Cv. Sub. Notes,
7.00%, 6/1/02 738,000
1,000,000 Genesco Inc., Cv. Sub. Notes,
5.50%, 4/15/05(a) 831,250
1,500,000 Michaels Stores Inc., Cv. Sub.
Deb., 6.75%, 1/15/03 1,533,750
700,000 Saks Holdings Inc., Cv. Sub.
Notes, 5.50%, 9/15/06 679,000
$1,200,000 Sunglass Hut Inc., Cv. Sub.
Notes, 5.25%, 6/15/03 $ 972,000
-----------
4,754,000
-----------
SEMICONDUCTORS-6.7%
450,000 Integrated Process Equipment
Corp., Cv. Sub. Notes, 6.25%,
9/15/04(a) 319,500
1,400,000 Micron Technology, Inc., Cv. Sub.
Notes, 7.00%, 7/1/04 1,389,500
750,000 National Semiconductor, Cv. Sub.
Notes, 6.50%, 10/1/02(a) 681,562
500,000 Photronics Inc., Cv. Sub. Notes,
6.00%, 6/1/04 479,062
1,250,000 VLSI Technology, Inc., Cv. Sub.
Notes, 8.25%, 10/1/05 1,218,750
-----------
4,088,374
-----------
Total Corporate Convertible Bonds
(Cost $21,313,909) 21,544,314
-----------
Convertible Preferred
Shares Securities-25.6%
- ----------
AEROSPACE & AIRLINES-1.6%
22,000 Coltec Capital Trust, 5.25% Cv.
Pfd.(a) 979,000
-----------
BROADCASTING-2.2%
20,000 Sinclair Broadcast Group, Inc.,
$3.00 Cv. Pfd., Series D 1,327,500
-----------
ENERGY-4.7%
20,000 AES Trust II, $2.75 Cv. Pfd.,
Series B 1,030,000
35,000 Unocal Capital Trust II, 6.25%
Cv. Pfd. 1,828,750
-----------
2,858,750
-----------
FINANCIAL SERVICES-3.6%
80,000 CNB Capital Trust I, 6.00% Cv.
Pfd. 2,200,000
-----------
FOODS & BEVERAGES-3.4%
18,000 Chiquita Brands International Inc.,
$2.875 Cv. Pfd. A 756,000
30,000 Suiza CapitalTrust II, 5.50% Cv.
Pfd.(a) 1,350,000
-----------
2,106,000
-----------
LEISURE & ENTERTAINMENT-3.2%
17,000 Royal Caribbean Cruises Limited,
$3.625 Cv. Pfd. A 1,993,250
-----------
PAPER PACKAGING & FOREST
PRODUCTS-1.3%
15,000 Owens Illinois Inc., $2.375 Cv.
Pfd. A 780,000
-----------
PRINTING-.5%
5,000 Big Flower Trust I, 6.00% Cv.
Pfd.(a) 300,000
-----------
RAW MATERIALS-3.1%
20,000 Bethlehem Steel Corporation,
$5.00 Cum. Pfd. 1,098,750
10,000 TIMET Capital Trust I, 6.625%
Cv. Pfd. (a) 405,000
10,000 TIMET Capital Trust I, 6.625%
Cv. Pfd. $ 405,000
-----------
1,908,750
-----------
REAL ESTATE-2.0%
40,000 Prologis Trust, 7.00%, Cv. Pfd. B 1,215,000
-----------
Total Convertible Preferred
Securities (Cost $14,499,486) 15,668,250
-----------
Mandatory Convertible
Securities-9.1%
COMMUNICATIONS-1.6%
20,000 AirTouch Communications, Inc.,
6.00% Cv. Pfd., Class B,
8/16/99(c) 970,000
-----------
FOODS & BEVERAGES-1.6%
17,000 Ralston Purina Co., 7.00%
Exchangeable Notes, 12/1/00(b) 969,000
-----------
LEISURE & ENTERTAINMENT-2.6%
25,000 Premier Parks Inc., 7.50% Income
Equity Securities, 4/1/01(c) 1,581,250
-----------
RETAILING-3.3%
13,000 CVS Automatic Common Exchange
Security Trust, $4.23, 5/15/01(c) 1,027,000
25,000 Dollar General Corp., $3.352,
Strypes(c) 1,006,250
-----------
2,033,250
-----------
Total Mandatory Convertible
Securities (Cost $4,913,723) 5,553,500
-----------
Shares Common Stocks-11.3% Value
- -------------------------------------------------------------------
UTILITIES
40,000 American Electric Power Co., Inc. $ 1,722,500
40,000 New Century Energies Inc. 1,665,000
70,000 OGE Energy Corp. 1,824,375
68,000 Puget Sound Energy Inc. 1,721,250
-----------
Total Common Stocks
(Cost $4,945,919) 6,933,125
-----------
Principal Short-Term Corporate
Amount Notes-17.7%
- ----------
$ 850,000 American Honda Finance Corp.,
5.53%, 8/9/98 848,172
2,450,000 Ford Motor Credit Corp., 5.57%,
8/7/98 2,446,967
2,450,000 General Motors Acceptance Corp.,
5.54%, 8/13/98 2,444,722
2,800,000 Hertz Corp., 5.53%, 8/5/98 2,793,978
2,300,000 OGE Energy Corp., 5.62%,
8/5/98 2,297,128
-----------
Total Short-Term Corporate Notes
(Cost $10,830,967) 10,830,967
-----------
Total Investments
(Cost $56,504,004) 98.9% 60,530,156
Other Assets in Excess of Liabilities 1.1 647,757
------------------------
Total Net Assets 100.0% $61,177,913
========================
Net Asset Value Per Share $27.36
======
- --------------------
<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, 1998 (Unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest $1,745,793
Dividends 1,074,140
----------
Total Income 2,819,933
Total Expenses 490,637
----------
NET INVESTMENT INCOME 2,329,296
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments $ 2,482,698
Net change in unrealized depreciation on investments (3,149,826)
-----------
Net realized and unrealized gain (loss) on investments (667,128)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,662,168
==========
</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
July 31, 1998
