Dear Shareholder:
There are some signs that the financial crisis in Asia is beginning to
abate. The Asian currencies have rebounded from the lows of December and
January and the stock markets in the region have staged a modest recovery.
However, even though the financial markets are showing some signs of
stabilizing, economic activity in these countries is likely to slow
dramatically in 1998 and the timing of a recovery remains highly uncertain.
The crisis in Asia will result in slower growth for the global
economy. Japan and neighboring countries in Southeast Asia, which are major
trading partners and direct competitors with the countries now in crisis,
will feel the brunt of the decline. As a result, growth in these neighboring
economies will weaken and U.S. exports to the entire region will slow.
However, U.S. merchandise exports to all of Asia account for roughly 33% of
total U.S. exports, or less than 4% of GDP. Since the U.S. economy is
predominantly service-based and domestic-demand driven, weaker export demand
should not result in a severe slowdown in the U.S. economy.
There are also strong positive forces which should keep the U.S.
economy on track. The economy ended the year with good momentum and consumer
confidence remains buoyant. The decline in long-term interest rates should
support continued growth in the U.S. economy. The American banking system
remains strong. American bank exposure to the bad loans in Asia appear to be
comparatively small and manageable. Finally, the Federal government has made
significant progress in reducing the size of the budget deficit. The deficit
had dropped to a mere $22 billion, or 0.3% of GDP, for the fiscal year ended
September 1997. Current projections suggest that the deficit for the current
year will be very small as well.
Inflation should remain modest. Collapsing demand in Asia has driven
down prices for basic raw commodities and we do not expect prices to rebound
any time soon. Prices on goods imported from the countries whose currencies
have collapsed are already falling and should fall further in the months
ahead. The drop in import prices should limit price increases for
domestically produced goods. Imported components for products assembled here
will cost less, so American companies will be able to keep current prices
unchanged. Competition from lower-priced imports is expected to keep
domestic producers from raising prices on their own products.
Given the outlook for subdued economic growth, an improving outlook
for inflation, and lower Federal deficits, we expect interest rates to stay
low. Prospects for the stock market, in our view, remain favorable as well.
In the current environment, we expect Castle Convertible Fund to continue to
produce positive returns for its investors.
The Board of Directors decided to lower Castle's quarterly dividend to
$0.33 from $0.37. The reduction is due to changes in the convertible bond
market and to a reduction in income-producing assets caused by the $2.30 per
share capital gains dividend that the Fund paid in December 1997. Coupon
rates on new issues have been falling as more buyers enter the convertible
market. Together with a general shortening of available maturities, this
means that the Fund must accept lower interest rates on its investments in
order to maintain the same level of investment quality in its portfolio.
Attempting to replace lost income by investing in securities with greater
risk is not a strategy we believe to be in the best interests of our
shareholders.
Respectfully submitted,
/s/ David D. Alger
David D. Alger
President
March 3, 1998
CASTLE CONVERTIBLE FUND, INC.
SCHEDULE OF INVESTMENTS (Unaudited)
January 31, 1998
<TABLE>
<CAPTION>
Principal Corporate Convertible
Amount Bonds--45.4% Value
- -------------------------------------------------------------------
<S> <C> <C>
AEROSPACE-2.1%
$ 400,000 Atlantic Coast Airlines, Inc., Cv.
Sub. Notes, 7.00%, 7/1/04(a) $ 797,500
500,000 Kellstrom Industries Inc., Cv. Sub.
Notes, 5.75%, 10/15/02(a) 500,625
-----------
1,298,125
-----------
COMPUTER RELATED & BUSINESS
EQUIPMENT-6.8%
1,000,000 Bay Networks Inc., Cv. Sub. Deb.,
5.25%, 5/15/03 1,013,750
500,000 DSC Communications Corp., Cv.
Sub. Notes, 7.00%, 8/1/04(a) 473,125
1,000,000 Quantum Corporation, Cv. Sub.
Notes, 7.00%, 8/1/04 992,500
1,600,000 Read-Rite Corporation, Cv. Sub.
Notes, 6.50%, 9/1/04 1,304,000
500,000 Tecnomatix Technologies Ltd., Cv.
Sub. Notes, 5.25%, 8/15/04(a) 450,000
-----------
4,233,375
-----------
ENERGY-7.6%
1,850,000 Consolidated Natural Gas, Cv.
Sub. Deb., 7.25%, 12/15/15 1,905,500
2,000,000 Enserch, (Eurodollar), Cv. Sub.
Deb., 6.375%, 4/1/02 2,155,000
650,000 Parker Drilling Corp., Cv. Sub.
Notes, 5.50%, 8/1/04 692,250
-----------
4,752,750
-----------
HEALTHCARE-4.3%
1,450,000 Centocor, Inc., (Eurodollar), Cv.
Sub. Deb., 6.75%, 10/16/01 1,450,000
500,000 ESC Medical Systems Ltd., Cv.
Sub. Notes, 6.00%, 9/1/02(a) 534,375
400,000 NeXstar Pharmaceuticals, Inc., Cv.
Sub. Deb., 6.25%, 8/1/04(a) 352,500
250,000 Sunrise Assisted Living, Inc., Cv.
Sub. Notes, 5.50%, 6/15/02(a) 313,750
-----------
2,650,625
-----------
LEISURE & ENTERTAINMENT-.4%
200,000 Family Golf Centers, Inc., Cv. Sub.
Notes, 5.75%, 10/15/04(a) 224,500
-----------
MANUFACTURING-2.1%
1,250,000 Quanex Corp., Cv. Sub. Deb.,
6.88%, 6/30/07 1,303,125
-----------
METALS-2.8%
1,750,000 Inco Limited, Cv. Sub. Deb.,
7.75%, 3/15/16 1,771,875
-----------
PRINTING-2.2%
1,400,000 World Color Press Inc., Cv. Sub.
Notes, 6.00%, 10/1/07 1,373,750
-----------
REAL ESTATE-1.8%
1,000,000 Developers Diversified Realty Corp.,
Cv. Sub. Deb., 7.00%, 8/15/99 1,156,250
-----------
RESTAURANTS & LODGING-2.4%
1,500,000 Signature Resorts, Inc., Cv. Sub.
Notes, 5.75%, 1/15/07 1,507,500
-----------
RETAILING-5.4%
$1,000,000 Men's Wearhouse Inc., Cv. Sub.
Notes, 5.25%, 3/1/03 $ 1,197,500
1,500,000 Michaels Stores Inc., Cv. Sub.
Deb., 6.75%, 1/15/03 1,561,875
700,000 Saks Holdings Inc., Cv. Sub.
Notes, 5.50%, 9/15/06 628,250
-----------
3,387,625
-----------
SEMICONDUCTORS-7.5%
750,000 Integrated Process Equipment
Corp., Cv. Sub. Notes, 6.25%,
9/15/04(a) 618,750
1,400,000 Micron Technology, Inc., Cv. Sub.
Notes, 7.00%, 7/1/04 1,457,750
750,000 National Semiconductor, Cv. Sub.
Notes, 6.50%, 10/1/02(a) 765,000
500,000 Photronics Inc., Cv. Sub. Notes,
6.00%, 6/1/04 565,000
1,250,000 VLSI Technology, Inc., Cv. Sub.
Notes, 8.25%, 10/1/05 1,264,061
-----------
4,670,561
-----------
Total Corporate Convertible Bonds
(Cost $27,095,356) 28,330,061
-----------
Convertible Preferred
Shares Securities-18.8%
BROADCASTING-2.3%
24,000 Sinclair Broadcast Group, Inc.,
$3.00 Cv. Pfd., Series D. 1,410,000
-----------
ENERGY-.8%
10,000 Hvide Capital Trust, 6.5% Cv.
Pfd.(a). 486,250
-----------
FOODS & BEVERAGES-1.3%
18,000 Chiquita Brands International Inc.,
$2.875 Cv. Pfd. A 837,000
-----------
LEISURE & ENTERTAINMENT-2.3%
17,000 Royal Caribbean Cruises Limited,
$3.625 Cv. Pfd. A 1,418,437
-----------
PAPER PACKAGING & FOREST
PRODUCTS-5.9%
60,000 Fort James Corp., Dep. Shares,
Series L $14.00 Cum. Conv.
Exc. Pfd. 3,652,500
-----------
PRINTING-.4%
5,000 Big Flower Trust I, 6.00% Cv.
Pfd.(a) 283,750
-----------
RAW MATERIALS-3.7%
20,000 Bethlehem Steel Corporation,
$5.00 Cum. Pfd. 1,105,000
5,000 Howell Corp., $3.50 Cv. Pfd. 265,626
10,000 TIMET Capital Trust I, 6.625%
Cv. Pfd. (a) 476,250
10,000 TIMET Capital Trust I, 6.625%
Cv. Pfd. 476,250
-----------
2,323,126
-----------
REAL ESTATE-2.1%
40,000 Security Capital Industrial Trust,
7.00%, Cv. Pfd. B $ 1,297,500
-----------
Total Convertible Preferred
Securities (Cost $9,538,076) 11,708,563
-----------
Mandatory Convertible
Securities-6.7%
COMMUNICATIONS-1.8%
30,000 AirTouch Communications, Inc.,
6.00% Cv. Pfd., Class B,
8/16/99(c) 1,125,000
-----------
ENERGY-1.6%
30,100 MCN Corporation, 8.75%, Pfd.,
4/30/99(c) 974,487
-----------
FINANCIAL SERVICES-1.5%
45,000 The Money Store Inc., $1.72 Cv.
Pfd., 12/1/99(c) 950,625
-----------
FOODS & BEVERAGES-1.8%
17,000 Ralston Purina Co., 7.00%
Exchangeable Notes, 12/1/00(b) 1,134,750
-----------
Total Mandatory Convertible
Securities (Cost $3,925,282) 4,184,862
-----------
Common Stocks-12.3%
UTILITIES
45,000 American Electric Power Co., Inc. 2,219,063
50,000 New Century Energies Inc. 2,278,125
38,000 OGE Energy Corp. 1,987,875
43,000 Puget Sound Energy Inc. 1,190,563
-----------
Total Common Stocks
(Cost $4,733,197) 7,675,626
-----------
Principal Short-Term Corporate
Amount Notes-16.8%
- ----------
$ 360,000 British Gas Capital Inc., 5.50%,
2/9/98 359,285
2,600,000 CADES, 5.45%, 2/9/98 2,592,915
2,000,000 Cargill Inc., 5.42%, 2/9/98 1,994,580
2,500,000 Ford Motor Credit Co., 5.44%,
2/5/98 2,494,333
2,250,000 Merrill Lynch & Co. Inc., 5.56%,
2/11/98 2,245,483
800,000 Reliastar Mortgage Corp., 5.50%,
2/9/98 798,289
-----------
Total Short-Term Corporate Notes
(Cost $10,484,885) 10,484,885
-----------
Total Investments
(Cost $55,776,796) 100.0% 62,383,997
Other Assets in Excess of Liabilities .0 11,035
-----------------------
Total Net Assets 100.0% $62,395,032
=======================
Net Asset Value Per Share $ 27.90
===========
- --------------------
<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 three months ended January 31, 1998 (Unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest $ 636,308
Dividends 324,244
----------
Total Income 960,552
Total Expenses 160,033
----------
NET INVESTMENT INCOME 800,519
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments $1,171,783
Net change in unrealized appreciation of investments (568,777)
----------
Net realized and unrealized gain (loss) on investments 603,006
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,403,525
==========
</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, 1998
