Dear Shareholder:
As we observed in our last letter, the convertible securities market
did not escape the turbulence of the summer and early fall. The market only
began to regain its bearings in mid-October. The primary catalyst for the
turnaround was the surprise move by the Federal Reserve on October 15 to
lower the Fed funds rate to 5% and the discount rate to 4.75%. This action
followed a 25 basis point cut in the Fed funds rate on September 29th, which
the markets had viewed as inadequate. This unexpected move, coming between
meetings of the Federal Open-Market Committee, was seen as a very strong
statement that the Federal Reserve would act to restore liquidity to the
credit markets and, thereby, fend off a possible recession.
At the same time, as policy makers started to address the other crises
bedeviling the global markets, fears began to subside that the economic and
financial turmoil was spreading like wildfire around the world. In Japan,
the government finally passed banking reform legislation. This step, as well
as other measures, should in time help reinvigorate the Japanese economy. As
importantly, the prospect of a more stable Japan began to take some of the
fear and uncertainty out of the other markets in Asia. The International
Monetary Fund received the resources to help countries that may require
future assistance from additional funding that was approved by the U.S.
Congress. Following the reelection of President Cardoso, the Brazilian
government began to put together the austerity package considered essential
for the country's long-term fiscal and economic stability.
While recent events will likely result in slower economic growth in coming
quarters, we believe that the outlook for the U.S. economy remains
constructive. The positives-low inflation, low interest rates, high levels
of employment, reasonably high levels of consumer confidence, a well-
capitalized banking system, and prudent monetary and fiscal policies-should
offset the negative impact of a weakening import/export sector. While we do
not foresee a recession, we do believe that the rate of gain in corporate
profits will not be as robust as in recent years.
The Fund began to recoup the losses suffered during the summer once the
markets started to recover from the damaging reversals of the summer. Still,
Castle Convertible Fund produced a modest negative total return on an NAV
basis for the fiscal year ended October 31. We believe that Castle is well-
positioned to produce stronger returns in the coming year.
Respectfully submitted,
/s/ David D. Alger
David D. Alger
President
December 17, 1998
CASTLE CONVERTIBLE FUND, INC.
SCHEDULE OF INVESTMENTS
October 31, 1998
<TABLE>
<CAPTION>
Principal Corporate Convertible
Amount Bonds-29.3% Value
- ------------------------------------------------------------------
<C> <S> <C>
AEROSPACE-1.2%
$ 250,000 Atlantic Coast Airlines, Inc., Cv.
Sub. Notes, 7.00%, 7/1/04(a) $ 672,812
-----------
COMMUNICATION EQUIPMENT-5.8%
1,500,000 Bay Networks Inc., Cv. Sub. Deb.,
5.25%, 5/15/03 1,522,500
500,000 DSC Communications Corp., Cv.
Sub. Notes, 7.00%, 8/1/04(a) 511,875
1,200,000 DSC Communications Corp., Cv.
Sub. Notes, 7.00%, 8/1/04 1,228,500
-----------
3,262,875
-----------
COMPUTER RELATED & BUSINESS
EQUIPMENT-1.9%
1,250,000 Quantum Corporation, Cv. Sub.
Notes, 7.00%, 8/1/04 1,081,250
-----------
CONSUMER PRODUCTS &
SERVICES-.8%
538,000 Fieldcrest Cannon Inc., Cv. Sub.
Deb., 6.00%, 3/15/12 468,060
-----------
HEALTH CARE-.5%
400,000 NeXstar Pharmaceuticals, Inc., Cv.
Sub. Deb., 6.25%, 8/1/04(a) 300,500
-----------
MANUFACTURING-2.0%
1,250,000 Quanex Corp., Cv. Sub. Deb.,
6.88%, 6/30/07 1,112,500
-----------
METALS-2.3%
1,500,000 Inco Limited, Cv. Sub. Deb.,
7.75%, 3/15/16 1,331,250
-----------
PRINTING-2.5%
1,400,000 World Color Press Inc., Cv. Sub.
Notes, 6.00%, 10/1/07 1,400,000
-----------
REAL ESTATE-2.0%
1,000,000 Developers Diversified Realty Corp.,
Cv. Sub. Deb., 7.00%, 8/15/99 1,135,000
-----------
RETAILING-5.9%
800,000 Baker (J.) Inc., Cv. Sub. Notes,
7.00%, 6/1/02 632,000
1,000,000 Genesco Inc., Cv. Sub. Notes,
5.50%, 4/15/05(a) 619,375
1,500,000 Michaels Stores Inc., Cv. Sub.
Deb., 6.75%, 1/15/03 1,290,000
1,200,000 Sunglass Hut Inc., Cv. Sub.
Notes, 5.25%, 6/15/03 810,000
-----------
3,351,375
-----------
SEMICONDUCTORS-4.4%
1,400,000 Micron Technology, Inc., Cv. Sub.
Notes, 7.00%, 7/1/04 1,368,500
750,000 National Semiconductor, Cv. Sub.
Notes, 6.50%, 10/1/02(a) 611,250
500,000 Photronics Inc., Cv. Sub. Notes,
6.00%, 6/1/04 516,563
-----------
2,496,313
-----------
Total Corporate Convertible Bonds
(Cost $17,559,005) 16,611,935
-----------
<CAPTION>
Convertible Preferred
Shares Securities-28.4% Value
- ------------------------------------------------------------------
<C> <S> <C>
AEROSPACE & AIRLINES-1.5%
22,000 Coltec Capital Trust, 5.25% Cv.
Pfd.(a) $ 863,500
-----------
BROADCASTING-1.1%
15,000 Sinclair Broadcast Group, Inc.,
$3.00 Cv. Pfd., Series D. 596,250
-----------
BUILDING & CONSTRUCTION-2.0%
22,500 Owens Corning Capital LLC,
$3.25 Monthly Income Pfd.(a) 1,116,563
-----------
COMMUNICATION EQUIPMENT-2.0%
20,100 Corning Inc., $3.00 Cv. Monthly
Income Pfd. 1,157,006
-----------
ENERGY-7.2%
30,000 AES Trust II, $2.75 Cv. Pfd.,
Series B 1,387,500
15,000 Devon Financing Trust, $3.25 Cv.
Pfd. 922,500
35,000 Unocal Capital Trust II, 6.25%
Cv. Pfd. 1,802,500
-----------
4,112,500
-----------
FINANCIAL SERVICES-3.7%
80,000 CNB Capital Trust I, 6.00% Cv.
Pfd. 2,090,000
-----------
FOODS & BEVERAGES-1.2%
15,000 Suiza CapitalTrust II, 5.50% Cv.
Pfd.(a) 500,625
5,000 Suiza CapitalTrust II, 5.50% Cv.
Pfd. 166,875
-----------
667,500
-----------
LEISURE & ENTERTAINMENT-2.7%
17,000 Royal Caribbean Cruises Limited,
$3.625 Cv. Pfd. A 1,503,438
-----------
PACKAGING PRODUCTS-2.1%
30,000 Owens-Illinois, Inc., $2.375 Cv.
Pfd. Class A 1,203,750
-----------
RAW MATERIALS-1.9%
20,000 Bethlehem Steel Corporation,
$5.00 Cum. Pfd. 1,076,250
-----------
RETAILING-1.0%
10,000 Kmart Financing Trust I, $3.875
Cv. Pfd. 554,375
-----------
REAL ESTATE-2.0%
40,000 Prologis Trust, 7.00%, Cv. Pfd. B 1,115,000
-----------
Total Convertible Preferred
Securities (Cost $16,048,108) 16,056,132
-----------
Mandatory Convertible
Securities-8.6%
COMMUNICATIONS-1.6%
20,000 AirTouch Communications, Inc.,
6.00% Cv. Pfd., Class B,
8/16/99(c) 920,000
-----------
FOODS & BEVERAGES-1.5%
17,000 Ralston Purina Co., 7.00%
Exchangeable Notes, 12/1/00(b) 842,563
-----------
LEISURE & ENTERTAINMENT-2.1%
25,000 Premier Parks Inc., 7.50% Income
Equity Securities, 4/1/01(c) $ 1,168,750
-----------
RETAILING-3.4%
13,000 CVS Automatic Common Exchange
Security Trust, $4.23, 5/15/01(c) 1,118,000
25,000 Dollar General STRYPES Trust,
$3.352, 5/15/01(c) 832,813
-----------
1,950,813
-----------
Total Mandatory Convertible
Securities (Cost $4,913,723) 4,882,126
-----------
Common Stocks-13.4%
UTILITIES
40,000 American Electric Power Co., Inc. 1,957,500
40,000 New Century Energies Inc. 1,932,500
70,000 OGE Energy Corp. 1,859,375
68,000 Puget Sound Energy Inc. 1,836,000
-----------
Total Common Stocks
(Cost $4,945,921) 7,585,375
-----------
<CAPTION>
Principal Short-Term Corporate
Amount Notes-19.8% Value
- ------------------------------------------------------------------
<C> <S> <C>
$2,000,000 Aetna Services, Inc., 5.26%,
11/6/98 $ 1,998,539
2,500,000 Bayerische Vereinsbank A.G.,
5.22%, 11/5/98 2,498,551
600,000 Cooperative Association of Tractor
Dealers, Inc.,5.25%, 11/2/98 599,913
1,400,000 Hertz Corporation, 5.27%,
11/13/98 1,397,541
1,400,000 Merrill Lynch & Co., Inc., 5.25%,
11/10/98 1,398,162
2,500,000 National Australia Funding, Inc.,
5.22%, 11/5/98 2,498,550
800,000 Republic Industries Funding,
Corp., 5.25%, 11/12/98 798,715
-----------
Total Short-Term Corporate Notes
(Cost $11,189,971) 11,189,971
-----------
<S> <C> <C>
Total Investments
(Cost $54,656,728)(d) 99.5 % 56,325,539
Other Assets in Excess of Liabilities .5 301,212
------------------------
Total Net Assets 100.0 % $56,626,751
========================
<FN>
- --------------------
<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.
<Fd> At October 31, 1998, the net unrealized appreciation on investments,
based on cost for federal income tax purposes of $54,656,728, amounted
to $1,668,811, which consisted of aggregate gross unrealized
appreciation of $4,953,288 and aggregate gross unrealized depreciation
of $3,284,477.
</FN>
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities, at value (cost $54,656,728),
see accompanying schedule of investments $56,325,539
Receivable for investment securities sold 247,492
Dividends and interest receivable 453,921
Prepaid expenses 3,670
-----------
Total Assets 57,030,622
LIABILITIES:
Bank overdraft $190,267
Payable for investment securities purchased 120,625
Investment advisory fees payable 35,380
Directors' fees payable 3,424
Accrued expenses 54,175
-------
Total Liabilities 403,871
-----------
NET ASSETS applicable to 2,236,003 outstanding shares of
$0.01 par value (10,000,000 shares authorized) $56,626,751
===========
NET ASSET VALUE PER SHARE $ 25.32
===========
</TABLE>
See Notes to Financial Statements.
CASTLE CONVERTIBLE FUND, INC.
STATEMENT OF OPERATIONS
For the year ended October 31, 1998
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Income:
Interest $ 2,222,011
Dividends 1,529,286
-----------
Total Income 3,751,297
Expenses:
Investment advisory fees-Note 2(a) $ 467,452
Shareholder reports 38,130
Directors' fees 38,000
Custodian and transfer agent fees 34,707
Professional fees 22,935
Bookkeeping fees 18,000
Miscellaneous 24,609
-----------
Total Expenses 643,833
-----------
NET INVESTMENT INCOME 3,107,464
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 248,589
Net change in unrealized depreciation on investments (5,507,167)
-----------
Net realized and unrealized gain (loss) on investments (5,258,578)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,151,114)
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1998 October 31, 1998
------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net investment income $ 3,107,464 $ 3,433,579
Net realized gain on investments 248,589 5,386,112
Net change in unrealized depreciation on investments (5,507,167) (730,772)
--------------------------------
Net increase (decrease) in net assets
resulting from operations (2,151,114) 8,088,919
--------------------------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income (3,331,584) (3,577,609)
Net realized gains (5,142,806) (3,309,288)
--------------------------------
Total dividends (8,474,390) (6,886,897)
--------------------------------
Net increase (decrease) in net assets (10,625,504) 1,202,022
NET ASSETS:
Beginning of year 67,252,255 66,050,233
--------------------------------
End of year (including undistributed net investment
income of $411,524 and $635,644, respectively) $56,626,751 $67,252,255
================================
</TABLE>
See Notes to Financial Statements.
CASTLE CONVERTIBLE FUND, INC.
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period
<TABLE>
<CAPTION>
Four
Months
Year Ended October 31, Ended Year Ended
---------------------------------------- October 31, June 30,
1998 1997 1996 1995 1994(i) 1994
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 30.08 $ 29.54 $ 28.39 $ 25.77 $ 25.07 $ 27.29
-------------------------------------------------------------------
Net investment income 1.39 1.54 1.56 1.74 0.52 1.62
Net realized and unrealized gain
(loss) on investments (2.36) 2.08 1.89 3.29 0.58 (1.60)
-------------------------------------------------------------------
Total from investment operations (0.97) 3.62 3.45 5.03 1.10 0.02
-------------------------------------------------------------------
Dividends from net investment
income (1.49) (1.60) (1.59) (1.60) (0.40) (1.67)
Distributions from net realized gains (2.30) (1.48) (0.71) (0.81) - (0.57)
-------------------------------------------------------------------
Total Distributions (3.79) (3.08) (2.30) (2.41) (0.40) (2.24)
-------------------------------------------------------------------
Net asset value, end of period $ 25.32 $ 30.08 $ 29.54 $ 28.39 $ 25.77 $ 25.07
===================================================================
Market value, end of period $ 22.75 $ 25.75 $ 25.38 $ 25.63 $ 24.38 $ 22.25
===================================================================
Total investment return based on
market value per share 1.66% 14.01% 8.14% 15.82% 11.28% (8.41%)
===================================================================
Ratios and Supplemental Data:
Net assets, end of period
(000's omitted) $56,627 $67,252 $66,050 $63,478 $57,207 $55,665
===================================================================
Ratio of expenses to average net
assets 1.04% 1.00% 1.03% 1.05% 1.04% 1.05%
===================================================================
Ratio of net investment income to
average net assets 5.00% 5.26% 5.44% 6.62% 6.02% 6.02%
===================================================================
Portfolio Turnover Rate 52.99% 57.58% 63.68% 52.80% 8.65% 29.38%
===================================================================
<FN>
- --------------------
<Fi> Ratios have been annualized; total investment return has not been
annualized.
</FN>
</TABLE>
See Notes to Financial Statements.
CASTLE CONVERTIBLE FUND, INC.
NOTES TO FINANCIAL STATEMENTS
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. Distributions 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 asset value.
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 year ended October 31, 1998, no reimbursement was required pursuant to
the Contract. For the year ended October 31, 1998, the total investment
advisory fee charged to the Fund amounted to $467,452, and the Adviser
received $18,000 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 year ended October 31, 1998, the Fund incurred fees of approximately
$15,100 for services provided by Alger Services and reimbursed Alger
Services approximately $4,500 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 October 31, 1998, the Adviser and
its affiliates owned 345,756 shares of the Fund.
NOTE 3-Securities Transactions:
During the year ended October 31, 1998, purchases and sales of
investment securities, excluding short-term securities, aggregated
$26,980,192 and $34,804,340, respectively.
NOTE 4-Components of Net Assets:
At October 31, 1998, the Fund's net assets consisted of:
<TABLE>
<S> <C>
Paid-in capital $54,012,068
Undistributed net investment income 411,524
Undistributed net realized gain 534,348
Net unrealized appreciation 1,668,811
-----------
NET ASSETS $56,626,751
===========
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Castle Convertible Fund, Inc.:
We have audited the accompanying statement of assets and liabilities
of Castle Convertible Fund, Inc. (a Delaware Corporation), including the
schedule of investments, as of October 31, 1998, and the related statement
of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the four years in the period then ended, for the four
months in the period ended October 31, 1994, and for the year ended June 30,
1994. These financial statements and financial highlights are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 1998, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Castle Convertible Fund, Inc. as of October 31, 1998, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the four years in the period then ended, for the four
months in the period ended October 31, 1994, and for the year ended June 30,
1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
December 11, 1998
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.
1 World Trade Center
Suite 9333
New York, N.Y. 10048
- ----------------------------------------
Transfer Agent and Dividend Disbursing Agent
Alger Shareholder Services, Inc.
30 Montgomery Street, Box 2001
Jersey City, N.J. 07302-9811
- ----------------------------------------
Results of the Annual Meeting of Shareholders
The annual meeting of the shareholders of the Fund was held on December 9,
1997. The following matters were submitted to a shareholder vote and
approved:
(i) the reelection of the following directors of the Fund: Fred M. Alger,
David D. Alger, Lester L. Colbert, Jr., Arthur M. Dubow, Stephen E. O'Neil,
Nathan E. Saint-Amand, and John T. Sargent. Each of the directors reelected
received at least 1,917,378 affirmative votes and no more than 18,744 votes
were withheld for any director. There were 15,330 abstentions.
(ii) the ratification of the selection of Arthur Andersen LLP as the Fund's
independent public accountants for the fiscal year ending October 31, 1998:
For-1,920,285; Against-19,997; Abstain-16,348
(iii) the approval of the removal of an investment restriction of the Fund:
For-1,257,692; Against-65,637; Abstain-56,182.
- ----------------------------------------
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. |
Annual Report
October 31, 1998
