UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-2213
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Castle Convertible Fund, Inc.
-----------------------------
(Exact name of registrant as specified in charter)
111 Fifth Avenue, New York, New York 10003
---------------------------------------------
(Address of principal executive offices) (Zip code)
Mr. Frederick A. Blum
Fred Alger Management, Inc.
111 Fifth Avenue
New York, New York 10003
---------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-806-8800
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Date of fiscal year end: October 31
Date of reporting period: October 31, 2003
ITEM 1. REPORT(S) TO STOCKHOLDERS.
Dear Shareholders,
The fiscal year ended October 31, 2003, was dramatic, both
economically and politically. It began shortly after the Dow hit a five
year low and ended with a robust recovery.
At the beginning of 2003, the markets had been down three years in a
row, something that hadn't happened since 1939-1941. Overshadowed by
national security concerns, the markets remained essentially stagnant into
the spring. The looming American-led invasion of Iraq dominated the
headlines and the attention of the American public. In spite of encouraging
economic data, both Wall Street and Main Street were preoccupied with war.
On March 19th, the United States invaded Iraq. The markets then fluctuated
with the perceived progress of the military campaign. Later in the spring,
as the U.S. military achieved success, at least relative to very
pessimistic media opinion, the markets recovered dramatically.
Throughout 2003, the U.S. economy grew steadily, aided by the Federal
Reserve, by tax policy, and by improving corporate outlooks. On June 25,
2003, the Fed cut the Fed Funds Rate to 1.00%, a 40 year low. The yield on
the 10-year note reached a low of 3.11% on June 13, before climbing back
above 4.00% in July.
The combination of low interest rates, tax cuts, increased federal
spending and the mortgage refinancing boom boosted the economy
significantly. Fueled by a spike in consumer spending and high
productivity, third quarter GDP growth soared to 8.2%, the highest rate
since 1984. Productivity growth also was exceptional throughout 2003. The
one soft spot was the job market. Historically, there has always been a lag
time between economic recovery and job creation. For the month of October,
the unemployment rate was at 6.0%, below its peak of 6.4%, but still
indicative of less-than-stellar job creation.
By the end of our fiscal year, both the economy and the markets
experienced remarkable growth, and investors seemed to have gained a level
of rational confidence that was absent from both the bull market of the
late 1990s and the bear market of 2000 through 2002. The Dow rose 17% in
the 12 months ended October 31, 2003, and the S&P 500 rose 19%.
For the year, fixed-income lagged equities. Within fixed-income, low
yields on Treasuries meant that corporate bonds were relatively more
attractive, and low-quality corporate bonds outperformed during much of the
2nd and 3rd quarters of 2003. Overall, it was better to be concentrated in
lower rated corporate credit, which Castle Convertible Fund was. The Lehman
Brothers Government/Credit Bond Index rose 6.18% in the 12-months ended
October 31, 2003. Over the same period, the Fund was up 12.99%.
As we head into 2004, we believe the coming year is likely to be
shaped by an economy expanding between 3.5% and 4% annually. We anticipate
that the markets will reflect that. Investors have maintained high
expectations for future earnings. They are optimistic, but cautious, as are
we. Having survived the bubble and the bust, we, like you, would prefer not
to see a repeat of either.
Respectfully submitted,
/s/ Dan C. Chung
Dan C. Chung
Chief Investment Officer
December 11, 2003
CASTLE CONVERTIBLE FUND, INC.
SCHEDULE OF INVESTMENTS
October 31, 2003
Principal Corporate Convertible
Amount Bonds-64.4% Value
- ------------------------------------------------------------------------
<s> <c> <c> <c>
AEROSPACE & DEFENSE-2.0%
$ 500,000 EDO Corporation, Cv. Sub.
Notes, 5.25%, 4/15/07 $ 537,500
500,000 L-3 Communications Holdings,
Inc., Senior Sub. Cv. Contingent
Debt Securities, 4.40%, 9/15/11 530,000
-----------
1,067,500
-----------
BIOTECHNOLOGY-.9%
500,000 Charles River Laboratories
International, Inc., Senior Cv.
Deb., 3.50%, 2/1/22 519,400
-----------
CAPITAL MARKETS-1.5%
800,000 E*TRADE Group, Inc., Cv. Sub.
Notes, 6.00%, 2/1/07 800,000
-----------
COMMUNICATIONS EQUIPMENT-9.2%
850,000 Adaptec, Inc., Cv. Sub. Notes,
3.00%, 3/5/07 819,230
1,000,000 Brocade Communications
Systems, Inc., Cv. Sub. Notes,
2.00%, 1/1/07 901,200
1,000,000 CIENA Corporation, Cv. Notes,
3.75%, 2/1/08 877,500
1,000,000 Corning Incorporated, 3.50%,
Cv. Deb., 11/1/08 1,290,000
1,250,000 Nortel Networks Corporation,
Cv. Senior Notes, 4.25%,
9/1/08 1,183,875
-----------
5,071,805
-----------
COMMUNICATION SERVICES
& SUPPLIES-2.5%
750,000 Cendant Corporation, Cv. Senior
Deb., 3.875%, 11/27/11 799,650
600,000 SCI Systems, Inc., Cv. Sub.
Notes, 3.00%, 3/15/07 556,500
-----------
1,356,150
-----------
COMPUTER SOFTWARE-3.7%
550,000 BEA Systems, Inc., Cv. Sub.
Notes, 4.00%, 12/15/06 550,000
950,000 Juniper Networks, Inc., Cv. Sub.
Notes, 4.75%, 3/15/07 973,750
500,000 Mercury Interactive Corporation,
Cv. Sub. Notes, 4.75%, 7/1/07 499,850
-----------
2,023,600
-----------
ELECTRONIC EQUIPMENT &
INSTRUMENTS-1.5%
850,000 Tech Data Corporation, Cv. Sub.
Deb., 2.00%, 12/15/21 816,680
-----------
ENERGY EQUIPMENT & SERVICES-2.7%
650,000 Kerr-McGee Corporation, Cv.
Sub. Deb., 5.25%, 2/15/10 676,780
250,000 PPL Corporation, Senior Cv.
Notes, 2.625%, 5/15/23(a) 245,312
550,000 Pride International Inc., Cv.
Senior Notes, 3.25%, 5/1/33(a) 558,250
-----------
1,480,342
-----------
FOOD & DRUG RETAILING-1.5%
700,000 Rite Aid Corporation, Cv. Notes,
4.75%, 12/1/06 805,000
-----------
HEALTH CARE-5.0%
500,000 AmeriSource Health Corporation,
Cv. Sub. Notes, 5.00%, 12/1/07 600,050
500,000 Apria Healthcare Group Inc.,
Cv. Senior Notes, 3.375%,
5/15/33(a) 565,000
800,000 Edwards Lifesciences
Corporation, CV. Senior Deb.,
3.875%, 5/15/33(a) 788,000
450,000 LifePoint Hospitals, Inc., Cv.
Sub. Notes, 4.50%, 6/1/09 435,375
375,000 Province Healthcare Company,
Cv. Sub. Notes, 4.50%,
11/20/05 381,562
-----------
2,769,987
-----------
HOTELS, RESTAURANTS &
LEISURE-1.4%
750,000 Hilton Hotels Corp., Cv. Sub.
Notes, 3.375%, 4/15/23(a) 780,000
-----------
INDUSTRIAL CONGLOMERATES-2.0%
500,000 TYCO International Group, Cv.
Senior Deb., 2.75%, 1/15/18(a) 553,150
500,000 TYCO International Group, Cv.
Senior Deb., 2.75%, 1/15/18 553,150
-----------
1,106,300
-----------
MEDIA-6.3%
1,350,000 Liberty Media Corporation,
Senior Exchangeable Deb.,
3.50%, 1/15/31 1,080,000
800,000 Liberty Media Corporation, Senior
Exchangeable Deb., 3.25%,
3/15/31 799,040
725,000 Regal Entertainment Group,
Cv. Senior Notes, 3.75%,
5/15/08(a) 806,563
825,000 Sinclair Broadcast Group, Inc.,
Cv. Senior Sub. Notes, 4.875%
7/15/18 796,125
-----------
3,481,728
-----------
METALS & MINING-2.1%
750,000 Freeport-McMoran Copper &
Gold, Inc., Cv. Senior Notes,
7.00%, 2/11/11(a) 1,165,312
-----------
2
Principal Corporate Convertible
Amount Bonds-64.4% Value
- ------------------------------------------------------------------------
<s> <c> <c> <c>
PHARMACEUTICALS-3.6%
$1,200,000 IVAX Corporation, Cv. Senior
Sub. Notes, 4.50%, 5/15/08 $ 1,200,000
850,000 Sepracor, Inc., Cv. Sub. Deb.,
5.00%, 2/15/07 796,875
-----------
1,996,875
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RETAIL-6.1%
750,000 Barnes & Noble, Inc., Cv. Sub.
Notes, 5.25%, 3/15/09 797,850
450,000 Best Buy Co. Inc., Cv. Sub.
Deb., 2.25%, 1/15/22 503,955
250,000 Gap, Inc. (The), Senior Cv.
Notes, 5.75%, 3/15/09(a) 331,875
500,000 Gap, Inc. (The), Senior Cv.
Notes, 5.75%, 3/15/09 663,750
1,000,000 Penney (J.C.) Company, Inc.,
Cv. Sub. Notes, 5.00%,
10/15/08 1,052,400
-----------
3,349,830
-----------
ROAD & RAIL-1.9%
850,000 Yellow Corporation, Contingent
Senior Cv. Notes, 5.00%,
8/8/23(a) 1,060,375
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SEMICONDUCTOR EQUIPMENT
& PRODUCTS-8.6%
1,150,000 Fairchild Semiconductor
Corporation, Senior Cv. Sub.
Notes, 5.00%, 11/1/08 1,208,880
1,150,000 International Rectifier
Corporation, Cv. Sub. Notes,
4.25%, 7/15/07 1,139,880
375,000 Lam Research Corporation, Cv.
Sub. Notes, 4.00%, 6/1/06 384,975
725,000 LSI Logic Corporation, Cv. Sub.
Notes, 4.00%, 11/1/06 706,875
500,000 LSI Logic Corporation, Cv. Sub.
Notes, 4.00%, 5/16/10(a) 561,491
650,000 Teradyne, Inc., Senior Cv.
Notes, 3.75%, 10/15/06 724,750
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4,726,851
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WIRELESS TELECOMMUNICATION
SERVICES-1.9%
1,100,000 Nextel Communications, Inc.,
Cv. Senior Notes, 5.25%,
1/15/10 1,061,500
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Total Corporate Convertible
Bonds (Cost $32,913,848) 35,439,235
-----------
Shares Preferred Stock-1.0%
- ----------
MEDIA
7,000 Tribune Co., Exchangeable Sub.
Deb., 2.00%, 5/15/29
(Cost $551,600) 553,000
-----------
Convertible Preferred
Shares Securities-13.6% Value
- ------------------------------------------------------------------------
<s> <c> <c> <c>
AUTOMOBILES-1.7%
38,000 General Motors Corporation,
4.50%, Cv. Senior Deb.,
Class A $ 942,400
-----------
BANKS-1.2%
11,700 Washington Mutual Capital
Trust 2001, 5.375%, Cv. Pfd.
Income Equity Redeemable
Securities 676,377
-----------
COMMUNICATIONS EQUIPMENT-1.3%
650 Lucent Technology Inc., 7.75%,
Cumulative Convertible Trust 697,164
-----------
DIVERSIFIED FINANCIALS-.8%
10,550 Household International Inc.,
8.875%, Adjustable Conversion
Rate Equity Security Units 450,485
-----------
HOUSEHOLD DURABLES-.9%
10,500 Newell Financial Trust I, 5.25%,
Cv. Quarterly Income Pfd. 459,375
-----------
INSURANCE-3.0%
21,000 Chubb Corporation (The), 7.00%,
Equity Units 582,750
44,000 Travelers Property Casualty
Corp., 4.50%, Cv. Jr. Sub.
Notes 1,053,360
-----------
1,636,110
-----------
MEDIA-1.5%
25,000 Comcast Corporation, 2.00%,
Exch. Sub. Deb., 10/15/29 836,250
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PAPER PACKAGING & FOOD
PRODUCTS-1.3%
15,000 International Paper
Capital Trust, 5.25%, Cv. Pfd 731,250
-----------
RETAIL-1.9%
25,000 United Rental Trust I, 6.50%,
Cv. Quarterly Income Pfd. 1,051,500
-----------
Total Convertible Preferred
Securities (Cost $6,697,716) 7,480,911
-----------
Mandatory Convertible
Securities-5.5%
DIVERSIFIED TELECOMMUNICATION
SERVICES-2.1%
12,000 ALLTEL Corporation, 7.75%,
Equity Units, 5/17/05(b) 588,000
20,000 CenturyTel, Inc., 6.875%,
Corporate Units, 5/15/05(b) 566,600
-----------
1,154,600
-----------
ENERGY-1.0%
10,000 Dominion Resources Inc., 8.75%,
Upper DECS Equity Income
Securities, 5/15/06(b) 532,200
-----------
3
Mandatory Convertible
Shares Securities-(Continued) Value
- ------------------------------------------------------------------------
HEALTH CARE-2.0%
6,375 Anthem, Inc., 6.00%, Equity
Security Units, 11/15/04(b) $ 519,690
10,000 Omnicare Capital Trust I, 4.00%,
Income Equity Redeemable
Securities, 6/15/33(b) 588,700
-----------
1,108,390
-----------
INSURANCE-.4%
4,400 PartnerRe Ltd., 8.00%,
Premium Equity Participating
Security Units, 12/31/04(b) 240,548
-----------
Total Mandatory Convertible
Securities (Cost $2,861,780) 3,035,738
-----------
Common Stocks-10.8%
DIVERSIFIED FINANCIALS-4.7%
7,500 Bank of America Corporation 567,975
17,500 Citigroup Inc. 829,500
15,000 J.P. Morgan Chase & Co. 538,500
24,000 U.S. Bancorp 653,280
-----------
2,589,255
-----------
ELECTRIC UTILITIES-1.6%
7,500 FirstEnergy Corp. 257,925
27,500 TXU Corp. 627,550
-----------
885,475
-----------
GAS COMPANIES-.2%
4,000 KeySpan Corporation 139,880
-----------
HEALTH CARE-.1%
820 Medco Health Solutions, Inc.* 27,224
-----------
OIL & GAS-2.0%
10,000 ConocoPhillips $ 571,500
12,200 Royal Dutch Petroleum
Company 541,436
-----------
1,112,936
-----------
PHARMACEUTICALS-1.5%
20,000 Bristol-Myers Squibb Company 507,400
6,800 Merck & Co., Inc. 300,900
-----------
808,300
-----------
WIRELESS TELECOMMUNICATION
SERVICES-.7%
11,000 Verizon Communications Inc. 369,600
-----------
Total Common Stocks
(Cost $5,361,737) 5,932,670
-----------
Principal Short-Term
Amount Investments-4.1%
- ----------
$2,250,000 Federal National Mortgage
Association, 0.93%, 11/1/03
(Cost $2,249,884) 2,249,884
-----------
Total Investments
(Cost $50,636,565)(c) 99.4% 54,691,438
Other Assets in Excess of Liabilities .6 353,197
---------------------
Net Assets 100.0% $55,044,635
=====================
<FN>
* Non-income producing security.
(a) Pursuant to Securities and Exchange Commission Rule 144A, these
securities may be sold prior to their maturity only to qualified
institutional buyers.
(b) 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.
(c) At October 31, 2003, the net unrealized appreciation on investments,
based on cost for federal income tax purposes of $50,540,605 amounted
to $4,150,833 which consisted of aggregate gross unrealized
appreciation of $4,578,955 and aggregate gross unrealized
depreciation of $428,122.
</FN>
See Notes to Financial Statements.
4
CASTLE CONVERTIBLE FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2003
<s> <c> <c>
ASSETS:
Investments in securities, at value (cost $50,636,565),
see accompanying schedule of investments $54,691,438
Cash 10,908
Receivable for investment securities sold 525,063
Dividends and interest receivable 475,356
Prepaid expenses 18,485
-----------
Total Assets 55,721,250
LIABILITIES:
Payable for investment securities purchased $563,849
Investment advisory fees payable 34,544
Directors' fees payable 3,836
Accrued expenses 74,386
--------
Total Liabilities 676,615
-----------
NET ASSETS applicable to 2,236,003 outstanding shares of $0.01
par value (10,000,000 shares authorized) $55,044,635
===========
NET ASSET VALUE PER SHARE $ 24.62
===========
STATEMENT OF OPERATIONS
For the year ended October 31, 2003
<s> <c> <c>
INVESTMENT INCOME:
Income:
Interest $1,465,388
Dividends 971,706
----------
Total Income 2,437,094
Expenses:
Investment advisory fees-Note 2(a) $ 391,086
Directors' fees 40,000
Shareholder reports 54,193
Custodian and transfer agent fees 19,730
Professional fees 57,176
Bookkeeping fees 18,000
Miscellaneous 39,290
-----------
Total Expenses 619,475
----------
NET INVESTMENT INCOME 1,817,619
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (1,400,986)
Net change in unrealized appreciation (depreciation) on investments 6,128,333
-----------
Net realized and unrealized gain (loss) on investments 4,727,347
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,544,966
==========
See Notes to Financial Statements.
5
CASTLE CONVERTIBLE FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended
October 31, 2003 October 31, 2002
------------------------------------
<s> <c> <c>
FROM INVESTMENT ACTIVITIES:
Net investment income $ 1,817,619 $ 2,428,488
Net realized loss on investments (1,400,986) (2,201,495)
Net change in unrealized appreciation (depreciation) on investments 6,128,333 (4,870,976)
-------------------------------
Net increase (decrease) in net assets resulting from operations 6,544,966 (4,643,983)
-------------------------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income (1,945,322) (2,526,683)
-------------------------------
Net increase (decrease) in net assets 4,599,644 (7,170,666)
NET ASSETS:
Beginning of year 50,444,991 57,615,657
-------------------------------
End of year (including undistributed net investment income of $971,255
and $610,235, respectively) $55,044,635 $50,444,991
===============================
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the year
Year Ended October 31,
-------------------------------------------------------
2003 2002 2001 2000 1999
-------------------------------------------------------
<s> <c> <c> <c> <c> <c>
Net asset value, beginning of year $ 22.56 $ 25.77 $ 28.22 $ 26.20 $ 25.32
-------------------------------------------------------
Net investment income 0.81 1.09 1.34 1.40 1.32
Net realized and unrealized gain (loss)
on investments 2.12 (3.17) (1.80) 2.24 1.07
-------------------------------------------------------
Total from investment operations 2.93 (2.08) (0.46) 3.64 2.39
-------------------------------------------------------
Dividends from net investment income (0.87) (1.13) (1.33) (1.32) (1.46)
Distributions from net realized gains - - (0.66) (0.30) (0.05)
-------------------------------------------------------
Total Distributions (0.87) (1.13) (1.99) (1.62) (1.51)
-------------------------------------------------------
Net asset value, end of year $ 24.62 $ 22.56 $ 25.77 $ 28.22 $ 26.20
=======================================================
Market value, end of year $ 21.75 $ 20.57 $ 24.25 $ 22.75 $ 21.00
=======================================================
Total investment return based on
market value per share 9.98% (11.05%) 15.83% 16.51% (1.29%)
=======================================================
Ratios and Supplemental Data:
Net assets, end of year (000's omitted) $55,045 $50,445 $57,616 $63,107 $58,583
=======================================================
Ratio of expenses to average net assets 1.19% 1.09% 1.03% 1.06% 1.02%
=======================================================
Ratio of net investment income
to average net assets 3.49% 4.30% 4.89% 5.05% 5.05%
=======================================================
Portfolio Turnover Rate 156.83% 186.48% 53.81% 68.55% 60.65%
=======================================================
See Notes to Financial Statements.
6
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").
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 investments
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.
Effective November 1, 2001, premiums and discounts on debt securities
purchased are amortized or accreted over the lives of the respective
securities. This change in accounting policy which has been applied
retroactively had no material effect on the accompanying financial
statements.
(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.
The characterization of distributions to shareholders for financial
reporting purposes is determined in accordance with federal income tax
rules. Therefore, the source of the Fund's distributions may be shown in
the accompanying financial statements as either from, or in excess of net
investment income, net realized gain on investment transactions or paid-in
capital, depending on the type of book/tax differences that may exist.
At October 31, 2003, the Fund reclassified $488,723 to undistributed
net investment income (accumulated loss) and $205,583 from undistributed
net realized gain (accumulated loss) to paid-in capital. Reclassifications
result primarily from the difference in tax treatment of certain debt
instruments. The reclassification had no impact on the net asset value of
the Fund and is designed to present the Fund's capital accounts on a tax
basis.
(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. At October 31, 2003, the net capital loss
carryforward of the Fund which may be used to offset future net realized
gains was approximately $3,678,369, and expires 2009 through 2011.
(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.
7
CASTLE CONVERTIBLE FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 2-Investment Advisory Fees and Other Transactions with Affiliates
(continued):
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, 2003, no reimbursement was
required pursuant to the Contract. For the year ended October 31, 2003, the
total investment advisory fee charged to the Fund amounted to $391,086, 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, 2003, the Fund incurred fees of
approximately $2,000 for services provided by Alger Services and reimbursed
Alger Services approximately $1,000 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, 2003, the Adviser and
its affiliates owned 451,484 shares of the Fund.
NOTE 3-Securities Transactions:
During the year ended October 31, 2003, purchases and sales of
investment securities, excluding short-term securities, aggregated
$80,442,004 and $76,194,877, respectively.
NOTE 4-Components of Net Assets:
At October 31, 2003, the Fund's net assets consisted of:
<s> <c>
Paid-in capital $53,735,071
Undistributed net investment income 971,255
Undistributed net realized gain
(accumulated loss) (3,716,564)
Net unrealized appreciation 4,054,873
-----------
NET ASSETS $55,044,635
===========
NOTE 5-Distributions to Shareholders:
Distributions paid from ordinary income during the year ended October
31, 2003, and the year ended October 31, 2002, were $1,945,322 and
$2,526,683, respectively.
As of October 31, 2003, the components of distributable earnings on a
tax basis were as follows:
<s> <c>
Undistributed ordinary income $ 837,229
Undistributed long-term gain
accumulated (loss) -
Capital loss carrryforward 3,678,369
Unrealized appreciation
(depreciation) 4,150,833
The difference between book basis and tax-basis undistributed long-
term gain is attributable primarily to the tax deferral of losses on wash
sales.
NOTE 6-Regulatory Matters:
The Office of the New York Attorney General, the Massachusetts
Securities Division of the Office of the Secretary of the Commonwealth, and
the United States Securities and Exchange Commission ("SEC") have contacted
Alger Management in connection with their investigation of practices in the
mutual fund industry identified as "market timing" and "late trading" of
mutual fund shares. Alger Management does not believe that the foregoing
investigations will materially affect its ability to perform its management
contracts with any of the funds that it manages.
8
Report of Independent Auditors
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., including the schedule of investments, as
of October 31, 2003, and the related statement of operations for the year
then ended, and the statement of changes in net assets and the financial
highlights for each of the two years then ended. These financial statements
and financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements
and financial highlights based on our audits. The financial highlights for
the three years ended October 31, 2001 were audited by other auditors,
whose report, dated November 30, 2001, expressed an unqualified opinion on
those financial highlights.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. 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 investments in securities as of October
31, 2003, 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, and audited by us, present fairly, in all material
respects, the financial position of Castle Convertible Fund, Inc. at
October 31, 2003, the results of its operations for the year then ended,
and the changes in its net assets and the financial highlights for each of
the two years then ended, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
December 10, 2003
9
Directors and Officers of the Fund (Unaudited)
Information about the Directors and officers of the Fund is set forth
below. In the table the term "Alger Fund Complex" refers to the Fund, The
Alger Fund, The Alger American Fund, The Alger Institutional Fund, The
China-U.S. Growth Fund and Spectra Fund, each of which is a registered
investment company managed by Fred Alger Management, Inc. ("Alger
Management"). Each Director serves until an event of termination, such as
death or resignation, or until his successor is duly elected; each
officer's term of office is one year. Unless otherwise noted, the address
of each person named below is 111 Fifth Avenue, New York, NY 10003.
Number of Portfolios
in the Alger Fund
Director Complex
Name, Age, Position with and/or which are Overseen
the Fund and Address Principal Occupations Officer Since by Director
- -----------------------------------------------------------------------------------------------------------------------
Interested Directors
<s> <c> <c> <c>
Fred M. Alger III (68) Chairman of the Board of Alger Associates, 1974 22
Chairman of the Board Inc. ("Associates"), Fred Alger & Company,
Incorporated ("Alger Inc."), Alger Manage-
ment, Alger Properties, Inc. ("Properties"),
Alger Shareholder Services, Inc. ("Ser-
vices"), Alger Life Insurance Agency, Inc.
("Agency"), Fred Alger International
Advisory S.A. ("International"), and five of
the six funds in the Alger Fund Complex;
Chairman of the Boards of Alger SICAV
("SICAV") and Analysts Resources, Inc.
("ARI").
Dan C. Chung (41) President, Director and Chief Investment 2001 16
President and Director Officer of Alger Management; President and
Director of Associates, Alger Inc., Properties,
Services, Agency, International, ARI and
Trust; Trustee/Director of four of the
six funds in the Alger Fund Complex.
Hilary M. Alger (42) Trustee/Director of five of the six funds 2003 17
Director in the Alger Fund Complex; Associate
Director of Development, College
of Arts and Sciences, University of Virginia;
formerly Director of Development and
Communications, Lenox Hill Neighborhood
House.
Non-Interested Directors
Stephen E. O'Neil (71) Attorney; Private investor since 1981; Director 1973 23
Trustee of Brown-Forman Corporation; Trustee/
Director of the six funds in the Alger Fund
Complex; formerly of Counsel to the law firm
of Kohler & Barnes.
Charles F. Baird, Jr. (50) Managing Partner of North Castle Partners, a 2000 16
Director private equity securities group; Chairman of
Equinox, Leiner Health Products, Elizabeth
Arden Day Spas, Grand Expeditions and EAS;
Trustee/Director of four of the six funds in
the Alger Fund Complex. Formerly Managing
Director of AEA Investors, Inc.
10
Number of Portfolios
in the Alger Fund
Director Complex
Name, Age, Position with and/or which are Overseen
the Fund and Address Principal Occupations Officer Since by Director
- -----------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c>
Roger P. Cheever (58) Associate Dean of Development, Harvard 2000 16
Director University; Trustee/Director of four of the six
funds in the Alger Fund Complex. Formerly
Deputy Director of the Harvard College Fund.
Lester L. Colbert, Jr. (69) Private investor; Trustee/Director of five of 1974 17
Director the six funds in the Alger Fund Complex.
Formerly Chairman of the Board and Chief
Executive Officer of Xidex Corporation.
Nathan E. Saint-Amand, Medical doctor in private practice; Co-Partner 1986 23
M.D. (65) Fishers Island Partners; Member of the Board
Director of the Manhattan Institute; Trustee/Director of
five of the six funds in the Alger Fund Complex.
Formerly Co-Chairman Special Projects
Committee of Memorial Sloan Kettering.
Officers
Frederick A. Blum (50) Executive Vice President of Alger Manage- 1996 N/A
Treasurer and Assistant ment; Treasurer and Assistant Secretary
Secretary of the six funds in the Alger Fund Complex.
Director, Executive Vice President and
Treasurer of the Trust.
Dorothy G. Sanders (48) Senior Vice President, General Counsel 2000 N/A
Secretary and Secretary of Alger, Inc., General Counsel
and Secretary of Associates, Agency,
Properties, Services, ARI and Alger Manage-
ment; Secretary of International, and the six
funds in the Alger Fund Complex. Formerly
Senior Vice President, Fleet Financial Group.\
Messrs. Alger and Chung are "interested persons" (as defined in the
Investment Company Act) of the Fund because of their affiliations with
Alger Management. Mr. Chung is Mr. Alger's son-in-law. Ms. Alger is a
daughter of Fred M. Alger III. Ms. Alger is an "interested person" because
she is an immediate family member of Mr. Alger. No Trustee is a director of
any public company except as may be indicated under "Principal
Occupations."
TAX INFORMATION (Unaudited)
In accordance with subchapter M of the Internal Revenue Code of 1986,
as amended, for the year ended October 31, 2003, 35.5% of the dividends
paid from ordinary income qualified for the dividends received deduction
for corporations. For the fiscal year ended October 31, 2003 certain
dividends paid by the Fund may be subject to a maximum tax rate of 15%, as
provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003.
The Fund intends to designate up to a maximum amount of $911,290 as taxed
at a maximum rate of 15%.
Shareholders should not use the above information to prepare their
tax returns. Since the Fund's fiscal year is not the calendar year, another
notification will be sent with respect to calendar year 2003. Such
notification, which will reflect the amount to be used by taxpayers on
their federal income tax returns, will be made in conjunction with Form
1099 DIV and will be mailed in January 2004. Shareholders are advised to
consult their own tax advisers with respect to the tax consequences of
their investment in the Fund.
11
Castle Convertible Fund, Inc.
Investment Adviser
Fred Alger Management, Inc.
111 Fifth Avenue, 2nd Floor
New York, NY 10003
- -------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Alger Shareholder Services, Inc.
30 Montgomery Street, Box 2001
Jersey City, NJ 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 Fund, Inc.
Annual Report
October 31, 2003
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics (the "Code of
Ethics") that applies to its principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions.
(b) Not applicable.
(c) The Registrant has not amended its Code of Ethics during the
period covered by the shareholder report presented in Item 1 hereto.
(d) The Registrant has not granted a waiver or an implicit waiver
from a provision of its Code of Ethics during the period covered by
the shareholder report presented in Item 1 hereto.
(e) Not applicable.
(f) The Registrant's Code of Ethics is attached as an Exhibit
hereto.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
On September 8, 2003, the Board of Trustees of the Registrant
determined that Stephen E. O'Neil is an audit committee financial
expert (within the meaning of that phrase specified in the
instructions to Form N-CSR) on the Registrant's audit committee. Mr.
O'Neil is an "independent" trustee - i.e., he is not an interested
person of the Registrant as defined in the Investment Company Act of
1940, nor has he accepted directly or indirectly any consulting,
advisory or other compensatory fee from the Registrant, other than in
his capacity as Trustee.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Applicable only for reports covering fiscal years ending on or after
December 15, 2003.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable
ITEM 6. RESERVED
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED END
MANAGEMENT INVESTMENT COMPANIES
Not applicable
ITEM 8. RESERVED
ITEM 9. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal
financial officer have concluded that the registrant's disclosure
controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended) are effective based on
their evaluation of the disclosure controls and procedures as of a
date within 90 days of the filing date of this document.
(b) No changes in the registrant's internal control over financial
reporting occurred during the registrant's second fiscal half-year
that materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
ITEM 10. EXHIBITS.
(a) (1) Code of Ethics as Exhibit EX-99.CODE ETH
(a) (2) Certifications of principal executive officer and principal
financial officer as required by rule 30a-2(a) under the Investment
Company Act of 1940 are attached as Exhibit 99.CERT
(b) Certifications of principal executive officer and principal
financial officer as required by rule 30a-2(b) under the Investment
Company Act of 1940 are attached as Exhibit 99.906CERT
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Castle Convertible Fund, Inc.
By: /s/Dan C. Chung
Dan C. Chung
President
Date: December 16, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/Dan C. Chung
Dan C. Chung
President
Date: December 16, 2003
By: /s/Frederick A. Blum
Frederick A. Blum
Treasurer
Date: December 16, 2003