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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
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. Hal Liebes
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
Date of fiscal year end: October 31
Date of reporting period: April 30, 2006
ITEM 1. REPORT(S) TO STOCKHOLDERS.
June 8, 2006
Dear Shareholders,
In the six months ended April 30, 2006, the U.S. economy remained strong,
with inflation contained and overall Gross Domestic Product ("GDP") growth
increasing at an annual rate of 4.8% as of March 31, 2006, three percentage
points over the previous quarter's rate. And it wasn't simply that the economy
overall was solid. During this period, corporate profits exceeded expectations;
productivity stayed high; and growth companies in particular saw healthy stock
appreciation.
At the same time, the continued strength of the economy led to uncertainty
about interest rates and inflation, and that in turn, kept the markets from
breaking out of their trading range. At the Federal Open Market Committee (FOMC)
meeting on March 28th, the Fed once again raised the key interest rate from
4.50% to 4.75%--the 15th consecutive increase since June 2004. The Fed noted
that the current business climate is showing remarkable growth "but appears
likely to moderate to a more sustainable pace."1
After new Fed Chairman Ben Bernanke appeared before the U.S. Congress on
April 27th, it was widely believed that the Fed would stop raising rates before
the summer. Subsequent economic data clouded the picture yet again, and the
markets retreated. Nonetheless, rates remain low relative to historical
levels, and while the precise number of future increases is uncertain, it is
our belief that we are close to the peak of the current cycle.
Rising interest rates have been a headwind for the markets, but the
uncertainty over when the increases will stop has been even more of an
impediment. Even with that uncertainty hovering over the market, solid GDP
growth and robust corporate profit growth propelled equities higher during the
six months that ended on April 30th, and nearly every market sector posted
positive returns. And because corporate profits have increased at a faster rate
than the major indices, the market overall has continued to become less
expensive. For the six months ending April 30, 2006, the major indices ended up,
with the Dow Jones Industrials up 10.21%, the Standard & Poor's 500 Index up
15.27% and the NASDAQ up 9.55%.
Globally, foreign markets and emerging economies have been torrid. Asian
stock markets offered substantial gains in 2005, and by the end of December,
China had revised its official GDP figures upward by about $300 billion, more
accurately reflecting the size and scope of its economy and the growing power of
its consumers. Even those investors not directly exposed to those markets tended
to benefit. Many companies have global exposure, and their earnings growth
reflects the strong global economy.
In the bond market, we saw a dramatic re-steepening of the yield curve for
the six months ending April 30, 2006, with yields on the 2-year bond up 34 basis
points to 4.86% and rates on the 10-year bond rising more than 50 basis points
to 5.05%. The dramatic move upward in interest rates corresponded to renewed
fears of inflation spurred on by rising energy and commodity prices as well as
two more potential increases in the overnight target lending rate by the Fed.
The 10-year Treasury note pierced 5.00% for the first time in nearly four years
on the heels of a continued robust economic landscape, ever-increasing capacity
utilization and tight labor markets.
<FN>
- --------------------
(1) As of this writing, the key interest rate experienced another quarter
percentage point hike on May 10, 2006 to 5.0%.
</FN>
Despite the continued rise in interest rate, we believe that the overall
low rates by historical standards and record levels of household net worth have
buoyed consumer spending, with U.S. consumers now sustaining higher levels of
debt than they have in years. In fact, in 2005 U.S. consumers defied
expectations by absorbing rising energy prices without substantial decreases in
spending. The first months of 2006 saw no significant change in these trends,
as both growth and productivity outpaced expectations.
Going forward, we believe that both the U.S. and the global economy will
continue to expand, and our outlook for corporate earnings for 2006 is
positive. U.S. markets may remain range-bound so long as the interest rate
picture stays uncertain, but by most measures, the markets are trading at
reasonable valuations backed by strong fundamentals.
We want you to know that we value the trust you have placed in Alger. We
will continue to look for dynamic, forward-looking companies that are creating
the business and marketplaces of tomorrow, bringing growth opportunities to our
investors.
Respectfully submitted,
/s/ Daniel C. Chung
Daniel C. Chung
Chief Investment Officer
The views of the Fund's management are as of June 8, 2006 and fund
holdings described in this document are as of April 30, 2006; these views and
the Fund holdings may have changed subsequent to these dates. Nothing in this
document should be construed as a recommendation to purchase or sell securities,
markets, or industries.
Mutual funds are not insured by the FDIC, are not deposits or other
obligations of, or guaranteed by banks, and are subject to investment risks,
including possible loss of principal amount invested.
Investors should consider the Fund's investment objective, risks and
charges and expenses carefully before investing. The Fund's prospectus contains
this and other information about the Fund, and may be obtained by asking your
financial advisor, calling us at (800) 254-3796, or visiting our website at
www.alger.com, or contacting the Fund's distributor, Fred Alger & Company,
Incorporated, 30 Montgomery Street, Jersey City, New Jersey 07302. Read the
prospectus carefully before investing.
2
CASTLE CONVERTIBLE FUND, INC.
SCHEDULE OF INVESTMENTS (Unaudited)
April 30, 2006
Principal Corporate Convertible
Amount Bonds--52.1% Value
- --------------------------------------------------------------
AEROSPACE & DEFENSE--2.1%
$ 750,000 AAR Corporation, 1.75%
2/1/26(a) ...................... $ 814,688
500,000 L-3 Communications Holdings,
3.00%, 8/1/35(a) ............... 500,000
-----------
1,314,688
-----------
BIOTECHNOLOGY--4.3%
1,000,000 Amgen Inc., 0.375%, 2/1/13(a) ... 955,000
250,000 BioMarin Pharmaceutical Inc.,
2.50%, 3/29/13 ................. 250,938
500,000 Protein Design Labs, 2.75%,
8/16/23 ........................ 757,500
500,000 Protein Design Labs, 2.00%,
2/15/12(a) ..................... 668,750
-----------
2,632,188)
-----------
BUSINESS SERVICES--1.6%
1,000,000 Quanta Services Inc., 3.75%,
4/30/26(a) ..................... 998,750
-----------
COMMUNICATIONS
EQUIPMENT--1.3%
850,000 Adaptec, Inc.*, Cv. Sub. Notes,
3.00%, 3/5/07 .................. 810,688
-----------
COMPUTER &
PERIPHERALS--3.7%
1,250,000 Hutchinson Technology Inc.,
3.25%, 1/15/26 ................. 1,160,938
1,000,000 Mentor Graphics Corporation,
6.25%, 3/1/26(a) ............... 1,102,500
-----------
2,263,438
-----------
CONSUMER FINANCE--1.6%
1,000,000 CompuCredit Corporation,
5.875%, 11/30/35(a) ............ 1,007,500
-----------
CONSUMER PRODUCTS--1.0%
500,000 Ceradyne, Inc., 2.875%,
12/15/35 ....................... 581,250
-----------
DIVERSIFIED FINANCIAL
SERVICES--1.6%
1,000,000 Lehman Brothers Holdings Inc.,
1.00%, 3/23/09 ................. 997,400
-----------
ENERGY EQUIPMENT &
SERVICES--4.6%
500,000 Diamond Offshore Drilling Inc.,
Cv. Senior Deb., 1.50%,
4/15/20 ........................ 933,125
750,000 Maverick Tube Corp., Cv. Sub. ..
Notes, 1.875%, 11/15/25(a) .... 1,107,188
550,000 Pride International Inc., 3.25%,
5/1/33(a) ...................... 800,250
-----------
2,840,563
-----------
Principal Corporate Convertible
Amount Bonds--(Continued) Value
- --------------------------------------------------------------
HEALTH CARE--.8%
$ 500,000 Apria Healthcare Group Inc.,
Cv. Senior Notes, 3.375%,
9/1/33(a) ...................... $ 481,250
-----------
HEALTH CARE EQUIPMENT &
SUPPLIES--3.2%
800,000 Edwards Lifesciences, Cv. Senior
Deb. Notes, 3.875%,
5/15/33(a) ..................... 802,000
1,000,000 Nektar Therapeutics, 3.25%,
9/28/12(a) ..................... 1,188,750
-----------
1,990,750
-----------
HEALTH CARE PROVIDERS &
SERVICES--1.2%
250,000 Manor Care, Inc., 2.125%,
8/1/35(a) ...................... 270,625
500,000 Omnicare, Inc., 3.25%, 12/15/35 . 493,125
-----------
763,750
-----------
HOTELS, RESTAURANTS &
LEISURE--1.7%
750,000 Starwood Hotels & Resorts
Worldwide Inc., Cv. Senior
Notes, 3.50%, 5/16/23 .......... 1,071,563
-----------
MEDIA--4.5%
1,350,000 Liberty Media Corporation, Senior
Exch. Deb., 3.50%, 1/15/31 .... 1,351,688
725,000 Regal Entertainment Group,
Cv. Notes, 3.75%, 5/15/08 ...... 1,014,094
500,000 XM Satellite Radio Holdings,
1.75%, 12/1/09 ................. 416,250
-----------
2,782,032
-----------
METALS & MINING--2.6%
750,000 Freeport-McMoRan Copper
Inc., Cv. Senior Notes,
7.00%, 2/11/11 ................. 1,623,750
-----------
PHARMACEUTICALS--3.4%
1,150,000 Sepracor Inc., Cv. Sub. Notes,
5.00%, 2/15/07 ................. 1,147,122
1,000,000 Watson Pharmaceuticals,
1.75%, 3/15/23 ................. 920,000
-----------
2,067,122
-----------
REAL ESTATE--3.6%
1,000,000 Reckson Operating Partnership,
4.00%, 6/15/25 ................. 1,086,250
1,000,000 Vornado Realty L.P., 3.875%,
4/15/25 ........................ 1,122,500
-----------
2,208,750
-----------
3
Principal Corporate Convertible
Amount Bonds--(Continued) Value
- --------------------------------------------------------------
SEMICONDUCTORS &
SEMICONDUCTOR
EQUIPMENT--2.9%
$ 725,000 LSI Logic Corporation, CV. Sub.
Notes, 4.00%, 11/1/06 .......... $ 722,281
1,000,000 LSI Logic Corporation, 4.00%,
5/16/10 ........................ 1,073,750
-----------
1,796,031
-----------
SOFTWARE--1.7%
550,000 BEA Systems, Inc., Cv. Sub. ....
Notes, 4.00%, 12/15/06 ......... 547,250
500,000 Mercury Interactive, Cv. Sub. ..
Notes, 4.75%, 7/1/07 ........... 498,750
-----------
1,046,000
-----------
SPECIALTY RETAIL--2.9%
1,000,000 Best Buy Co., Inc., Cv. Sub. ...
Notes, 2.25%, 1/15/22 .......... 1,276,250
500,000 Casual Male Retail Group Inc.,
5.00%, 1/1/24 .................. 516,250
-----------
1,792,500
-----------
WIRELESS
TELECOMMUNICATION
SERVICES--1.8%
1,100,000 Nextel Communications Inc.,
Cv. Senior Notes, 5.25%,
1/15/10 ........................ 1,090,375
-----------
Total Corporate Convertible
Bonds (Cost $28,876,827) ....... 32,160,338
-----------
Corporate Bonds--4.3%
BIOTECHNOLOGY--.8%
500,000 Gilead Sciences, Inc., 0.625%,
5/1/13(a) ...................... 468,750
-----------
COMMUNICATION
TECHNOLOGY--1.9%
1,100,000 Dobson Communications
Corporation, 1.50%,
10/1/25(a) ..................... 1,178,375
-----------
HEALTH CARE EQUIPMENT &
SUPPLIES--1.6%
1,000,000 Medtronic, Inc., 1.625%,
4/15/13(a) ..................... 997,500
-----------
Total Corporate Bonds
(Cost $2,613,350) .............. 2,644,625
-----------
Shares Preferred Stock--2.6%
- ----------
CAPITAL MARKETS--1.0%
25,000 The Goldman Sachs Group,
Inc., 6.20% Pfd., Series B ..... 617,250
-----------
COMMERCIAL BANKS--.8%
20,000 U.S. Bancorp, Series B 0.00% .... 507,400
-----------
REAL ESTATE--.8%
20,000 Public Storage Inc., 7.25% Pfd.
Total Preferred Stocks
(Cost $1,625,000) .............. 1,624,650
-----------
Convertible Preferred
Shares Securities--18.0% Value
- --------------------------------------------------------------
CAPITAL MARKETS--2.2%
13,800 Credit Suisse (USA) Inc., ....... 1,171,275
5,000 Merrill Lynch & Co., Inc., 6.75%,
10/15/07 ....................... 215,515
-----------
1,386,790
-----------
COMMERCIAL BANKS--.8%
20,000 BAC Capital Trust X, 6.25%,
3/29/55 ........................ 467,800
-----------
DIVERSIFIED FINANCIAL
SERVICES--3.8%
40,000 Citigroup Funding, Inc., Variable
Rate, 9/27/05, Series GNW ...... 1,297,200
40,000 Lehman Brothers Holdings Inc.,
Conv. Pfd., 6.25% .............. 1,055,000
-----------
2,352,200
-----------
ELECTRIC UTILITIES--.4%
5,000 Entergy Corporation, 7.625%,
2/17/09 ........................ 250,000
-----------
INSURANCE--4.4%
21,000 Chubb Corporation (The),
7.00%, Equity Units ............ 763,875
40,000 MetLife Inc., 6.375%............. 1,130,000
30,000 Platinum Underwriters Holdings
Ltd., 6.00%, 2/15/09 Series A .. 840,000
-----------
2,733,875
-----------
MEDIA--1.7%
25,000 Comcast Holdings Corp., 2.0%,
Exch. Sub. Deb., 10/15/29 ...... 1,025,000
-----------
OIL & GAS--2.8%
7,000 Chesapeake Energy Corporation,
4.50% .......................... 665,000
20,000 Goodrich Petroleum Corporation,
5.375%(a) ...................... 1,067,500
-----------
1,732,500
-----------
THRIFTS & MORTGAGE
FINANCE--1.1%
11,700 Washington Mutual, Inc., Capital
Trust 2001 Red. Eq. Sec ........ 656,019
-----------
UTILITIES--.8%
5,000 Southern California Edison
Company, 6.00% ................. 485,400
-----------
Total Convertible Preferred
Securities (Cost $10,278,151) ... 9,918,309
-----------
Mandatory Convertible
Securities--6.0%
HEALTH CARE PROVIDERS
& SERVICES--2.4%
20,000 Omnicare Capital Trust I, 4.00%,
6/15/33(b) ..................... 1,472,500
-----------
INSURANCE--.8%
20,000 IPC Holdings, Ltd., 7.25%
11/15/08(b) .................... 522,500
-----------
OIL & GAS--2.0%
10,000 Amerada Hess Corp., 7.00%,
12/1/06 Peps(b) ................ 1,208,750
4
Mandatory Convertible
Shares Securities--(Continued) Value
- --------------------------------------------------------------
PHARMACEUTICALS--.8%
10,000 Schering-Plough Corporation
Peps, 6.00%, 9/14/07(b) ........ $ 515,000
-----------
Total Mandatory Convertible
Securities (Cost $2,663,115) ... 3,718,750
-----------
Common Stocks--16.4%
CAPITAL MARKETS--1.8%
16,948 E*TRADE Financial Corporation*... 421,666
15,000 J.P. Morgan Chase & Co........... 680,700
-----------
1,102,366
-----------
COMMERCIAL BANKS--1.2%
15,000 Bank of America Corporation ..... 748,800
-----------
DIVERSIFIED FINANCIAL
SERVICES--1.4%
17,500 Citigroup Inc. .................. 874,125
-----------
ELECTRIC UTILITIES--6.0%
14,000 Entergy Corporation ............. 979,160
55,000 TXU Corp. ....................... 2,729,650
-----------
3,708,810
-----------
OIL & GAS--2.7%
10,000 ConocoPhillips .................. 669,000
15,000 Royal Dutch Shell, PLC .......... 1,021,950
-----------
1,690,950
-----------
Common Stocks--
Shares (Continued) Value
- --------------------------------------------------------------
PHARMACEUTICALS--1.2%
13,000 GlaxoSmithKline PLC# ............ $ 739,440
-----------
RETAIL--.6%
15,000 Inergy, L.P. .................... 398,250
-----------
UTILITIES--1.5%
22,572 FPL Group, Inc. ................. 893,851
-----------
Total Common Stocks
(Cost $6,098,367) .............. 10,156,592
-----------
Principal Short-Term
Amount Investments--2.2%
- ----------
$1,342,000 U.S. Agency Obligations
Federal Home Loan Banks,
4.52%, 5/1/06
(Cost $1,341,663) .............. 1,341,663
-----------
Total Investments
(Cost $53,496,473)(c).................. 101.6% 62,736,202
Liabilities in Excess of Other Assets... (1.6) (983,852)
---------------------
Net Assets.............................. 100.0% $61,752,350
=====================
<FN>
- --------------------
* Non-income producing security.
# American Depositary Receipts.
(a) Pursuant to Securities and Exchange Commission Rule 144A, these securities
may be sold only to qualified institutional buyers. These securities are
deemed to be liquid and represent 21.6% of net assets of the Fund.
(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 April 30, 2006, the net unrealized appreciation on investments, based on
cost for federal income tax purposes of $54,170,562, amounted to $8,565,640
which consisted of aggregate gross unrealized appreciation of $9,811,736
and aggregate gross unrealized depreciation of $1,246,096.
</FN>
See Notes to Financial Statements.
5
CASTLE CONVERTIBLE FUND, INC.
PORTFOLIO SUMMARY* (Unaudited)
April 30, 2006
Sectors Value%
-----------------------------------------------
Consumer Discretionary............... 10.8%
Energy............................... 12.7
Financials........................... 27.1
Health Care.......................... 21.4
Industrials.......................... 4.7
Information Technology............... 7.8
Materials............................ 2.6
Telecommunication Services........... 3.7
Utilities............................ 8.6
Cash and Net Other Assets............ 0.6
-----
100.0%
=====
<FN>
- --------------------
* Based on Net Assets.
</FN>
6
CASTLE CONVERTIBLE FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES (Unaudited)
April 30, 2006
ASSETS:
Investments in securities, at value (cost $53,496,473), see accompanying
schedule of investments.................................................. $62,736,202
Cash .................................................................... 1,465
Receivable for investment securities sold................................. 184,482
Dividends and interest receivable......................................... 365,707
Prepaid expenses.......................................................... 44,177
-----------
Total Assets.......................................................... 63,332,033
LIABILITIES:
Investment advisory fees payable.......................................... $ 35,279
Directors' fees payable................................................... 6,597
Payable for investment securities purchased............................... 1,482,500
Accrued expenses.......................................................... 55,307
----------
Total Liabilities..................................................... 1,579,683
-----------
NET ASSETS applicable to 2,236,000 outstanding shares of $0.01 par value
(10,000,000 shares authorized)............................................. $61,752,350
===========
NET ASSET VALUE PER SHARE................................................... $ 27.62
===========
STATEMENT OF OPERATIONS (Unaudited)
For the six months ended April 30, 2006
INVESTMENT INCOME:
Income:
Interest................................................................ $ 602,738
Dividends (net of $1,250 of foreign withholding taxes).................. 563,498
----------
Total Income......................................................... 1,166,236
Expenses:
Investment advisory fees--Note 2(a)..................................... $ 223,379
Directors' fees......................................................... 19,617
Shareholder reports..................................................... 20,110
Custodian and transfer agent fees....................................... 34,006
Professional fees....................................................... 35,400
Bookkeeping fees........................................................ 9,000
Miscellaneous........................................................... 13,624
----------
Total Expenses 355,136
----------
NET INVESTMENT INCOME....................................................... 811,100
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments.......................................... 218,272
Net change in unrealized appreciation (depreciation) on investments....... 2,842,450
----------
Net realized and unrealized gain on investments........................... 3,060,722
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................ $3,871,822
==========
See Notes to Financial Statements.
7
CASTLE CONVERTIBLE FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
For the Six
Months Ended
April 30, 2006 Year Ended
(Unaudited) October 31, 2005
- -------------------------------------------------------------------------------------------------------------------
FROM INVESTMENT ACTIVITIES:
Net investment income...................................................... $ 811,100 $ 1,767,889
Net realized gain on investments........................................... 218,272 1,793,029
Net change in unrealized appreciation (depreciation) on investments........ 2,842,450 936,927
- ------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations................... 3,871,822 4,497,845
- ------------------------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income...................................................... (1,744,080) (2,414,880)
- ------------------------------------------------------------------------------------------------------------------
Net increase in net assets............................................. 2,127,742 2,082,965
NET ASSETS:
Beginning of period........................................................ 59,624,608 57,541,643
- ------------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment income (loss) of
$(627,759) and $305,221, respectively).................................... $61,752,350 $59,624,608
==================================================================================================================
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period
For the
Six Months Year Ended October 31,
Ended ----------------------------------------------------
April 30, 2006(i) 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period..... $26.67 $25.73 $24.62 $22.56 $25.77 $28.22
- -----------------------------------------------------------------------------------------------------------------
Net investment income.................... 0.36 0.79 0.86 0.81 1.09 1.34
Net realized and unrealized gain (loss) on
investments............................. 1.37 1.23 1.27 2.12 (3.17) (1.80)
- -----------------------------------------------------------------------------------------------------------------
Total from investment operations......... 1.73 2.02 2.13 2.93 (2.08) (0.46)
- -----------------------------------------------------------------------------------------------------------------
Dividends from net investment income..... (0.78) (1.08) (1.02) (0.87) (1.13) (1.33)
Distributions from net realized gains.... -- -- -- -- -- (0.66)
- -----------------------------------------------------------------------------------------------------------------
Total Distributions................... (0.78) (1.08) (1.02) (0.87) (1.13) (1.99)
- -----------------------------------------------------------------------------------------------------------------
Net asset value, end of period........... $27.62 $26.67 $25.73 $24.62 $22.56 $25.77
=================================================================================================================
Market value, end of period.............. $23.34 $22.51 $22.90 $21.75 $20.57 $24.25
=================================================================================================================
Total investment return based on market
value per share......................... 7.22% 2.91% 10.06% 9.98% (11.05%) 15.83%
=================================================================================================================
Ratios and Supplemental Data:
Net assets, end of period (000's omitted) $61,752 $59,625 $57,542 $55,045 $50,445 $57,616
=================================================================================================================
Ratio of expenses to average net assets 1.18% 1.11% 1.11% 1.19% 1.09% 1.03%
=================================================================================================================
Ratio of net investment income to
average net assets................... 2.70% 2.99% 3.37% 3.49% 4.30% 4.89%
=================================================================================================================
Portfolio Turnover Rate............... 40.24% 58.54% 26.29% 156.83% 186.48% 53.81%
=================================================================================================================
<FN>
- --------------------
(i) Unaudited. Ratios have been annualized; total investment return has not been annualized.
</FN>
See Notes to Financial Statements.
CASTLE CONVERTIBLE FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
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
readily available 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, having a remaining maturity of sixty days or
less, 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.
Premiums and discounts on debt securities purchased are amortized or
accreted over the lives of the respective securities.
(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 return of
capital, depending on the type of book/tax differences that may exist.
Capital accounts within the financial statements are adjusted for
permanent book/tax differences. 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.
(e) Indemnification--The Fund enters into contracts that contain a variety of
indemnification provisions. The Fund's maximum exposure under these
arrangements is unknown. The Fund does not anticipate recognizing any loss
related to these arrangements.
(f) 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 six months
ended April 30, 2006, no reimbursement was required pursuant to the Contract.
For the six months ended April 30, 2006, the total investment advisory fee
charged to the Fund amounted to $223,379, and the Adviser received $9,000 for
bookkeeping services supplied to the Fund at cost.
(b) Shareholder Administrative Servicing Fees--The Fund has entered into a
shareholder administrative services agreement with Alger Shareholder Services,
Inc. ("Alger Services") to compensate Alger Services on a per account basis for
its liaison and administrative oversight of the transfer agent and related
services. During the period ended April 30, 2006, the Fund incurred fees of
$1,131 for these services provided by Alger Services.
(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
9
CASTLE CONVERTIBLE FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 2--Investment Advisory Fees and Other
Transactions with Affiliates (continued):
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--Certain directors and officers of the
Fund are directors and officers of Alger Management and Alger Services. At
April 30, 2006, the Adviser and its affiliates owned 452,385 shares of the
Fund.
NOTE 3--Securities Transactions:
During the six months ended April 30, 2006, purchases and sales of
investment securities, excluding short-term securities, aggregated $23,898,711
and $24,702,292, respectively.
NOTE 4--Components of Net Assets:
At April 30, 2006, the Fund's net assets consisted of:
Paid-in capital........................ $53,986,469
Undistributed net investment
loss.................................. (627,759)
Undistributed net realized gain
(accumulated loss).................... (846,089)
Net unrealized appreciation............ 9,239,729
-----------
NET ASSETS............................. $61,752,350
===========
NOTE 5--Distributions to Shareholders:
Distributions paid from ordinary income during the six months ended April
30, 2006 and the year ended October 31, 2005 were $1,744,080 and $2,414,880,
respectively.
As of October 31, 2005 the components of distributable earnings on a tax
basis were as follows:
Undistributed ordinary income.......... $ 979,310
Undistributed long-term gain........... --
Unrealized appreciation................ 5,723,190
The difference between book basis and tax basis unrealized appreciation
is determined annually and is attributable primarily to the tax deferral of
losses on wash sales and tax treatment of certain debt obligations. Tax basis
unrealized appreciation as of April 30, 2006 does not reflect any potential tax
adjustments subsequent to October 31, 2005.
At October 31, 2005, the Fund, for federal income tax purposes, had a
capital loss carryforward of $1,064,361 which expires in 2011. This amount may
be applied against future net realized gains until the earlier of its
utilization or expiration.
NOTE 6--Litigaton:
Alger Management has responded to inquiries, document requests and/or
subpoenas from regulatory authorities, including the United States Securities
and Exchange Commission ("SEC"), the Office of the New York State Attorney
General, the Attorney General of New Jersey, and the West Virginia Securities
Commissioner, in connection with their investigations of practices in the
mutual fund industry identified as "market timing" and "late trading." On
December 16, 2005, Alger Management received from the staff of the SEC a "Wells
Notice" which indicated that the staff intends to recommend that the Commission
bring civil enforcement action for possible violations of the federal
securities laws. "Wells Notices" also have been sent to certain companies
affiliated with Alger Management, as well as certain present and former members
of its senior management. The Wells Notices arose out of the SEC's staff
ongoing investigation of market timing and late trading practices in the mutual
fund industry. Alger Management and the other recipients have the opportunity
to respond to the staff before the staff makes a formal recommendation. Alger
Management submitted a response in January 2006.
On June 7, 2006, Alger Management, its parent, Alger Inc., and their
affiliated companies reached an agreement in principle with the staff of the
New York Regional Office of the SEC and with the staff of the New York State
Attorney General's office ("NYAG") resolving all issues with the SEC and the
NYAG related to the allegations of mutual fund market timing and late trading
that were the subject of the December 2005 Wells Notice. Alger Management and
Alger Inc. are working with the staff of the SEC and NYAG to finalize the
agreement. The agreement is subject to the approval fo the SEC and NYAG. In the
proposed settlement agreement, without admitting or denying liability, the firm
will consent to the payment of $30 million dollars to reimburse fund
shareholders; a fine of $10 million; and certain other remedial measure
including a reduction in management fees of $1 million per year for five years.
The entire $40 million and fee reduction will be available for the benefit of
investors. Alger Management has advised the Fund that the proposed settlement
payment is not expected to adversely affect the operations of the Manager,
Alger Inc. or their affiliates, or adversely affect their ability to continue
to provide services to the Fund.
On August 31, 2005, the West Virginia Securities Commissioner in an ex
parte Summary Order to Cease and Desist and Notice of Right to Hearing
concluded that Alger Management and Alger Inc. had violated the West Virginia
Uniform Securities Act, and ordered Alger Management and Alger Inc. to cease
and desist from further violations of the Act by engaging
10
CASTLE CONVERTIBLE FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6--Litigaton (continued):
in the market-timing related conduct described in the order. The ex parte order
provided notice of their right to a hearing with respect to the violations of
law asserted by the Commissioner. Other firms unaffiliated with Alger
Management were served with similar orders. Alger Management and Alger Inc.
intend to request a hearing for the purpose of seeking to vacate or modify the
order.
In addition, in 2003 and 2004 several purported class actions and
shareholder derivative suits were filed against various parties in the mutual
fund industry, including Alger Management, certain mutual funds managed by
Alger Management (the "Alger Mutual Funds"), and certain current and former
Alger Mutual Fund trustees and officers, alleging wrongful conduct related to
market-timing and late-trading by mutual fund shareholders. These cases were
transferred to the U.S. District Court of Maryland by the Judicial Panel on
Multidistrict Litigation for consolidated pre-trial proceedings. In September
2004, consolidated amended complaints involving these cases (not yet including
the West Virginia action) -- a Consolidated Amended Fund Derivative Complaint
(the "Derivative Complaint") and two substantially identical Consolidated
Amended Class Action Complaints (together,the "Class Action Complaint") -- were
filed in the Maryland Federal District Court under the caption number
1:04-MD-15863 (JFM). In April 2005 a civil lawsuit involving similar
allegations was filed by the West Virginia Attorney General and also
transferred to the Maryland District Court.
The Derivative Complaint alleged (i) viola-tions, by Alger Management
and, depending on the specific offense alleged, by its immediate parent, Alger
Inc., which is the Distributor of the Alger Mutual Funds, and/or the fund
trustee defendants, of Sections 36(a), 36(b), 47, and 48 of the Investment
Company Act of 1940 (the "Investment Company Act") and of Sections 206 and 215
of the Investment Advisers Act of 1940, breach of fiduciary duty, and breach of
contract, (ii) various offenses by other third-party defendants, and (iii)
unjust enrichment by all the named defendants. The Class Action Complaint
alleged, in addition to the offenses listed above, (i) violations, by Alger
Management, Alger Inc., their affiliates, the funds named as defendants, and
the current and former fund trustees and officers, of Sections 11, 12(a)(2),
and 15 of the Securities Act of 1933, Sections 10(b) (and Rule 10b-5
thereunder) and 20(a) of the Securities Exchange Act of 1934 (the "1934 Act"),
and Section 34(b) of the Investment Company Act of 1940, (ii) breach of
contract by the funds named as defendants, and (iii) unjust enrichment of the
defendants. The West Virginia Attorney General action also alleges violations
of the West Virginia Consumer Credit and Protection Act and other wrongful
conduct.
Motions to dismiss the Class Action Complaint and the Derivative
Complaint were subsequently filed. On November 3, 2005, the district court
issued letter rulings dismissing both companies in their entirety with respect
to the Alger Mutual Funds and dismissing all claims against the other Alger
defendants, other than the claims under the 1934 Act and Section 36(b) of the
Investment Company Act (as to which the court deferred ruling with respect to
the Alger Mutual Fund Trustees), with leave to the class action plaintiffs to
file amended complaints against those defendants with respect to claims under
state law. Orders implementing the letter rulings are being entered. On January
11, 2006, the Alger defendants filed a motion for partial reconsideration of
the district court's ruling with respect to the Section 10(b), Rule 10b-5 and
Section 36(b) claims against them; the district court denied the motion on
February 9, 2006.
Alger Management does not believe that the Alger Mutual Funds are
themselves targets of the regulatory investigations as potential enforcement
defendants.
The SEC and, in some cases, state government authorities have a variety
of administrative and civil enforcement powers, including injunctive powers,
authority to assess fines and penalties and order restitution, authority to
limit the activities of a person or company and other enforcement powers, that
may be exercised administratively or through the courts.
Under Section 9(a) of the Investment Company Act, if any of the various
regulatory proceedings or lawsuits were to result in a court injunction against
Alger Management or Alger Inc., Alger Management would, in the absence of
exemptive relief granted by the SEC, be barred from serving as investment
adviser/sub-adviser for any registered investment company, including the Fund.
While exemptive relief from Section 9(a) has been granted in certain other
cases, there is no assurance that such exemptive relief would be granted if
sought. In addition, it is possible that these matters and/or other
developments resulting from these matters could result in loss of Alger
Management personnel, diversion of time and attention of Alger Management
personnel, diminishment of financial resources of Alger Management, or other
consequences potentially adverse to the Fund. Alger Management cannot predict
the potential effect of such actions upon Alger Management or the Fund. There
can be no assurance that the effect, if any, would not be material.
11
Castle Convertible Fund, Inc.
Investment Adviser
Fred Alger Management, Inc.
111 Fifth Avenue
New York, NY 10003
- -------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
State Street Bank and Trust Company
c/o Computershare Financial Services
P.O. Box 43010
Providence, RI 02940-3010
- -------------------------------------------------
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.
Results of Annual Meeting of Shareholders
The annual meeting of the shareholders of the fund was held on December 6, 2005.
The following matters were submitted to a shareholder vote and approved:
(i) The election or reelection of the following directors of the Fund: Fred M.
Alger III, Hilary M. Alger, Charles F. Baird, Jr., Roger P. Cheever, Dan C.
Chung, Lester L. Colbert, Jr., Stephen E. O'Neil and Nathan E. Saint-Amand.
Each of the candidates elected or reelected received at least 1,858,730
affirmative votes and no more than 128,277 votes were withheld for any
candidate.
Proxy Voting Policies
A description of the policies and procedures the Fund uses to determine how to
vote proxies relating to portfolio securities and the proxy voting record is
available, without charge, by calling 1-800-992-3863 or by accessing the SEC's
website at http://www.sec.gov.
Quarterly Fund Holdings
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarter of each fiscal year on Form N-Q. Forms N-Q are available
on the SEC's website at http://www.sec.gov. The Fund's Forms N-Q may be reviewed
and copied at the SEC's Public Reference Room in Washington, D.C. Information
regarding the operation of the SEC's Public Reference Room may be obtained by
calling 1-800-SEC-0330. A copy of the most recent quarterly holdings may also be
obtained from the Fund by calling 1-800-992-3863.
Castle Convertible Fund, Inc.
Semi-Annual Report
April 30, 2006
(Unaudited)
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 11. 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 quarter of the period covered by
this report that materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) (1) Not applicable
(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: June 22, 2006
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: June 22, 2006
By: /s/Frederick A. Blum
Frederick A. Blum
Treasurer
Date: June 22, 2006