<PAGE> 1
[LOGO]
BANCROFT CONVERTIBLE FUND, INC.
1998 ANNUAL REPORT
October 31, 1998
<PAGE> 2
DIRECTORS
GORDON F. AHALT
WILLIAM A. BENTON
ELIZABETH C. BOGAN
THOMAS H. DINSMORE, C.F.A.
DONALD M. HALSTED, JR.
GEORGE R. LIEBERMAN
DUNCAN O. MCKEE
JANE D. O'KEEFFE
NICOLAS W. PLATT
OFFICERS
THOMAS H. DINSMORE Chairman of the Board
JANE D. O'KEEFFE President
SIGMUND LEVINE Senior Vice President
and Secretary
H. TUCKER LAKE Vice President, Trading
GERMAINE M. ORTIZ Assistant Vice President
GARY I. LEVINE Treasurer and
Assistant Secretary
MERCEDES A. PIERRE Assistant Treasurer
INVESTMENT ADVISOR
Davis-Dinsmore Management Company
65 Madison Avenue, Morristown, NJ 07960-7308
(973) 631-1177
http://www.bcvecf.com
email: [email protected]
SHAREHOLDER SERVICES AND TRANSFER AGENT
ChaseMellon Shareholder Services, L.L.C.
Shareholder Relations Department
P.O. Box 3322, South Hackensack, NJ 07606-9980
(800) 526-0801
http://www.cmssonline.com
COMMON STOCK LISTING
American Stock Exchange
Symbol: BCV
[Recycled Logo] Printed on recycled paper
<PAGE> 3
1998 ANNUAL REPORT
OCTOBER 31, 1998
Bancroft Convertible Fund, Inc. operates as a closed-end, diversified management
investment company and invests primarily in convertible securities with the
objectives of providing income and the potential for capital appreciation --
which objectives the Company considers to be relatively equal due to the nature
of the securities in which it invests.
HIGHLIGHTS
QUARTERLY HISTORY OF NAV AND MARKET PRICE
<TABLE>
<CAPTION>
NET ASSET VALUES MARKET PRICES
1998 HIGH LOW CLOSE HIGH LOW CLOSE
<S> <C> <C> <C> <C> <C> <C>
Jan 31 $30.67 $26.34 $27.20 $29.81 $24.00 $25.75
Apr 30 29.87 27.89 29.61 30.25 24.63 28.81
Jul 31 30.75 28.19 29.12 29.00 27.00 27.75
Oct 31 28.83 24.55 26.89 27.63 22.38 26.75
</TABLE>
MAJOR INDUSTRY EXPOSURE AS OF 10/31/98
<TABLE>
<CAPTION>
% OF
NET ASSETS
<S> <C>
Communications 10.66
Entertainment 10.13
Health Care & Drugs 10.05
Retail 8.74
Banking 8.52
Technology 6.57
Capital Goods 6.00
Financial & Insurance 5.66
Energy 4.25
Aerospace 3.65
</TABLE>
PERFORMANCE THRU 10/31/98
with dividends reinvested
<TABLE>
<CAPTION>
CALENDAR
YTD 1YR 5YR 10YR
<S> <C> <C> <C> <C>
- - Bancroft market value 12.56% 19.00% 121.68% 305.52%
- - Bancroft net asset
value 1.81% 4.99% 104.33% 236.72%
- - Lipper average
of closed-end
convertible funds 6.70% 14.53% 81.64% 231.58%
- - S&P 500 17.71% 30.15% 182.16% 447.68%
- - Russell 2000 5.27% 16.79% 96.01%* 202.31%*
</TABLE>
Performance data represent past results and do not reflect future performance.
* Simple appreciation of index
TOP TEN SECURITIES HELD AS OF 10/31/98
<TABLE>
<CAPTION>
% OF
NET ASSETS
<S> <C>
Home Depot, Inc. 4.01
NatWest Markets exch. for Lucent Technologies, Inc. 3.28
Bell Atlantic Financial exch. for
Telephone New Zealand 3.24
Houston Industries, Inc. exch. for Time Warner, Inc. 2.60
Republic National Bank of NY exch. for
Merck & Co. 2.34
Morgan Stanley Dean Witter Discover & Co.
exch. for SmithKline Beecham 2.17
Jefferson-Pilot Corp. exch. for NationsBank Corp. 2.10
Hewlett-Packard Co., Inc. 2.02
WBK Trust 2.00
BankAtlantic Bancorp 1.90
</TABLE>
Pursuant to Section 23 of the Investment Company Act of 1940, notice is hereby
given that the Fund may in the future purchase shares of Bancroft Convertible
Fund, Inc. Common Stock from time to time, at such times, and in such amounts,
as may be deemed advantageous to the Fund. Nothing herein shall be considered a
commitment to purchase such shares.
<PAGE> 4
BANCROFT CONVERTIBLE FUND, INC.
TO OUR SHAREHOLDERS:
December 8, 1998
The late summer and fall of 1998 saw a dramatic increase in market volatility.
Stocks, corporate bonds and convertible securities made dramatic moves that
surprised many professional investors. This loss of stability was partially
caused by July's high stock valuations. Additionally there were the shocks
created by the economic downturns in several emerging economies such as
Indonesia and Russia followed by sudden and dramatic losses in hedge funds that
had become extraordinarily large due to borrowing by the funds to leverage their
positions. The decline in equity prices from late July to early October was
roughly 20%, the standard for a bear market. While most stock prices have since
rebounded, damage was done as several sectors (such as the energy sector) have
not recovered.
The losses in the hedge funds affected the convertible market directly as
many of those funds used convertibles in their strategies and included them when
selling securities to raise capital. Because of this, convertibles as an asset
class underperformed equities, something that they generally don't do in
volatile markets. According to Lipper Analytical,* for the nine-months ended
September 30, 1998, the average open-end convertible fund's net asset value
(NAV) fell 6.11% and the average closed-end convertible fund's NAV fell 5.20%,
while that of the general equity funds fell only 4.89%.** Also according to
Lipper Analytical, Bancroft's net asset value fell 0.93%+ for that same period.
For the year-to-date through 11/20/98 the average closed-end convertible fund's
NAV was up 1.07%.** Lipper Analytical has Bancroft's NAV up 6.60%+. Shareholders
should note that Bancroft's investment restrictions do not allow it to borrow
money in order to leverage its assets,++ so that when markets do not perform as
expected shareholders should not see losses magnified by that leverage.
Our current outlook for the stock market is optimistic. The positives of
the market outweigh the negatives. We still see the demographics of the 'baby
boomer generation' working in favor of equities as this group of people are at
their most productive and they need to save for retirement and their children's
education. Further, the information revolution continues to generate
productivity gains and new products. Finally, despite the declines in a number
of emerging market economies, the global expansion of free markets continues and
should provide a strong growth component to all economies over the long run.
The negatives, however, are significant. Equities are not cheap by any
historical standard and this implies a greater level of risk. Emerging economies
have had a difficult time over the last year and while they appear to have
stabilized, they may not have reached the bottom yet. Commodity prices continue
to fall which helps most of the economy but hurts certain sectors and raises the
risk of deflation which can be more damaging than inflation. Finally, political
uncertainty in Washington may unsettle some investors even though, in our
opinion, we don't believe that any outcome will change current public policies
enough to hurt the markets.
In the December 1998 edition of Mutual Funds Magazine, Bancroft was listed
among the five star (highest rating) funds that the magazine covers. In the
Mutual Funds newsletter (also from the editors of Mutual Funds Magazine) dated
September 1998, Bancroft was named one of their two All-Star Funds of the month
(the other was Bancroft's sister fund, Ellsworth Convertible Growth and Income
Fund, Inc.). In addition, in the November 6, 1998 edition of Morningstar Mutual
Funds+++ Bancroft was rated at three stars overall in the category of general
equity funds. The Fund's performance for three and five years was in the top ten
percent among the combined closed-end and open-end convertible funds rated.
Shareholders who wish a copy of this newsletter or the Morningstar report should
contact us.
At its November meeting, the Fund's Board of Directors voted to pay a
dividend of $3.125. This dividend consists of 18.3 cents per share from net
investment income and $2.942 per share of long-term capital gain. The dividend
is payable on December 30, 1998 to shareholders of record on December 1, 1998.
The 1999 annual meeting of shareholders will be held in our offices in
Morristown on February 22, 1999. All shareholders are welcome to attend. We hope
to see you here.
/s/ THOMAS H. DINSMORE
- -----------------------------
Chairman of the Board
* Lipper Analytical Services, Inc. is an independent statistical service.
** 59 open-end convertible funds with dividends reinvested, 9 closed-end
convertible funds with dividends reinvested and 3,670 general equity funds
with dividends reinvested.
+ With all dividends reinvested at NAV.
++ The Fund may borrow up to 5% of total assets for temporary or emergency
purposes.
+++ Morningstar is an independent statistical service that rates mutual funds.
<PAGE> 5
BANCROFT CONVERTIBLE FUND, INC
PORTFOLIO OF INVESTMENTS OCTOBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IDENTIFIED VALUE
OR SHARES COST (NOTE A)
--------- ----------- ----------
<S> <C> <C> <C>
ADVERTISING -- 1.0%
$1,000,000 Interpublic Group Cos., Inc. 1.80% 2004 cv. sub. deb.* (NR) ........... $ 838,874 $ 909,375
---------- ----------
AEROSPACE -- 3.6%
1,500,000 Morgan Stanley Dean Witter Discover & Co. 0% 2000 medium-term
exch. notes (A1) ...................................................... 1,446,411 1,440,000
(exch. for Boeing Company common stock)
350,000 Orbital Sciences Corp. 5% 2002 cv. sub. notes* (B) .................... 350,000 472,500
125,000 Orbital Sciences Corp. 5% 2002 cv. sub. notes - Reg. (B) .............. 122,656 168,750
925,000 Simula, Inc. 8% 2004 sr. cv. sub. notes (NR) .......................... 936,875 744,625
705,000 SPACEHAB, Inc. 8% 2007 cv. sub. notes* (NR) ........................... 706,450 581,625
---------- ----------
3,562,392 3,407,500
---------- ----------
BANKING -- 8.5%
50,000 shs CNB Capital Trust I 6% SPuRS (Baa2) ................................... 1,253,063 1,306,250
(exch. for CNB Bancshares, Inc. common stock)
40,000 shs National Australia Bank Ltd. 7 7/8% exch. capital units (A1)........... 1,038,700 1,057,500
65,000 shs WBK Trust 10% STRYPES*# (NR) .......................................... 2,059,135 1,864,688
2,165,000 BankAtlantic Bancorp 5 5/8% 2007 cv. sub. deb. (NR) ................... 2,417,063 1,775,300
20,000 Jefferson-Pilot Corp. 7 1/4% 2000 ACES# (A1) .......................... 1,720,850 1,960,000
(exch. for NationsBank Corp. common stock)
---------- ----------
8,488,811 7,963,738
---------- ----------
CAPITAL GOODS -- 6.0%
1,700,000 CS First Boston, Inc. 2 1/4% 2003 sr. medium-term exch. notes* (Aa3) .. 1,700,000 1,772,250
(exch. for General Electric Corp. common stock)
1,250,000 CS First Boston, Inc. 2 5/8% 2003 sr. medium-term exch. notes (Aa) .... 1,250,000 1,185,938
(exch. for Minnesota Mining and Manufacturing common stock)
1,510,000 Robbins & Myers, Inc. 6 1/2% 2003 cv. sub. notes (NR) ................. 1,555,600 1,547,750
1,200,000 U.S. Filter Corp. 4 1/2% 2001 cv. sub. notes (Ba3) .................... 1,265,406 1,102,500
---------- ----------
5,771,006 5,608,438
---------- ----------
COMMUNICATIONS -- 10.6%
3,000,000 Bell Atlantic Financial 5 3/4% 2003 cv. sub. deb.* (A1) ............... 3,147,725 3,031,875
(exch. for cash equiv. of Telephone New Zealand common stock)
1,000,000 Bell Atlantic Financial 4 1/4% 2005 cv. sub. deb.* (A1) ............... 1,004,454 987,500
(exch. for cash equiv. of Cable & Wireless Communications
plc common stock)
15,000 MediaOne Group, Inc. 6 1/4% 2001 PIES# (Ba1) .......................... 871,875 808,125
(exch. for AirTouch Communications, Inc. common stock)
1,500,000 NatWest Markets 0% 2003 exch. trust securities*+ (AA2) ................ 1,408,491 3,060,000
(exch. for Lucent Technologies, Inc. common stock)
500,000 Norddeutsche 3% 2003 euro. cv. deb. (Aa1) ............................. 580,000 550,625
(exch. for Deutsche Telekom AG common stock)
1,000,000 Telefonica De Espana 2% 2002 gtd. exch. deb.* (NR) .................... 1,000,000 1,510,000
---------- ----------
8,012,545 9,948,125
---------- ----------
CONSUMER GOODS -- 1.0%
17,500 shs Newell Financial Trust I 5 1/4% QUIPS* (Baa1) ........................ 878,750 951,563
(conv. into Newell Co. common stock) ---------- ----------
DATA-PROCESSING SERVICES -- 3.5%
500,000 Affiliated Computer Services, Inc. 4% 2005 cv. sub. notes* (Ba2) ...... 500,000 532,813
1,100,000 American Express Credit Corp. 1 1/8% 2003 cash exch. notes (Aa3) ...... 1,044,260 1,122,000
1,750,000 National Data Corp. 5% 2003 cv. sub. notes (Ba3) ...................... 1,746,875 1,617,654
---------- ----------
3,291,135 3,272,467
---------- ----------
ELECTRIC UTILITIES -- 0.3%
5,000 shs Texas Utilities Co. 9 1/4% FELINE PRIDES# (Baa3) ..................... 250,000 281,875
---------- ----------
ENERGY -- 4.2%
1,750,000 AES Corp. 4 1/2% 2005 cv. jr. sub. deb. (Ba1) ......................... 1,750,000 1,723,750
750,000 Diamond Offshore Drilling, Inc. 3 3/4% 2007 cv. sub. notes (Baa2) ..... 765,000 753,281
700,000 Parker Drilling Co. 5 1/2% 2004 cv. sub. notes (B3) ................... 825,500 497,000
1,000,000 Swiss Life Financial Ltd. 2% 2005 GEMMS* (NR) ......................... 1,006,563 992,500
(exch. for Royal Dutch Petroleum common stock)
---------- ----------
4,347,063 3,966,531
---------- ----------
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
BANCROFT CONVERTIBLE FUND, INC
PORTFOLIO OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IDENTIFIED VALUE
OR SHARES COST (NOTE A)
--------- ----------- -----------
<S> <C> <C> <C>
ENTERTAINMENT -- 10.1%
5,000 shs Chancellor Media Corp. 6% cv. exch. pfd.* (Caa2)................ $ 250,000 $ 379,375
10,000 shs Chancellor Media Corp. 7% cv. pfd. (Caa2)....................... 500,000 1,095,000
30,000 shs Houston Industries, Inc. 7% 2000 ACES# (Baa1)...................
(exch. for Time Warner, Inc. common stock) 1,552,105 2,431,875
10,000 shs News Corporation Exchange Trust 5% cv. trust originated pfd.* (Ba2)
(exch. for British Sky Broadcasting Group plc ADS's)............ 1,006,897 933,750
50,000 shs Triathlon Broadcasting Co. depositary shares.................... 525,000 484,375
(representing 9% mandatory cv. pfd.) (NR)
$1,500,000 Clear Channel Communications, Inc. 2 5/8% 2003 sr. cv. notes (Baa3) 1,500,000 1,444,688
1,000,000 Imax Corp. 5 3/4% 2003 cv. sub. notes* (B1)..................... 1,000,000 1,254,375
750,000 International CableTel, Inc. 7% 2008 cv. sub. notes* (Caa1)..... 750,000 986,250
(conv. into NTL, Inc. common stock)
350,000 International CableTel, Inc. 7% 2008 cv. sub. notes - Reg. (Caa1).. 450,625 460,250
(conv. into NTL, Inc. common stock)
----------- -----------
7,534,627 9,469,938
----------- -----------
FINANCIAL & INSURANCE -- 5.7%
13,000 shs American General Delaware, L.L.C. 6% cv. A MIPS (A2)............ 658,455 1,124,500
20,000 shs Frontier Financing Trust 6 1/4% cv. trust originated pfd.* (Baa3)
(conv. into Frontier Insurance Group, Inc. common stock) ....... 1,046,875 925,000
500,000 American International Group 2 1/4% 2004 cash exchangeable equity-linked
notes (AAA)..................................................... 500,000 612,500
20,000 MediaOne Group, Inc. 7 5/8% 1998 DECS# (A2)..................... 480,000 965,000
(exch. for Enhance Financial Services Group, Inc. common stock)
1,375,000 Penn Treaty American Corp. 6 1/4% 2003 cv. sub. notes* (BB+).... 1,406,875 1,306,250
375,000 Penn Treaty American Corp. 6 1/4% 2003 cv. sub. notes - Reg. (BB+) 348,750 356,250
----------- -----------
4,440,955 5,289,500
----------- -----------
FOODS -- 2.2%
10,000 shs Apple South Financing I 7% cv. A pfd.* (B2)..................... 500,000 368,750
(conv. into Apple South, Inc. common stock)
5,000 shs Apple South Financing I 7% cv. A pfd. - Reg. (B2)............... 297,188 184,375
(conv. into Apple South, Inc. common stock)
30,000 Ralston Purina Co. 7% 2000 SAILS# (Baa1)........................ 1,861,638 1,486,875
(exch. for Interstate Bakeries Corp. common stock) ----------- -----------
2,658,826 2,040,000
----------- -----------
HEALTH CARE & DRUGS -- 10.0%
500,000 Genzyme Corp. 5 1/4% 2005 cv. sub. notes* (NR).................. 500,000 620,000
1,000,000 HealthSouth Corp. 3 1/4% 2003 cv. sub. notes* (Ba2)............. 1,000,000 820,625
250,000 HealthSouth Corp. 3 1/4% 2003 cv. sub. notes - Reg. (Ba2)....... 222,500 205,156
1,200,000 Morgan Stanley Dean Witter Discover & Co. 0% 2001 medium-term
exchangeable notes (A1)......................................... 1,093,111 2,026,500
(exch. for ADR's representing SmithKline Beecham plc common stock)
2,000,000 Republic National Bank of NY 1 7/8% 2002 sr. exch. notes (Aa1).. 1,968,079 2,190,000
(exch. for the cash equivalent of Merck & Co., Inc. common stock)
2,500,000 Roche Holdings, Inc. 0% 2010 LYON* (Aa2)........................ 1,212,918 1,556,250
500,000 Sandoz Capital BVI Ltd. 2% 2002 cv. sub. notes* (AAA)........... 526,250 862,500
(cv. into Novartis AG common stock)
1,000,000 Swiss Life Financial Ltd. 2% 2003 GEMMS* (NR)................... 1,025,156 1,101,250
(exch. for Glaxo Wellcome PLC common stock)
----------- -----------
7,548,014 9,382,281
----------- -----------
MANUFACTURED HOUSING -- 1.9%
40,000 shs Fleetwood Capital Trust 6% cv. trust pfd.* (Baa3)............... 2,000,000 1,770,000
(conv. into Fleetwood Enterprises, Inc. common stock) ----------- -----------
OFFICE EQUIPMENT -- 0.9%
750,000 Xerox Credit 2 7/8% 2002 medium-term notes (A2)................. 740,000 860,625
----------- -----------
PACKAGING -- 0.4%
10,000 shs Owens-Illinois, Inc. 4 3/4% cv. pfd. A (BA3).................... 507,800 401,250
----------- -----------
</TABLE>
See accompanying notes to financial statements.
<PAGE> 7
BANCROFT CONVERTIBLE FUND, INC
PORTFOLIO OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IDENTIFIED VALUE
OR SHARES COST (NOTE A)
--------- ----------- -----------
<S> <C> <C> <C>
RETAIL -- 8.7%
32,500 shs Dollar General Trust 8 1/2% STRYPES# (NR)....................... $ 1,246,035 $ 1,082,656
(conv. into Dollar General Corp. common stock)
16,000 shs Estee Lauder Trust 6 1/4% TRACES# (NR).......................... 966,573 1,020,000
(conv. into Estee Lauder Companies, Inc. common stock)
$1,000,000 Costco Companies, Inc. 0% 2017 cv. sub. notes* (A3)............. 532,753 696,250
500,000 Costco Companies, Inc. 0% 2017 cv. sub. notes - Reg. (A3)....... 311,187 348,125
2,000,000 Home Depot, Inc. 3 1/4% 2001 cv. sub. notes (A1)................ 2,003,125 3,748,750
1,000,000 Rite Aid Corp. 5 1/4% 2002 cv. sub. notes* (Baa1)............... 1,024,375 1,274,375
----------- -----------
6,084,048 8,170,156
----------- -----------
STAFFING SERVICES -- 0.9%
1,000,000 Interim Services, Inc. 4 1/2% 2005 cv. sub. deb. (Ba3).......... 1,012,500 851,875
----------- -----------
TECHNOLOGY -- 6.6%
500,000 Arbor Software Corp. 4 1/2% 2005 cv. sub. notes* (NR)........... 512,488 405,000
3,500,000 Hewlett-Packard Co., Inc. 0% 2017 LYON* (Aa3)................... 1,946,818 1,887,813
1,000 Morgan Stanley Dean Witter Discover & Co. 0% 2001 technology exch. note
trust certificates* (A1) ....................................... 933,034 1,307,500
(exch. for technology basket common stocks++)
500,000 Synoptics Communications, Inc. 5 1/4% 2003 cv. sub. deb.* (Ba3). 510,625 506,250
(exch. for Northern Telecommunications Ltd. common stock)
37,500 Tribune Co. 6 1/4% 2001 DECS# (A2).............................. 1,047,656 928,125
(exch. for The Learning Company, Inc. common stock)
1,250,000 VLSI Technology, Inc. 8 1/4% 2005 cv. sub. notes (B)............ 1,262,125 1,100,000
----------- -----------
6,212,746 6,134,688
----------- -----------
U.S. TREASURY NOTES -- 0.0%
25,000 6 1/4% 3/31/99**................................................ 24,922 25,188
----------- -----------
CORPORATE SHORT-TERM NOTES -- 11.5%
4,400,000 American Express Credit Corp. 5.26% 11/12/98 (P1)............... 4,377,499 4,377,499
3,800,000 American Express Credit Corp. 5.06% 11/5/98 (P1)................ 3,791,988 3,791,988
2,600,000 American Express Credit Corp. 5.35% 11/3/98 (P1)................ 2,598,068 2,598,068
----------- -----------
10,767,555 10,767,555
----------- -----------
TOTAL CONVERTIBLE BONDS AND NOTES -- 67.5%...................................... $57,668,438 $63,042,331
TOTAL CONVERTIBLE PREFERRED STOCKS -- 18.9%..................................... 16,536,576 17,662,782
TOTAL CORPORATE SHORT-TERM NOTES -- 11.5%....................................... 10,767,555 10,767,555
----------- -----------
TOTAL INVESTMENTS -- 97.9%...................................................... $84,972,569 91,472,668
===========
OTHER ASSETS AND LIABILITIES, NET -- 2.1%....................................... 1,960,585
-----------
TOTAL NET ASSETS -- 100.0%...................................................... $93,433,253
===========
</TABLE>
* Rule 144A security, may be sold only to qualified institutional buyers.
# See Note A(5).
+ Guaranteed by National Westminster Bank PLC.
++ Ticker symbols: CSCO, EDS, HWP, INTC, MSFT & ORCL.
** Collateral for a letter of credit.
ACES Automatic Common Exchange Securities
ADR American Depositary Receipts
ADS American Depositary Shares
DECS Debt Exchangeable for Common Stock
FELINE Family of Equity-Linked Income Securities
GEMMS Guaranteed Exchangeable Monetisation of Multiple Shares
LYON Liquid Yield Option Note
MIPS Monthly Income Preferred Securities
PIES Premium Income Exchangeable Securities
PRIDES Preferred Redeemable Increased Dividend Equity Securities
QUIPS Quarterly Income Preferred Securities
SAILS Stock Appreciation Income Linked Securities
SPuRS Shared Preference Redeemable Securities
STRYPES Structured Yield Product Exchangeable for Stock
TRACES Trust Automatic Common Exchange Securities
Ratings in parentheses by Moody's Investors Service, Inc. or Standard &
Poor's, a division of McGraw-Hill Companies, Inc., have been obtained from
sources believed to be reliable but have not been audited by
PricewaterhouseCoopers LLP.
The cost of investments for federal income tax purposes is $84,972,569 resulting
in gross unrealized appreciation and depreciation of $10,950,501 and $4,450,402,
respectively, or net unrealized appreciation of $6,500,099 on a tax cost basis.
See accompanying notes to financial statements.
<PAGE> 8
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
OCTOBER 31,
1998
-----------
<S> <C>
ASSETS:
Investments at value (Identified cost $84,972,569) (Note A)................................. $91,472,668
Cash........................................................................................ 810,339
Receivable for securities sold.............................................................. 579,216
Dividends and interest receivable .......................................................... 639,808
Other assets................................................................................ 24,895
-----------
Total assets.............................................................................. 93,526,926
-----------
LIABILITIES:
Accrued management fee (Note B)............................................................. 58,441
Accrued expenses............................................................................ 35,232
-----------
Total liabilities ........................................................................ 93,673
-----------
NET ASSETS AT VALUE.......................................................................... $93,433,253
===========
NET ASSETS CONSIST OF:
Undistributed net investment income......................................................... $ 630,505
Undistributed net realized gain from investment transactions................................ 10,211,265
Unrealized appreciation on investments ..................................................... 6,500,099
Capital shares (Note C)..................................................................... 34,753
Additional paid-in capital ................................................................. 76,056,631
-----------
NET ASSETS AT VALUE.......................................................................... $93,433,253
===========
Net asset value per share ($93,433,253 / 3,475,291 outstanding shares)....................... $26.89
===========
</TABLE>
See accompanying notes to financial statements.
STATEMENT OF OPERATIONS FOR THE YEAR ended October 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME (Note A):
Interest .............................................................................. $ 2,649,243
Dividends ............................................................................. 1,454,636
-----------
Total Income ....................................................................... 4,103,879
-----------
EXPENSES (Note B):
Management fee ........................................................................ 723,452
Custodian fees ........................................................................ 30,189
Transfer agent fees.................................................................... 40,221
Professional fees...................................................................... 49,956
Directors' fees........................................................................ 64,800
Printing and reports to shareholders................................................... 50,777
Treasurer's office .................................................................... 25,000
Other.................................................................................. 88,291
-----------
Total Expenses ..................................................................... 1,072,686
-----------
NET INVESTMENT INCOME................................................................... 3,031,193
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from investment transactions......................................... 10,224,916
Net change in unrealized appreciation of investments................................... (9,493,576)
-----------
Net gain on investments............................................................. 731,340
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................... $ 3,762,533
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 9
BANCROFT CONVERTIBLE FUND, INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................. $ 30.48 $ 28.23 $ 24.84 $ 23.11 $ 25.00
---------- ---------- ---------- ---------- ----------
Net investment income .............................. .87 .94 .96 1.14 1.20
Net realized and unrealized investment gain (loss) . (.01) 4.55 4.19 2.30 (1.18)
---------- ---------- ---------- ---------- ----------
Total from investment operations ............... .86 5.49 5.15 3.44 .02
Less distributions:
Dividends from net investment income ............... (.88) (.93) (1.11) (1.17) (1.24)
Distributions from realized gains .................. (3.57) (2.31) (.65) (.54) (.67)
---------- ---------- ---------- ---------- ----------
Total distributions ............................ (4.45) (3.24) (1.76) (1.71) (1.91)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ....................... $ 26.89 $ 30.48 $ 28.23 $ 24.84 $ 23.11
========== ========== ========== ========== ==========
Market value, end of year .......................... $ 26.75 $ 26.81 $ 23.88 $ 22.25 $ 20.13
Total investment return:
Based on net asset value* ........................ 3.16% 21.18% 21.55% 15.79% .18%
Based on market value** .......................... 18.17% 28.19% 15.65% 20.17% (4.88)%
Ratios/Supplemental Data:
Net assets, end of year (000's) .................... $ 93,433 $ 96,187 $ 83,302 $ 71,425 $ 64,551
Ratio of expenses to average net assets ............ 1.1% 1.2% 1.2% 1.2% 1.2%
Ratio of net investment income to average net assets 3.1% 3.3% 3.9% 4.9% 5.2%
Portfolio turnover rate ............................ 55% 71% 70% 43% 39%
</TABLE>
* Assumes valuation of the Fund's shares, and reinvestment of dividends, at
net asset values.
** Assumes valuation of the Fund's shares at market price, and
reinvestment of dividends at actual reinvestment price.
See accompanying notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
1998 1997
------------ -----------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income.................................................... $ 3,031,193 $ 2,955,432
Net realized gain from investment transactions........................... 10,224,916 11,286,484
Net change in unrealized appreciation of investments..................... (9,493,576) 3,620,296
------------ -----------
Net increase in net assets resulting from operations................... 3,762,533 17,862,212
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income.................................................... (2,981,861) (2,898,260)
Net realized gain on investments......................................... (11,271,015) (6,815,292)
------------ -----------
Total dividends........................................................ (14,252,876) (9,713,552)
------------ -----------
CAPITAL SHARE TRANSACTIONS (Note C)........................................ 7,736,436 4,736,186
------------ -----------
Increase (decrease) in net assets...................................... (2,753,907) 12,884,846
NET ASSETS AT BEGINNING OF YEAR............................................ 96,187,160 83,302,314
------------ -----------
NET ASSETS AT END OF YEAR (including undistributed net
investment income of $630,505 and $581,173, respectively)................ $ 93,433,253 $96,187,160
============ ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 10
BANCROFT CONVERTIBLE FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(A) Bancroft Convertible Fund, Inc. (the Fund) is registered under the
Investment Company Act of 1940 as a diversified, closed-end management
investment company. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements:
1. Security Valuation
Investments in securities traded on a national securities exchange are valued at
market using the last reported sales price. Securities traded in the
over-the-counter market and listed securities for which no sales were reported
are valued at the mean between closing reported bid and asked prices. Where no
closing prices are available, value is determined by management, with the
approval of the Board of Directors.
2. Securities Transactions and Related Investment Income
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed) with gain or loss on the sale of securities being
determined based upon identified cost. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Interest
of $15,824 was earned on cash balances held by the custodian of the Fund's
assets during the year ended October 31, 1998.
3. Federal Income Taxes
It is the policy of the Fund to distribute substantially all of its taxable
income within the prescribed time and to otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies.
Therefore, no provision for federal income or excise taxes is believed
necessary.
4. Dividends and Distributions to Shareholders
The liability for dividends and distributions payable is recorded on the
ex-dividend date.
5. Market Risk
It is the Fund's policy to invest the majority of its assets in convertible
securities. Although convertible securities do derive part of their value from
that of the securities into which they are convertible, they are not considered
derivative financial instruments under Statement of Financial Accounting
Standards No. 119. However certain of the Fund's investments include features
which render them more sensitive to price changes in their underlying security.
Thus they expose the Fund to greater downside risk than traditional convertible
securities, but still less than that of the underlying common stock. The market
value of those securities was $12,829,219 at October 31, 1998, representing
13.7% of net assets.
(B) The management fee is paid to Davis-Dinsmore Management Company, investment
adviser. The contract provides for payment of a monthly advisory fee, computed
at an annual rate of 3/4 of 1% of the first $100,000,000 and 1/2 of 1% of the
excess over $100,000,000 of the Fund's net asset value in such month. The annual
fee is subject to reduction to the extent that the ordinary expenses of the Fund
(excluding taxes and interest) exceed 1 1/2% of the first $100,000,000 and 1% of
the excess over $100,000,000 of the average of the monthly net asset values of
the Fund for the year.
The adviser furnishes investment advice, office equipment and facilities, and
pays the salaries of all executive officers of the Fund, except that the costs
associated with personnel and certain non-personnel expenses of the office of
the Treasurer up to a maximum of $25,000 a year are reimbursed by the Fund. Such
reimbursements amounted to $25,000 for the year ended October 31, 1998. The
officers of the Fund are also directors, officers or employees of the investment
adviser, and are compensated by the investment adviser.
(C) At October 31, 1998 there were 3,475,291 shares of $.01 par value common
stock outstanding (9,000,000 shares authorized). During the year ended October
31, 1998, 319,028 shares were issued in connection with reinvestment of
dividends from net investment income and capital gains, resulting in an increase
in paid-in capital of $7,736,436.
(D) Purchases and sales of investments, exclusive of corporate short-term notes,
aggregated $50,219,491 and $63,211,673, respectively, for the year ended October
31, 1998.
(E) A distribution of $3.125 per share, derived from net investment income of
18.3 cents, and net realized gains on investments of $2.942, was declared on
November 16, 1998, payable December 30, 1998 to shareholders of record at the
close of business December 1, 1998.
(F) The Fund has adopted a Director deferred compensation arrangement, which
allows the Directors to defer the receipt of all or a portion of Director Fees
payable on or after October 31, 1998. The amount of these fees will remain an
asset of the Fund. The Fund will be obligated to pay these fees, with interest,
to the Directors who have elected to defer receipt of their fees on a future
date or dates specified by the Directors, or as determined under the terms of
the arrangement.
<PAGE> 11
BANCROFT CONVERTIBLE FUND, INC.
Report Of Independent Accountants
To the Shareholders and Board of Directors of
Bancroft Convertible Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statement of operations
and of changes in net assets, and the financial highlights present fairly, in
all material respects, the financial position of Bancroft Convertible Fund, Inc.
(the "Fund") 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 five years in
the period then ended, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities owned at
October 31, 1998 by correspondence with the custodian and brokers, provides a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
New York, New York
November 13, 1998
<PAGE> 12
BANCROFT CONVERTIBLE FUND, INC.
AUTOMATIC DIVIDEND INVESTMENT PLAN
AUTHORIZATION FORM
c/o ChaseMellon Shareholder Services
Shareholder Relations Department
P.O. Box 3322
South Hackensack, NJ 07606-9980
Dear Sirs:
I hold stock certificates, registered in my name, for shares of Common
Stock of Bancroft Convertible Fund, Inc. (the "Company").
I wish to invest all the dividends and distributions paid by the Company on
my shares automatically in additional shares from the date hereof until this
arrangement is terminated as stated below.
AUTHORIZATION
You are authorized to act as my agent as follows:
A. Establish an Account in my name.
B. Take into my Account all dividends and distributions paid by the Company
on all its Common Stock held in my name now or in the future and on all
additional shares of the Company (including fractions) held by you in my
Account.
C. Whenever the Company declares a dividend or distribution payable in cash
or, at the option of all its shareholders, in Common Stock of the Company at
market price or net asset value, whichever is lower, take the dividend or
distribution in Common Stock.
D. Whenever the Company declares a dividend or distribution payable in cash
or, at the option of the shareholders for whom you act as agent under the Plan,
in the Company's Common Stock at net asset value, take the dividend or
distribution in Common Stock if the net asset value as determined by the Company
as of the close of business on the last trading day preceding the date of
payment is lower then (1) the asked price of the Company's Common Stock in the
over-the-counter market, as reported by the National Quotation Bureau, if the
Common Stock is not listed on a national securities exchange, or (2) the closing
market price of the Common Stock on a national securities exchange, on that
trading day, plus brokerage commissions, if the Company's Common Stock is listed
on such exchange. If the market price is lower, take the dividend or
distribution in cash and add it to my Account.
E. As soon as practicable after each cash payment is made to my Account, use
the funds in my Account to buy in the over-the-counter market or on a national
securities exchange, as the case may be, as many additional full shares of the
Company's Common Stock as possible, plus a fractional interest in one share
computed to four decimal places.
F. You may mingle the cash in my Account with similar funds of other
shareholders of the Company for whom you act as agent under the Plan. The cost
of the shares and fractional interest you buy for my Account in connection with
a particular dividend or distribution shall be determined by the average cost
per share, including brokerage commission, of all shares bought by you for all
shareholders for whom you act under the Plan in connection with that dividend or
distribution.
G. Whenever you receive or purchase shares or fractional interests for my
Account, you will send me confirmation of the transaction as soon as
practicable. You will hold such shares and fractional interests as my agent in
your name or the name of your nominee. Do not send me stock certificates for
full shares until I so request in writing or until my Account is terminated as
stated below. You will vote any shares so held for me in accordance with any
proxy returned to the Company by me in respect of the shares of which I am a
record owner.
H. I understand that there is presently no service charge for your serving as
my agent and maintaining my Account. You may, however, charge me for extra
services performed at my request. I further understand that the Company reserves
the right to amend the Plan in the future to impose a service charge. You will
be liable only for willful misconduct or gross negligence in acting as my agent
under the Plan.
<PAGE> 13
BANCROFT CONVERTIBLE FUND, INC.
NAME AND ADDRESS
My name as shown on my Common Stock certificate or certificates (including
all names if more than one) and my address, are as follows:
PLEASE PRINT:
NAME OR NAMES.............................................................
NUMBER AND STREET.........................................................
CITY, STATE AND ZIP CODE..................................................
STOCK CERTIFICATES
I understand that if I hold more than one Common Stock certificate registered
in similar but not identical names or if more than one address is shown for me
on the Company's Common Stock records, all my shares of Common Stock must be put
into the same name and address prior to signing this authorization if all of
them are to be covered by one Account. I understand that additional shares
subsequently acquired by me otherwise than through the Plan will be covered by
my Account if and when they are registered in the same name and address as the
shares in my Account.
INCOME TAX
I understand that participation in the Plan for automatic investment of
dividends and distributions does not relieve me of any income tax which may be
payable by me on such dividends and distributions.
AMENDMENTS AND CHANGE OF AGENT
I understand that the Company may amend the terms of the Plan and reserves
the right to change the agent which acts for all participants in the Plan at any
time by giving written notice thereof to each participant at his address as
shown on your records. Any such change shall be effective as to all dividends
and distributions payable to shareholders of record on any date more than 30
days after mailing of such notice. Further, I understand that the Company in
connection with any dividend or distribution will change the price at which
shares of its Common Stock are issued to participants in the Plan if the net
asset value of the shares is less than 95% of the fair market value of such
shares on the last trading day preceding the payment date of any distribution of
net investment income or net capital gain, unless the Board obtains a legal
opinion from independent counsel that the purchase of shares at net asset value
under these circumstances will not have a material adverse effect upon the
federal income tax liability of the Company. The Board may not authorize
issuance of shares offered to Plan participants only, if such issuance is at a
price less than net asset value, without the prior specific approval of the
Company's stockholders or of the Securities and Exchange Commission.
TERMINATION
I may terminate this authorization and my Account at any time by delivering
written notice to you, such termination to be effective as to all dividends and
distributions payable to shareholders of record on any date more than 15 days
after receipt of such notice by you. I understand that you or the Company may
terminate all authorizations for any reason at any time by sending written
notice addressed to participants at their addresses as shown on your records,
such termination to be effective as to all dividends and distributions payable
to shareholders of record on any date more than 30 days after mailing of such
notice. I understand you will terminate my Account if you are informed of the
transfer of all shares of the Company's Common Stock registered in my name.
Following the date of termination, you shall send me at my address shown on your
records a stock certificate or certificates for the full shares held by you in
my Account and a check for the value of any fractional interest in my Account
based on the market price of the Company's Common Stock on that date.
Date:...................................................................
Signature:..............................................................
Note: If shares are in more than one name, all must sign.
<PAGE> 14
BANCROFT CONVERTIBLE FUND, INC.
ADDITIONAL SERVICES AVAILABLE TO SHAREHOLDERS
OF
BANCROFT CONVERTIBLE FUND, INC.
AUTOMATIC DIVIDEND INVESTMENT PLAN You may wish to participate in our
Automatic Dividend Investment Plan whereby all of the dividends and
distributions on your Bancroft shares are automatically invested in
additional shares of the Company's stock at the then current market price
or net asset value, whichever is lower. When the market price is lower
than net asset value, the Bank, as your agent, will take your dividends or
distributions in cash, combine them with those of other Plan participants,
and purchase shares in the market and thereby take advantage of the lower
commissions on larger purchases. When the net asset value is lower than
the market price, the participant will receive shares issued by the
Company at net asset value. When the Company makes dividends and
distributions payable in cash or at the option of all stockholders in
common stock, a participant will receive shares of common stock issued by
the Company. There is no other charge for this service. To join the Plan,
fill out and mail the authorization form on the next page.
CASH PAYMENT PLAN Members of the Dividend Investment Plan may also wish to
participate in our Cash Payment Plan which provides a convenient and
economical means to increase your investment in the Company's shares. The
Cash Payment Plan, for which Mellon Securities Trust Company (the "Bank")
acts as your agent, permits you to send cash payments of between $25 to
$5,000 per month to the Bank, which will be aggregated with the funds of
other participants, to purchase additional Bancroft shares. You pay only a
service charge (5% of the amount to be invested with a maximum of $3.00
per transaction) plus your proportionate share of the brokerage commission
which is typically at a savings because your funds are combined with
others to take advantage of the reduced commission on larger purchases.
PRINCIPAL PORTFOLIO CHANGES AUGUST 1 to OCTOBER 31, 1998
(unaudited)
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT
HELD AT
ADDITIONS REDUCTIONS 10-31-98
--------------------------------------------
<S> <C> <C> <C>
AES Corp. 4 1/2% 2005 cv. jr. sub. deb. 1,750,000 1,750,000
AES Trust I $2.6875 term cv. securities, series A 39,900 --
American General Delaware, L.L.C. 6% cv. A MIPS 7,000 13,000
AMF Bowling, Inc. 0% 2018 cv. deb. 144A 4,900,000 --
Atria Communities, Inc. 5% 2002 cv. sub. notes 144A 750,000 --
BEA Systems, Inc. 4% 2005 cv. sub. notes 144A 750,000 --
Bear Stearns Cos., Inc. 6 3/4% 2000 notes (SEG) 7,500 --
Bell Atlantic Financial Services 4 1/4% 2005 cv. sub. deb. 144A (CWZ) 1,000,000 1,000,000
Central Parking Financial Trust 5 1/4% cv. pfd 144A 25,000 --
Credit Suisse 3% 2001 equity-linked certificates (DIS) 1,000,000 --
Hollinger Intl, Inc. common stock 36,800 --
Host Marriott Financial Trust 6 3/4% cv. pfd. 10,000 --
Ingersoll-Rand Co. 6 3/4% FELINE PRIDES 39,500 --
Lodgian Capital Trust 7% cv. trust pfd. 144A 20,000 --
MediaOne, Inc. DECS 7 5/8% 1998 (EFS) 10,000 20,000
Morgan Stanley Dean Witter Discover & Co. 6% 1998 DECS (CSCO) 7,500 --
National City Corp. common stock 13,400 --
NatWest Markets 0% 2003 exch. trust securities 144A (LU) 500,000 1,500,000
Royal Caribbean Cruises Ltd. $3.625 cv. A pfd. 7,500 --
Synoptics Communications, Inc. 5 1/4% 2003 cv. sub. deb. 144A (NT) 500,000 500,000
Unocal Capital Trust 6 1/4% trust cv. pfd. 12,500 --
</TABLE>
<PAGE> 15
BANCROFT CONVERTIBLE FUND, INC.
THE YEAR 2000 ISSUE
BACKGROUND. Like other investment companies as well as financial and business
organizations around the world, the Fund could be adversely affected if the
computer systems and embedded technology used by the Adviser and other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000.
PROGRAMS AND SYSTEMS. The Adviser assessed and tested its internal computer
programs and systems earlier this year to ensure these programs and systems will
be Year 2000 compliant. The computers used for trading and pricing are Pentium
II desktop systems, certified to be Year 2000 compliant by the manufacturer,
Dell Computer. The vendors whose accounting software we use, Microsoft Corp. and
Advent Software, have also supplied us with statements certifying that their
products are now compliant.
2ND AND 3RD PARTY ISSUES. The two banks that provide services to the Fund,
ChaseMellon Shareholder Services, the Fund's transfer agent and registrar, and
the Fund's custodian, The Bank of New York, have stated in writing that they
will meet all interim and final regulatory deadlines in order to be fully
compliant by December 31, 1998. They have advised the Fund that they are
currently in the process of assessing, repairing and replacing, and testing the
systems necessary to meet these deadlines.
Bloomberg, the Adviser's securities pricing service provider, provides periodic
statements in writing that detail its strategy in dealing with the Year 2000
problem. In addition, Bloomberg states that its assessments of its trading
system software have not uncovered any problems to date. Bloomberg attributes
this to the fact that it started addressing the Year 2000 issue as early as
1982, since there were many financial instruments that had maturity dates
subsequent to January 1, 2000.
We continue to receive updates from each of these and our other outside vendors
as they become available.
Since the Fund has investments in securities whose issuers may be materially
adversely impacted by the Year 2000 issue, the Fund could also be adversely
affected. For this reason, earlier this year, the Adviser began reviewing public
filings and web page disclosures of each issuer and assessing each with respect
to Year 2000 compliance. Some of the criteria the Adviser looks at are: costs
incurred and estimated of system repair and replacement, whether or not there is
a contingency plan prepared and the status of second and third party issues. The
Adviser continues to monitor these disclosures and uses them concurrently with
other methods of evaluating a security's value as an investment vehicle.
In addition to computers and related systems, the operation of office and
facilities equipment, such as fax machines, photocopiers, telephone switches,
security systems, elevators, and other common devices may be affected by the
Year 2000 Problem. The Adviser is currently assessing the potential effect of,
and costs of remediating, the Year 2000 Problem regarding its office and
facilities equipment. The companies that provide telephone and electricity
services to the Adviser regularly update their respective web sites with
contingency plans and information on compliance status.
The Fund has not incurred any costs to date in the matter of the Year 2000
problem, nor do we expect the Fund to have any in the future.
MOST REASONABLY LIKELY WORST CASE YEAR 2000 SCENARIO FOR THE FUND. Since the
Fund has investments in securities whose issuers may be materially adversely
impacted by the Year 2000 issue, the Fund could also be adversely affected.
The failure to correct a material Year 2000 problem is perhaps most likely to
occur with respect to the two banks that provide services to the Fund,
ChaseMellon Shareholder Services, the Fund's transfer agent and registrar, and
the Fund's custodian, The Bank of New York. Although the Banks expect
mission-critical systems to be compliant by 1998 year-end as stated above, the
Banks cannot ensure that all the vendors they rely upon will also be completely
compliant. The effects might include difficulty in the settlement of trades in a
timely manner and dividend distribution delays. There is also the possibility
that the Fund's fees to the Banks might be increased due to the Banks' increased
cost of doing business.
<PAGE> 16
BANCROFT CONVERTIBLE FUND, INC.
THE YEAR 2000 ISSUE (CONTINUED)
For the Adviser the problems that might be faced include the lack of telephone
and power service needed to perform daily pricing and trading.
Such failures and others could materially and adversely affect the Fund's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and their
customers, the Fund is unable to determine at this time whether the consequences
of Year 2000 failures will have a material impact on the Fund's results of
operations, liquidity or financial condition.
CONTINGENCY PLAN. Based on the representations made by ChaseMellon and The Bank
of New York, the Fund has not made any contingency plans relating to the receipt
of services these Banks provide. The Adviser currently has plans underway which
include the following: an alternate site in which to do business in the event
that electric and/or telephone service is lost and the purchase of laptop
computers and small generators to run them. In addition, cellular telephones
would be used in the event that regular telephone and Bloomberg service is lost,
to contact brokers for pricing and trading. The Adviser will bear the cost of
this equipment. The Adviser currently expects to have these plans in place and
fully functional by May of 1999. The Adviser intends to review these plans
periodically and to update them as circumstances change.
Per share distributions to shareholders during the fiscal year ended October 31,
1998 (unaudited):
<TABLE>
<CAPTION>
TOTAL ORDINARY LONG-TERM QUALIFYING
PAYMENT DATE PAID INCOME CAPITAL GAIN DISTRIBUTION*
------------------ ---- ------ ------------ -------------
<S> <C> <C> <C> <C>
December 30, 1997 $3.756 $0.841 $2.915 30%
March 30, 1998 0.23 0.23 -- 29%
June 30, 1998 0.23 0.23 -- 29%
September 28, 1998 0.23 0.23 -- 29%
------ ------ ------
4.446 1.531 2.915
</TABLE>
* The percentages indicate the portion of each ordinary income distribution
which qualifies under the Internal Revenue Code for the deduction for
dividends received by corporate shareholders.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The letter to Shareholders and the Statement on The Year 2000 Issue contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements which reflect the intent, belief or
expectations of the Company, its management, the Adviser and other service
providers regarding the anticipated effect of events, circumstances and trends
should be considered forward-looking statements. These forward-looking
statements are not guarantees of future performance and there are a number of
meaningful factors which could cause the Company's results to vary materially
from those indicated by any such statements. Factors which could cause actual
results to differ from expectations include, among others, changes in the
Federal Reserve Board's monetary policy, an increase in interest rates,
inflation or taxes, changes in individuals' savings rates, a decline in
productivity or new products, changes to foreign and domestic markets in
general, changes to the market for convertible securities or the inability of
the Company's service providers and the companies whose securities the Company
buys to resolve any Year 2000 issues.
