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: 811-2151
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BANCROFT CONVERTIBLE FUND, INC.
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(Exact name of registrant as specified in charter)
65 Madison Avenue, Morristown, New Jersey 07960-7308
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(Address of principal executive offices) (Zip code)
Thomas H. Dinsmore
BANCROFT CONVERTIBLE FUND, INC.
65 Madison Avenue
Morristown, New Jersey 07960-7308
(Name and address of agent for service)
Copy to:
Martha J. Hays, Esq.
Ballard Spahr Andrews & Ingersoll, LLP
1735 Market Street
Philadelphia, PA 19103-7599
Registrant's telephone number, including area code: (973)631-1177
Date of fiscal year end: October 31
Date of reporting period: October 31, 2005
ITEM 1. REPORTS TO STOCKHOLDERS.
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--------------------------- BANCROFT CONVERTIBLE FUND --------------------------
[LOGO]
2005 ANNUAL REPORT
OCTOBER 31, 2005
2005 ANNUAL REPORT
OCTOBER 31, 2005
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 FUND CONSIDERS TO BE RELATIVELY EQUAL, OVER THE LONG-TERM, DUE TO
THE NATURE OF THE SECURITIES IN WHICH IT INVESTS.
HIGHLIGHTS
PERFORMANCE THROUGH OCTOBER 31, 2005 WITH DIVIDENDS REINVESTED
Calendar Cumulative
YTD 1 Year 5 Years 10 Years
---------- --------- ----------- ----------
Bancroft market price (a)..................... (4.38)% 1.27% 13.32% 129.13%
Bancroft net asset value (b).................. 1.55 6.68 7.91 118.37
Closed-end convertible fund average (b)....... 1.43 7.61 17.29 106.30
S&P 500 Index (a)............................. 1.05 8.72 (8.38) 144.21
Russell 2000 Index (a)........................ 0.24 12.20 39.11 150.44
Lehman Aggregate Bond Total Return Index (b).. 1.02 1.13 35.81 84.63
PERFORMANCE DATA REPRESENT PAST RESULTS AND DO NOT REFLECT FUTURE PERFORMANCE.
(a) From Bloomberg L.P. pricing service.
(b) From Lipper, Inc. Closed-End Fund Performance Analysis, dated October 31,
2005.
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QUARTERLY HISTORY OF NAV AND MARKET PRICE
Net Asset Values Market Prices(AMEX, symbol BCV)
Qtr. Ended High Low Close High Low Close
------------ ------ ------- ------- ------ ------- -------
Jan. 05 $21.24 $20.36 $20.77 $19.11 $18.08 $18.49
Apr. 05 21.28 19.86 19.92 18.60 16.95 16.95
Jul. 05 21.26 19.72 21.26 18.25 16.99 18.25
Oct. 05 21.75 20.79 21.05 18.55 17.52 17.77
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DIVIDEND DISTRIBUTIONS (12 MONTHS)
Record Payment Capital *Corporate
Date Date Income Gains Deduction
---------- ---------- ---------- ----------- -------------
12/03/04 12/28/04 $0.188 -- 12%
3/16/05 3/30/05 0.170 -- 19
6/15/05 6/29/05 0.170 -- 19
9/15/05 9/29/05 0.170 -- 19
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$0.698
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*Percentage of each ordinary income distribution qualifying for the corporate
dividend received tax deduction.
B A N C R O F T C O N V E R T I B L E F U N D
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To Our Shareholders ------------------------------------------------------------
December 9, 2005
The year is ending with substantially good economic news. In China and
India it has been estimated that 25 million people are moving up to middle class
every year. These are people moving to indoor plumbing, electricity and standard
appliances from homes that had few or none of these things. It also means that
they need commodities like copper and oil in ever growing quantities. This has
provided the difference that has moved the energy markets from the glut of a
decade ago to the tight market and higher prices of today.
In the U.S., economic and productivity growth have been better than
expected. Importantly, the consumer appears to be in very good fiscal health.
According to economist Ed Yardeni, the Federal Reserve reported that household
net worth was at an all-time record high of $51.1 trillion dollars at the end of
September 2005. Assets were at a record $62.5 trillion and liabilities were
$11.4 trillion. Corporations are also doing well; Dr. Yardeni estimates that in
the last four quarters, non-financial corporations have increased cash flow to
almost a trillion dollars.
The U.S. Government's fiscal health may also be much better than we
think. Since we do not have a balance sheet showing both assets and liabilities,
we only have income, expenditures, deficits and debt. It may be that current
levels of deficits and debt are reasonable. If deficits are run while the
government's asset base is expanded (think roads, bridges, nature preserves,
ships, aircraft, etc.) then future generations are not burdened. We believe that
this is the case and that the private sector is not being 'crowded out' by
current deficit spending.
All of the above sums up to a potentially very good year in 2006 for
commodity companies and financial firms. Since energy stocks have already done
well, perhaps they already reflect this news. We believe that there is still
room for these stocks to do well, but that the 'easy' gains are in the past.
Our experience in 2005 to date has reflected the above as our energy
industry exposure has contributed to overall performance. The Fund's exposure to
finance and insurance has also contributed positively, while the
telecommunications industry holdings have underperformed this year.
Bancroft Convertible Fund is the oldest closed-end convertible fund.
Founded in 1971, the Fund's strategy has consistently been to use convertible
securities as an equity alternative to reduce risk and volatility. This strategy
tends to outperform in bear markets and lag in bull markets. For the quarter,
year-to-date and ten-year periods ended October 31, 2005, Bancroft's NAV has
outperformed the average of the closed-end convertible fund category tracked by
Lipper, Inc. and published in the LIPPER CLOSED-END PERFORMANCE ANALYSIS.
However, for the one year and five years ended October 31, 2005, the Fund
underperformed the average of the eleven funds in its category. Of these eleven
funds, only four, including the Fund, remain unleveraged convertible funds and
only five, including the Fund, have more than 65% of their assets in convertible
securities. We believe these factors contributed to the difference in
performance between Bancroft and many of the other funds in the group.
William A. Benton, independent director of the Fund since 1994, is
retiring from service at the end of his term in 2006. His contributions to the
Fund have been many. He will be missed.
CONTINUED ON THE FOLLOWING PAGE
PAGE 1
B A N C R O F T C O N V E R T I B L E F U N D
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To Our Shareholders (continued) ------------------------------------------------
Visit our website, www.bancroftfund.com, for additional information on
the Fund. In addition, shareholders who wish to obtain a copy of the most recent
report on the Fund issued by Standard and Poor's should contact us.
At its November 21, 2005 meeting, the Board of Directors declared a
dividend of 24.3 cents ($0.243) per share. The dividend consists of
undistributed net investment income and will be payable on December 27, 2005 to
shareholders of record on December 2, 2005.
The 2006 annual meeting of shareholders will be held at our offices in
Morristown, New Jersey on February 13, 2006. Time and location will be included
in the proxy statement, scheduled to be mailed to shareholders on December 27,
2005. All shareholders are welcome to attend; we hope to see you there.
/s/ Thomas H. Dinsmore
Thomas H. Dinsmore
Chairman of the Board
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Major Portfolio Changes by underlying common stock -----------------------------
Six months ended October 31, 2005
ADDITIONS REDUCTIONS
Best Buy Co., Inc. Baxter International, Inc.
Celanese Corp. Cephalon, Inc.
EchoStar Communication Corp. The Chubb Corp.
Euronet Worldwide, Inc. Devon Energy Corp.
FTI Consulting, Inc. Global Marine Corp.
Genworth Financial, Inc. Impax Laboratories, Inc.
(EXCHANGEABLE FROM CITIGROUP FUNDING, INC.)
IKON Office Solutions, Inc.
Ionatron, Inc. (EXCHANGEABLE FROM IOS CAPITAL, LLC)
L-3 Communications Holdings, Inc. Ivax Corp.
Manor Care, Inc. Mentor Corp.
MetLife, Inc. Ocwen Financial Corp.
Oil States International, Inc. Omnicare, Inc.
Semco Energy, Inc. Pegasus Solutions, Inc.
U.S. Bancorp Weatherford International, Ltd.
PAGE 2
B A N C R O F T C O N V E R T I B L E F U N D
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Largest Investment Holdings by underlying common stock -------------------------
Value % Total
(Note 1) Net Assets
------------ ------------
Chesapeake Energy Corp......................................... $ 3,729,750 3.2%
PRODUCES OIL AND NATURAL GAS. THE COMPANY'S OPERATIONS
ARE FOCUSED ON DEVELOPMENTAL DRILLING AND PRODUCING
PROPERTY ACQUISITIONS IN ONSHORE NATURAL GAS PRODUCING
AREAS OF THE UNITED STATES AND CANADA.
The Walt Disney Company........................................ 3,532,690 3.0
AN ENTERTAINMENT COMPANY WHICH CONDUCTS OPERATIONS IN
MEDIA NETWORKS, STUDIO ENTERTAINMENT, THEME PARKS AND
RESORTS, CONSUMER PRODUCTS, AND INTERNET AND DIRECT
MARKETING.
The St. Paul Travelers Companies, Inc.......................... 2,989,800 2.5
PROVIDES A BROAD RANGE OF INSURANCE PRODUCTS AND SERVICES
FOR THE COMMERCIAL AND CONSUMER MARKETS.
Nuveen Investments, Inc........................................ 2,775,245 2.4
THE COMPANY'S PRINCIPAL ACTIVITIES ARE ASSET MANAGEMENT AND
RELATED RESEARCH, AND THE DEVELOPMENT, MARKETING AND
DISTRIBUTION OF INVESTMENT PRODUCTS AND SERVICES.
(EXCHANGEABLE FROM MERRILL LYNCH & CO., INC. AND MORGAN
STANLEY, INC.)
International Rectifier Corp................................... 2,672,656 2.3
DESIGNS, MANUFACTURES AND MARKETS POWER SEMICONDUCTORS.
THE COMPANY'S PRODUCTS INCLUDE POWER INTEGRATED CIRCUITS
AND ADVANCED CIRCUIT DEVICES, POWER SYSTEMS AND POWER
COMPONENTS.
Washington Mutal, Inc.......................................... 2,581,250 2.2
A FINANCIAL SERVICES COMPANY THAT PROVIDES A DIVERSIFIED
LINE OF PRODUCTS AND SERVICES TO CONSUMERS AND SMALL- TO
MID-SIZED BUSINESSES.
Semco Energy, Inc.............................................. 2,534,188 2.2
OWNS AND OPERATES NATURAL GAS DISTRIBUTION SYSTEMS AND
BUSINESSES INVOLVED IN GAS ENGINEERING AND QUALITY
ASSURANCE SERVICES, PIPELINE CONSTRUCTION SERVICES, PROPANE
DISTRIBUTION, AND NATURAL GAS STORAGE.
U.S. Bancorp................................................... 2,471,875 2.1
A DIVERSIFIED FINANCIAL SERVICES COMPANY THAT PROVIDES
LENDING AND DEPOSITORY SERVICES, CASH MANAGEMENT, FOREIGN
EXCHANGE, TRUST AND INVESTMENT MANAGEMENT SERVICES.
Schering-Plough Corp........................................... 2,372,400 2.0
A WORLDWIDE PHARMACEUTICAL COMPANY THAT DISCOVERS AND
MARKETS NEW THERAPIES AND TREATMENT PROGRAMS. THE COMPANY'S
CORE PRODUCT GROUPS INCLUDE ALLERGY/RESPIRATORY,
ANTI-INFECTIVE/ANTI-CANCER, AND CARDIOVASCULARS.
The TJX Companies, Inc......................................... 2,355,720 2.0
RETAILS OFF-PRICE APPAREL AND HOME FASHIONS. THE COMPANY ------------ ------------
CURRENTLY OPERATES T.J. MAXX, MARSHALLS, HOMEGOODS, A.J.
WRIGHT, WINNERS AND T.K. MAXX STORES.
Total.......................................................... $28,015,574 23.9%
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PAGE 3
B A N C R O F T C O N V E R T I B L E F U N D
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Major Industry Exposure --------------------------------------------------------
Banking/Savings and Loan -------------------------> 9.6%
Chemicals --------> 3.4%
Energy --------------------------------> 13.1%
Entertainment ------------> 4.3%
Financial and Insurance ----------------------------------------> 15.4%
Health Care ------> 3.1%
Pharmaceuticals -----------------------------> 10.5%
Retail -----------------> 6.4%
Technology ----------------------> 8.4%
Telecommunications --------------> 5.2%
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DIVERSIFICATION OF ASSETS ------------------------------------------------------
% Total Net Assets
October 31,
Value -----------------------
Cost (Note 1) 2005 2004
------------- ------------- --------- ---------
Aerospace and Defense............. $ 3,029,094 $ 3,013,125 2.6% 3.3%
Automotive........................ 2,858,318 2,601,813 2.2 4.4
Banking/Savings and Loan.......... 11,474,870 11,236,447 9.6 10.2
Chemicals......................... 4,082,152 4,013,965 3.4 --
Consumer Goods.................... 2,462,595 3,016,853 2.6 3.4
Energy............................ 11,601,726 15,400,466 13.1 8.8
Entertainment..................... 5,181,944 5,010,190 4.3 4.3
Financial and Insurance........... 17,801,478 18,275,458 15.4 11.6
Foods............................. 3,072,285 3,017,700 2.6 1.3
Health Care....................... 3,548,493 3,682,650 3.1 5.0
Mining............................ 1,961,987 2,212,960 1.9 1.3
Pharmaceuticals................... 12,010,584 12,324,698 10.5 9.4
Retail............................ 7,880,093 7,463,640 6.4 7.4
Technology........................ 10,151,998 9,869,035 8.4 9.0
Telecommunications................ 5,932,761 6,135,730 5.2 6.9
Utilities......................... 1,500,000 1,803,750 1.5 1.1
Other............................. 2,050,334 1,837,900 1.5 6.4
Short-Term Securities............. 4,808,871 4,808,881 4.1 6.0
------------- ------------- --------- ---------
TOTAL INVESTMENTS ............. 111,409,583 115,725,261 98.4 99.8
Other Assets, Net of Liabilities.. -- 1,896,869 1.6 0.2
------------- ------------- --------- ---------
TOTAL NET ASSETS .............. $111,409,583 $117,622,130 100.0% 100.0%
============= ============= ========= =========
PAGE 4
B A N C R O F T C O N V E R T I B L E F U N D
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Statement of Assets and Liabilities --------------------------------------------
OCTOBER 31, 2005
----------------
ASSETS:
Investments at value (cost $111,409,583) (Note 1)............................ $115,725,261
Cash......................................................................... 51,249
Receivable for securities sold............................................... 1,462,892
Dividends and interest receivable............................................ 723,814
Other assets................................................................. 32,329
------------
Total assets................................................................. 117,995,545
------------
LIABILITIES:
Payable for securities purchased............................................. 304,620
Accrued management fee (Note 2).............................................. 8,532
Accrued expenses............................................................. 21,733
Other liabilities............................................................ 38,530
------------
Total liabilities............................................................ 373,415
------------
NET ASSETS...................................................................... $117,622,130
============
NET ASSETS CONSIST OF:
Undistributed net investment income.......................................... $ 659,011
Accumulated net realized loss from investment transactions................... (4,003,135)
Unrealized appreciation on investments....................................... 4,315,678
Capital shares (Note 3)...................................................... 55,885
Additional paid-in capital................................................... 116,594,691
------------
NET ASSETS...................................................................... $117,622,130
============
Net asset value per share ($117,622,130 / 5,588,453 outstanding shares)......... $ 21.05
============
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STATEMENT OF OPERATIONS---------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31, 2005
INVESTMENT INCOME (NOTE 1):
Interest..................................................................... $ 2,587,003
Dividends.................................................................... 2,400,263
------------
Total Income.............................................................. 4,987,266
------------
EXPENSES (NOTE 2):
Management fee............................................................... 834,076
Custodian.................................................................... 21,688
Transfer agent............................................................... 25,518
Professional fees............................................................ 178,499
Directors' fees.............................................................. 129,275
Reports to shareholders...................................................... 74,171
Insurance.................................................................... 32,700
Treasurer's office........................................................... 25,000
Other........................................................................ 97,575
------------
Total Expenses............................................................ 1,418,502
------------
NET INVESTMENT INCOME........................................................... 3,568,764
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from investment transactions............................... 414,909
Net unrealized appreciation of investments................................... 3,577,352
------------
Net gain on investments...................................................... 3,992,261
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................... $ 7,561,025
============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
PAGE 5
B A N C R O F T C O N V E R T I B L E F U N D
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Statement of Changes in Net Assets ---------------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 2005 AND 2004
2005 2004
---------------- ----------------
CHANGE IN NET ASSETS FROM OPERATIONS:
Net investment income ........................................ $ 3,568,764 $ 3,878,705 (a)
Adjustment for change in amortization policy ............... -- (87,223)
------------
Net investment income, as adjusted ....................... 3,791,482
------------
Net realized gain from investment transactions ............... 414,909 3,760,644 (a)
Adjustment for change in amortization policy ............... -- 10,188
------------
Net realized gain from investment transactions,
as adjusted ............................................ 3,770,832
------------
Net change in unrealized appreciation of investments ......... 3,577,352 (3,604,190)(a)
Adjustment for change in amortization policy ............... -- 77,035
------------
Net unrealized appreciation of investments, as adjusted .. (3,527,155)
------------ ------------
Net change in net assets resulting from operations ........... 7,561,025 4,035,159 (a)
Adjustment for change in amortization policy ............... -- --
------------ ------------
Net change in net assets resulting from operations,
as adjusted ............................................ 7,561,025 4,035,159
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income ........................................ (3,894,853) (3,826,570)
------------ ------------
CAPITAL SHARE TRANSACTIONS (NOTE 3)
Value of shares issued on reinvestment of distributions ...... 582,476 628,542
Net proceeds from rights offering ............................ -- 14,050,851
------------ ------------
Total capital share transactions ........................... 582,476 14,679,393
------------ ------------
CHANGE IN NET ASSETS ............................................ 4,248,648 14,887,982
Net assets at beginning of period ............................... 113,373,482 98,485,500
------------ ------------
NET ASSETS AT END OF PERIOD ..................................... $117,622,130 $113,373,482
============ ============
Undistributed net investment income at end of period ......... $ 659,011 $ 1,037,260 (a)
============
Adjustment for change in amortization policy ............... (52,160)
------------
Undistributed net investment income at end of period,
as adjusted ............................................ $ 985,100
============
---------------
(a) As previously reported.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
PAGE 6
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Financial Highlights------------------------------------------------------------
SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING:
YEAR ENDED OCTOBER 31,
--------------------------------------------------
2005 2004 2003 2002 2001
--------------------------------------------------
OPERATING PERFORMANCE:
Net asset value, beginning of year ............... $20.40 $20.84 $18.55 $20.72 $27.09
--------------------------------------------------
Net investment income ............................ 0.64 0.70(a) 0.71(a) 0.79 (a) 1.07
Adjustment for change in amortization policy ... -- (0.02) (0.02) -- --
--------------------------------------------------
Net investment income, as adjusted ........... 0.64 0.68 0.69 0.79 1.07
--------------------------------------------------
Net realized and unrealized gain (loss) .......... 0.71 0.08(a) 2.31(a) (2.02)(a) (3.23)
Adjustment for change in amortization policy ... -- 0.02 0.02 -- --
--------------------------------------------------
Net realized and unrealized gain (loss),
as adjusted .................................. 0.71 0.10 2.33 (2.02) (3.23)
--------------------------------------------------
Total from investment operations ................ 1.35 0.78 3.02 (1.23) (2.16)
--------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income ............. (0.70) (0.72) (0.73) (0.94) (1.11)
Distributions from realized gains ................ -- -- -- -- (3.10)
--------------------------------------------------
Total distributions ............................. (0.70) (0.72) (0.73) (0.94) (4.21)
--------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Effect of rights offering ........................ -- (0.50) -- -- --
Capital share repurchases ........................ -- -- -- -- --
--------------------------------------------------
Total capital share transactions ................ -- (0.50) -- -- --
--------------------------------------------------
Net asset value, end of year ..................... $21.05 $20.40 $20.84 $18.55 $20.72
==================================================
Market value, end of year ........................ $17.77 $18.23 $19.70 $17.54 $18.75
Total Net Asset Value Return (%)(b) .............. 6.7 1.3 16.7 (6.3) (8.7)
Total Investment Return (%)(c) ................... 1.3 (3.8) 16.7 (1.8) 1.3
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) ........... $117,622 $113,373 $98,486 $86,904 $95,864
Ratio of expenses to average net assets (%) ...... 1.2 1.1 1.2 1.2 1.1
Ratio of net investment income to
average net assets (%) .......................... 3.1 3.3(d) 3.6(d) 4.0 (d) 4.9
Portfolio turnover rate (%) ...................... 86 66 87 78 83
---------------
(a) As previously reported.
(b) Assumes valuation of the Fund's shares, and reinvestment of dividends, at
net asset values.
(c) Assumes valuation of the Fund's shares at market price and reinvestment of
dividends at actual reinvestment price.
(d) Ratios for 2004, 2003 and 2002 reflect ratios adjusted for change in
amortization policy. Ratios previously reported for 2004, 2003 and 2002 were
3.4%, 3.6% and 4.0%, respectively.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
PAGE 7
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Portfolio of Investments October 31, 2005 --------------------------------------
Principal Identified Value
Amount Cost (Note 1)
------------ ------------ ------------
CONVERTIBLE BONDS AND NOTES -- 52.3%
AEROSPACE AND DEFENSE -- 1.3%
$1,500,000 L-3 Communications Holdings, Inc. 3% 2035 CODES (Ba3)
(Acquired 07/27/05 - 07/28/05) (1,2) .................... $1,529,094 $1,513,125
---------- ----------
AUTOMOTIVE -- 2.2%
625,000 CSK Auto Inc. 3.375% 2025 sr. exch. notes (NR)
(conv. into CSK Auto Corp. common stock)
(Acquired 07/26/05) (2) ................................. 636,898 590,875
4,500,000 Lear Corp. 0% 2022 cv. sr. notes (Ba2) .................. 2,221,420 2,010,938
---------- ----------
2,858,318 2,601,813
---------- ----------
BANKING/SAVINGS AND LOAN -- 2.8%
1,000,000 The Bear Stearns Companies, Inc. 0.25% 2010
medium-term notes (A1)
(exch. for Fifth Third Bancorp common stock) (1) ........ 1,145,433 848,797
2,500,000 U.S. Bancorp floating rate 2035 cv. sr. deb. (Aa2)
(Acquired 08/10/05) (2) ................................. 2,475,101 2,471,875
---------- ----------
3,620,534 3,320,672
---------- ----------
CONSUMER GOODS -- 1.5%
1,375,000 Church & Dwight Co., Inc. 5.25% 2033 cv. sr. deb. (Ba2).. 1,375,000 1,771,413
---------- ----------
ENERGY -- 2.9%
1,250,000 OMI Corp. 2.875% 2024 cv. sr. notes (B+) ................ 1,217,470 1,159,375
1,750,000 Oil States International, Inc. 2.375% 2025 contingent
cv. sr. notes (NR)
(Acquired 06/16/05 - 10/20/05) (2) ...................... 1,781,247 2,185,313
---------- ----------
2,998,717 3,344,688
---------- ----------
ENTERTAINMENT -- 4.3%
1,500,000 EchoStar Communications Corp. 5.75% 2008 cv. sub.
notes (B2) .............................................. 1,496,484 1,477,500
3,500,000 The Walt Disney Company 2.125% 2023 cv. sr.
notes (Baa1) ............................................ 3,685,460 3,532,690
---------- ----------
5,181,944 5,010,190
---------- ----------
FINANCIAL AND INSURANCE -- 1.9%
1,125,000 FTI Consulting, Inc. 3.75% 2012 cv. sr. sub. notes (Ba3)
(Acquired 07/29/05 - 10/10/05) (2) ...................... 1,157,819 1,253,588
1,000,000 Swiss Re America Holding Corp. 3.25% 2021 euro. sub. cv.
bonds (A1)
(conv. into Swiss Reinsurance Company common stock)
(Acquired 11/15/01 - 12/05/01) (2) ..................... 1,006,218 926,950
---------- ----------
2,164,037 2,180,538
---------- ----------
FINANCIAL SERVICES -- 0.8%
1,000,000 Euronet Worldwide, Inc. 3.50% 2025 cv. deb. (NR)
(Acquired 09/28/05 - 09/29/05) (1,2) .................... 1,015,651 981,500
---------- ----------
FOODS -- 0.8%
1,000,000 Lehman Brothers Holdings, Inc. 3% 2012 medium-term
notes (A1) (performance linked to General Mills, Inc.
common stock) (1) ....................................... 1,000,000 996,900
---------- ----------
HEALTH CARE -- 3.1%
1,500,000 Community Health Systems, Inc. 4.25% 2008 cv. sub.
notes (B3) .............................................. 1,505,056 1,680,150
2,000,000 Manor Care, Inc. 2.125% 2035 cv. sr. notes (Baa3)
(Acquired 07/27/05 - 09/20/05) (2) ...................... 2,043,437 2,002,500
---------- ----------
3,548,493 3,682,650
---------- ----------
PAGE 8
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Portfolio of Investments October 31, 2005 (continued) --------------------------
Principal Identified Value
Amount Cost (Note 1)
------------ ------------ -----------
CONVERTIBLE BONDS AND NOTES -- CONTINUED
MULTIINDUSTRY -- 0.7%
$1,000,000 Lehman Brothers Holdings, Inc. 1% 2011 medium-term notes (A1)
(performance linked to Cendant Corp. common stock) (1) ...... $ 1,034,683 $ 856,400
------------ -----------
PHARMACEUTICALS -- 8.5%
2,000,000 Alza Corp. 0% 2020 cv. sub. deb. (Aa1)
(exch. for Johnson & Johnson common stock) .................. 1,670,572 1,727,500
2,000,000 Amgen, Inc. 0% 2032 LYONs (A2) (1)........................... 1,698,080 1,544,110
550,000 CV Therapeutics, Inc. 3.25% 2013 sr. sub. cv. notes (NR) .... 576,174 622,875
1,500,000 Cephalon, Inc. 2% 2015 cv. sr. sub. notes (B-) .............. 1,482,760 1,651,875
1,250,000 Encysive Pharmaceuticals, Inc. 2.5% 2012 cv. sr. notes (NR).. 1,266,848 1,204,688
1,000,000 Ivax Corp. 4.5% 2008 cv. sr. sub. notes (NR) ................ 1,000,650 1,002,500
1,000,000 Teva Pharmaceutical Finance II, LLC series A 0.5% 2024
cv. sr. deb. (BBB) (exch. for Teva Pharmaceutical
Industries Ltd. ADR) ........................................ 1,000,000 1,075,000
1,000,000 Teva Pharmaceutical Finance II, LLC series B 0.25% 2024
cv. sr. deb. (BBB) (exch. for Teva Pharmaceutical
Industries Ltd. ADR) ........................................ 1,000,000 1,123,750
------------ -----------
9,695,084 9,952,298
------------ -----------
RETAIL -- 6.4%
1,000,000 Amazon.com, Inc. 4.75% 2009 cv. sub. notes (B3) ............. 977,939 968,000
2,000,000 Best Buy Co., Inc. 2.25% 2022 cv. sub. deb. (Ba1) (1) ....... 2,291,117 2,214,920
1,250,000 Casual Male Retail Group, Inc. 5% 2024 cv. sr. sub.
notes (NR) .................................................. 1,257,480 1,090,625
1,250,000 Dick's Sporting Goods, Inc. 1.6061% 2024 sr. cv. notes (B) .. 836,546 834,375
3,000,000 The TJX Companies, Inc. 0% 2021 LYONs (Baa1) ................ 2,517,011 2,355,720
------------ -----------
7,880,093 7,463,640
------------ -----------
TECHNOLOGY -- 8.4%
1,250,000 Advanced Micro Devices, Inc. 4.75% 2022 cv. sr. deb.
(B3) (1) .................................................... 1,454,754 1,371,094
2,000,000 Citigroup Funding, Inc. 1% 2010 medium-term notes (Aa1)
(exch. for the cash equivalent of a basket of technology
stocks) (1) ................................................. 2,024,554 1,851,600
2,750,000 International Rectifier Corp. 4.25% 2007 cv. sub. notes (B2). 2,740,202 2,672,656
1,500,000 LSI Logic Corp. 4% 2010 cv. sub. notes (B) .................. 1,483,312 1,449,450
1,500,000 Sybase, Inc. 1.75% 2025 cv. sub. notes (NR) ................. 1,492,356 1,581,735
1,000,000 Vishay Intertechnology, Inc. 3.625% 2023 cv. sub. notes (B3). 956,820 942,500
------------ -----------
10,151,998 9,869,035
------------ -----------
TELECOMMUNICATIONS -- 5.2%
1,000,000 Comverse Technology, Inc. 0% 2023 ZYPS (BB-) (3) ............ 1,131,775 1,444,750
1,000,000 Lucent Technologies, Inc. 2.75% 2023 series A cv. sr.
deb. (B1) ................................................... 1,000,000 1,041,650
500,000 Lucent Technologies, Inc. 2.75% 2025 series B cv. sr.
deb. (B1) ................................................... 500,000 540,830
1,250,000 Nortel Networks Corp. 4.25% 2008 cv. sr. notes (B3) ......... 1,273,722 1,173,500
2,000,000 Tekelec, Inc. 2.25% 2008 sr. sub. cv. notes (NR) ............ 2,027,264 1,935,000
------------ -----------
5,932,761 6,135,730
------------ -----------
UTILITIES -- 1.5%
1,500,000 CMS Energy Corp. 2.875% 2024 cv. sr. notes (B1) ............. 1,500,000 1,803,750
------------ -----------
TOTAL CONVERTIBLE BONDS AND NOTES ........................... $ 61,486,407 $61,484,342
------------ -----------
Shares CONVERTIBLE PREFERRED STOCKS -- 26.0%
------------
AEROSPACE AND DEFENSE -- 1.3%
60,000 Ionatron, Inc. 6.5% series A cv. pfd. (NR)
(Acquired 10/27/05) (2) ..................................... 1,500,000 1,500,000
------------ -----------
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Portfolio of Investments October 31, 2005 (continued) --------------------------
Identified Value
Shares Cost (Note 1)
------------ ------------ -----------
CONVERTIBLE PREFERRED STOCKS -- CONTINUED
BANKING/SAVINGS AND LOAN -- 6.7%
40,000 National Australia Bank Ltd. 7.875% exch. capital units (NR). $ 1,038,700 $ 1,626,400
45,000 New York Community Bancorp, Inc. 6% BONUSES units (Baa2)..... 2,303,400 2,137,500
35,000 Sovereign Capital Trust IV 4.375% PIERS (Ba1) (exch. for
Sovereign Bancorp, Inc. common stock) (1).................... 1,907,736 1,570,625
50,000 Washington Mutual Capital Trust 5.375% PIERS units (Baa1)
(exch. for Washington Mutual, Inc. common stock) ............ 2,604,500 2,581,250
------------ -----------
7,854,336 7,915,775
------------ -----------
CHEMICALS -- 1.9%
85,000 Celanese Corp. 4.25% cv. perp. pfd. (NR) .................... 2,070,748 2,259,725
------------ -----------
ENERGY -- 7.1%
11,500 Chesapeake Energy Corp. 5% cum. cv. pfd. (B) ................ 1,312,550 1,684,750
20,000 Chesapeake Energy Corp. 4.5% cum. cv. pfd. (B) .............. 2,098,870 2,045,000
13,000 Semco Energy, Inc. 5% series B cv. cum. pfd. (B-) ........... 2,637,904 2,534,188
20,000 The Williams Companies, Inc. 5.5% 2033 jr. sub. cv. deb. (B-) 1,015,000 2,100,000
------------ -----------
7,064,324 8,363,938
------------ -----------
FINANCIAL AND INSURANCE -- 7.1%
75,000 Citigroup Funding, Inc. variable rate 2008 exch. notes (Aa1)
(exch. for Genworth Financial, Inc. common stock) ........... 2,212,500 2,330,475
20 Fannie Mae 5.375% non-cumulative cv. pfd. (Aa3)
(Acquired 12/29/04 - 01/11/05) (2)........................... 2,078,125 1,822,500
20,000 Reinsurance Group of America, Inc. 5.75% PIERS (Baa2) ....... 1,000,000 1,196,500
120,000 The St. Paul Travelers Cos., Inc. 4.5% 2032 cv. jr. sub.
notes (Baa1) ................................................ 2,927,175 2,989,800
------------ -----------
8,217,800 8,339,275
------------ -----------
MINING -- 1.9%
2,000 Freeport-McMoRan Copper and Gold, Inc. 5.5% cv. perp.
pfd. (B-) ................................................... 1,961,987 2,212,960
------------ -----------
TOTAL CONVERTIBLE PREFERRED STOCKS .......................... $ 28,669,195 $30,591,673
------------ -----------
MANDATORY CONVERTIBLE SECURITIES -- 16.0% (4)
CHEMICALS -- 1.5%
40,000 Huntsman Corp. 5% mand. cv. pfd. 02/16/08 (NR) .............. 2,011,404 1,754,240
------------ -----------
CONSUMER GOODS -- 1.1%
35,000 Constellation Brands, Inc. dep. shs. representing 5.75%
series A mand. cv. pfd. 09/01/06 (B) ........................ 1,087,595 1,245,440
------------ -----------
ENERGY -- 3.1%
20,000 Amerada Hess Corp. 7% mand. cv. pfd. ACES 12/01/06 (Ba3) .... 1,086,435 2,128,600
15,000 Valero Energy Corp. 2% mand. cv. pfd. 07/01/06 (BB) ......... 452,250 1,563,240
------------ -----------
1,538,685 3,691,840
------------ -----------
FINANCIAL AND INSURANCE -- 6.6%
25,000 The Chubb Corp. 7% equity units 08/16/06 (A2) (1)............ 734,213 840,750
30,000 Merrill Lynch & Co., Inc. 6.75% mand. exch. security
10/15/07 (Aa3) (exch. for Nuveen Investments, Inc.
common stock) ............................................... 1,020,000 1,150,470
80,000 MetLife, Inc. 6.375% common equity units 08/15/08 (BBB+) .... 2,084,000 2,192,800
42,500 Morgan Stanley, Inc. 5.875% mand. exch. security 10/15/08
(Aa3) (exch. for Nuveen Investments, Inc. common stock) ..... 1,445,000 1,624,775
40,000 The PMI Group, Inc. 5.875% HITS units 11/15/06 (A1) (1)...... 999,428 978,000
45,000 XL Capital, Ltd. 6.5% equity security units 05/15/07 (A2) ... 1,137,000 968,850
------------ -----------
7,419,641 7,755,645
------------ -----------
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Portfolio of Investments October 31, 2005 (continued) --------------------------
Principal
Amount Identified Value
or Shares Cost (Note 1)
------------ ------------ -----------
MANDATORY CONVERTIBLE SECURITIES -- CONTINUED
FOODS -- 1.7%
40,000 shs Albertson's, Inc. 7.25% HITS units 05/16/07 (Baa3) (1).. $ 1,014,285 $ 976,800
40,000 shs Lehman Brothers Holdings, Inc. 6.25% PIES 10/15/07 (A1)
(exch. for General Mills, Inc. common stock) ........... 1,058,000 1,044,000
------------ -----------
2,072,285 2,020,800
------------ -----------
PHARMACEUTICALS -- 2.0%
45,000 shs Schering-Plough Corp. 6% mand. cv. pfd. 09/14/07 (Baa3).c 2,315,500 2,372,400
------------ -----------
TOTAL MANDATORY CONVERTIBLE SECURITIES (4) ............. $ 16,445,110 $18,840,365
------------ -----------
SHORT-TERM SECURITIES -- 4.1%
COMMERCIAL PAPER -- 4.1%
$4,800,000 American Express Credit Corp. (P1)
(3.78% maturing 11/01/05) .............................. 4,797,984 4,797,984
------------ -----------
U.S. GOVERNMENT OBLIGATIONS -- 0.0%
11,000 U.S. Treasury notes 2.25% 04/30/06 (Aaa) (5) ........... 10,887 10,897
------------ -----------
TOTAL SHORT-TERM SECURITIES ............................ $ 4,808,871 $ 4,808,881
------------ -----------
TOTAL CONVERTIBLE BONDS AND NOTES -- 52.3% ............. 61,486,407 61,484,342
TOTAL CONVERTIBLE PREFERRED STOCKS -- 26.0% ............ 28,669,195 30,591,673
TOTAL MANDATORY CONVERTIBLE SECURITIES -- 16.0% ........ 16,445,110 18,840,365
TOTAL SHORT-TERM SECURITIES -- 4.1% .................... 4,808,871 4,808,881
------------ -----------
TOTAL INVESTMENTS -- 98.4% ............................. $111,409,583 115,725,261
============
OTHER ASSETS AND LIABILITIES, NET -- 1.6% .............. 1,896,869
------------
TOTAL NET ASSETS -- 100.0% ............................. $117,622,130
============
(1) Contingent payment debt instrument which accrues contingent interest. See
Note 1(b).
(2) Security not registered under the Securities Act of 1933, as amended (e.g.,
the security was purchased in a Rule 144A or a Reg D transaction). The
security may be resold only pursuant to an exemption from registration under
the 1933 Act, typically to qualified institutional buyers. The Fund
generally has no rights to demand registration of these securities. The
aggregate market value of these securities at October 31, 2005 was
$15,248,226 which represented 13.0% of the Fund's net assets.
(3) Non-income producing security.
(4) These securities are required to be converted on the dates listed; they
generally may be converted prior to these dates at the option of the holder.
(5) Collateral for a letter of credit.
ACES Automatic Convertible Equity Securities LYONs Liquid Yield Option Notes.
ADR American Depositary Receipts. PIES Premium Income Exchangeable Securities.
BONUSES Bifurcated Option Note Unit Securities. PIERS Preferred Income Equity Redeemable
Securities.
CODES Convertible Contingent Debt Securities. ZYPS Zero Yield Puttable Securities.
HITS Hybrid Income Term Security.
Ratings in parentheses by Moody's Investors Service, Inc. or Standard & Poor's;
NR is used whenever a rating is unavailable.
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Notes to Financial Statements --------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Bancroft Convertible Fund, Inc. (the "Fund"), established in 1971, 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:
(A) SECURITY VALUATION
Investments in securities traded on a national securities exchange are valued at
market using the last reported sales price as of the close of regular trading.
Unlisted 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 as of the close of regular trading. Securities for
which quotations are not readily available, restricted securities and other
assets are valued at fair value as determined in good faith by management with
the approval of the Board of Directors. Short-term debt securities with initial
maturities of 60 days or less are valued at amortized cost.
(B) 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, including
accretion of discounts and amortization of non-equity premium. For certain
securities, known as "contingent payment debt instruments," Federal tax
regulations require the Fund to record non-cash, "contingent" interest income in
addition to interest income actually received. Contingent interest income
amounted to 12 cents per share for the year ended October 31, 2005. In addition,
Federal tax regulations require the Fund to reclassify realized gains on
contingent payment debt instruments to interest income. At October 31, 2005
there were unrealized losses of approximately 8 cents per share on contingent
payment debt instruments.
(C) CHANGES IN METHOD OF ACCOUNTING FOR BOND PREMIUM AND DISCOUNT AMORTIZATION
Effective November 1, 2004, the Fund began amortizing discounts and premiums on
all debt securities. Prior to November 1, 2004, the Fund amortized discounts on
original issue discount debt securities. The new method of amortization was
adopted in accordance with the provisions of the AICPA Audit and Accounting
Guide, Audits of Investment Companies and the financial highlights and statement
of changes in net assets presented herein have been restated to reflect the new
method retroactive to November 1, 2001.
The effect of this accounting change is included in the financial highlights for
the years ended October 31, 2002, 2003 and 2004, and in the statement of changes
in net assets for the year ended October 31, 2004. The cumulative effect of this
accounting change had no impact on the total net assets of the Fund or on
distributions for tax purposes, but resulted in a $103,986 increase in the cost
of securities held and a corresponding $103,986 reduction in the net unrealized
gains based on the securities held on November 1, 2001. The impact of this
change during the twelve months ended October 31, 2005 was to reduce net
investment income by $620,843, increase unrealized gains by $79,841 and increase
realized gains by $541,002. These changes had no effect on previously reported
total net assets or total returns.
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Notes to Financial Statements (continued) --------------------------------------
(D) FEDERAL INCOME TAXES
The Fund's policy is 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.
The capital loss carryforward represents tax basis capital losses which may be
carried over to offset future realized capital gains. To the extent that the
carryforward is used, no capital gains distributions will be made. At October
31, 2005, the Fund had available for federal income tax purposes unused capital
losses of $4,596,296, available to offset future net capital gains, $4,045,634
of which expires in 2010 and $424,570 of which expires in 2011. The current
year's loss carryover of $126,092 will expire on October 31, 2013.
(E) DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders from net investment income are recorded by the
Fund on the ex-dividend date. Distributions from capital gains, if any, are
recorded on the ex-dividend date and paid annually. The amount and character
of income and capital gains to be distributed are determined in accordance with
income tax regulations, which may differ from generally accepted accounting
principles. The tax character of distributions paid during the years ended
October 31, 2005 and 2004 were $3,894,853 and $3,826,570, respectively, both
from ordinary income.
At October 31, 2005 the components of distributable net assets and the federal
tax cost were as follows:
Unrealized appreciation $ 8,089,284
Unrealized depreciation (3,853,448)
------------
Net unrealized appreciation 4,235,836
Undistributed ordinary income 1,332,014
Tax basis capital loss carryforward (4,596,296)
Cost for federal income tax purposes $111,489,425
2. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The management fee is paid to the investment adviser, Davis-Dinsmore Management
Company (the "Adviser"). The contract provides for payment of a monthly advisory
fee, computed at an annual rate of 0.75% of the first $100,000,000 and 0.50% of
the excess over $100,000,000 of the Fund's net asset value in such month.
The Adviser furnishes investment advice, office equipment and facilities, and
pays the salaries of all executive officers of the Fund. The Fund pays all
expenses incurred by it and not assumed by the Adviser and in addition will pay
the costs and expenses of its Treasurer's office, up to a maximum of $25,000 per
year, incurred in connection with its performance of certain services for the
Fund. These services include the valuation of securities owned by the Fund, and
the preparation of financial statements and schedules of the Fund's investments
for inclusion in certain periodic reports to the Fund's Board of Directors and
to the U.S. Securities and Exchange Commission.
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Notes to Financial Statements (continued) --------------------------------------
3. CAPITAL STOCK
At October 31, 2005 there were 5,588,453 shares of $.01 par value common stock
outstanding (9,000,000 shares authorized). During the years ended October 31,
2005 and 2004, 31,315 shares and 33,362 shares were issued in connection with
reinvestment of dividends from net investment income, resulting in an increase
in paid-in capital of $582,476 and $628,542 respectively.
4. PORTFOLIO ACTIVITY
Purchases and sales of investments, exclusive of corporate short-term notes,
aggregated $92,749,941 and $93,097,404, respectively, for the year ended October
31, 2005.
--------------------------------------------------------------------------------
Federal Tax Information (unaudited) --------------------------------------------
In accordance with subchapter M of the Internal Revenue Code of 1986, as
amended, for the year ended October 31, 2005, 18.5% of the dividends paid from
ordinary income qualified for the dividends received deduction for corporations.
Certain dividends paid by the Fund for the fiscal year ended October 31, 2005
may be subject to a maximum tax rate of 15%, as provided for by the Jobs and
Growth Tax Relief Reconciliation Act of 2003. The Fund intends to designate up
to a maximum amount of $721,114 as taxed at a maximum rate of 15%.
Shareholders should not use the above information to prepare their tax returns.
Since the Fund's fiscal year is not the calendar year, another notification will
be sent with respect to calendar year 2005. Such notification, which will
reflect the amount to be used by taxpayers on their federal income tax returns,
will be made in conjunction with Form 1099 DIV and will be mailed in January
2006. Shareholders are advised to consult their own tax advisers with respect to
the tax consequences of their investment in the Fund.
PAGE 14
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Report of Independent Registered -----------------------------------------------
Public Accounting Firm
To the Shareholders and
Board of Directors of
Bancroft Convertible Fund, Inc.
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments of the Bancroft Convertible Fund, Inc. (the
"Fund"), as of October 31, 2005, and the related statement of operations, the
statement of changes in net assets, and the financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets for the year ended October 31,
2004 and the financial highlights for each of the years ended October 31, 2004,
October 31, 2003, October 31, 2002 and October 31, 2001, have been audited by
other auditors, whose reports dated November 19, 2004, November 17, 2003,
November 18, 2002 and November 16, 2001 express an unqualified opinion.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 2005, by correspondence with the custodian and brokers. Where
brokers have not replied to our confirmation requests, we have carried out other
appropriate auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly in all material respects, the financial position of the
Bancroft Convertible Fund, Inc. as of October 31, 2005, the results of its
operations, the changes in its net assets, and its financial highlights for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
TAIT, WELLER & BAKER LLP
Philadelphia, Pennsylvania
December 2, 2005
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---------------------- Board Approval of Advisory Contract ---------------------
IN OCTOBER 2005, THE INDEPENDENT DIRECTORS OF BANCROFT (I) RENEWED THE EXISTING
ADVISORY CONTRACT WITH DAVIS-DINSMORE MANAGEMENT COMPANY (THE "CURRENT ADVISORY
AGREEMENT") AND (II) APPROVED A NEW ADVISORY CONTRACT WITH DAVIS-DINSMORE
MANAGEMENT COMPANY (THE "NEW ADVISORY AGREEMENT" AND, TOGETHER WITH THE CURRENT
ADVISORY AGREEMENT, THE "ADVISORY AGREEMENTS"), SUBJECT TO SHAREHOLDER APPROVAL
AT THE SHAREHOLDER MEETING TO BE HELD IN FEBRUARY 2006. THE FOLLOWING ARE THE
MATERIAL FACTORS AND CONCLUSIONS THAT FORMED THE BASIS FOR THE RENEWAL OF THE
CURRENT ADVISORY AGREEMENT AND THE APPROVAL OF THE NEW ADVISORY AGREEMENT.
--------------------------------------------------------------------------------
THE NATURE AND EXTENT OF THE ADVISORY SERVICES PROVIDED BY DAVIS-DINSMORE. The
Board and the independent directors reviewed the services to be provided by
Davis-Dinsmore under both Advisory Agreements. The Board noted that the terms of
the Current Advisory Agreement and the New Advisory Agreement were consistent in
that Davis-Dinsmore would supervise all aspects of the Company's operations
including the investment and reinvestment of cash, securities or other
properties comprising the Company's assets. In this regard, the Board noted that
under the Advisory Agreements it is Davis-Dinsmore's responsibility to, among
other things, (a) supervise all aspects of the operations of the Company; (b)
obtain and evaluate pertinent information about significant developments and
economic, statistical and financial data, domestic, foreign or otherwise,
whether affecting the economy generally or any industry or the Company or any
issuer of securities held or to be purchased by the Company; (c) determine which
issuers and securities shall be represented in the Company's investment
portfolio and regularly report thereon to the Board; (d) place orders for the
purchase and sale of securities for the Company; and (e) take, on behalf of the
Company, such other action as may be necessary or appropriate in connection with
the above.
With respect to the New Advisory Agreement, the Board and the independent
directors noted that no changes in the level or type of investment advisory
services provided under the Current Advisory Agreement with Davis-Dinsmore would
occur if the New Advisory Agreement was approved by shareholders. The Board
noted further that administration services provided under the Current Advisory
Agreement would not be provided under the New Advisory Agreement and that such
services would instead be provided under a new Administrative Services
Agreement.
Based on such review and comparison of the terms of the New Advisory Agreement
and the Current Advisory Agreement, both the Board and the independent directors
concluded that the range of services to be provided by Davis-Dinsmore under the
Advisory Agreements was appropriate.
THE QUALITY OF SERVICES PROVIDED BY DAVIS-DINSMORE. In reviewing the
qualifications of Davis-Dinsmore to provide investment advisory services, both
the Board and the independent directors reviewed the credentials and experience
of Davis-Dinsmore's investment personnel who will provide investment advisory
services to the Company, and considered Davis-Dinsmore's (i) portfolio and
product review process, particularly its adherance to the Company's investment
mandate, (ii) compliance function and its culture of compliance, (iii) use of
technology, (iv) investment research operations and trading operations, and (v)
focus on providing quality services while keeping the Company's fees and
expenses low. The Board and the independent directors also took into
consideration the presentations made by Davis-Dinsmore at prior Board meetings
pertaining to its management of the Company. Based on the review of these and
other factors, both the Board and the independent directors determined and
concluded that the quality of services to be provided by Davis-Dinsmore was
appropriate and that Davis-Dinsmore was qualified to continue to provide
investment advisory services to the Company.
THE PERFORMANCE OF THE COMPANY RELATIVE TO COMPARABLE FUNDS. Both the Board and
the independent directors reviewed the performance of the Company (at net asset
value) during the past one, three, five and ten years ended September 30, 2005
against the performance of other closed-end funds categorized to be in the
Company's peer group by Lipper, Inc. Both
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Board Approval of Advisory Contract (continued) --------------------------------
the Board and the independent directors noted that the Company's performance for
the one, three, and five year periods was below the average performance of all
closed-end funds in the peer group, but was above the average performance of
such funds for the ten year period. In evaluating the Company's performance
against other funds in its peer group, the Board and the independent directors
took into account the fact that many of the Company's competitors engage in
leverage, which has increased their returns, but that the Company does not
engage in leverage. In addition, the Board and the independent directors
recognized that many of the Company's competitors have a higher percentage of
their assets invested in securities with lower credit quality than does the
Company, and that such securities have performed better than higher quality
securities in recent years. Because of the differences in how funds in the
Company's peer group are managed, the Board and the independent directors
concluded that they should consider the performance of the Company against
appropriate indices as a more relevant factor in assessing the performance of
the Company.
THE PERFORMANCE OF THE COMPANY RELATIVE TO INDICES. Both the Board and the
independent directors reviewed the performance of the Company (at net asset
value) during the past one, five and ten year fiscal years against the
performance of the Merrill Lynch All Convertibles Index and Merrill Lynch
Investment Grade Convertibles Index (the "Indices"). Both the Board and the
independent directors noted that, for the one year period, the Company's
performance was above the Indices' performance. The Board and the independent
directors noted that, for the five year period, the Company's performance (i)
adjusted for the Company's 2004 rights offering, was above the
Indices' performance, and (ii) not adjusted for the Company's 2004 rights
offering, was below the Merrill Lynch All Convertibles Index, but above the
Merrill Lynch Investment Grade Convertibles Index. The Board and the independent
directors also noted that, for the ten year period, the Company's performance
(both adjusted and not adjusted for the Company's 2004 rights offering) (i) was
below the Merrill Lynch All Convertibles Index, and (ii) was above the Merrill
Lynch Investment Grade Convertibles Index. Based on this review and taking into
account all of the other factors that the Board and the independent directors
considered in determining whether to approve the Advisory Agreements, the Board
and the independent directors concluded that no changes should be made to the
Company's investment objective or policies, or the portfolio management team.
MEETINGS WITH THE COMPANY'S PORTFOLIO MANAGER AND INVESTMENT PERSONNEL. Both the
Board and the independent directors noted that they meet regularly with the
Company's portfolio manager and investment personnel, and believe that such
individuals are competent and able to continue to carry out their
responsibilities under the Advisory Agreements.
OVERALL PERFORMANCE OF DAVIS-DINSMORE. After considering the overall performance
of Davis-Dinsmore in providing investment advisory and administrative services
to the Company, both the Board and the independent directors concluded that such
performance was satisfactory.
FEES RELATIVE TO THOSE OF CLIENTS OF DAVIS-DINSMORE WITH COMPARABLE INVESTMENT
STRATEGIES. Both the Board and the independent directors noted that the Company
and Ellsworth Fund (the Funds) are the only clients of Davis-Dinsmore, and that
the advisory fee rates for the Funds are the same. Both the Board and the
independent directors concluded that, because the fee rates are the same for the
Funds, the current advisory fee rate of the Company was fair as compared to the
rate for Ellsworth Fund.
FEES RELATIVE TO THOSE OF COMPARABLE FUNDS WITH OTHER ADVISORS. After reviewing
the advisory fee rate for the Company against the advisory fee rates for funds
advised by other advisors in the Company's peer group both the Board and the
independent directors determined that the Company's advisory fee rate was at
approximately the median of the funds in its peer group, and concluded that the
current advisory fee rate of the Company was fair and reasonable.
PAGE 17
B A N C R O F T C O N V E R T I B L E F U N D
--------------------------------------------------------------------------------
---------------- Board Approval of Advisory Contract (continued) ---------------
EXPENSE LIMITATIONS AND FEE WAIVERS. Both the Board and the independent
directors noted that, although there are no contractual expense limitations or
fee waivers in effect for the Company, Davis-Dinsmore is very diligent in its
efforts to keep expenses of the Company as low as possible. Both the Board and
the independent directors also noted that the Company's expense ratio had
declined as a result of the Company's rights offering during the 2004 fiscal
year, but that the cost of compliance with regulatory initiatives was
increasing. Both the Board and the independent directors concluded that the
current level of expenses for the Company was reasonable.
BREAKPOINTS AND ECONOMIES OF SCALE. Both the Board and the independent directors
reviewed the structure of the Company's advisory fee under the Current Advisory
Agreement, and noted that the fee includes a significant breakpoint when the
Company's assets reach $100 million. Both the Board and the independent
directors noted that breakpoints had become effective as a result of the
Company's rights offering that occurred during the 2004 fiscal year, which
resulted in lower management fee expenses as a percentage of assets. Both the
Board and the independent directors concluded that it was not necessary to
implement any further changes to the structure of the advisory fee for the
Company.
PROFITABILITY OF DAVIS-DINSMORE. Both the Board and the independent directors
reviewed information concerning the profitability and financial condition of
Davis-Dinsmore. In particular, the Board reviewed Davis-Dinsmore's financial
statements including its income statement and audited balance sheet. The Board
also reviewed Davis-Dinsmore's costs in providing services to the Funds. The
Board noted that Davis-Dinsmore's sole source of revenue was fees from the Funds
for providing advisory and administrative services to the Funds. The Board noted
that if the New Advisory Agreement is approved, the Company will enter into the
Administrative Services Agreement with Davis-Dinsmore, which will provide a
source of revenue for Davis-Dinsmore. The Board and the independent directors
noted that Davis-Dinsmore's operations remain profitable, but that increased
expenses in recent years have reduced Davis-Dinsmore's profitability. The Board
also noted that increasing the success of the Funds will positively impact
Davis-Dinsmore's profitability.
Based on the review of the profitability of Davis-Dinsmore and its financial
condition, both the Board and the independent directors concluded that the
compensation to be paid by the Company to Davis-Dinsmore under the Advisory
Agreements was not excessive.
BENEFITS OF SOFT DOLLARS TO DAVIS-DINSMORE. Both the Board and the independent
directors discussed the fact that there are no third-party soft dollar
arrangements in effect with respect to the Company. Both the Board and the
independent directors recognized that Davis-Dinsmore does receive proprietary
research from brokers with whom it executes portfolio transactions on behalf of
the Company. This research is used by Davis-Dinsmore in making investment
decisions for the Company. Both the Board and the independent directors also
considered representations made by Davis-Dinsmore that portfolio transactions
received best execution. Because such research ultimately benefits the Company,
the Board and the independent directors concluded that it was appropriate to
receive proprietary research.
DAVIS-DINSMORE'S FINANCIAL SOUNDNESS IN LIGHT OF THE COMPANY'S NEEDS. Both the
Board and the independent directors considered whether Davis-Dinsmore is
financially sound and has the resources necessary to perform its obligations
under the Advisory Agreements, and concluded that Davis-Dinsmore has the
financial resources necessary to fulfill its obligations under the Advisory
Agreements.
HISTORICAL RELATIONSHIP BETWEEN THE COMPANY AND DAVIS-DINSMORE. In determining
whether to approve the Advisory Agreements for the Company, both the Board and
the independent directors also considered the prior relationship between
Davis-Dinsmore and the Company, as well as the independent directors' knowledge
of Davis-Dinsmore's operations, and concluded
PAGE 18
B A N C R O F T C O N V E R T I B L E F U N D
--------------------------------------------------------------------------------
---------------- Board Approval of Advisory Contract (continued) ---------------
that it was beneficial to maintain the current relationship, in part, because of
such knowledge. Both the Board and the independent directors also reviewed the
general nature of the non-investment advisory services currently performed by
Davis-Dinsmore, such as administrative services, and the fees received by
Davis-Dinsmore for performing such services. The Board noted that if the New
Advisory Agreement is approved, the Company will enter into the Administrative
Services Agreement with Davis-Dinsmore, and such administrative services would
be provided pursuant to such agreement. In addition to reviewing such services,
both the Board and the independent directors also considered the organizational
structure employed by Davis-Dinsmore to provide those services. Based on the
review of these and other factors, both the Board and the independent directors
concluded that Davis-Dinsmore was qualified to continue to provide non-
investment advisory services to the Company, including administrative services,
and that Davis-Dinsmore currently is providing satisfactory non-investment
advisory services.
OTHER FACTORS AND CURRENT TRENDS. Both the Board and the independent directors
considered the culture of compliance and high ethical standards at
Davis-Dinsmore, and the efforts historically and currently undertaken by
Davis-Dinsmore to engage in best practices. Both the Board and the independent
directors noted Davis-Dinsmore's historical adherence to compliance procedures,
as well as the Company's investment objectives, policies and restrictions. Both
the Board and the independent directors concluded that this commitment to adhere
to the highest ethical standards was an important factor in their determination
that they should renew the Current Advisory Agreement and approve the New
Advisory Agreement for the Company.
BREAKOUT OF ADMINISTRATIVE SERVICES. With respect to the New Advisory Agreement,
the Board and the independent directors considered the fact that the
administrative services being provided by Davis-Dinsmore under the Current
Advisory Agreement were not included in the New Advisory Agreement, and instead
are set forth in a new Administrative Services Agreement. When evaluating the
new Administrative Services Agreement, the Board and the independent directors
considered (i) the additional administrative services provided by Davis-Dinsmore
in recent years due to increased regulation, (ii) the additional expenses
incurred by Davis-Dinsmore in providing such services, and (iii) that the
Company has reimbursed Davis-Dinsmore $25,000 each year (which is the
maximum amount permitted to be reimbursed under the Current Advisory Agreement)
since 1988 for expenses incurred by the Treasurer's Office in performing
administrative services. As a result, the Board and the independent directors
concluded (i) that the new Administrative Services Agreement should be
structured so that Davis-Dinsmore is not required to seek reimbursement for its
costs in providing administrative services but rather be paid fixed compensation
in the amount of $25,000 for providing such services, and (ii) that such
arrangement was fair and reasonable. In concluding the new Administrative
Service Agreement was fair and reasonable, the Board and the independent
directors considered, in addition to the factors set forth above, the Company's
need for the provision of administrative services, the quality of administrative
services provided by Davis-Dinsmore in the past, the amounts to be paid under
the Administrative Services Agreement, and how the amounts paid to
Davis-Dinsmore under the Administrative Services Agreement impact
Davis-Dinsmore's profitability. The Board and the independent directors also
considered the fact that in the future, the fees for administrative services
could be increased by the Board without shareholder approval. Both the Board and
the independent directors concluded that this breakout of administrative
services was an important factor in their determination that they should approve
the New Advisory Agreement for the Company.
--------------------------------------------------------------------------------
After considering the above factors, the Board concluded that it is in the best
interests of the Company and its shareholders to renew the Current Advisory
Agreement and approve the New Advisory Agreement.
PAGE 19
B A N C R O F T C O N V E R T I B L E F U N D
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Miscellaneous Notes ------------------------------------------------------------
AUTOMATIC DIVIDEND INVESTMENT AND CASH PAYMENT PLAN
The Fund has an Automatic Dividend Investment and Cash Payment Plan (the
"Plan"). Any shareholder may elect to join the Plan by sending an application to
American Stock Transfer & Trust Company, P.O. Box 922, Church Street Station, NY
10269-0560 (the "Plan Agent"). You may obtain additional information about the
Plan by calling the Plan Agent toll free at (800) 937-5449. If your shares are
held by a broker or other nominee, you should instruct the nominee to join the
Plan on your behalf. Some brokers may require that your shares be taken out of
the broker's "street name" and reregistered in your own name. Shareholders
should also contact their broker to determine whether shares acquired through
participation in the Plan can be transferred to another broker, and thereafter,
whether the shareholder can continue to participate in the Plan.
Under the Plan, all dividends and distributions are automatically invested in
additional Fund shares. Depending on the circumstances, shares may either be
issued by the Fund or acquired through open market purchases at the current
market price or net asset value, whichever is lower (but not less than 95% of
market price). When the market price is lower, the Plan Agent will combine your
dividends with those of other Plan participants and purchase shares in the
market, thereby taking advantage of the lower commissions on larger purchases.
There is no other charge for this service.
All dividends and distributions made by the Fund (including capital gain
distributions and dividends designated as qualified dividend income, which are
eligible for taxation at lower rates) remain taxable to Plan participants,
regardless of whether such dividends and distributions are reinvested in
additional shares of the Fund through open market purchases or through the
issuance of new shares. Plan participants will be treated as receiving the cash
used to purchase shares on the open market and, in the case of any dividend or
distribution made in the form of newly issued shares, will be treated as
receiving an amount equal to the fair market value of such shares as of the
reinvestment date. Accordingly, a shareholder may incur a tax liability even
though such shareholder has not received a cash distribution with which to pay
the tax.
Plan participants may also voluntarily send cash payments of $100 to $10,000 per
month to the Plan Agent, to be combined with other Plan monies, for purchase of
additional Fund shares in the open market. You pay only a bank service charge of
$1.25 per transaction, plus your proportionate share of the brokerage
commission. All shares and fractional shares purchased will be held by the Plan
Agent in your dividend reinvestment account. You may deposit with the Plan Agent
any Bancroft stock certificates you hold, for a one-time fee of $7.50.
At any time, a Plan participant may instruct the Plan Agent to liquidate all or
any portion of such Plan participant's account. To do so, a Plan participant
must deliver written notice to the Plan Agent prior to the record date of any
dividend or distribution requesting either liquidation or a stock certificate.
The Plan Agent will combine all liquidation requests it receives from Plan
participants on a particular day and will then sell shares of the Fund that are
subject to liquidation requests in the open market. The amount of proceeds a
Plan participant will receive shall be determined by the average sales price per
share, after deducting brokerage commissions, of all shares sold by the Plan
Agent for all Plan participants who have given the Plan Agent liquidation
requests.
The Plan Agent or the Fund may terminate the Plan for any reason at any time by
sending written notice addressed to Plan participant's address as shown on the
Plan Agent's records. Following the date of termination, the Plan Agent shall
send the Plan participant either the proceeds of liquidation, or a stock
certificate or certificates for the full shares held by the Plan Agent in the
Plan participant's account. Additionally, a check will be sent for the value of
any fractional interest in the Plan participant's account based on the market
price of the Fund's Common Stock on that date.
PAGE 20
B A N C R O F T C O N V E R T I B L E F U N D
--------------------------------------------------------------------------------
Miscellaneous Notes (continued) ------------------------------------------------
NOTICE OF PRIVACY POLICY
The Fund has adopted a privacy policy in order to protect the confidentiality of
nonpublic personal information that we have about you. We receive personal
information, such as your name, address and account balances, when transactions
occur in Bancroft shares registered in your name.
We may disclose this information to companies that perform services for the
Fund, such as the Fund's transfer agent or proxy solicitors. These companies may
only use this information in connection with the services they provide to the
Fund, and not for any other purpose. We will not otherwise disclose any
nonpublic personal information about our stockholders or former stockholders to
anyone else, except as required by law.
Access to nonpublic information about you is restricted to our employees and
service providers who need that information in order to provide services to you.
We maintain physical, electronic and procedural safeguards that comply with
federal standards to guard your nonpublic personal information.
--------------------------------------------------------------------------------
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
In addition to the semi-annual and annual reports that Bancroft delivers to
shareholders and makes available through the Bancroft public website, the Fund
files a complete schedule of portfolio holdings with the Securities and Exchange
Commission (SEC) for the Fund's first and third fiscal quarters on Form N-Q.
Bancroft does not deliver the schedule for the first and third fiscal quarters
to shareholders, however the schedule is posted to the Bancroft public website,
www.bancroftfund.com. You may obtain the Form N-Q filings by accessing the SEC's
website at www.sec.gov. You may also review and copy them at the SEC's Public
Reference Room in Washington, DC. Information on the operation of the SEC's
Public Reference Room may be obtained by calling the SEC at (800) SEC-0330.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES/PROXY VOTING RECORD
The Fund's policies and procedures with respect to the voting of proxies
relating to the Fund's portfolio securities is available without charge, upon
request, by calling (973) 631-1177, or at our website at www.bancroftfund.com.
This information is also available on the SEC's website at www.sec.gov. In
addition, information on how the Fund voted such proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is available
without charge at the above sources.
--------------------------------------------------------------------------------
The Fund is a member of the Closed-End Fund Association (CEFA). Its website
address is www.cefa.com. CEFA is solely responsible for the content of its
website.
--------------------------------------------------------------------------------
DISCLOSURE OF PORTFOLIO HOLDINGS TO BROKER-DEALERS
From time to time, brokers with whom the Fund's Adviser, Davis-Dinsmore
Management Company, has a pre-existing relationship may request that the Adviser
disclose Fund portfolio holdings to such broker in advance of the public
disclosure of such portfolio holdings. The Adviser may make such disclosure
under the following conditions: (i) the specific purpose of the disclosure is to
assist the Adviser in identifying potential investment opportunities for the
Funds; (ii) prior to the receipt of nonpublic portfolio holdings, the broker, by
means of e-mail or other written communication, shall agree to keep the
nonpublic portfolio holdings confidential and not to use the information for the
broker's own benefit, except in connection with the above described purpose for
which it was disclosed; (iii) the Adviser shall keep written records of its
agreement with each broker to which it distributes nonpublic portfolio holdings;
and (iv) the Adviser will secure a new agreement with a broker any time the
broker directs the nonpublic portfolio holdings to be sent to a new recipient.
PAGE 21
B A N C R O F T C O N V E R T I B L E F U N D
--------------------------------------------------------------------------------
----------------------------------- Directors ----------------------------------
Each director is also a director of Ellsworth Convertible Growth and Income
Fund, Inc. (Ellsworth)(a closed-end management investment company).
Davis-Dinsmore Management Company (Davis-Dinsmore) is the Fund's investment
adviser and is also the investment adviser to Ellsworth. Because of this
connection, the Fund and Ellsworth make up a Fund Complex. Therefore, each
director oversees two investment companies in the Fund Complex.
--------------------------------------------------------------------------------
Personal Principal Occupation(s) During Past Five Years;
Information Other Directorship(s)
--------------------------------------------------------------------------------
INDEPENDENT DIRECTORS
Gordon F. Ahalt Retired. Prior to 2001, President of G.F.A. Inc.
65 Madison Avenue (a petroleum industry consulting company).
Suite 550 Director of Ellsworth and CalDive International
Morristown, NJ 07960 (a diving service company).
Term expires 2007
Director since 1982
Age 77
--------------------------------------------------------------------------------
William A. Benton Retired. Prior to 2001, Partner of BE Partners
65 Madison Avenue (a small options market maker); Director of
Suite 550 Ellsworth.
Morristown, NJ 07960
Term expires 2006
Director since 1994
Age 72
--------------------------------------------------------------------------------
Elizabeth C. Bogan, Ph.D. Senior Lecturer in Economics at Princeton
65 Madison Avenue University; Director of Ellsworth.
Suite 550
Morristown, NJ 07960
Term expires 2006
Director since 1990
Age 61
--------------------------------------------------------------------------------
Donald M. Halsted, Jr. Retired Business Executive; Director of
65 Madison Avenue Ellsworth.
Suite 550
Morristown, NJ 07960
Term expires 2008
Director since 1970
Age 78
--------------------------------------------------------------------------------
Duncan O. McKee Retired Attorney; Director of Ellsworth.
65 Madison Avenue
Suite 550
Morristown, NJ 07960
Term expires 2008
Director since 1996
Age 74
PAGE 22
B A N C R O F T C O N V E R T I B L E F U N D
--------------------------------------------------------------------------------
----------------------------- Directors (continued) ----------------------------
Personal Principal Occupation(s) During Past Five Years;
Information Other Directorship(s)
--------------------------------------------------------------------------------
INDEPENDENT DIRECTORS (CONTINUED)
Robert J. McMullan Chief Executive Officer and Board member of
65 Madison Avenue Control Point Solutions, Inc. (a
Suite 550 telecommunications service provider) (2005 to
Morristown, NJ 07960 present). Trustee of AmSouth Funds (2003 to
Term expires 2006 2005); Senior Vice President and Chief
Director since 2004 Financial Officer of Conexant Systems, Inc.
Age 51 (formerly, GlobeSpan Virata, Inc.) (a
semiconductor manufacturing company) (1998 to
2004); Director of Ellsworth and Control Point
Solutions, Inc.
--------------------------------------------------------------------------------
Nicolas W. Platt President of CNC-US (an international consulting
65 Madison Avenue company).
Suite 550
Morristown, NJ 07960 Prior to January 2003, Senior Partner of Platt &
Term expires 2007 Rickenbach (a public relations firm). Prior to
Director since 1997 May 2001, with WPP Group, UK and its
Age 52 public relations subsidiaries, Ogilvy Public
Relations, Burson-Marsteller and Robinson Lehr
Montgomery; Director of Ellsworth.
--------------------------------------------------------------------------------
INTERESTED DIRECTORS
Thomas H. Dinsmore, C.F.A.(1) Chairman and Chief Executive Officer of the
65 Madison Avenue Fund, Ellsworth and Davis-Dinsmore; Director of
Suite 550 Ellsworth and Davis-Dinsmore.
Morristown, NJ 07960
Term expires 2008
Director since 1985
Chairman of the Board since 1996
Age 52
--------------------------------------------------------------------------------
Jane D. O'Keeffe (1) President of the Fund, Ellsworth and
65 Madison Avenue Davis-Dinsmore; Director of Ellsworth and
Suite 550 Davis-Dinsmore.
Morristown, NJ 07960
Term expires 2007
Director since 1995
Age 50
--------------------------------------------------------------------------------
(1) Mr.Dinsmore and Ms. O'Keeffe are considered interested persons because they
are officers and directors of Davis-Dinsmore. They are brother and sister.
PAGE 23
B A N C R O F T C O N V E R T I B L E F U N D
--------------------------------------------------------------------------------
------------------------------ Principal Officers ------------------------------
The business address of each officer is 65 Madison Avenue, Suite 550,
Morristown, NJ 07960. Officers are elected by and serve at the pleasure of the
Board of Directors. Each officer holds office until the annual meeting to be
held in 2006, and thereafter until his or her respective successor is duly
elected and qualified.
--------------------------------------------------------------------------------
Personal
Information Principal Occupation(s) During Past Five Years
--------------------------------------------------------------------------------
Thomas H. Dinsmore, C.F.A.
(1,2,3) Director, Chairman and Chief Executive Officer
Director, Chairman and of the Fund, Ellsworth and Davis-Dinsmore.
Chief Executive Officer
Officer since 1984
Age 52
--------------------------------------------------------------------------------
Jane D. O'Keeffe (1,2,3) Director and President of the Fund, Ellsworth
Director and President and Davis-Dinsmore.
Officer since 1994
Age 50
--------------------------------------------------------------------------------
Gary I. Levine Executive Vice President and Chief Financial
Executive Vice President, Officer of the Fund, Ellsworth and
Chief Financial Officer and Davis-Dinsmore since 2004. Secretary of the
Secretary Fund, Ellsworth and Davis-Dinsmore since 2003.
Officer since 1986 Treasurer of Davis-Dinsmore since 1997. Vice
Age 48 President of the Fund, Ellsworth and
Davis-Dinsmore from 2002 until 2004. Treasurer
of the Fund and Ellsworth from 1993 until 2004.
--------------------------------------------------------------------------------
H. Tucker Lake, Jr. (2,4) Vice President of the Fund and Ellsworth since
Vice President 2002, and of Davis-Dinsmore since 1997. Vice
Officer since 1994 President, Trading, of the Fund and Ellsworth
Age 58 from 1994 to 2002.
--------------------------------------------------------------------------------
Germaine M. Ortiz Vice President of the Fund, Ellsworth and
Vice President Davis-Dinsmore.
Officer since 1996
Age 36
--------------------------------------------------------------------------------
Mercedes A. Pierre Vice President and Chief Compliance Officer of
Vice President and the Fund, Ellsworth and Davis-Dinsmore since
Chief Compliance Officer 2004, and Assistant Treasurer from 1998 to 2004.
Officer since 1998
Age 44
--------------------------------------------------------------------------------
Joshua P. Lake, C.T.P. (3,4) Treasurer of the Fund and Ellsworth since 2004.
Treasurer and Assistant Assistant Secretary of the Fund, Ellsworth and
Secretary Davis-Dinsmore since 2002. Assistant Treasurer
Officer since 2002 of Davis-Dinsmore, also since 2002.
Age 29
--------------------------------------------------------------------------------
(1) Mr. Dinsmore and Ms. O'Keeffe are brother and sister.
(2) Mr. H. Tucker Lake, Jr. is the cousin of Mr. Dinsmore and Ms. O'Keeffe.
(3) Mr. Joshua Lake is the cousin of Mr. Dinsmore and Ms. O'Keeffe.
(4) Mr. H. Tucker Lake, Jr. is the father of Mr. Joshua Lake.
PAGE 24
BOARD OF DIRECTORS INTERNET
GORDON F. AHALT www.bancroftfund.com
WILLIAM A. BENTON email: info@bancroftfund.com
ELIZABETH C. BOGAN Ph.D.
THOMAS H. DINSMORE, C.F.A. INVESTMENT ADVISER
DONALD M. HALSTED, JR.
DUNCAN O. MCKEE Davis-Dinsmore Management Company
ROBERT J. MCMULLAN 65 Madison Avenue, Suite 550
JANE D. O'KEEFFE Morristown, NJ 07960
NICOLAS W. PLATT (973) 631-1177
OFFICERS SHAREHOLDER SERVICES AND TRANSFER AGENT
THOMAS H. DINSMORE, C.F.A. American Stock Transfer & Trust Company
CHAIRMAN OF THE BOARD 59 Maiden Lane
AND CHIEF EXECUTIVE OFFICER New York, NY 10038
(800) 937-5449
JANE D. O'KEEFFE www.amstock.com
PRESIDENT
COMMON STOCK LISTING
GARY I. LEVINE American Stock Exchange Symbol: BCV
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND LEGAL COUNSEL
SECRETARY Ballard Spahr Andrews & Ingersoll LLP
H. TUCKER LAKE, JR. INDEPENDENT ACCOUNTANTS
VICE PRESIDENT Tait, Weller & Baker LLP
GERMAINE M. ORTIZ
VICE PRESIDENT
MERCEDES A. PIERRE
VICE PRESIDENT AND
CHIEF COMPLIANCE OFFICER
JOSHUA P. LAKE, C.T.P.
TREASURER AND ASSISTANT SECRETARY
JESSICA K. LAKE
ASSISTANT VICE PRESIDENT
JOANN VENEZIA
ASSISTANT VICE PRESIDENT AND
ASSISTANT SECRETARY
--------------------------------------------------------------------------------
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 its own 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.
BANCROFT CONVERTIBLE FUND, INC.
65 MADISON AVENUE, SUITE 550
MORRISTOWN, NEW JERSEY 07960
www.bancroftfund.com
[LOGO]
AMERICAN
STOCK EXCHANGE
--------------
LISTED
--------------
BCV
ITEM 2. CODE OF ETHICS.
Effective May 15, 2003, the Board of Directors of the Fund has adopted a
code of ethics that applies to the Fund's principal executive officer and
principal financial officer. See attached Exhibit EX-99.CODE ETH.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Effective November 15, 2004, the Board of Directors determined that Director
Robert J. McMullan, who is "independent" as such term is used in Form N-CSR,
possesses the attributes required to be considered an audit committee financial
expert under applicable federal securities laws.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Set forth in the table below are the aggregate fees billed to the Company
by Tait, Weller & Baker LLP ("Tait Weller") for services rendered to the Company
during the Company's last fiscal year ended September 30, 2005, and
PricewaterhouseCoopers LLP ("PwC") for the fiscal year ended September 30, 2004.
Fiscal YE Audit Audit-Related All Other
September 30 Fees Fees (1) Tax Fees (4) Fees
------------- ------- ------------- ------------ ---------
2004 $34,400 $ 9,785 (2) $2,500 $0
2005 $30,000 $10,000 (3) $2,500 $0
(1) All Audit-Related Fees were pre-approved by the Company's Audit Committee
and no Audit-Related Fees were approved by the Company's Audit Committee
pursuant to section 2.01(c)(7)(i)(C) of Regulation S-X, which waives the
pre-approval requirement for certain de minimus fees.
(2) Includes fees billed to the Company by PWC in connection with its review
of the Company's Registration Statement on Form N-2 relating to the
Company's Rights Offering in fiscal year 2004.
(3) Includes fees billed to the Company by Tait Weller in connection with the
Company's change of accounting practice related to amortization of
convertible bond premiums and discounts.
(4) "Tax Fees" include those fees billed by Tait Weller and PWC in connection
with their review of the Company's income tax returns for fiscal years 2005
and 2004, respectively. All Tax Fees were pre-approved by the Company's
Audit Committee and no Tax Fees were approved by the Company's Audit
Committee pursuant to section 2.01(c)(7)(i)(C) of Regulation S-X, which
waives the pre-approval requirement for certain de minimus fees.
Non-Audit Services
During each of the last two fiscal years ended September 30, 2004 and
September 30, 2005, PwC and Tait Weller did not provide any non-audit services
to the Company or Davis-Dinsmore or its affiliates or otherwise bill the
Company or Davis-Dinsmore or its affiliates for any such non-audit services.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee pre-approves all audit and permissible non-audit
services that are proposed to be provided to the Company by its independent
auditors before they are provided to the Company. Such pre-approval also
includes the proposed fees to be charged by the independent auditors for such
services. The Audit Committee may delegate the pre-approval of audit and
permissible non-audit services and related fees to one or more members of the
Audit Committee who are "independent," as such term is used in Form N-CSR.
Any such member's decision to pre-approve audit and/or non-audit services and
related fees shall be presented to the full Audit Committee, solely for
informational purposes, at their next scheduled meeting.
The Audit Committee also pre-approves non-audit services to be provided by
the Company's independent auditors to the Company's investment adviser if the
engagement relates directly to the operations and financial reporting of the
Company and if the Company's independent auditors are the same as, or affiliated
with, the investment adviser's auditors.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Fund has a designated Audit Committee in accordance with
Section 3(a)(58)(A) of the Exchange Act:
WILLIAM A. BENTON
ELIZABETH C. BOGAN, PH.D.
DONALD M. HALSTED, JR.
ROBERT J. MCMULLAN
(b) Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
The Schedule of Investments in securities of unaffiliated issuers is included as
part of the report to shareholders, filed under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Bancroft Convertible Fund, Inc.
Ellsworth Convertible Growth and Income Fund, Inc.
Davis-Dinsmore Management Company
Proxy Voting Guidelines
(Adopted April 14, 2003)
These proxy voting guidelines have been adopted by the Boards of Directors of
Bancroft Convertible Fund, Inc. and Ellsworth Convertible Growth and Income
Fund, Inc. (collectively, the "Funds"), as well as by the Board of Directors of
Davis-Dinsmore Management Company ("Davis-Dinsmore").
The Boards of Directors of the Funds have delegated to Davis-Dinsmore
responsibility for voting proxies received by the Funds in their capacities as
shareholders of various companies. The Boards recognize that, due to the nature
of the Funds' investments, the Funds do not frequently receive proxies.
Davis-Dinsmore exercises its voting responsibility with the overall goal of
maximizing the value of the Funds' investments. The portfolio managers at
Davis-Dinsmore oversee the voting policies and decisions for the Funds.
In evaluating voting issues, the portfolio managers may consider information
from many sources, including management of a company presenting a proposal,
shareholder groups, research analysts, and independent proxy research services.
Set forth below are the proxy voting guidelines:
A. Matters Related to the Board of Directors
1. The Funds generally will support the election of nominees recommended
by management for election as directors. In determining whether to support a
particular nominee, Davis-Dinsmore will consider whether the election of that
nominee will cause a company to have less than a majority of independent
directors.
2. The Funds generally will support proposals to de-classify boards of
directors if fewer than 66 2/3% of the directors are independent, and will
generally vote against proposals to classify boards of directors.
3. The Funds generally will withhold a vote in favor of a director who
has served on a committee which has approved excessive compensation arrangements
or proposed equity-based compensation plans that unduly dilute the ownership
interests of stockholders.
B. Matters Related to Independent Auditors
1. The Funds generally will vote in favor of independent accountants
approved by the company. Prior to such vote, however, Davis-Dinsmore will take
into consideration whether non-audit fees make up more than 50 to 75% of the
total fees paid by the company to the independent auditors, and the nature of
the non-audit services provided.
C. Corporate Governance Matters
1. As a general rule, the Funds will vote against proposals recommended
by management of a company that are being made primarily to implement anti-
takeover measures, and will vote in favor of proposals to eliminate policies
that are primarily intended to act as anti-takeover measures.
2. Subject to the other provisions of these guidelines, including without
limitation provision C.1. above, the Funds generally will vote in accordance
with management's recommendations regarding routine matters, including the
following:
a. Fixing number of directors;
b. Stock splits; and
c. Change of state of incorporation for specific corporate purposes.
D. Matters Related to Equity-Based Compensation Plans
1. The Fund generally will vote in favor of broad-based stock option
plans for executives, employees or directors which would not increase the
aggregate number of shares of stock available for grant under all currently
active plans to over 10% of the total number of shares outstanding.
2. The Funds generally will vote in favor of employee stock purchase
plans and employee stock ownership plans permitting purchase of company stock at
85% or more of fair market value.
E. Contested Matters
1. Contested situations will be evaluated on a case by case basis by the
portfolio manager at Davis-Dinsmore principally responsible for the particular
portfolio security.
F. Miscellaneous Matters
1. The Funds may in their discretion abstain from voting shares that have
been recently sold.
2. The Funds generally will abstain from voting on issues relating to
social and/or political responsibility.
3. Proposals that are not covered by the above-stated guidelines will be
evaluated on a case by case basis by the portfolio manager at Davis-Dinsmore
principally responsible for the particular portfolio security.
G. Material Conflicts of Interest
1. Conflicts of interest may arise from time to time between Davis-
Dinsmore and the Funds. Examples of conflicts of interests include:
a. Davis-Dinsmore may manage a pension plan, administer employee
benefit plans, or provide services to a company whose management is
soliciting proxies;
b. Davis-Dinsmore or its officers or directors may have a business
or personal relationship with corporate directors, candidates for
directorships, or participants in proxy contests;
c. Davis-Dinsmore may hold a position in a security contrary to
shareholder interests.
2. If a conflict of interest arises with respect to a proxy voting
matter, the portfolio manager will promptly notify the Funds' Audit Committee
and counsel for independent directors and the proxies will be voted in
accordance with direction received from the Audit Committee.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not currently applicable to registrant.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
During the period covered by this report, there were no purchases made by or
on behalf of the registrant or any "affiliated purchaser," as defined in Rule
10b-18(a)(3) under the Exchange Act (17 CFR 240.10b-18(a)(3)), of shares or
other units of any class of the registrant's equity securities that is
registered by the registrant pursuant to Section 12 of the Exchange Act
(15 U.S.C. 781).
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which shareholders may
recommend nominees to the Registrant's board of directors since those procedures
were last disclosed in response to the requirements of Item 7(d)(2)(ii)(G) of
Schedule 14A (17 CFR 240.14a-101), or this Item 10 of Form N-CSR.
ITEM 11. CONTROLS AND PROCEDURES.
Conclusions of principal officers concerning controls and procedures
(a) As of November 11, 2005, an evaluation was performed under the supervision
and with the participation of the officers of Bancroft Convertible Fund, Inc.
(the "Registrant"), including the Principal Executive Officer ("PEO") and
Principal Financial Officer ("PFO"), to assess the effectiveness of the
Registrant's disclosure controls and procedures, as that term is defined in
Rule 30a-3(c) under the Investment Company Act of 1940 (the "Act"), as amended.
Based on that evaluation, the Registrant's officers, including the PEO and PFO,
concluded that, as of November 11, 2005, the Registrant's disclosure controls
and procedures were reasonably designed so as to ensure: (1) that information
required to be disclosed by the Registrant on Form N-CSR is recorded, processed,
summarized and reported within the time periods specified by the rules and forms
of the Securities and Exchange Commission; and (2) that material information
relating to the Registrant is made known to the PEO and PFO as appropriate to
allow timely decisions regarding required disclosure.
(b) There have been no changes in the Registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the Registrant's second fiscal
quarter of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal control over
financial reporting.
ITEM 12. EXHIBITS
(a)(1) A code of ethics, effective May 15, 2003, that applies to the Fund's
principal executive officer and principal financial officer is attached
hereto.
(a)(2) Certifications of the principal executive officer and the principal
financial officer pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 are attached hereto.
(a)(3) There were no written solicitations to purchase securities under Rule
23c-1 under the Investment Company Act of 1940 during the period covered by the
report.
(b) Certifications of the principal executive officer and the principal
financial officer, as required by Rule 30a-2(b) under the Investment Company Act
of 1940 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities and 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.
Bancroft Convertible Fund, Inc.
By: /s/Thomas H. Dinsmore
Thomas H. Dinsmore
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: December 27, 2005
Pursuant to the requirements of the Securities and 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/Thomas H. Dinsmore
Thomas H. Dinsmore
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: December 27, 2005
By: /s/Gary I. Levine
Gary I. Levine
Chief Financial Officer
(Principal Financial Officer)
Date: December 27, 2005