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 811-06445
The Herzfeld Caribbean Basin Fund, Inc.
---------------------------------------
(Exact name of registrant as specified in charter)
P.O. BOX 161465, MIAMI, FLORIDA 33116
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(Address of principal executive offices) (Zip code)
THOMAS J. HERZFELD
P.O. BOX 161465, MIAMI, FL 33116
--------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code:
305-271-1900
Date of fiscal year end: 06/30/06
Date of reporting period: 07/01/05 - 6/30/06
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. SHAREHOLDER REPORT
[GRAPHIC OMITTED]
THE HERZFELD
CARIBBEAN BASIN
FUND, INC.
ANNUAL REPORT
JUNE 30, 2006
================================================================================
The Herzfeld Caribbean Basin Fund, Inc.
The Herzfeld Building
PO Box 161465
Miami, FL 33116
(305) 271-1900
Investment Advisor
HERZFELD/CUBA
a division of Thomas J. Herzfeld Advisors, Inc.
PO Box 161465
Miami, FL 33116
(305) 271-1900
Transfer Agent & Registrar
Investors Bank & Trust Company
200 Clarendon Street, 16th Floor
Boston, MA 02116
(617) 443-6870
Custodian
Investors Bank & Trust Company
200 Clarendon Street, 5th Floor
Boston, MA 02116
Counsel
Pepper Hamilton LLP
3000 Two Logan Square
18th and Arch Streets
Philadelphia, PA 19103
Independent Auditors
Rothstein Kass & Company, LLP
500 Ygnacio Valley Road, Suite 200
Walnut Creek, CA 94596
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The Herzfeld Caribbean Basin Fund's investment objective is long-term capital
appreciation. To achieve its objective, the Fund invests in issuers that are
likely, in the Advisor's view, to benefit from economic, political, structural
and technological developments in the countries in the Caribbean Basin, which
consist of Cuba, Jamaica, Trinidad and Tobago, the Bahamas, the Dominican
Republic, Barbados, Aruba, Haiti, the Netherlands Antilles, the Commonwealth of
Puerto Rico, Mexico, Honduras, Guatemala, Belize, Costa Rica, Panama, Colombia
and Venezuela. The fund invests at least 80% of its total assets in a broad
range of securities of issuers including U.S.-based companies, which engage in
substantial trade with and derive substantial revenue from operations in the
Caribbean Basin Countries.
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Listed NASDAQ Capital Market
Symbol: CUBA
-2-
Letter to Stockholders
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[PHOTO]
Thomas J. Herzfeld
Chairman and President
July 24, 2006
Dear Fellow Stockholders:
We are pleased to present our annual report for the period ended June 30, 2006.
On that date The Herzfeld Caribbean Basin Fund's net assets were $13,553,493 and
its net asset value per share was $8.08, compared with $12,291,956, or $7.33 per
share, at the beginning of the period. This represents a gain of 12.6% in net
asset value and an increase of 22.9% in share price (adjusted for $0.1748 per
share distribution) from $6.30 to $7.57 per share.
2006, our 12th year of operations, proved to be yet another successful year.
During the period both the net asset value and share price made record highs.
For the benefit of putting things in long-term perspective, the Fund was
launched in 1994 and underwritten by Thomas J. Herzfeld & Co., Inc, an affiliate
of the Fund's advisor. The initial net asset value was $5.00 per share and the
IPO price was $5.20, with net assets of $8,364,180. Since then, the Fund has
paid out $1.686 per share, the equivalent of $2.83 million and our net assets
and share price on June 30, 2006 were $13.55 million and $7.57 per share. These
figures represent a 95% gain in net asset value and 78% increase in share price
from inception. Bear in mind, this was accomplished without the benefit of the
U.S. embargo against Cuba being lifted, which we believe will be the key to
significant growth in the region in which we invest.
At year-end we were 97% invested primarily in companies which we believe will do
well, even if there is no political change in Cuba, but we also seek to invest
in companies which we believe will benefit from resumption of U.S. trade with
that country.
Our largest positions continue to be approximately the same as last year, with
the exception of the Latin American Equity Fund (LAQ), in which we took a rather
substantial profit. Part of our investment strategy is to seek short-term gains
from trading opportunities. These profits help offset some of the expenses of
the fund. For instance, during the fiscal year, our short-term trading generated
approximately $205,000, which offset about 45% of the total expenses of the Fund
for the year.
-3-
Letter to Stockholders (continued)
================================================================================
As you are probably aware, due to the added requirements of the Sarbanes-Oxley
Act, the expenses of public companies have increased. In my view these new
regulations are unnecessary for the already highly regulated closed-end fund
industry.
Largest Allocations
The following tables present our largest investments and geographic allocations
as of June 30, 2006.
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Geographic
Allocation % of Net Assets Largest Portfolio Positions % of Net Assets
USA 57.03% Florida East Coast Industries, Inc. 18.73%
Mexico 13.44% Consolidated Water Co. 8.57%
Cayman Islands 9.63% Watsco Incorporated 6.62%
Panama 3.03% Seaboard Corporation 6.61%
Netherlands Antilles 3.00% Florida Rock Industries, Inc. 6.08%
Puerto Rico 2.57% Royal Caribbean Cruises Ltd. 4.80%
Latin American Regional 2.02% Carnival Corp. 4.31%
Colombia 1.51% Garmin Ltd. 4.28%
Virgin Islands 1.42% Orthofix International N.V. 3.00%
Belize 1.13% Banco Latinoamericano de
Costa Rica 0.27% Exportaciones 2.53%
Venezuela 0.05%
Cuba 0.00%
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Premium/Discount
The Fund has traded at both premiums and discounts every year except the year of
inception in which it traded only at a premium. As I have stated before, we
believe that closed-end funds trading at discounts to net asset value represent
good value.
-4-
Letter to Stockholders (continued)
================================================================================
Further Information
Daily net asset values, quarterly, semi-annual and annual reports and press
releases on the Fund are available on the Internet at www.herzfeld.com.
I would like to thank the members of the Board of Directors for their hard work
and guidance and also to thank my fellow stockholders for their continued
support and suggestions.
Sincerely,
/s/ Thomas J. Herzfeld
Thomas J. Herzfeld
Chairman of the Board and President
-5-
Schedule of Investments as of June 30, 2006
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Shares or Principal Amount Description Market Value
--------------------------------------------------------------------------------
Common stocks - 97.23% of net assets
Banking and finance - 4.81%
8,500 Bancolombia, S.A. $ 204,850
21,920 Banco Latinoamericano de Exportaciones, S.A. 342,610
8,000 Doral Financial Corp. 51,280
16,400 Grupo Financiero Banorte, S.A. de C.V. Series O 38,182
9,900 Grupo Financiero Inbursa, S.A. de C.V. Series O 14,898
Communications - 11.61%
35,600 America Movil, S.A. de C.V. Series A 62,713
2,000 America Movil, S.A. de C.V. Series L 66,520
12,500 America Telecom, S.A. de C.V. Series A1* 73,806
9,250 Atlantic Tele-Network, Inc. 192,678
11,900 Carso Global Telecom, S.A. de C.V. Series A1* 24,755
5,500 Garmin Ltd. 579,920
725 Grupo Iusacell, S.A. de C.V. Series V* 3,209
16,800 Grupo Radio Centro, S.A. ADR 104,832
14,300 Grupo Televisa, S.A. GDR 276,133
13,400 Grupo Televisa, S.A. Series CPO 52,193
1,000 Telefonos de Mexico ADR Series L 20,830
23,800 Telefonos de Mexico, S.A. de C.V. Series A 24,439
78,600 Telefonos de Mexico, S.A. de C.V. Series L 82,660
13,900 TV Azteca, S.A. de C.V. Series CPO 9,413
Conglomerates - 2.12%
5,400 Alfa, S.A. de C.V. Series A 27,243
42,595 BB Holdings Ltd. 153,570
13,000 Carlisle Group Ltd. 20,911
3,200 Corporacion Interamericana de Entretenimiento,
S.A. de C.V. Series B* 5,071
1,580 Desc, S.A. de C.V. Series B* 1,280
11,000 Grupo Carso, S.A. de C.V. Series A1 25,512
600 Grupo Imsa, S.A. de C.V., Series UBC 2,071
2,525 OneSource Services, Inc. 33,146
3,300 U.S. Commercial Corp., S.A. de C.V.* 701
2,900 Vitro, S.A. Series A 2,467
6,000 Vitro Sociedad Anonima ADR 15,325
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*Non-income producing
See accompanying notes.
-6-
Schedule of Investments as of June 30, 2006 (continued)
================================================================================
Shares or Principal Amount Description Market Value
--------------------------------------------------------------------------------
Construction and related - 10.20%
23,359 Cemex, S.A. de C.V. Series CPO $ 133,684
2,000 Cemex, S.A. de C.V. ADR 113,940
2,032 Ceramica Carabobo Class A ADR* 3,157
4,300 Consorcio ARA, S.A. de C.V.* 17,776
3,583 Empresas ICA, Sociedad Controladora, S.A. de C.V.* 10,150
16,600 Florida Rock Industries, Inc. 824,522
800 Grupo Cementos de Chichuahua, S.A. de C.V. 2,755
20,950 Mastec, Inc.* 276,750
Consumer products and related manufacturing - 7.76%
800,000 Atlas Electricas, S.A. 36,067
5,900 Grupo Casa Saba, S.A. ADR 117,882
15,000 Watsco Incorporated 897,300
Food, beverages and tobacco - 1.85%
300 Alsea, S.A. de C.V. 1,062
4,800 Coca Cola Femsa, S.A. de C.V. ADR 141,696
200 Coca Cola Femsa, S.A. de C.V. Series L 595
6,300 Fomento Econ--mico Mexicano, S.A. de C.V. Series UBD 52,981
800 Gruma, S.A. de C.V. Series B 2,195
7,600 Grupo Bimbo, S.A. de C.V. Series A 22,868
7,700 Grupo Modelo, S.A. de C.V. Series C 29,549
Housing - 0.07%
1,700 Corporaci--n Geo S.A. de C.V. Series B 5,655
100 Desarrolladora Homex, S.A. de C.V. 550
400 Sare Holding, S.A. de C.V. Series B 363
1,500 Urbi Desarrollos Urbanos, S.A. de C.V. 3,492
Investment companies - 4.66%
2,000 iShares S&P Latin America 40 Index 273,440
4,000 The Mexico Fund, Inc. 122,800
19,000 Salomon Brothers Worldwide Income Fund 235,790
Leisure - 9.11%
14,000 Carnival Corp. 584,360
17,000 Royal Caribbean Cruises Ltd. 650,250
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*Non-income producing
See accompanying notes.
-7-
Schedule of Investments as of June 30, 2006 (continued)
================================================================================
Shares or Principal Amount Description Market Value
--------------------------------------------------------------------------------
Medical - 3.26%
8,386 Micromet Inc.* $ 35,892
10,660 Orthofix International N.V.* 406,466
Mining - 0.03%
1,200 Grupo Mexico, S.A. de C.V. Series B* 3,442
Pulp and paper - 0.14%
6,100 Kimberly-Clark de Mexico, S.A. de C.V. Series A 19,396
Railroad and landholdings - 18.73%
48,500 Florida East Coast Industries, Inc. 2,538,005
Retail - 1.07%
3,700 Controladora Comercial Mexicana, S.A. de C.V.
Series UBC 6,295
1,380 Grupo Elektra, S.A. de C.V. Series CPO 13,070
44,612 Wal-Mart de Mexico, S.A. de C.V. Series V 125,189
Service - 0.02%
700 Grupo Aeroportuario del Sureste, S.A. de C.V. Series B 2,373
100 Promotora Ambiental, S.A. de C.V. 96
Trucking and marine freight - 9.29%
14,800 Grupo TMM, S.A. ADR* 60,236
700 Seaboard Corporation 896,000
41,799 Trailer Bridge, Inc.* 303,043
Utilities - 9.68%
12,000 Caribbean Utilities Ltd. Class A 143,160
47,241 Consolidated Water, Inc. 1,161,656
700 Cuban Electric Company 7,700
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*Non-income producing
See accompanying notes.
-8-
Schedule of Investments as of June 30, 2006 (continued)
================================================================================
Shares or Principal Amount Description Market Value
--------------------------------------------------------------------------------
Other - 2.82%
3,000 Copa Holdings S.A. $ 67,950
55,921 Margo Caribe, Inc. 297,500
100 Mexichem S.A. de C.V. 119
843 Siderurgica Venezolana Sivensa ADR 3,016
75 Siderurgica Venezolana Sivensa Series B 268
45,000 Xcelera, Inc.* 12,600
-----------
Total common stocks (cost $8,425,070) $13,178,319
Bonds - 0% of net assets
$165,000 Republic of Cuba - 4.5%, 1977 - in default
(cost $63,038) (Note 2)* --
Other assets less liabilities - 2.77% of net assets $ 375,174
-----------
Net Assets - 100% $13,553,493
===========
The above investments are concentrated in the following geographic regions (as
percentages of net assets):
United States of America 57.03%
Mexico 13.44%
Cayman Islands 9.63%
Other, individually under 5% 19.90%
======
100.00%
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*Non-income producing
See accompanying notes.
-9-
Statement of Assets and Liabilities as of June 30, 2006
================================================================================
ASSETS
Investments in securities, at market value
(cost $8,488,108) (Notes 2 and 5) $13,178,319
Cash 313,755
Receivable for securities sold 98,977
Dividends receivable 15,215
Other assets 33,250
-----------
TOTAL ASSETS 13,639,516
LIABILITIES
Accrued investment advisor fee (Note 3) 51,935
Other payables 34,088
-----------
TOTAL LIABILITIES 86,023
-----------
NET ASSETS (Equivalent to $8.08 per share
based on 1,677,636 shares outstanding) $13,553,493
===========
Net assets consist of the following:
Common stock, $.001 par value; 100,000,000
shares authorized; 1,677,636 shares issued
and outstanding $ 1,678
Additional paid-in capital 7,255,413
Accumulated net realized gain on investments (Note 5) 1,606,191
Net unrealized gain on investments (Notes 4 and 5) 4,690,211
-----------
TOTAL $13,553,493
===========
See accompanying notes.
-10-
Statement of Operations
Year Ended June 30, 2006
================================================================================
INVESTMENT INCOME
Dividends $ 193,657
Interest 183
-----------
Total investment income 193,840
EXPENSES
Investment advisor fees (Note 3) $ 196,852
Professional fees 95,440
Custodian fees 54,000
Insurance 27,624
Transfer agent fees 17,500
Printing, postage and proxy services 15,638
Listing fees 15,000
Salaries 12,918
Director fees 7,000
Other 16,715
-----------
Total investment expenses 458,687
-----------
INVESTMENT LOSS - NET (264,847)
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain on investments and foreign currency 2,021,250
Net increase (decrease) in unrealized appreciation
(depreciation) on investments and foreign currency (201,615)
-----------
NET GAIN ON INVESTMENTS 1,819,635
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 1,554,788
===========
See accompanying notes.
-11-
Statements of Changes in Net Assets
Years Ended June 30, 2006 and 2005
================================================================================
2006 2005
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS:
Net investment loss $ (264,847) $ (155,794)
Net realized gain on investments and
foreign currency 2,021,250 700,005
Net increase (decrease) in unrealized
appreciation (depreciation) on
investments and foreign currency (201,615) 2,638,583
------------ ------------
NET INCREASE IN NET ASSETS
resulting from operations 1,554,788 3,182,794
DISTRIBUTIONS TO SHAREHOLDERS:
Long-term realized gains (293,251) --
------------ ------------
TOTAL INCREASE IN NET ASSETS 1,261,537 3,182,794
NET ASSETS:
Beginning of year 12,291,956 9,109,162
------------ ------------
End of year $ 13,553,493 $ 12,291,956
============ ============
See accompanying notes.
-12-
Financial Highlights
Years Ended June 30, 2002 through 2006
================================================================================
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(For a share of capital stock outstanding
for the year)
Net asset value, beginning of year $ 7.33 $ 5.43 $ 3.95 $ 3.92 $ 5.15
---------- ---------- ---------- ---------- ----------
Operations:
Net investment loss(1) (0.16) (0.09) (0.07) (0.11) (0.10)
Net realized and unrealized gain (loss)
on investment transactions(1) 1.08 1.99 1.55 0.22 (0.98)
---------- ---------- ---------- ---------- ----------
Total from operations 0.92 1.90 1.48 0.11 (1.08)
---------- ---------- ---------- ---------- ----------
Distributions:
From net investment income -- -- -- -- (0.10)
From net realized gains (0.17) -- -- (0.08) (0.05)
---------- ---------- ----------
Total distributions (0.17) -- -- (0.08) (0.15)
---------- ---------- ----------
Net asset value, end of year $ 8.08 $ 7.33 $ 5.43 $ 3.95 $ 3.92
---------- ---------- ---------- ---------- ----------
Per share market value, end of year $ 7.57 $ 6.30 $ 4.87 $ 3.49 $ 3.48
---------- ---------- ---------- ---------- ----------
Total investment return (loss) based on
market value per share 22.86% 29.36% 39.54% 2.70% (13.45%)
---------- ---------- ---------- ---------- ----------
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (in 000's) $ 13,553 $ 12,292 $ 9,109 $ 6,626 $ 6,568
---------- ---------- ---------- ---------- ----------
Ratio of expenses to average net assets 3.37% 3.55% 3.67% 4.46% 3.77%
---------- ---------- ---------- ---------- ----------
Ratio of net investment loss
to average net assets (1.95%) (1.47%) (1.39%) (3.15%) (2.45%)
---------- ---------- ---------- ---------- ----------
Portfolio turnover rate 40% 30% 23% 3% 18%
---------- ---------- ---------- ---------- ----------
(1) Computed by dividing the respective year's amounts from the Statement of
Operations by the average outstanding shares for each year presented.
See accompanying notes.
-13-
Notes to Financial Statements
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Related Matters
The Herzfeld Caribbean Basin Fund, Inc. (the "Fund") is a non-diversified,
closed-end management investment company incorporated under the laws of the
State of Maryland on March 10, 1992, and registered under the Investment Company
Act of 1940. The Fund commenced investing activities in January 1994. The Fund
is listed on the NASDAQ capital market and trades under the symbol "CUBA".
The Fund's investment policy is to invest at least 80% of its assets in
investments that are economically tied to Caribbean Basin Countries. The Fund's
investment objective is to obtain long-term capital appreciation. The Fund
pursues its objective by investing primarily in equity and equity-linked
securities of public and private companies, including U.S.-based companies, (i)
whose securities are traded principally on a stock exchange in a Caribbean Basin
Country or (ii) that have at least 50% of the value of their assets in a
Caribbean Basin Country or (iii) that derive at least 50% of their total revenue
from operations in a Caribbean Basin Country. The Fund's investment objective is
fundamental and may not be changed without the approval of a majority of the
Fund's outstanding voting securities.
At June 30, 2006, the Fund had foreign investments in companies operating
principally in Mexico and the Cayman Islands representing approximately 13% and
10% of the Fund's net assets, respectively.
The Fund's custodian and transfer agent is Investors Bank & Trust Company
("IBTC"), based in Boston, Massachusetts.
Security Valuation
Investments in securities traded on a national securities exchange (or reported
on the NASDAQ national market or capital market) are stated at the last reported
sales price on the day of valuation (or at the NASDAQ official closing price);
other securities traded in the over-the-counter market and listed securities for
which no sale was reported on that date are stated at the last quoted bid price.
Restricted securities and other securities for which quotations are not readily
available are valued at fair value as determined by the Board of Directors.
-14-
Notes to Financial Statements
================================================================================
Income Recognition
Security transactions are recorded on the trade date. Gains and losses on
securities sold are determined on the basis of identified cost. Dividend income
is recognized on the ex-dividend date, or in the case of certain foreign
securities, as soon as the Fund is notified, and interest income is recognized
on an accrual basis. Pursuant to a custodian agreement, IBTC receives a fee
reduced by credits which are determined based on the average daily cash balance
the Fund maintains with IBTC. Credit balances used to reduce the Fund's
custodian fees for the year ended June 30, 2006, were approximately $4,700.
Discounts and premiums on debt securities purchased are amortized over the life
of the respective securities. It is the Fund's practice to include the portion
of realized and unrealized gains and losses on investments denominated in
foreign currencies as components of realized and unrealized gains and losses on
investments and foreign currency.
Deposits with Financial Institutions
The Fund may, during the course of its operations, maintain account balances
with financial institutions in excess of federally insured limits.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Income Taxes
The Fund's policy is to continue to comply with the provisions of the Internal
Revenue Code that are applicable to regulated investment companies and to
distribute all its taxable income to its stockholders. Under these provisions,
the Fund is not subject to federal income tax on its taxable income and no
federal tax provision is required.
The Fund has adopted a June 30 year-end for federal income tax purposes.
-15-
Notes to Financial Statements
================================================================================
Distributions to Stockholders
Distributions to stockholders are recorded on the ex-dividend date. Income and
capital gain distributions are determined in accordance with income tax
regulations which may differ from accounting principles generally accepted in
the United States of America.
NOTE 2. NON-MARKETABLE SECURITY OWNED
Investments in securities, at market value include $165,000 principal, 4.5%,
1977 Republic of Cuba bonds purchased for $63,038. The bonds are listed on the
New York Stock Exchange and had been trading in default since 1960. A
"regulatory halt" on trading was imposed by the New York Stock Exchange in July
1995. As of June 30, 2006, the position was valued at $0 by the Board of
Directors, which approximates the bonds' fair value.
NOTE 3. TRANSACTIONS WITH AFFILIATES
HERZFELD / CUBA (the "Advisor"), a division of Thomas J. Herzfeld Advisors,
Inc., is the Fund's investment advisor and charges a monthly fee at the annual
rate of 1.45% of the Fund's average daily net assets. Total fees for the year
ended June 30, 2006 amounted to $196,852 of which $51,935 is payable at year
end.
During the year ended June 30, 2006, the Fund paid approximately $15,800 of
brokerage commissions to Thomas J. Herzfeld & Co., Inc., an affiliate of the
Advisor, at an average cost per share of $0.06.
A director of the Fund serves on the Board of Directors of Margo Caribe, Inc., a
company in which the Fund has an investment.
NOTE 4. INVESTMENT TRANSACTIONS
During the year ended June 30, 2006, purchases and sales of investment
securities were $5,381,331 and $4,542,209, respectively.
At June 30, 2006, the Fund's investment portfolio had gross unrealized gains of
$5,258,688 and gross unrealized losses of $568,477, resulting in a net
unrealized gain of $4,690,211.
-16-
Notes to Financial Statements
================================================================================
NOTE 5. INCOME TAX INFORMATION
On November 10, 2005, a long-term capital gain distribution of $293,251 ($0.1748
per share) was declared. The distribution was paid on January 13, 2006 to
shareholders of record on December 30, 2005.
For financial statement purposes, the Fund's net investment loss for the year
ended June 30, 2006 differs from the net investment loss for tax purposes due to
the tax characterization of certain dividends received by the Fund. Realized
gains differ for financial statement and tax purposes primarily due to differing
treatments of wash sales and the tax characterization of certain dividends
received by the Fund.
The cost basis of securities owned for financial statement purposes is lower
than the cost basis for income tax purposes by $10,908 due to wash sale
adjustments.
As of June 30, 2006, undistributed realized gains were $1,617,099, gross
unrealized gains were $5,247,780, and gross unrealized losses were $568,477 for
income tax purposes.
Permanent differences accounted for during the year ended June 30, 2006 result
from differences between book and tax accounting. Such amounts have been
reclassified as follows:
Accumulated Net
Accumulated Net Realized Gain on Additional Paid
Investment Loss Investments in Capital
--------------------------------------------------------------------------------
Year ended June 30, 2006 $ 264,847 $ (216,144) $ (48,703)
Prior period 1,400,781 (342,395) (1,058,386)
--------------------------------------------------------------------------------
-17-
Directors and Officers of the Fund
================================================================================
Number of
Portfolios
Name Position(s) In Complex
Address Held Term of Office and Principal Occupation(s) Overseen Public
Age with Fund Length of Time Served During Past 5 Years By Director Directorships
------------------------------------------------------------------------------------------------------------------------------------
Officers
--------
Thomas J. Herzfeld President, three years; Chairman and President of 2 The Cuba Fund, Inc.
PO Box 161465 Chairman, 1993 to present Thomas J. Herzfeld & Co., (in registration)
Miami, FL 33116 Director Inc., a broker dealer, and
Age: 61 Thomas J. Herzfeld Advisors,
Inc.
Cecilia L. Gondor Secretary, 1993 to present Executive Vice President of N/A
PO Box 161465 Treasurer Thomas J. Herzfeld & Co., Inc.,
Miami, FL 33116 a broker dealer, and Thomas J.
Age: 44 Herzfeld Advisors, Inc.
Independent Directors
---------------------
Ann S. Lieff Director three years; President of the Lieff Company, a 1 Hastings
c/o The Herzfeld Caribbean 1998 to present management consulting firm that Entertainment, Inc.;
Basin Fund, Inc. offers ongoing advisory services Claire's Stores, Inc.;
PO Box 161465 as a corporate director to Birks & Mayors, Inc.
Miami, FL 33116 several leading regional and
Age: 54 national retail operations,
1998-present; former CEO Spec's
Music 1980-1998, a retailer of
recorded music.
Michael A. Rubin Director three years; Partner of Michael A. Rubin P.A., 1 Margo Caribe, Inc.
c/o The Herzfeld Caribbean 2002 to present attorney at law; Broker, Oaks
Basin Fund, Inc. Management & Real Estate Corp.,
PO Box 161465 a real estate corporation
Miami, FL 33116
Age: 64
Albert L. Weintraub Director three years; Senior Partner of Weintraub, 1 None
c/o The Herzfeld Caribbean 1999 to present Weintraub; of counsel Orshan
Basin Fund, Inc. et al, attornies; Chairman of
PO Box 161465 E-Lysium Transaction Systems,
Miami, FL 33116 Inc., an application service
Age: 76 provider of transaction
processing, billing and payment
systems
-18- and -19-
Certified Rothstein, Kass & Company LLP Beverly Hills
Public 500 Ygnacio Valley Road, Suite 200 Dallas
Accountants Walnut Creek, CA 94596 Denver
tel 925.946.1300 Grand Cayman
fax 925.947.1700 New York
www.rkco.com Roseland
San Francisco
Walnut Creek
Rothstein Kass
Report of Independent Registered Public Accounting Firm
================================================================================
To the Board of Directors and Stockholders of
The Herzfeld Caribbean Basin Fund, Inc.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of The Herzfeld Caribbean Basin Fund, Inc. (the
"Fund") as of June 30, 2006, and the related statements of operations and
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 statements
of changes in net assets and the financial highlights for the year ended June
30, 2005 and the financial highlights for each of the years in the four-year
period ended June 30, 2005 were audited by an independent registered public
accounting firm whose report dated July 14, 2005 expressed an unqualified
opinion on those statements and the financial highlights.
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 whether the financial
statements and financial highlights are free of material misstatement. An audit
includes 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 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 June 30, 2006, by correspondence with the
custodian. 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 2006 financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
Herzfeld Caribbean Basin Fund, Inc. as of June 30, 2006, and the results of its
operations, changes in net assets and financial highlights for the year then
ended, in conformity with accounting principles generally accepted in the United
State of America.
/s/ ROTHSTEIN, KASS & COMPANY, LLP
----------------------------------
Walnut Creek, California
July 14, 2006
Affiliated Offices Worldwide AGN
International
[LOGO]
-20-
Privacy Policy
================================================================================
Information We Collect
We collect nonpublic information about you from applications or other account
forms you complete, from your transactions with us, our affiliates or others
through transactions and conversations over the telephone.
Information We Disclose
We do not disclose information about you, or our former customers, to our
affiliates or to service providers or other third parties except on the limited
basis permitted by law. For example, we may disclose nonpublic information about
you to third parties to assist us in servicing your account with us and to send
transaction confirmations, annual reports, prospectuses and tax forms to you. We
may also disclose nonpublic information about you to government entities in
response to subpoenas.
Our Security Procedures
To ensure the highest level of confidentiality and security, we maintain
physical, electronic and procedural safeguards that comply with federal
standards to guard your personal information. We also restrict access to your
personal and account information to those employees who need to know that
information to provide services to you.
-21-
Quarterly Portfolio Reports
================================================================================
The Fund files quarterly schedules of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Form N-Q is
available by link on the Fund's website at www.herzfeld.com, by calling the Fund
at 800-TJH-FUND, or on the SEC's EDGAR database at www.sec.gov. In addition, the
Form N-Q can be reviewed and copied at the SEC's public reference room in
Washington, D.C. More information about the SEC's website or the operation of
the public reference room can be obtained by calling the SEC at 800-732-0330.
Proxy Voting Policies and Procedures
================================================================================
A description of the policies and procedures used to determine how to vote
proxies relating to portfolio securities is available without charge, upon
request, by calling the Fund at 800-TJH-FUND, or by accessing the SEC's website
at www.sec.gov.
Information on how the investment adviser voted proxies on the Fund's behalf for
the twelve month period ended June 30 is provided in the Fund's Form N-PX which
is is available on the SEC's EDGAR database at www.sec.gov. In addition, the
Form N-PX can be reviewed and copied at the SEC's public reference room in
Washington, D.C. More information about the SEC's website or the operation of
the public reference room can be obtained by calling the SEC at 800-732-0330.
-22-
Change in Certifying Accountant
================================================================================
On Febuary 14, 2006, the Audit Committee approved Rothstein, Kass & Company LLP
to serve as the Fund's independent registered public accounting firm for the
fiscal year ending June 30, 2006, replacing Kaufman, Rossin & Co. P.A., the
Fund's prior independent registered public accounting firm, which resigned on
February 7, 2006.
-23-
THE HERZFELD CARIBBEAN BASIN FUND, INC.
The Herzfeld Building
P.O. Box 161465
Miami, FL 33116
ITEM 2. CODE OF ETHICS
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party.
(c) There have been no amendments, during the period covered by this report, to
a provision of the code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, and that relates to
any element of the code of ethics description.
(d) The registrant has not granted any waivers, including an implicit waiver,
from a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, regardless of
whether these individuals are employed by the registrant or a third party, that
relates to one or more of the items set forth in paragraph (b) of this item's
instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the registrant's board of
directors has determined that Albert L. Weintraub is an "audit committee
financial expert" serving on its audit committee and that he is "independent" as
such terms are defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) - (d)
Set forth in the table below are audit fees and non-audit related fees billed to
the registrant by its principal accountant (the "Auditor") for the audit of the
registrant's annual financial statements and services provided by the Auditor in
connection with statutory and regulatory filings during and for the Registrant's
fiscal years ended June 30, 2005 and 2006.
Fiscal Year Audit Fees Audit-Related Tax Fees (1) All
Ended June 30, Fees Other Fees (2)
2005 $24,000 $ 0 $4,000 $3,054
2006 $37,500 $6,000 $5,000 $ 0
(1) These fees related to services consisting of the review or preparation of
U.S. federal, state, local and excise tax returns
(2) These fees related to services consisting of accounting consultations,
agreed upon procedure reports, attestation reports, comfort letters and review
of statutory and regulatory filings.
(e) The registrant's Audit Committee charter requires that the Audit Committee
pre-approve all auditing services and non-audit services (including the fees for
such services and terms thereof) to be performed for the registrant by its
Auditor, and the committee has not adopted pre-approval policies and procedures,
although it may determine to do so in the future. The engagement to render
auditing and non-auditing services would be presented to and pre-approved by the
Audit Committee. All of the audit, audit-related and tax services described
above for which the Auditor billed the registrant fees for the fiscal years
ended June 30, 2005 and 2006 were pre-approved by the Audit Committee.
(f) Not applicable.
(g) The aggregate non-audit fees bills by the registrant's Auditor for services
rendered to the registrant, and rendered to the registrant's investment adviser,
and any entity controlling, controlled by, or under common control with the
adviser that provides ongoing services to the registrant for each of the last
two fiscal years of the registrant were $33,582 for 2005 and $0 for 2006.
(h) Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The registrant has a separately-designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Exchange Act. The
registrant's audit committee is comprised of Albert L. Weintraub, Ann S. Lieff,
and Michael A. Rubin.
(b) Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable as schedule 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.
A copy of the registrant's proxy voting policies and procedures as well as its
adviser's policies and procedures are attached hereto as Appendix A.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1) Thomas J. Herzfeld, Chairman and President of The Herzfeld Caribbean
Basin Fund, Inc. serves as the portfolio manager of the Fund and has held this
position since its inception in 1993. This information is as of August 17, 2006.
(a)(2)(i) and (ii) Mr. Herzfeld is also portfolio manager for approximately 49
private clients, however, none with an investment focus of investing in the
Caribbean Basin. The Fund is the only investment company managed by Mr.
Herzfeld; the Fund has total assets of approximately $13 million. Other accounts
have total assets of approximately $51 million.
(a)(2)(iii) No accounts are charged fees based on performance. For accounts
other than the Fund, fees are calculated as a percentage of the value of assets
under management at the end of each quarter.
(a)(2)(iv) The Fund does not believe that any material conflicts are likely to
arise through Mr. Herzfeld's management of other accounts in addition to the
Fund in that there is very little overlap in the type of investments made for
the Fund and other accounts, which generally trade shares of closed-end funds.
The Fund is permitted, to a limited extent, to buy shares of other closed-end
funds and occasionally other clients or Mr. Herzfeld may buy shares of
securities also held in the portfolio of the Fund. The advisor and the Fund have
adopted procedures overseen by the Chief Compliance Officer ("CCO") intended to
monitor compliance with such policies which include conflicts which may occur
regarding allocation of investment opportunities between the Fund and other
account. The CCO of the Fund reports directly to the Board of Directors at least
annually.
(3) Mr. Herzfeld receives no direct compensation from the Fund for his services
as Portfolio Manager. Mr. Herzfeld is 100% owner of the Advisor, a Subchapter S
Corporation, therefore he profits from the success of the Advisor and is taxed
on its profits.
(4)(a) Range of value of shares of the Fund owned by Mr. Herzfeld as of June 30,
2006: $100,001-$500,000.
(4)(b) Range of value of shares of the Fund owned by Mr. Herzfeld as of the date
of this filing: $100,001-$500,000.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END FUND MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
-------------------------------------------------------------------------------------------------------------
(c) Total Number of (d) Maximum Number
Shares Purchased as of Shares that May
Part of Publicly Yet Be Purchased
(a) Total Number of (b) Average Price Announced Plans or Under the Plans or
Period Shares Purchased Paid Per Share Programs Programs
-------------------------------------------------------------------------------------------------------------
Month #1 (beginning 0 n/a n/a n/a
January 1, 2006 and
ending January 31,
2006)
-------------------------------------------------------------------------------------------------------------
Month #2 (beginning 0 n/a n/a n/a
February 1, 2006 and
ending February 28,
2006)
-------------------------------------------------------------------------------------------------------------
Month #3 (beginning 0 n/a n/a n/a
March 1, 2006 and
ending March 31, 2006)
-------------------------------------------------------------------------------------------------------------
Month #4 (beginning 0 n/a n/a n/a
April 1, 2006 and
ending April 30, 2006)
-------------------------------------------------------------------------------------------------------------
Month #5 (beginning 4,404* $7.29815 n/a n/a
May 1, 2006 and
ending May 31, 2006)
-------------------------------------------------------------------------------------------------------------
Month #6 (beginning 0 n/a n/a n/a
June 1, 2006 and
ending June 30, 2006)
-------------------------------------------------------------------------------------------------------------
Total 4,404* $7.29815 n/a n/a
-------------------------------------------------------------------------------------------------------------
* These shares were purchased by Thomas J. Herzfeld for his account on the
open market. Mr. Herzfeld is a director and officer of the Registrant and
a controlling person of the Registrant's investment adviser. Accordingly,
Mr. Herzfeld is an "affiliated purchaser" of the Registrant's shares as
such term is defined by Rule 10b-18(a)(3) under the Exchange Act of 1934.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the stockholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR
240.14a-101), or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing date of
the report that includes the disclosure required by this paragraph, based on
their evaluation of these controls and procedures required by Rule 30a-3(b)
under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under
the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d))
that occurred during the registrant's last fiscal half-year (the registrant's
second fiscal half-year in the case of an annual 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) Code of ethics is filed as Exhibit 99.CodeEth to the N-CSR filing dated
8/31/05.
(a)(2) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section
302 of the Sarbanes-Oxley Act of 2002 are filed herewith as Exhibits 99.302
Cert.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 906
of the Sarbanes-Oxley Act of 2002 are filed herewith as Exhibits 99.906 Cert.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
The Herzfeld Caribbean Basin Fund, Inc.
By: /s/ Thomas J. Herzfeld
-------------------------
Thomas J. Herzfeld
President and Chairman
Date: September 1, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Thomas J. Herzfeld
-------------------------
Thomas J. Herzfeld
President and Chairman
Date: September 1, 2006
By: /s/ Cecilia L. Gondor
-------------------------
Cecilia L. Gondor
Secretary and Treasurer
(Principal Financial Officer)
Date: September 1, 2006
APPENDIX A
THE HERZFELD CARIBBEAN BASIN FUND, INC.
Proxy Voting Policy and Procedures
The Board of Directors of The Herzfeld Caribbean Basin Fund, Inc. (the
"Fund") hereby adopts the following policy and procedures with respect to voting
proxies relating to portfolio securities held by the Fund:
Policy
It is the policy of the Board of Directors of the Fund (the "Board") to
delegate the responsibility for voting proxies relating to portfolio securities
held by the Fund to the Fund's investment adviser (the "Adviser") as a part of
the Adviser's general management of the Fund, subject to the Board's continuing
oversight.' The voting of proxies is an integral part of the investment
management services that the Adviser provides pursuant to the advisory contract.
The Adviser may, but is not required to, delegate the responsibility for
voting proxies relating to portfolio securities held by the Fund to a
sub-adviser ("Sub-Adviser") retained to provide investment advisory services, if
applicable. If such responsibility is delegated to a Sub-Adviser, then the
Sub-Adviser shall assume the fiduciary duty and reporting responsibilities of
the Adviser under these policy guidelines.
Fiduciary Duty
The right to vote a proxy with respect to portfolio securities held by the
Fund is an asset of the Fund. The Adviser, to which authority to vote on behalf
of the Fund is delegated, acts as a fiduciary of the Fund and must vote proxies
in a manner consistent with the best interest of the Fund and its shareholders.
Procedures
The following are the procedures adopted by the Board for the
administration of this policy:
A. Review of Adviser Proxy Voting Procedures. The Adviser with authority
to vote proxies on behalf of the Fund shall present to the Board its policies,
procedures and other guidelines for voting proxies at least annually, and must
notify the Board promptly of material changes to any of these documents.
B. Voting Record Reporting. No less than annually, the Adviser shall
report to the Board a record of each proxy voted with respect to portfolio
securities of the Fund during the year. With respect to those proxies that the
Adviser has identified as involving a conflict of interest(2), the Adviser shall
submit a separate report indicating the nature of the conflict of interest and
how that conflict was resolved with respect to the voting of the proxy.
Revocation
The delegation by the Board of the authority to vote proxies relating to
portfolio securities of the Fund is entirely voluntary and may be revoked by the
Board, in whole or in part, at any time.
Annual Filing
The Fund shall file an annual report of each proxy voted with respect to
its portfolio securities during the twelve-month period ended June 30 on Form
N-PX not later than August 31 of each year.
Disclosures
The Fund shall include in its annual report to stockholders:
A description of this policy and of the policies and procedures used by
the Adviser to determine how to vote proxies relating to portfolio securities
(3); and
A statement disclosing that information regarding how the Fund voted
proxies relating to portfolio securities during the most recent 12-month period
ended June 30 is available without charge, upon request, by calling the Fund's
toll-free telephone number and on the SEC website(4).
The Fund shall also include in its annual and semi-annual reports to
stockholders:
A statement disclosing that a description of the policies and procedures
used by or on behalf of the Fund to determine how to vote proxies relating to
portfolio securities of the Funds is available without charge, upon request, by
calling the Fund's toll-free telephone number and on the SEC website.(5)
A statement disclosing that information regarding how the Fund voted
proxies relating to portfolio securities during the most recent 12-month period
ended June 30 is available without charge, upon request, by calling the Fund's
toll-free telephone number and on the SEC website.(6)
Review of Policy.
At least annually, the Board shall review this Policy to determine its
sufficiency and shall make and approve any changes that it deems necessary from
time to time
----------
(1) This policy is adopted for the purpose of the disclosure requirements
adopted by the Securities and Exchange Commission, Release Nos. 33-8188,
34-47304, IC-25922.
(2) As it is used in this document, the term "conflict of interest"
refers to a situation in which the Adviser or Sub-Adviser or affiliated persons
of the Adviser or Sub-Adviser have a financial interest in a matter presented by
a proxy other than the obligation it incurs as investment adviser to the Fund
which compromises the Adviser's or Sub-Adviser's independence of judgment and
action with respect to the voting of the proxy.
(3)This disclosure shall be included in the annual report next filed by
the Fund, on Form N-CSR on or after July 1, 2003.
(4) Id.
(5) This disclosure shall be included in the report next filed by the Fund
on or after July 1, 2003.
(6) Id..
THOMAS J. HERZFELD ADVISORS, INC.
PROXY VOTING
POLICIES AND PROCEDURES
I. POLICY
Thomas J. Herzfeld Advisors, Inc. (the "Adviser") acts as discretionary
investment adviser for various clients, including The Herzfeld Caribbean Basin
Fund, Inc. an investment company registered under the Investment Company Act of
1940, as amended, and clients governed by the Employee Retirement Income
Security Act of 1974 ("ERISA").
Selected clients, including The Herzfeld Caribbean Basin Fund, Inc. have elected
to have the Adviser vote proxies or act on the other shareholder actions on
their behalf, while other clients vote proxies themselves.
When voting proxies or acting on corporate actions for clients, the Adviser's
utmost concern is that all decisions be made in the best interest of its clients
(for ERISA accounts, plan beneficiaries and participants, in accordance with the
letter and spirit of ERISA). The Adviser will act in a manner deemed prudent and
diligent and which is intended to enhance the economic value of the assets of
its clients' accounts.
II. PURPOSE
The purpose of these Policies and Procedures is to memorialize the procedures
and policies adopted by the Adviser to enable it to comply with its
responsibilities and the requirements of Rule 206(4)-6 under the Investment
Advisers Act of 1940, as amended ("Advisers Act"). These Policies and Procedures
also reflect the fiduciary standards and responsibilities set forth by the
Department of Labor for ERISA accounts.
III. PROCEDURES
Cecilia Gondor, Executive Vice President of the Adviser, is ultimately
responsible for ensuring that all proxies received by the Adviser are voted in a
timely manner and voted consistently across all portfolios. Although many proxy
proposals can be voted in accordance with the Adviser's established guidelines
(see Section V. below) (the "Guidelines"), the Adviser recognizes that some
proposals require special consideration, which may dictate that the Adviser
makes an exception to the Guidelines.
Cecilia Gondor is also responsible for ensuring that all corporate actions
received by the Adviser are addressed in a timely manner and consistent action
is taken across all portfolios.
A. Conflicts of Interest. Where a proxy proposal raises a material
conflict of interest between the Adviser's interests and that of one or more its
clients, the Adviser shall resolve such conflict in the manner described below.
1. Vote in Accordance with the Guidelines. To the extent that the
Adviser has little or no discretion to deviate from the Guidelines with respect
to the proposal in question, the Adviser shall vote in accordance with such
pre-determined voting policy.
2. Obtain Consent of Clients. To the extent that the Adviser has
discretion to deviate from the Guidelines with respect to the proposal in
question, the Adviser shall disclose the conflict to the relevant clients and
obtain their consent to the proposed vote prior to voting the securities. The
disclosure to the clients will include sufficient detail regarding the matter to
be voted on and the nature of our conflict that the clients would be able to
make an informed decision regarding the vote. When a client does not respond to
such a conflict disclosure request or denies the request, the Adviser will
abstain from voting the securities held by that client's account.
B. Limitations. In certain circumstances, in accordance with a client's
investment advisory contract (or other written directive) or where the Adviser
has determined that it is in the client's best interest, the Adviser will not
vote proxies received. The following are some circumstances where the Adviser
will limit its role in voting proxies received on client securities:
1. Client Maintains Proxy Voting Authority: Where a client has not
specifically delegated the authority to vote proxies to the Adviser or that it
has delegated the right to vote proxies to a third party, the Adviser will not
vote the securities and will direct the relevant custodian to send the proxy
material directly to the client. If any proxy material is received by the
Adviser, it will promptly be forwarded to the client.
2. Terminated Account: Once a client account has been terminated
with the Adviser in accordance with its investment advisory agreement, the
Adviser will not vote any proxies received after the termination. However, the
client may specify in writing that proxies should be directed to the client for
action.
3. Limited Value: If the Adviser concludes that the client's
economic interest or the value of the portfolio holding is indeterminable or
insignificant, the Adviser will abstain from voting a client's proxies. The
Adviser does not vote proxies received for securities which are no longer held
by the client's account. In addition, the Adviser generally does not vote
securities where the economic value of the securities in the client's account is
less than $500.
4. Securities Lending Programs: When securities are out on loan,
they are transferred into the borrower's name and are voted by the borrower, in
its discretion. However, where the Adviser determines that a proxy vote (or
shareholder action) is materially important to the client's account, the Adviser
may recall the security.
5. Unjustifiable Costs: In certain circumstances, after doing a
cost-benefit analysis, the Adviser may abstain from voting where the cost of
voting a client's proxy would exceed any anticipated benefits of the proxy
proposal.
IV. RECORD KEEPING
In accordance with Rule 204-2 under the Advisers Act, the Adviser will maintain
for the time periods set forth in the Rule (i) these proxy voting procedures and
policies, and amendments thereto; (ii) all proxy statements received regarding
client securities (provided however, that the Adviser may rely on the proxy
statement filed on EDGAR as its records)[1]; (iii) a record of votes cast on
behalf of clients; (iv) records of client requests for proxy voting information;
(v) any documents prepared by the adviser that were material to making a
decision how to vote or that memorialized the basis for the decision; and (vi)
records relating to requests made to clients regarding conflicts of interest in
voting the proxy.
The Adviser will describe in its Part II of Form ADV (or other brochure
fulfilling the requirement of Rule 204-3) its proxy voting policies and
procedures and advising clients how they may obtain information on how the
Adviser voted their securities. Clients may obtain information on how their
securities were voted or a copy of our Policies and Procedures by written
request addressed to the Adviser.
V. GUIDELINES
Each proxy issue will be considered individually. The following guidelines are a
partial list to be used in voting proposals contained in the proxy statements,
but will not be used as rigid rules.
----------
[1] Because the Adviser primarily invests its clients' assets in
securities of foreign issuers, the Adviser generally has not been receiving
proxy statements from such issuers because the laws of the countries in which
these issuers are domiciled respecting delivery of proxy statements to
shareholders are different than those of the U.S.
-------------------------------------------------------------------------------------------------------------
(1) Issues regarding the issuer's Board entrenchment and anti-takeover measures Oppose
such as the following:
b. Proposals to limit the ability of shareholders to call special
meetings;
c. Proposals to require super majority votes;
d. Proposals requesting excessive increases in authorized common
or preferred shares where management provides no explanation
for the use or need for these additional shares;
e. Proposals regarding "poison pill" provisions; and
f. Permitting "green mail".
-------------------------------------------------------------------------------------------------------------
(1) Providing cumulative voting rights. Oppose
-------------------------------------------------------------------------------------------------------------
(2) "Social issues," unless specific client guidelines supersede, e.g., Oppose
restrictions regarding South Africa.
-------------------------------------------------------------------------------------------------------------
(3) Election of directors recommended by management, except if there is a proxy Approve
fight.
-------------------------------------------------------------------------------------------------------------
(4) Election of auditors recommended by management, unless seeking to
replace if Approve there exists a dispute over policies. Approve
-------------------------------------------------------------------------------------------------------------
(5) Date and place of annual meeting. Approve
-------------------------------------------------------------------------------------------------------------
(6) Limitation on charitable contributions or fees paid to lawyers. Approve
-------------------------------------------------------------------------------------------------------------
(7) Ratification of directors' actions on routine matters since previous annual Approve
meeting.
-------------------------------------------------------------------------------------------------------------
(8) Confidential voting Approve
Confidential voting is most often proposed by shareholders as a means of
eliminating undue management pressure on shareholders regarding their vote on
proxy issues.
The Adviser will generally approve these proposals as shareholders can later
divulge their votes to management on a selective basis if a legitimate reason
arises.
-------------------------------------------------------------------------------------------------------------
(9) Limiting directors' liability Approve
-------------------------------------------------------------------------------------------------------------
(10) Eliminate preemptive right Approve
Preemptive rights give current shareholders the opportunity to maintain their
current percentage ownership through any subsequent equity offerings. These
provisions are no longer common in the U.S., and can restrict management's
ability to raise new capital.
The Adviser approves the elimination of preemptive rights, but will oppose the
elimination of limited preemptive rights, e.g., on proposed issues representing
more than an acceptable level of total dilution.
-------------------------------------------------------------------------------------------------------------
(11) Employee Stock Purchase Plan Approve
-------------------------------------------------------------------------------------------------------------
(12) Establish 401(k) Plan Approve
-------------------------------------------------------------------------------------------------------------
(13) Rotate annual meeting location/date Approve
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(14) Establish a staggered Board Approve
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(15) Eliminate director mandatory retirement policy Case-by-Case
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(16) Option and stock grants to management and directors Case-by-Case
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(17) Allowing indemnification of directors and/or officers after reviewing
the Case-by-Case applicable laws and extent of protection requested. Case-by-Case
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