As filed with the Securities and Exchange Commission on July 24, 2007
Securities Act File No. 33-_____
Investment Company Act File No. 811-02201
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
|X| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
|_| Pre-Effective Amendment No. ___
|_| Post-Effective Amendment No. ___
and/or
|X| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 4
THE HERZFELD CARIBBEAN BASIN FUND, INC.
(Exact Name of Registrant as Specified in Charter)
The Herzfeld Building
P.O. Box 161465
Miami, FL 33116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (305) 271-1900
Thomas J. Herzfeld
The Herzfeld Caribbean Basin Fund, Inc.
The Herzfeld Building
P.O. Box 161465
Miami, FL 33116
Copies to:
Thomas J. Herzfeld Joseph V. Del Raso, Esq.
The Herzfeld Building Pepper Hamilton LLP
P.O. Box 161465 3000 Two Logan Square
Miami, FL 33116 18th and Arch Streets
Philadelphia, PA 19103
Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, as
amended, other than securities offered in connection with a dividend
reinvestment plan, check the following box. |_|
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Per Aggregate Offering Amount of
Being Registered Registered Share (1) Price (2) Registration Fee
--------------------- ------------ ------------------ ------------------ ----------------
Common Stock 3,375,112 $13.24 $44,686,478 1371.87
(1) Calculated pursuant to Rule 457(c) under the Securities Act of 1933 based
upon the market price of $13.24 reported on the NASDAQ Capital Market on
July 24, 2007. The subscription price per share will be set as a
percentage of the average volume-weighted closing sale price at which the
common stock trades on the NASDAQ Capital Market on the expiration date
and the four preceding trading days.
(2) Estimated solely for the purpose of calculating the registration fee.
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment that specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. A
registration statement relating to the Securities has been filed with the
Securities and Exchange Commission but is not currently effective. We may not
sell these securities until this registration statement is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer, solicitation or sale
is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY [____], 2007
PROSPECTUS
1,687,556 Shares
THE HERZFELD CARIBBEAN BASIN FUND, INC.
Common Stock
Issuable Upon Exercise of Rights
to Subscribe for Such Shares of Common Stock
The Herzfeld Caribbean Basin Fund, Inc. (the "Fund") is issuing non-transferable
rights to its stockholders of record on [____], 2007 (the "Record Date"),
entitling the holders of rights to subscribe for an aggregate of approximately
1,687,556 shares of the Fund's common stock (the "Offer"). Each stockholder of
record on the Record Date will receive one right for each full share of the
Fund's common stock owned on the Record Date. The rights will entitle the
holders to purchase one share of the Fund's common stock, par value $0.001 per
share ("Common Stock") for each right held, and stockholders of record on the
Record Date who fully exercise their rights will be entitled to subscribe for
additional shares of Common Stock ("Over-Subscription Shares") subject to the
limitations set forth in this prospectus. The Over-Subscription Shares will be
allocated pro rata to stockholders who over-subscribe based on the number of
rights originally issued to them. The Fund may increase the number of shares of
Common Stock subject to subscription by up to 100% of the shares, or up to an
[____] additional shares of Common Stock, for an aggregate total of [____]
shares of Common Stock.
The rights are non-transferable and, therefore, may not be purchased or sold.
The Fund's Common Stock is listed, and the shares of Common Stock issued
pursuant to this Offer will be listed on the NASDAQ Capital Market under the
symbol "CUBA."
The Offer will expire at 5:00 p.m., Eastern Time, on [____], 2007 (the
"Expiration Date"), unless extended as described herein. The Fund announced its
intention to make the Offer on July [____], 2007. The net asset value ("NAV")
per share of common stock at the close of business on July [____], 2007 and on
[____], 2007 [ex-rights date] was $[____] and $[____], respectively, and the
last reported sale price of a share of Common Stock on the NASDAQ Capital Market
on those dates was $[____] and $[____], respectively.
The subscription price per share will be [__]% of the average volume-weighted
closing sale price at which the Common Stock trades on the NASDAQ Capital Market
on the Expiration Date and the four preceding trading days.
Once you subscribe for shares of Common Stock pursuant to the Offer and the Fund
receives payment or guarantee of payment, you will not be able to change your
investment decision.
The Fund is a non-diversified, closed-end management investment company
organized in the State of Maryland on March 10, 1992. Its investment adviser is
HERZFELD / CUBA, a division of Thomas J. Herzfeld Advisors, Inc. (the
"Adviser"). The Fund's investment objective is long-term capital appreciation.
To achieve its objective, the Fund invests in issuers that are likely, in the
Adviser's view, to benefit from economic, political, structural and
technological developments in the countries in the Caribbean Basin, which
include, among others, 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, the United States 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. An
investment in the Fund is not appropriate for all investors and should not
constitute a complete investment program. No assurances can be given that the
Fund's objective will be achieved.
Neither the Securities and Exchange Commission ("SEC") nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Estimated Subscription Estimated Proceeds
Price(1) Estimated Sales Load to the Fund(2)
---------------------- -------------------- ------------------
Per Share None
Total None
As a result of the terms of the Offer, Stockholders who do not fully exercise
their Rights, including the Over-Subscription Privilege described in the section
of this Prospectus entitled "The Offer--Over-Subscription Privilege," will, upon
the completion of the Offer, own a smaller proportional interest in the Fund
than they owned before the Offer. The Offer will result in either a dilution or
accretion of NAV for all Stockholders, whether or not they exercise some or all
of their Rights, because the Subscription Price per Share may be less than or
greater than the then-current NAV. The amount of dilution or accretion might be
significant. See "Risk Factors and Special Considerations" on page [____] of
this prospectus.
----------
(1) Since the Subscription Price will not be determined until after
printing and distribution of this prospectus, the Subscription Price above is
estimated based on the closing price of a share of common stock of the Fund on
[_, 2007] and applying the pricing formula set forth on the cover page of this
prospectus and described below under "Subscription Price" (i.e., [_]% of the
average volume-weighted closing sales price of the Fund's shares on the NASDAQ
Capital Market on [_, 2007], and the four preceding trading days) (the
"Estimated Subscription Price"). The average weighted closing sales price of a
share the Fund's common stock on [_, 2007] was $______. See "Subscription Price"
and "Payment For Shares" below.
(2) Proceeds to the Fund before deduction of expenses incurred by the Fund
in connection with the Offer which are estimated to be $_____. Amounts received
by check prior to the final dueH date of this Offer will be deposited in a
segregated interest-bearing account pending allocation and distribution of
Common Stock. Interest on subscription monies will be paid to the Fund
regardless of whether Common Stock is issued by the Fund.
The employees of the Fund's Adviser and the Directors and officers of the Fund
may purchase Shares through the Primary Subscription and the Over-Subscription
Privilege on the same terms as other Stockholders.
This prospectus sets forth concisely certain information about the Fund that a
prospective investor should know before investing. Please read this prospectus
carefully before investing and keep it for future reference. All subscription
questions and inquiries relating to the Offer should be directed to State Street
Bank and Trust Company, P.O. Box 642, Mail Code OPS22, Boston, MA 02116 or by
calling the (617) 937-6870.
Copies of the Fund's Annual Report and Semi-Annual Report may be obtained, free
of charge, upon request by writing to The Herzfeld Caribbean Basin Fund, P.O.
Box 161465, Miami, FL 33116 or calling (800) TJH-FUND. Information about the
Fund can be also be reviewed and copied at the SEC's Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at (202) 551-8090 or toll free at (800) 732-0330.
This information is also available on the EDGAR database on the SEC's internet
site at: http://www.sec.gov, and copies may be obtained, after paying a
duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov or by writing the Public Reference Section of the Securities
and Exchange Commission, 100 F Street, NE, Washington, D.C. 20549.
No dealer, salesperson or other person is authorized to give any information or
to represent anything not contained in this prospectus. You must not rely on any
unauthorized information or representations not contained in this prospectus as
if the fund had authorized it. The fund is offering to sell, and seeking offers
to buy, shares of common stock only in jurisdictions where offers and sales are
permitted. . This prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any security other than the shares of common
stock offered by this prospectus, nor does it constitute an offer to sell or the
solicitation of an offer to buy shares of common stock by anyone in any
jurisdiction in which such offer or solicitation would be unlawful. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or any sale of
common stock.
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................1
The Offer..................................................................1
Important Terms of the Offer...............................................1
Important Dates for the Offer..............................................2
Key Elements of the Offer..................................................2
Information Regarding the Fund.............................................5
Information Regarding the Adviser and Custodian............................5
Risk Factors and Special Considerations....................................5
Fee Table..................................................................7
FINANCIAL HIGHLIGHTS...........................................................8
THE FUND......................................................................10
Share Price Data..........................................................10
THE OFFERING..................................................................11
Terms of the Offer........................................................11
Purpose of the Offer......................................................12
Subscription Price........................................................14
Over-Subscription Privilege...............................................14
Expiration of the Offer...................................................15
Subscription Agent........................................................15
Method of Exercising Rights...............................................15
Payment for Shares........................................................15
Delivery of Stock Certificates............................................17
Foreign Restrictions......................................................17
Federal Income Tax Consequences Associated With the Offer.................17
Employee Plan Considerations..............................................18
USE OF PROCEEDS...............................................................18
RISK FACTORS AND SPECIAL CONSIDERATIONS.......................................19
Dilution of Net Asset Value and Effect of Non-Participation in the Offer..19
Discount From Net Asset Value.............................................19
Risks of Investing in Caribbean Basin Countries...........................20
Geographic Concentration Risk.........................................21
Foreign Securities Risk...............................................21
Foreign Economy Risk..................................................21
Currency Risk.........................................................21
Governmental Supervision and Regulation/Accounting Standards..........22
Certain Risks of Holding Fund Assets Outside the United States........22
Settlement Risk.......................................................23
Emerging Markets Risk.................................................23
INVESTMENT OBJECTIVE AND POLICIES.............................................24
Investment Policies - General.............................................24
Special Leverage Considerations...........................................25
Hedging Transactions..................................................25
Forward Foreign Currency Exchange Contracts...........................26
Options on Foreign Currencies.........................................26
Futures Contracts.....................................................27
Options on Securities and Options on Indices..........................27
Repurchase Agreements.....................................................28
Debt Securities...........................................................29
Securities Lending........................................................29
Portfolio Turnover........................................................30
Investment Restrictions...................................................30
MANAGEMENT OF THE FUND........................................................31
Board of Directors........................................................31
Information About Directors and Officers..............................31
Committees of the Board...............................................32
Ownership of the Fund By Directors....................................33
Investment Adviser and Portfolio Manager..................................34
Investment Adviser....................................................34
Portfolio Manager.....................................................34
Investment Advisory Agreement.............................................35
Benefit to the Adviser....................................................36
Expenses of the Fund......................................................36
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................37
CODE OF ETHICS................................................................37
PROXY VOTING POLICIES AND PROCEDURES..........................................38
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS...............................38
DESCRIPTION OF COMMON STOCK...................................................38
Share Repurchases and Tender Offers.......................................38
Certain Provisions of Articles of Incorporation and Bylaws................40
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN.......................41
TAXATION......................................................................43
Federal Taxation of the Fund and its Distributions........................44
Sales of Shares...........................................................46
Backup Withholding........................................................47
Other Tax Considerations..................................................47
DETERMINATION OF NET ASSET VALUE..............................................47
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND REGISTRAR...........48
LEGAL MATTERS.................................................................48
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................................48
FINANCIAL STATEMENTS..........................................................48
APPENDIX A...................................................................A-1
APPENDIX B...................................................................B-1
PROSPECTUS SUMMARY
This summary highlights some information that is described more fully elsewhere
in this prospectus and is qualified in its entirety by the more detailed
information included elsewhere in the prospectus. The summary may not contain
all of the information that is important to you. To understand the Offer fully
you should read the entire document carefully, including the risk factors.
The Offer
The Board of Directors of the Fund (the "Board") has determined that it is in
the best interests of the Fund and its existing stockholders to increase the
assets of the Fund so that the Fund may be in a better position to take
advantage of investment opportunities that may arise. In addition, the Board
believes that increasing the size of the Fund may lower the Fund's expenses as a
proportion of average net assets because the Fund's fixed costs would be spread
over a larger asset base. There can be no assurance, however, that an increase
in the size of the Fund will lower the Fund's expense ratio. Also the Fund has
had significant gains in NAV, and has realized gains. For the calendar year
ended December 31, 2006, the Fund paid a large year-end distribution. In
addition, the recent announcement that Florida East Coast Industries, currently
the Fund's largest holding, will be acquired by Fortress Investment Group LLC
could result in significant realized gains for the current calendar year ending
December 31, 2007. Net realized gains of the Fund are required to be distributed
to stockholders in order to maintain the Fund's status as a "regulated
investment company" under Subchapter M of the Internal Revenue Code.
Accordingly, the Fund may be required to make a large distribution to
shareholders to maintain its status as a regulated investment company, thereby
reducing the net assets of the Fund. If successful, the Offer will allow the
Fund to make the required distributions without causing a reduction in the
amount of cash available for additional investment opportunities. The Board also
believes that a larger number of outstanding shares and a larger number of
beneficial owners of shares could increase the level of market interest in and
visibility of the Fund and improve the trading liquidity of the Fund's common
stock on the NASDAQ Capital Market. The Offer seeks to reward existing
stockholders by giving them the right to purchase additional shares at a price
below market without incurring any commission or other transaction charges. See
"Purpose of the Offer."
At a Board meeting held on May 16, 2007, the Board discussed at length with the
Adviser and counsel to the Fund the details of a proposed rights offering. At
that meeting, the Board approved a non-transferable rights offering, the
substantive terms of which would permit stockholders to acquire one new share of
the Fund for each Right held (i.e., a one-for-one rights offering) for a
subscription price equal to [____]% of the volume-weighted average market price
of a share of common stock on the Expiration Date and the four immediately
preceding trading days.
Important Terms of the Offer
Total number of shares of Common Stock
available for primary subscription:....... 1,687,556
Number of Rights you will receive for each
outstanding share of Common Stock you own
on the Record Date:....................... One Right for every one Share *
Number of shares of Common Stock you
may purchase with your Rights at the
Subscription Price per share.............. One share for every one Right **
Subscription Price:....................... [__]% of the average volume-weighted
sales price per share of the Fund's
Common Stock on the NASDAQ Capital
Market on [____], 2007 and the four
preceding trading days.
Estimated Subscription Price.............. $[____]
* The number of Rights to be issued to a stockholder on the Record Date will
be rounded up to the nearest whole number of Rights; no fractional Rights
will be issued.
** Stockholders will be able to acquire additional shares of Common Stock
pursuant to an over-subscription privilege in certain circumstances.
Important Dates for the Offer
Record Date:.............................. [____], 2007
Subscription Period:...................... [____], 2007 to [____], 2007
Expiration Date and Pricing Date:......... [____], 2007*
Subscription Certificate and
Payment for Shares Due**......... [____], 2007*
Notice of Guaranteed Delivery Due**....... [____], 2007*
Final Payment for Shares (if any) Due***.. [____], 2007*
Confirmation Mailed to Participants....... [____], 2007*
* Unless the Offer is extended.
** Record Date Stockholders (defined below) exercising Rights must deliver to
the Subscription Agent by the Expiration Date either (i) the Subscription
Certificate together with the estimated payment or (ii) a Notice of
Guaranteed Delivery.
*** Additional amounts may be due at settlement for additional shares
purchased upon exercising Rights because the Estimated Subscription Price
may be less than the actual Subscription Price. See "The Offer -- Payment
for Shares."
-2-
Key Elements of the Offer
One-for-One Offering.......... The Offer will give stockholders on the Record
Date ("Record Date Stockholders") the right to
purchase one share of Common Stock for every
one Right received. For example, if you own 100
shares of common stock on the Record Date, you
will receive 100 Rights entitling you to
purchase 100 shares of Common Stock of the
Fund. Stockholders may exercise all or some of
their Rights. However, stockholders who do not
exercise all of their Rights will not be able
to participate in the Over-Subscription
Privilege. See "Over-Subscription Privilege"
below.
Non-Transferable Rights....... The Rights issued in the Offer will be
"non-transferable" and, therefore, may not be
purchased or sold. Rights not exercised will
expire without residual value at the Expiration
Date. The Rights will not be listed for trading
on the NASDAQ Capital Market or any other
securities exchange. However, the shares of
Common Stock to be issued pursuant to the Offer
will be listed for trading on the NASDAQ
Capital Market, subject to the NASDAQ Capital
Market being officially notified of the
issuance of those shares.
Dilution/Non-Participation
in Offer:................... Record Date Stockholders who do not fully
exercise their Rights including the
Over-Subscription Privilege described in the
section of this Prospectus entitled "The
Offer-Over-Subscription Privilege," will, at
the completion of the Offer, own a smaller
proportional interest in the Fund than if they
exercised their Rights. If the Subscription
Price per Share is below the then current NAV
per share, stockholders will experience an
immediate dilution of the aggregate NAV of
their Shares if they do not participate in the
Offer and will experience a reduction in the
NAV per share whether or not they participate
in the Offer. In contrast, Stockholders who
fully exercise their rights and over-subscribe
benefit from a slight accretion to the value of
their shares to the extent the non-subscribing
stockholders fail to fully exercise their
rights.The Fund cannot state precisely the
extent of this dilution (if any) if
stockholders do not exercise their Rights
because the Fund does not know what the NAV per
share will be at the time of the Offer or what
proportion of the Rights will be exercised.
See "Risk Factors and Special Considerations-
Dilution of Net Asset Value and Effect of
Non-Participation in the Offer."
Subscription Price............ Shares of Common Stock issued upon exercise of
Rights will be sold at a price equal to [____]%
of the volume-weighted average closing sales
price of a share of common stock on the NASDAQ
Capital Market on the Expiration Date and the
four preceding trading days. The Subscription
Price is discussed further under "The
Offer--Subscription Price." In addition,
information with respect to the quarterly high
and low sale prices of the Fund's Common Stock
on the NASDAQ Capital Market and the
corresponding NAVs per share of Common Stock is
provided under "The "Fund."
-3-
Over-Subscription Privilege... Each Record Date Stockholder who fully
exercises all Rights issued to him is entitled
to subscribe for shares which were not
otherwise subscribed for by others in the
primary subscription (the "Over-Subscription
Privilege"). If enough shares are available,
all of these requests will be honored in full.
If these requests for shares exceed the shares
available, the Fund may determine after the
expiration of the Offer, at the discretion of
the Fund, to issue additional Common Stock up
to an amount equal to 100% of the shares
available pursuant to the Offer (up to an
additional [____] shares of Common Stock) in
order to cover these requests. Regardless of
whether the Fund issues such additional shares,
to the extent shares are not available to honor
all requests, the available shares will be
allocated pro rata among those Record Date
Stockholders who over-subscribe based on the
number of Rights originally issued to them by
the Fund.
Exercising Rights............. Except as described below, subscription
certificates evidencing the Rights
("Subscription Certificates") will be sent to
Record Date Stockholders or their nominees.
There is no minimum number of Rights which must
be exercised for the Offer to close. If you
wish to exercise your Rights, you may do so in
the following ways:
1. Complete, sign and date the Subscription
Certificate. Enclose it in the envelope
provided, together with payment in full
and mail or deliver the envelope to the
Subscription Agent at the address
indicated on the Subscription Certificate
calculating the total payment on the
basis of the Estimated Subscription Price
of [____] per share (i.e., the estimated
subscription price based on the Fund's
market price on [____], 2007). Your
Subscription Certificate and payment must
be received by the Expiration Date.
Payment pursuant to this method must be
in United States dollars by money order
or check drawn on a bank located in the
United States and must be payable to The
Herzfeld Caribbean Fund, Inc.
2. Contact your broker, banker or trust
company, which can arrange, on your
behalf, to guarantee delivery of payment
and delivery of a properly completed and
executed Subscription Certificate
pursuant to a notice of guaranteed
delivery ("Notice of Guaranteed
Delivery") by the close of business on
the third Business Day after the
Expiration Date. For purposes of this
prospectus, a "Business Day" shall mean
any day on which trading is conducted on
the NASDAQ Capital Market. A fee may be
charged for this service. The Notice of
Guaranteed Delivery must be received by
the Expiration Date. Rights holders will
have no right to rescind a purchase after
the Subscription Agent has received the
Subscription Certificate or Notice of
Guaranteed Delivery. See "The
Offer--Method of Exercising Rights" and
"The Offer--Payment for Shares." The
Subscription Agent will deposit all
checks received by it prior to the final
due date into a segregated interest
bearing account at [____] pending
distribution of the shares from the
Offer. All interest will accrue to the
benefit of the Fund and investors will
not earn interest on payments submitted.
-4-
Restrictions on Foreign
Stockholders:................. The Fund will not mail Subscription
Certificates to stockholders whose record
addresses are outside the United States or who
have an APO or FPO address. Stockholders whose
addresses are outside the United States or who
have an APO or FPO address and who wish to
subscribe to the Offer either partially or in
full should contact the Subscription Agent by
written instruction or recorded telephone
conversation no later than three Business Days
prior to the Expiration Date.
Purpose of the Offer:......... The Board of the Fund has determined that it is
in the best interests of the Fund and its
stockholders to increase the assets of the Fund
available for investment so that the Fund will
be in a better position to take full advantage
of investment opportunities. The Board believes
that increasing the size of the Fund will
increase the liquidity of the Fund's shares of
Common Stock and also may reduce the Fund's
expenses as a proportion of average net assets.
The Offer also may allow the Fund to make
capital gain distributions required to maintain
its tax status as a regulated investment
company without causing a reduction in the net
assets of the Fund. Any such reduction will
reduce the amount of cash available for
additional investment opportunities.The Board
also believes that a larger number of
outstanding shares and a larger number of
beneficial owners of shares could increase the
level of market interest in and visibility of
the Fund and improve the trading liquidity of
the Fund's common stock on the NASDAQ Capital
Market.
In addition, the Offer seeks to reward the
Fund's stockholders by giving them the right
to purchase additional shares of Common Stock
at a price that will be below the market price
without incurring any direct transaction
costs. The Offer will benefit both the Fund
and its stockholders by providing the Fund
with the ability to make additional investments
without selling current investments if
otherwise not desirable. Moreover, if the
Subscription Price is greater than the NAV per
share of Common Stock of the Fund on the
Expiration Date (less offering expenses), the
Offer will increase the NAV per share. See
"The Offer--Purpose of the Offer."
Use of Proceeds:.............. The net proceeds of the Offer are estimated to
be approximately [____]. This figure is based
on the Estimated Subscription Price per share
of $[____] and assumes all shares offered are
sold and that the expenses related to the Offer
estimated at approximately $[____] are paid.
The Adviser anticipates that it will take no
longer than six months for the Fund to invest
these proceeds in accordance with its
investment objective and policies under current
market conditions. Pending investment, the
proceeds will be invested in short-term
cash-equivalent instruments. See "Use of
Proceeds" below.
-5-
Information Regarding the Fund
The Herzfeld Caribbean Basin Fund, Inc. is a non-diversified, closed-end
management investment company organized in the State of Maryland on March 10,
1992. The Fund's investment objective is long-term capital appreciation. To
achieve its objective, the Fund invests in issuers that are likely, in the
Adviser's view, to benefit from economic, political, structural and
technological developments in the countries in the Caribbean Basin, which
includes, among others, 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, the United States 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. See
"Investment Objective and Policies." An investment in the Fund is not
appropriate for all investors and should not constitute a complete investment
program. No assurances can be given that the Fund's objective will be achieved.
As of [____], 2007, the Fund had 1,687,556 shares of common stock outstanding.
The Fund's common stock trades on the NASDAQ Capital Market under the symbol
"CUBA." The average weekly trading volume of the common stock on the NASDAQ
Capital Market during the fiscal year ended June 30, 2007 was approximately
91,544 shares. As of [____], 2007, the aggregate net assets of the Fund were
approximately [____].
Information Regarding the Adviser and Custodian
The Adviser has acted as the investment adviser to the Fund since the Fund's
inception in 1993. The Fund pays the Adviser a monthly fee at the annual rate of
1.45% of the Fund's average daily net assets. See "Management of the Fund -
Investment Adviser."
State Street Bank and Trust Company acts as custodian for the Fund's assets.
State Street Bank and Trust Company also serves as the Fund's transfer agent,
dividend/distribution disbursing agent, dividend reinvestment plan agent and as
registrar for the Fund's common stock. For its services as custodian, the Fund
currently pays State Street Bank and Trust Company a monthly fee of $4,500. For
its services as transfer agent, dividend reinvestment plan agent and registrar
for the Fund's common stock, the Fund currently pays State Street Bank and Trust
Company a monthly fee of $1,458 plus related expenses.
Risk Factors and Special Considerations
Dilution/Non-Participation
in Offer: Stockholders who do not fully exercise their
Rights including the Over-Subscription
Privilege described in the section of this
Prospectus entitled "The
Offer-Over-Subscription Privilege," will, at
the completion of the Offer, own a smaller
proportional interest in the Fund than if they
exercised their Rights. If the Subscription
Price per Share is below the then current NAV
per share, stockholders will experience an
immediate dilution of the aggregate NAV of
their Shares if they do not participate in the
Offer and will experience a reduction in the
NAV per share whether or not they participate
in the Offer. The Fund cannot state precisely
the extent of this dilution (if any) if
stockholders do not exercise their Rights
because the Fund does not know what the NAV per
share will be at the time of the Offer or what
proportion of the Rights will be exercised. In
contrast, Stockholders who fully exercise their
rights and over-subscribe benefit from a slight
accretion to the value of their shares to the
extent the non-subscribing stockholders fail to
fully exercise their rights. "Accretion" is the
dilution experienced by the non-exercising
stockholders less the pro-rata share of the
offering expenses. Assuming, for example, that
all Rights are exercised, the Estimated
Subscription Price is [____] and the Fund's NAV
per share is [____], the Fund's NAV per share
(after payment of estimated offering expenses)
would be reduced by approximately $[____] per
share. See "Risk Factors and Special
Considerations- Dilution of Net Asset Value and
Effect of Non-Participation in the Offer"
-6-
Discount From NAV............. Shares of closed-end funds frequently trade at
a market price that is less than the value of
the net assets attributable to those shares (a
"discount"). The possibility that the Fund's
shares will trade at a discount from NAV is a
risk separate and distinct from the risk that
the Fund's NAV will decrease. The risk of
purchasing shares of a closed-end fund that
might trade at a discount or unsustainable
premium is more pronounced for investors who
wish to sell their shares in a relatively short
period of time after purchasing them because,
for those investors, realization of a gain or
loss on their investments is likely to be more
dependent upon the existence of a premium or
discount than upon portfolio performance.
Caribbean Basin Countries..... Investing in the securities of non-U.S. issuers
involves certain risks and considerations not
typically associated with investing in
securities of U.S. issuers. These risks include
currency fluctuations, political and economic
risks, including nationalization and
expropriation, reduced levels of publicly
available information concerning issuers and
reduced levels of government regulation of
foreign securities markets. Also, investment in
Caribbean Basin Countries may involve special
considerations, such as limited liquidity and
small market capitalization of the Caribbean
Basin securities markets, currency
devaluations, high inflation and repatriation
restrictions.
Cuba Specific Issues.......... Investment in Cuban securities or any
investment in Cuba directly or indirectly is
currently prohibited under U.S. law. There can
be no assurances that the U.S. trade embargo
against Cuba will ever be lifted or eased or,
if and when such a normalization commences,
that the Adviser will be able to identify
direct investments in issuers domiciled in Cuba
that are acceptable for the Fund.
-7-
However, if investment in securities issued by
companies domiciled in Cuba were to be
permitted under U.S. law, certain
considerations not typically associated with
investing in securities of U.S. companies
should be considered, including: (1)
restrictions on foreign investment and on
repatriation of capital invested in Cuba; (2)
unstable currency exchange and fluctuation; (3)
the cost of converting foreign currency into
U.S. Dollars; (4) potential price volatility
and lesser or lack of liquidity of shares
listed on a securities market (if one is
established); (5) continued political and
economic risks including a new government that
if not properly stabilized may lead to the risk
of nationalization or expropriation of assets
and the risk of civil war; (6) the absence of a
developed legal structure governing private
property; (7) the absence of a capital market
structure or market oriented economy; and (8)
the difficulty of assessing the financial
status of particular companies.
"Non-diversified" Investment
Company: As a "non-diversified" investment company, the
Fund's investments involve greater risks than
would be the case for a similar diversified
investment company because the Fund is not
limited by the Investment Company Act of 1940,
as amended (the "1940 Act"), in the proportion
of its assets that may be invested in the
assets of a single issuer. Although the Fund is
not diversified for the purposes of the 1940
Act, it must maintain a certain degree of
diversification in order to comply with certain
requirements of the U.S. Internal Revenue Code
of 1986, as amended (the "Code"), applicable to
regulated investment companies. See "Risk
Factors/Special Considerations" and "Taxation."
Dividends and Distributions:.. The Fund distributes annually to its
stockholders substantially all of its net
investment income and net short-term capital
gains. The Fund determines annually whether to
distribute any net realized long-term capital
gains in excess of net realized short-term
capital losses. See "Dividends and
Distributions" and "Taxation."
Certain Charter Provisions.... The Fund's Articles of Incorporation include
provisions that could have the effect of:
inhibiting the Fund's possible conversion to
open-end status; limiting the ability of other
entities or persons to acquire control of the
Fund or to change the composition of its Board;
and depriving stockholders of an opportunity to
sell their shares at a premium over prevailing
market prices by discouraging a third party
from seeking to obtain control of the Fund. See
"Description of Common Stock."
-8-
Fee Table
The following Fee Table is intended to assist prospective investors in
understanding the costs and expenses that an investor in the Offer will bear
directly or indirectly.
Stockholder Transaction Expenses:
Sales Load.................................................. None
Expenses of the Offer (as a percentage of offering price)... [____] %
Dividend Reinvestment Plan Fees............................. None
Annual Expenses (as a percentage of net assets):
Management Fees........................................... 1.45%
Other Expenses (1)........................................ [____] %
Acquired Fund Fees and Expenses (2)....................... [____] %
Total Annual Expenses................................... [____] %
(1) "Other Expenses" does not include expenses of the Fund incurred in
connection with the Offer, estimated at $__. However, these expenses
will be borne by the holders of the shares of Common Stock of the
Fund and result in a reduction in the NAV of the shares of Common
Stock.
(2) Fees and expenses incurred indirectly as a result of investment in
shares of one or more "Acquired Funds," which include (i) investment
companies, or (ii) companies that would be an investment company
under Section 3(a) of the 1940 Act except for exceptions under
Sections 3(c)(1) and 3(c)(7) under the 1940 Act.
Cumulative Expenses Paid for the
Period of:
----------------------------------
Example 1 year 3 years 5 years 10 years
----------------------------------------- ------ ------- ------- --------
An investor would pay the following
expenses on a $1,000 investment, assuming
a 5% annual return throughout the periods
The foregoing Fee Table and Example are intended to assist investors in
understanding the costs and expenses that an investor will bear directly or
indirectly. "Other Expenses" are based on estimated amounts for the current
fiscal year. See "Management of the Fund" for additional information.
The Example assumes the reinvestment of all dividends and distributions at NAV
and an expense ratio of [____]%. The tables above and the assumption in the
Example of a 5% annual return are required by U.S. Securities and Exchange
Commission (the "SEC") regulations applicable to all investment companies. The
Example should not be considered a representation of past or future expenses or
annual rates of return and actual expenses or annual rates of return may be more
or less than those assumed for purposes of the Example. In addition, while the
Example assumes the reinvestment of all dividends and distributions at NAV,
participants in the Dividend Reinvestment Plan may receive shares purchased or
issued at a price or value different from NAV. See "Dividends and Distributions;
Dividend Reinvestment Plan."
-9-
FINANCIAL HIGHLIGHTS
The table below sets forth selected data for a share of Common Stock outstanding
for each period presented. The information for the fiscal years ended June 30,
2007 and June 30, 2006 contained in the table has been audited by
[______________], the Fund's independent registered public accounting firm. The
information for the fiscal years ending prior to June 30, 2006 was audited by
[FORMER AUDITOR], the Fund's previous independent registered public accounting
firm. Audited financial statements for the Fund for the fiscal year ended June
30, 2007, are included in the Annual Report to stockholders. The Annual Report
to stockholders is available without charge on by calling (800) TJH-FUND.
Year Ended June 30,
----------------------------------------------
2007 2006 2005 2004 2003
------- ------- ------- ------- ------
Per Share Operating Performance
(For a share of capital stock
outstanding for each time period
indicated)
Net asset value, beginning
of year $ 7.33 $ 5.43 $ 3.95 $ 3.92
------- ------- ------- ------- ------
Operations:
Net investment loss(1) (0.16) (0.09) (0.07) (0.11)
Net realized and unrealized gain
(loss) on investment transactions (1) 1.08 1.99 1.55 0.22
------- ------- ------- ------- ------
Total from operations 0.92 1.90 1.48 0.11
------- ------- ------- ------- ------
Distributions:
From net investment income -- -- -- --
From net realized gains (0.17) -- -- (0.08)
------- ------- ------- ------- ------
Total distributions (0.17) -- -- (0.08)
------- ------- ------- ------- ------
Net asset value, end of year $ 8.08 $ 7.33 $ 5.43 $ 3.95
======= ======= ======= ======= ======
Per share market value, end of year $ 7.57 $ 6.30 $ 4.87 $ 3.49
Total investment return (loss) based
on market value per share 22.86% 29.36% 39.54% 2.70%
Ratios And Supplemental Data
Net assets, end of year (in 000's) $13,553 $12,292 $ 9,109 $6,626
Ratio of expenses to average net assets 3.37% 3.55% 3.67% 4.46%
Ratio of net investment loss to
average net assets (1.95)% (1.47)% (1.39)% (3.15)%
Portfolio turnover rate 40% 30% 23% 30%
Average commission rate (per share) 0.0424 0.0481 0.0473 0.05
----------
(1) Computed by dividing the respective period's amounts from the Statement of
Operations by the average outstanding shares for each time period
presented.
-10-
Year Ended June 30,
-----------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Per Share Operating Performance
(For a share of capital stock
outstanding for each time period
indicated)
Net asset value, beginning
of period $ 5.15 $ 5.02 $ 6.12 $ 6.43 $ 6.34
------- ------- ------- ------- -------
Operations:
Net investment loss(1) (0.10) (0.07) (0.10) (0.11) (0.01)
Net realized and unrealized gain
(loss) on investment transactions (1) (0.98) 0.20 (1.00) 0.51 0.54
------- ------- ------- ------- -------
Total from operations (1.08) 0.13 (1.10) 0.40 0.53
------- ------- ------- ------- -------
Distributions:
From net investment income (0.10) -- -- -- --
From net realized gains (0.05) -- -- (0.71) (0.44)
------- ------- ------- ------- -------
Total distributions (0.15) -- -- (0.71) (0.44)
------- ------- ------- ------- -------
Net asset value, end of period $ 3.92 $ 5.15 $ 5.02 $ 6.12 $ 6.43
======= ======= ======= ======= =======
Per share market value, end of period $ 3.48 $ 4.20 $ 5.06 $ 6.00 $ 6.00
Total investment return (loss) based
on market value per share (13.45)% (17.04)% (15.63)% 11.83% 23.54%
Ratios And Supplemental Data
Net assets, end of period (in 000's) $ 6,568 $ 8,643 $ 8,424 $10,272 $10,784
Ratio of expenses to average net assets 3.77% 3.11% 3.11% 3.30% 3.21%
Ratio of net investment loss to
average net assets (2.45)% (1.33)% (1.76)% (1.95)% (0.14)%
Portfolio turnover rate 18% 27% 10% 59% 40%
-11-
THE FUND
The Herzfeld Caribbean Basin Fund, Inc. 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 "1940 Act"). The Fund is designed for investors seeking long-term
capital appreciation. The Fund seeks to achieve its objective primarily by
investing in issuers that are likely, in the opinion of the Adviser, to benefit
from political, legal and economic developments in Cuba and the Caribbean Basin.
At such time as it becomes legally permissible for U.S. entities to invest
directly in Cuba, the Fund will consider such investments. See "Investment
Objective and Policies". The Fund maintains its principal offices at The
Herzfeld Building, P.O. Box 161465, Miami, Florida 33116. No assurance can be
given that the Fund's investment objective will be achieved.
The Fund's investment adviser is HERZFELD/CUBA, a division of Thomas J. Herzfeld
Advisors, Inc., a Miami-based U.S. investment adviser.
As of the Record Date, the Fund had 1,687,556 shares of common stock
outstanding. The Fund's common stock is publicly held and is listed and traded
on the NASDAQ Capital Market under the symbol "CUBA." The average weekly trading
volume of the common stock on the NASDAQ Capital Market during the fiscal year
ended June 30, 2007 was approximately 91,544 shares. As of [____], 2007, the
aggregate net assets of the Fund were approximately [____], the NAV per share
was [____], the share price was [____], and the premium was [____]%.
Historically, the Fund's common stock has traded at both premiums and discounts
to its NAV.
The following table sets forth, for the periods indicated, the high and low
closing sales prices for the shares on the NASDAQ Capital Market, the NAVs per
share on the date of the high and low closing sales prices, and the discount or
premium that each sales price represented as a percentage of the preceding NAV:
Share Price Data
NAV Premium/Discount NAV Premium/Discount
Quarter High (on High (on High Close Low (on Low (on Low Close
Ended Close Close Date) Date) Close Close date) Date)
---------- ------ ----------- ---------------- ------ ----------- ----------------
6/30/2007 $14.34 $9.66 48.45% $10.20 $8.70 17.24%
3/31/2007 $17.40 $8.15 113.50% $11.15 $8.08 38.00%
12/31/2006 $16.25 $8.07 101.36% $ 7.75 $8.17 -5.14%
9/30/2006 $ 8.81 $7.61 15.77% $ 7.05 $7.55 -6.62%
6/30/2006 $ 8.36 $8.83 -5.32% $ 7.20 $8.07 -10.78%
3/31/2006 $ 8.25 $8.91 -7.41% $ 7.41 $8.13 -8.86%
12/31/2005 $ 8.46 $8.02 5.49% $ 6.35 $7.53 -15.67%
9/30/2005 $ 7.25 $7.66 -5.35% $ 6.15 $7.37 -16.55%
6/30/2005 $ 6.39 $7.31 -12.59% $ 5.47 $6.61 -17.25%
3/31/2005 $ 6.44 $6.91 -6.80% $ 5.76 $6.67 -13.64%
-12-
THE OFFERING
Terms of the Offer
The Fund is issuing to its holders of common stock on the Record Date ("Record
Date Stockholders") Rights to subscribe for additional shares of the Fund's
common stock as of the close of business on [____], 2007 (the "Record Date").
Each Record Date Stockholder will receive one non-transferable Right for each
share of common stock owned on the Record Date. The Rights entitle the holder to
acquire one share of common stock at the Subscription Price for every one Right
held.
Rights may be exercised at any time during the period which commences on [____],
2007, and ends at 5:00 p.m., Eastern Time, on [____], 2007 (the "Subscription
Period"), unless extended by the Fund to a date not later than [____], at 5:00
p.m., Eastern Time. See "Expiration of the Offer" below. The right to acquire
one additional share of Common Stock for every one Right held during the
Subscription Period at the Subscription Price is herein after referred to as the
"Primary Subscription."
In addition, any Record Date Stockholder who fully exercises all Rights
initially issued to him is entitled to subscribe for shares which were not
otherwise subscribed for by others in the Primary Subscription (the
"Over-Subscription Privilege"). If enough shares are available, all of these
requests will be honored in full. If these requests for shares exceed the shares
available, the Fund may determine after the expiration of the Offer, in the
discretion of the Fund, to issue additional Common Stock up to an amount equal
to 100% of the Shares available pursuant to the Offer (up to an additional
[____] shares of Common Stock) in order to cover these requests, provided that
the Fund's per share NAV on the Expiration Date is equal to or less than the
Subscription Price. Regardless of whether the Fund issues such additional Common
Stock, to the extent shares are not available to honor all requests, the
available shares will be allocated pro rata among those Record Date Stockholders
who over-subscribe based on the number of Rights originally issued to them by
the Fund.
In the event that the Fund, in its sole discretion, issues additional Common
Shares in an amount of up to 100% of the Primary Subscription Shares (the
"Secondary Over-Subscription Shares") for purposes of determining the maximum
number of shares a Record Date Stockholder may acquire pursuant to the Offer,
broker-dealers whose shares are held of record by Cede, as nominee for The
Depository Trust Company, or by any other depository or nominee, will be deemed
to be the holders of the Rights that are issued to Cede or such other depository
or nominee on their behalf. Shares acquired pursuant to the Over-Subscription
Privilege are subject to allotment, which is more fully discussed below under
"Over-Subscription Privilege."
Officers of the Adviser have indicated to the Fund that the Affiliated Parties,
as Record Date Stockholders, have been authorized to purchase Common Stock
through the Primary Subscription and the Over-Subscription Privilege to the
extent the Common Stock becomes available to it in accordance with the Primary
Subscription and the allotment provisions of the Over-Subscription Privilege.
Such over-subscriptions by the Affiliated Parties may disproportionately
increase their already existing ownership resulting in a higher percentage
ownership of outstanding shares of the Fund. Any Common Stock acquired in the
Offer by the Affiliated Parties as "affiliates" of the Fund, as that term is
defined under the Securities Act of 1933 (the "Securities Act"), may only be
sold in accordance with Rule 144 under the Securities Act or another applicable
exemption or pursuant to an effective registration statement under the
Securities Act. In general, under Rule 144, as currently in effect, an
"affiliate" of the Fund is entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of common stock or the average weekly reported trading volume of the
common stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to certain restrictions on the manner of sale, to
notice requirements and to the availability of current public information about
the Fund.
-13-
Rights will be evidenced by certificates ("Subscription Certificates"). The
number of Rights issued to each Record Date Stockholder will be stated on the
Subscription Certificate delivered to the holder. The method by which Rights may
be exercised and shares paid for is set forth below in "Method of Exercising
Rights" and "Payment for Shares." A Rights holder will have no right to rescind
a purchase after the Subscription Agent has received payment. See "Payment for
Shares" below.
The Rights are non-transferable and, therefore may not be purchased or sold.
Rights not exercised will expire without residual value at the Expiration Date.
The Rights will not be listed for trading on the NASDAQ Capital Market or any
other securities exchange. Common Stock issued pursuant to an exercise of Rights
will be listed and available for trading on the NASDAQ Capital Market.
There is no minimum number of Rights which must be exercised in order for the
Offer to close.
Purpose of the Offer
The Board has determined that it is in the best interests of the Fund and its
existing stockholders to increase the assets of the Fund so that the Fund may be
in a better position to take advantage of investment opportunities that may
arise. Without additional capital, the Fund is limited in its ability to take
advantage of new investment opportunities. The only practical means of
increasing the Fund's assets available for investment other than through the
Offer would be through the sale of portfolio securities, which could subject the
Fund to certain adverse tax consequences under the Code.
The Offer affords the Fund a means of increasing its assets available for
investment without requiring the sale of portfolio securities at a time when it
would not be desirable to do so. The Offer will permit the Fund to take
advantage of investment opportunities as they arise, without necessarily having
to liquidate Fund holdings to raise cash. When the Adviser identifies an
investment opportunity, it wants to be able to take advantage of it quickly and
make investments, without having to sell current holdings in the process. The
Adviser believes that having the cash resources available to make new
investments without liquidating current portfolio holdings will allow the
investment adviser to more fully implement its investment strategy in pursuit of
the Fund's investment objective
In addition, the Board believes that increasing the size of the Fund may lower
the Fund's expenses as a proportion of average net assets because the Fund's
fixed costs would be spread over a larger asset base. As a fund's assets
decrease, its expense ratio (i.e., the ratio of expenses to fund assets) will
increase. This occurs because funds have certain fixed costs (e.g., fidelity
bond insurance, D&O liability insurance, legal fees, custodian fees, transfer
agent fees, accounting fees, regulatory filing fees etc.) which are not charged
in proportion to a fund's size. As a fund gets smaller, these fixed costs are
spread over fewer assets, thus resulting in a higher expense ratio. The opposite
occurs as a fund's assets increase, that is, the fixed costs are spread across a
larger asset base thus resulting in a lower expense ratio. There can be no
assurance, however, that an increase in the size of the Fund will lower the
Fund's expense ratio.
-14-
Also the Fund has had significant gains in NAV, and has realized gains. For the
calendar year ended December 31, 2006, the Fund paid a large year-end
distribution. In addition, the recent announcement that Florida East Coast
Industries, currently the Fund's largest holding, will be acquired by Fortress
Investment Group LLC could result in significant realized gains for the current
calendar year ending December 31, 2007. Net realized gains of the Fund are
required to be distributed to stockholders in order to maintain the Fund's
status as a "regulated investment company" under Subchapter M of the Internal
Revenue Code. Accordingly, the Fund may be required to make a large distribution
to shareholders to maintain its status as a regulated investment company,
thereby reducing the net assets of the Fund. If successful, the Offer will allow
the Fund to make the required distributions without causing a reduction in the
amount of cash available for additional investment opportunities.
The Board also believes that a larger number of outstanding shares and a larger
number of beneficial owners of shares could increase the level of market
interest in and visibility of the Fund and improve the trading liquidity of the
Fund's common stock on the NASDAQ Capital Market. If the Offer is successful,
the larger number of shares of common stock outstanding after the Offer should
help create a more efficient and active market for the Fund's shares and reduce
the effect of individual transactions on market price, all of which are believed
generally to increase liquidity.
The Offer seeks to reward existing stockholders by giving them the right to
purchase additional shares at a price below market without incurring any
commission or other transaction charges that they would normally incur when
buying shares in the market.
The Board considered, among other things, advice by the Investment Adviser,
using fixed pricing versus variable pricing for the Offer, the benefits and
drawbacks of conducting a non-transferable versus a transferable rights offering
and the effect on the Fund if the Offer is undersubscribed. The Board also
considered the extent to which the Adviser will benefit from the Offer because
the Adviser's fee is based on the average net assets of the Fund. It is not
possible to state precisely the amount of additional compensation the Adviser
will receive as a result of the Offer because the proceeds of the Offer will be
invested in additional portfolio securities which will fluctuate in value. In
addition, the Board determined to proceed with the offer of rights after having
considered the dilutive effects of the offering on stockholders who are
unwilling or unable to fully exercise their rights, as well as the alternatives
of a secondary offering. The Board has voted unanimously to approve the terms of
the Offer as set forth in this Prospectus.
-15-
It should be further understood by investors that the Fund's Adviser will
benefit from the Offer because the Adviser's fee is based on the average net
assets of the Fund. See "Management of the Fund." It is impossible to state
precisely the amount of additional compensation the Adviser will receive as a
result of the Offer because the proceeds of the Offer will be invested in
additional portfolio securities which will fluctuate in value. However, assuming
all Rights are exercised at the Estimated Subscription Price of $____, the
annual compensation to be received by the Adviser would be increased by
approximately $[____].
The Fund may, in the future and at its discretion, choose to make additional
rights offerings from time to time for a number of shares and on terms which may
or may not be similar to the Offer. Any such future rights offering will be made
in accordance with the 1940 Act. Under the laws of Maryland, the state in which
the Fund is organized, the Board is authorized to approve rights offerings
without obtaining stockholder approval. The staff of the Securities and Exchange
Commission has interpreted the 1940 Act as not requiring stockholder approval of
a rights offering at a price below the then current NAV so long as certain
conditions are met, including a good faith determination by the Board that such
offering would result in a net benefit to existing stockholders.
Subscription Price
The Subscription Price for the shares of Common Stock issued in the Offer will
be a price equal to [____]% of the volume-weighted average closing sales price
of a share of common stock on the NASDAQ Capital Market on the Expiration Date
and the four preceding trading days. Stockholders who exercise their Rights will
have no right to rescind a purchase after receipt of their completed
Subscription Certificates for Shares by the Subscription Agent. The Fund does
not have the right to withdraw the Offer after the Rights have been distributed.
The Fund announced its intention to make the Offer on [____], 2007. The NAV per
share of common stock at the close of business on [____], 2007 [the announcement
date] and on [____], 2007 [ex-rights or Record Date] was $[____] and $[____],
respectively, and the last reported sale price of a share of Common Stock on the
NASDAQ Capital Market on those dates was $[____] and $[____], respectively.
Over-Subscription Privilege
If some Record Date Stockholders do not exercise all of the Rights initially
issued to them to purchase Common Stock of the Fund, those Record Date
Stockholders who have exercised all of the Rights initially issued to them will
be offered, by means of the Over-Subscription Privilege, the right to acquire
more than the number of shares for which the Rights issued to them are
exercisable. Record Date Stockholders who exercise all the Rights initially
issued to them will have the opportunity to indicate on the Subscription
Certificate how many shares of Common Stock they are willing to acquire pursuant
to the Over-Subscription Privilege. In addition, if the Fund's NAV per share on
the Expiration Date is equal to or less than the Subscription Price, the Fund,
in its sole discretion, can issue additional Common Shares in an amount of up to
100% of the Primary Subscription Shares (the "Secondary Over-Subscription
Shares").
-16-
If sufficient Primary Subscription Shares remain after the Primary Subscriptions
have been exercised, all over-subscriptions will be honored in full. If
sufficient Primary Subscription Shares are not available to honor all
subscription requests, the available Common Shares will be allocated among those
Record Date Stockholders who over-subscribe based on the number of Rights
originally issued to them by the Fund. Should the Fund determine to issue some
or all of the Secondary Over-Subscription Shares, they will be allocated only
among Record Date Stockholders that submitted over-subscription requests.
Secondary Over-Subscription Shares will be allocated pro rata among those fully
exercising Record Date Stockholders who over-subscribe based on the number of
Rights originally issued to them by the Fund. Any Secondary Over-Subscription
Shares issued by the Fund, collectively with any Primary Subscription Shares not
subscribed through the Primary Subscription, will be referred to in this
Prospectus as the "Excess Shares."
The percentage of Excess Shares each over-subscribing Record Date Stockholder
may acquire will be rounded down to result in delivery of whole Common Shares;
provided, however, that if a pro rata allocation results in any holder being
allocated a greater number of Excess Shares than the holder subscribed for
pursuant to the exercise of such holder's Over-Subscription Privilege, then such
holder will be allocated only such number of Excess Shares as such holder
subscribed for and the remaining Excess Shares will be allocated among all other
holders then entitled to receive Excess Shares whose over-subscription requests
have not been fully honored. The allocation process may be iterative in order to
assure that the total number of Excess Shares is distributed in accordance with
the method described above.
The formula to be used in allocating the Excess Shares is as follows:
Stockholder's Record Date Position
----------------------------------------------------- X Excess Shares Remaining
Total Record Date Position of All Over-Subscribers
The Fund will not offer or sell any shares which are not subscribed for under
the Primary Subscription or the Over-Subscription Privilege.
Expiration of the Offer
The Offer will expire at 5:00 p.m., Eastern Time, on the Expiration Date
([____], 2007), unless extended by the Fund to a date not later than [____], at
5:00 p.m., Eastern Time (the "Extended Expiration Date"). Rights will expire on
the Expiration Date (or Extended Expiration Date as the case may be) and
thereafter may not be exercised.
Subscription Agent
The Subscription Agent is Colbent Corporation, 161 Bay State Drive, Braintree,
MA 02184.
Stockholders may also contact the Fund for information about the Offer by
writing to The Herzfeld Caribbean Basin Fund, P.O. Box 161465, Miami, FL 33116
or calling (800) TJH-FUND. Stockholders may also contact their brokers or
nominees for information with respect to the Offer.
-17-
Method of Exercising Rights
Rights may be exercised by filling in and signing the Subscription Certificate
and mailing it in the envelope provided, or otherwise delivering the completed
and signed Subscription Certificate to the Subscription Agent, together with
payment of the Estimated Subscription Price for the Shares as described below
under "Payment for Shares." Rights holders may also exercise Rights by
contacting a broker, bank or trust company who can arrange, on behalf of the
Rights holder, to guarantee delivery of payment and of a properly completed and
executed Subscription Certificate. A fee may be charged for this service.
Completed Subscription Certificates and full payment for the Shares subscribed
for must be received by the Subscription Agent prior to 5:00 p.m., Eastern Time,
on the Expiration Date (unless payment is effected by means of a notice of
guaranteed delivery as described below under "Payment for Shares") at the office
of the Subscription Agent at the addresses set forth above.
Qualified financial institutions that hold Shares as nominee for the account of
others should notify the respective beneficial owners of such Shares as soon as
possible to ascertain such beneficial owners' intentions and to obtain
instructions with respect to the Rights. For purposes of this Prospectus,
"Qualified Financial Institution" shall mean a registered broker-dealer,
commercial bank or trust company, securities depository or participant therein,
or nominee thereof. If the beneficial owner so instructs, the nominee should
complete the Subscription Certificate and submit it to the Subscription Agent
with the proper payment. In addition, beneficial owners of Common Stock or
Rights held through such a nominee should contact the nominee and request the
nominee to effect transactions in accordance with the beneficial owners'
instructions.
Stockholders who are registered holders can choose between either option set
forth under "Payment for Shares" below.
Payment for Shares
Payment for shares shall be calculated by multiplying the Estimated Subscription
Price of $[____] per share times the sum of (i) the number of Rights held and
intended to be exercised in the Primary Subscription, plus (ii) the number of
additional shares for which a stockholder wishes to over-subscribe under the
Over-Subscription Privilege. For example, if a stockholder receives 100 Rights
and wishes to subscribe for 100 shares of Common Stock in the Primary
Subscription, and also wishes to over-subscribe for 50 additional shares
pursuant to the Over-Subscription Privilege, he, she or it would send in [____]
x 100 plus ([____]) x 50. Rights holders who wish to acquire shares in the
Primary Subscription or pursuant to the Over-Subscription Privilege may choose
between the following methods of payment:
a. Notice of Guaranteed Delivery and Subscription Certificate (with payment)
sent separately. If, prior to 5:00 p.m., Eastern Time, on the Expiration
Date, the Subscription Agent shall have received a notice of guaranteed
delivery by telegram or otherwise, from a bank or trust company or a NYSE
member firm guaranteeing delivery of (i) payment of the Estimated
Subscription Price of $ [____] per share for the shares subscribed for in
the Primary Subscription and any additional shares subscribed for pursuant
to the Over-Subscription Privilege and (ii) a properly completed and
executed Subscription Certificate, the subscription will be accepted by
the Subscription Agent. The Subscription Agent will not honor a notice of
guaranteed delivery unless a properly completed and executed Subscription
Certificate is received by the Subscription Agent prior to 5:00 p.m.,
Eastern Time, on the third Business Day after the Expiration Date (the
"Protection Period").
-18-
b. Subscription Certificate sent with Payment. Alternatively, a
stockholder can, together with the properly completed and executed
Subscription Certificate, send payment for the shares acquired in the
Primary Subscription and any additional shares subscribed for pursuant
to the Over-Subscription Privilege, to the Subscription Agent based on
the Estimated Subscription Price of $[____] per share. To be accepted,
such payment, together with the Subscription Certificate, must be
received by the Subscription Agent prior to 5:00 p.m., Eastern Time, on
the Expiration Date.
Any excess payment will be refunded to the stockholder to the extent that
additional shares are unavailable.
A PAYMENT, PURSUANT TO THE SECOND METHOD DESCRIBED ABOVE, MUST ACCOMPANY ANY
SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION CERTIFICATE TO BE ACCEPTED.
Within ten (10) Business Days following the completion of the Protection Period
(the "Confirmation Date"), a confirmation will be sent by the Subscription Agent
to each stockholder (or, if the Fund's shares on the Record Date are held by
Cede or any other depository or nominee, to Cede or such other depository or
nominee). The confirmation will show (i) the number of shares acquired pursuant
to the Primary Subscription; (ii) the number of shares, if any, acquired
pursuant to the Over-Subscription Privilege; (iii) the Subscription Price and
total purchase price for the shares; and (iv) any additional amount payable by
such stockholder to the Fund (e.g., if the Estimated Subscription Price was less
than the Subscription Price on the Pricing Date) or any excess to be refunded by
the Fund to such stockholder (e.g., if the Estimated Subscription Price was more
than the Subscription Price on the Pricing Date). Any additional payment
required from a stockholder must be received by the Subscription Agent prior to
5:00 p.m., Eastern Time, on the tenth Business Day after the Confirmation Date,
and any excess payment to be refunded by the Fund to such stockholder will be
mailed by the Subscription Agent within ten (10) Business Days after the
Confirmation Date. All payments by a stockholder must be made in United States
Dollars by money order or by checks drawn on banks located in the Continental
United States payable to "The Herzfeld Caribbean Basin Fund, Inc."
Whichever of the above two methods is used, issuance and delivery of
certificates for the shares of Common Stock subscribed for are subject to
collection of funds and actual payment pursuant to any notice of guaranteed
delivery.
The Subscription Agent will deposit all checks received by it prior to the final
due date into a segregated interest bearing account pending distribution of the
shares from the Offer. All interest will inure to the benefit of the Fund and
investors will not earn interest on payments submitted.
-19-
YOU WILL HAVE NO RIGHT TO RESCIND YOUR SUBSCRIPTION AFTER THE SUBSCRIPTION AGENT
HAS RECEIVED THE SUBSCRIPTION CERTIFICATE OR NOTICE OF GUARANTEED DELIVERY.
If a holder of Rights who acquires shares pursuant to the Primary Subscription
or the Over-Subscription Privilege does not make payment of any amounts due, the
Fund reserves the right to take any or all of the following actions: (i) find
other stockholders or Rights holders to purchase such subscribed-for and
unpaid-for shares; (ii) apply any payment actually received by it toward the
purchase of the greatest whole number of shares which could be acquired by such
holder upon exercise of the Primary Subscription or the Over-Subscription
Privilege; (iii) sell all or a portion of the shares purchased by the holder in
the open market, and apply the proceeds to the amounts owed; and (iv) exercise
any and all other rights or remedies to which it may be entitled, including,
without limitation, the right to set off against payments actually received by
it with respect to such subscribed shares and to enforce the relevant guaranty
of payment.
Holders who hold shares of common stock for the account of others, such as
brokers, trustees or depositaries for securities, should notify the respective
beneficial owners of the shares as soon as possible to ascertain the beneficial
owners' intentions and to obtain instructions with respect to the Rights. If the
beneficial owners so instruct, the record holder of the Rights should complete
Subscription Certificates and submit them to the Subscription Agent with the
proper payment. In addition, beneficial owners of common stock or Rights held
through such a holder should contact the holder and request the holder to effect
transactions in accordance with the beneficial owner's instructions.
The instructions accompanying the Subscription Certificates should be read
carefully and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES TO THE
FUND.
The method of delivery of Subscription Certificates and payment of the
Subscription Price to the Subscription Agent will be at the election and risk of
the Rights holders, but if sent by mail it is recommended that the Subscription
Certificates and payments be sent by registered mail, properly insured, with
return receipt requested, and that a sufficient number of days be allowed to
ensure delivery to the Subscription Agent and clearance of payment prior to 5:00
p.m., Eastern Time, on the Expiration Date. Because uncertified personal checks
may take at least five Business Days to clear, you are strongly urged to pay, or
arrange for payment, by means of a certified or cashier's check or money order.
All questions concerning the timeliness, validity, form and eligibility of any
exercise of Rights will be determined by the Fund, whose determinations will be
final and binding. The Fund in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Fund determines
in its sole discretion. Neither the Fund nor the Subscription Agent will be
under any duty to give notification of any defect or irregularity in connection
with the submission of Subscription Certificates or incur any liability for
failure to give such notification.
-20-
Delivery of Stock Certificates
Stock certificates representing shares purchased pursuant to the Primary
Subscription will be delivered to subscribers as soon as practicable after the
corresponding Rights have been validly exercised and full payment for the shares
has been received and cleared. Stock certificates representing shares purchased
pursuant to the Over-Subscription Privilege will be delivered to subscribers as
soon as practicable after the Expiration Date and after all allocations have
been effected.
Foreign Restrictions
Subscription Certificates will only be mailed to Record Date Stockholders whose
addresses are within the United States (other than an APO or FPO address).
Record Date Stockholders whose addresses are outside the United States or who
have an APO or FPO address and who wish to subscribe to the Offer either in part
or in full should contact the Subscription Agent, Colbent Corporation, by
written instruction or recorded telephone conversation no later than three
Business Days prior to the Expiration Date. The Fund will determine whether the
Offer may be made to any such stockholder.
Federal Income Tax Consequences Associated With the Offer
The following discussion describes certain United States Federal income tax
consequences of the Offer generally applicable to citizens or residents of the
United States and U.S. trusts, estates, corporations and any other person who is
generally subject to U.S. Federal income tax ("U.S. Stockholders"). This summary
is intended to be descriptive only and does not purport to be a complete
analysis or listing of all potential tax effects relevant to the ownership of
Rights or Common Stock. It assumes that each U.S. Stockholder holds Common Stock
as a capital asset. Additionally, this summary does not specifically address the
U.S. Federal income tax consequences that might be relevant to holders of Rights
or Common Stock entitled to special treatment under the U.S. Federal income tax
laws, such as individual retirement accounts and other tax deferred accounts,
financial institutions, life insurance companies and tax-exempt organizations,
and does not discuss the effect of state, local and other tax laws. Further,
this summary is based on interpretations of existing law as of the date of this
Prospectus as contained in the Code, applicable current and proposed Treasury
Regulations, judicial decisions and published administrative positions of the
Internal Revenue Service, all of which are subject to change either
prospectively or retroactively.
1. U.S. Stockholders who receive Rights pursuant to the Offer should not
recognize taxable income for U.S. Federal income tax purposes upon their
receipt of the Rights. If Rights issued to a U.S. Stockholder expire
without being exercised, no basis should be allocated to such Rights, and
such Stockholder should not recognize any gain or loss for U.S. Federal
income tax purposes upon such expiration.
2. The tax basis of a U.S. Stockholder's Common Stock should remain unchanged
and the stockholder's basis in the Rights should be zero, unless such U.S.
Stockholder affirmatively and irrevocably elects (in a statement attached
to such stockholder's U.S. Federal income tax return for the year in which
the Rights are received) to allocate the basis in the Common Stock between
such Common Stock and the Rights in proportion to their respective fair
market values on the date of distribution.
3. A U.S. Stockholder who exercises Rights should not recognize any gain or
loss for U.S. Federal income tax purposes upon the exercise. The tax basis
of the newly acquired Common Stock should equal the Subscription Price
paid for the Common Stock (plus the basis, if any, allocated to the Rights
in the manner described in the immediately preceding paragraph). The
holding period for Common Stock acquired upon the exercise of Rights
should begin on the date of exercise of the Rights.
4. Each U.S. Stockholder is urged to consult his or her own tax adviser with
respect to the specific Federal, state and local tax consequences to such
U.S. Stockholder of receiving Rights in this offer.
Employee Plan Considerations
Stockholders that are employee benefit plans subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") (including corporate savings
and 401(k) plans), Keogh or H.R. 10 plans of self-employed individuals and
Individual Retirement Accounts ("IRAs") (collectively, "Plans") should be aware
of the complexity of the rules and regulations governing Plans and the penalties
for noncompliance, and Plans should consult with their counsel regarding the
consequences of their exercise of Rights under ERISA and the Internal Revenue
Code of 1986, as amended (the "Code").
-21-
USE OF PROCEEDS
The net proceeds of the Offer, assuming the Offer is fully subscribed, are
estimated to be approximately $____million, based on an Estimated Subscription
Price of $[____]per share, and after deducting expenses related to the Offer
estimated at approximately $[____]. The foregoing estimate of the net proceeds
of the Offer is based on the closing price of the Fund's shares on [____], 2007.
Accordingly, the assumptions and projections contained in this prospectus are
subject to change significantly depending on changes in market conditions for
the Fund's shares and performance of the Fund's portfolio. The Fund will invest
the net proceeds of the Offer in accordance with its investment objective and
policies. The Adviser anticipates that the proceeds will be invested promptly as
investment opportunities are identified, depending on market conditions and the
availability of appropriate securities, and it is anticipated to take not more
than approximately six months. Pending investment, the proceeds will be invested
in short-term cash-equivalent instruments.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in the Fund's common stock provides an equity ownership interest in
the Fund. Investing in any investment company security involves risk, including
the risk that a Stockholder may receive little or no return on the Stockholder's
investment or that the Stockholder may lose part or all of the Stockholder's
investment. Therefore, before investing, Stockholders should consider carefully
the following risks that are assumed when investing in the Fund through the
Offer.
Dilution of Net Asset Value and Effect of Non-Participation in the Offer
If a Stockholder does not exercise all of his Rights, the Stockholder will
likely own a smaller proportional interest in the Fund when the Offer is over
(i.e., proportional dilution). In addition, whether or not a Stockholder
exercises his Rights, because the Subscription Price (and net proceeds to the
Fund) may be below the Fund's NAV per share on the Expiration Date the per share
net asset value of a Stockholder's shares may be diluted (reduced) immediately
as a result of the Offer (i.e., economic dilution).
In other words, a Stockholder may experience economic dilution in addition to
proportional dilution because:
o The Subscription Price per share is [____]% of the average
volume-weighted closing sales price of a share of common stock on
the NASDAQ Capital Market on the Pricing Date and the four
immediately preceding trading days (which may be lower than the
NAV);
o All Stockholders will indirectly bear the expenses of the Offer; and
-22-
o the number of shares outstanding after the Offer will have increased
proportionately more than the increase in the size of the Fund's net
assets
The Fund cannot state precisely the amount of any dilution/accretion because it
is not known at this time (i) what the average volume-weighted closing sale
price of a share on the NASDAQ Capital Market will be on the Pricing Date and
the four immediately preceding trading days, or (ii) what proportion of the
Rights will be exercised.
The impact of the Offer on NAV per share is shown by the following example,
assuming a Subscription Price of $[____], full primary and over-subscription
privilege exercise and $[____] in expenses related to the Offer.
Net Asset Value ("NAV") $[____]
Subscription Price $[____]
[Increase/Reduction] in NAV ($) $[____]
[Increase/Reduction] in NAV (%) [____]%
Discount From Net Asset Value
Shares of closed-end funds frequently trade at a market price that is less than
the value of the net assets attributable to those shares (a "discount"). The
possibility that the Fund's shares will trade at a discount from NAV is a risk
separate and distinct from the risk that the Fund's NAV will decrease. The risk
of purchasing shares of a closed-end fund that might trade at a discount or
unsustainable premium is more pronounced for investors who wish to sell their
shares in a relatively short period of time after purchasing them because, for
those investors, realization of a gain or loss on their investments is likely to
be more dependent upon the existence of a premium or discount than upon
portfolio performance. The Fund's shares are not redeemable at the request of
stockholders. The Fund may repurchase its shares in the open market or in
private transactions, although it has no present intention to do so.
Stockholders desiring liquidity may, subject to applicable securities laws,
trade their shares in the Fund on the NASDAQ Capital Market or other markets on
which such shares may trade at the then current market value, which may differ
from the then current NAV.
Risks of Investing in Caribbean Basin Countries
The economies of Caribbean Basin Countries have in the past experienced
considerable difficulties, including high inflation rates and high interest
rates. The emergence of the economies and securities markets of the Caribbean
Basin Countries will require continued economic and fiscal discipline that has
been lacking at times in the past, as well as stable political and social
conditions. International economic conditions, particularly those in the United
States, as well as world prices for oil and other commodities may also influence
the development of the economies of the Caribbean Basin Countries.
The currencies of some Caribbean Basin Countries have experienced steady
devaluations relative to the U.S. Dollar and certain Caribbean Basin Countries
have had to make major adjustments in their currencies from time to time. Also
many Caribbean Basin Countries have experienced substantial, and in some periods
extremely high, rates of inflation for many years. For companies that keep
accounting records in the local currency, inflation accounting rules in some
Caribbean Basin Countries require, for both tax and accounting purposes, that
certain assets and liabilities be restated on the company's balance sheet in
order to express items in terms of currency of constant purchasing power.
Inflation accounting may indirectly generate losses or profits for certain
Caribbean Basin Companies. Inflation and rapid fluctuations in inflation rates
have had, and could, in the future, have very negative effects on the economies
and securities markets of certain Caribbean Basin Countries.
-23-
In addition, governments of many Caribbean Basin Countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector. Governmental actions in the future could have a significant effect on
economic conditions in Caribbean Basin Countries, which could affect the
companies in which the Fund invests and, therefore, the value of Fund shares.
Investments in foreign markets may be adversely affected by governmental actions
such as the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Substantial
limitations may exist in certain countries with respect to the Fund's ability to
repatriate investment income, capital or the proceeds of sales of securities.
The Fund could be adversely affected by delays in, or a refusal to grant, any
required governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments. Any of these actions
could severely affect security prices, impair the Fund's ability to purchase or
sell foreign securities or transfer the Fund's assets or income back into the
United States, or otherwise adversely affect the Fund's operations.
Certain Caribbean Basin Countries have entered into regional trade agreements
that are designed to, among other things, reduce barriers between countries,
increase competition among companies and reduce government subsidies in certain
industries. No assurance can be given that these changes will be successful in
the long term, or that these changes will result in the economic stability
intended. There is a possibility that these trade arrangements will not be fully
implemented, or will be partially or completely unwound. It is also possible
that a significant participant could choose to abandon a trade agreement, which
could diminish its credibility and influence. Any of these occurrences could
have adverse effects on the markets of both participating and non-participating
countries, including sharp appreciation or depreciation of participants'
national currencies and a significant increase in exchange rate volatility, a
resurgence in economic protectionism, an undermining of confidence in the
Caribbean Basin markets, an undermining of Caribbean Basin economic stability,
the collapse or slowdown of the drive towards economic unity, and/or reversion
of the attempts to lower government debt and inflation rates that were
introduced in anticipation of such trade agreements. Such developments could
have an adverse impact on the Fund's investments in the Caribbean Basin
generally or in specific countries participating in such trade agreements.
The Caribbean Basin has experienced natural disasters, including hurricanes,
droughts and floods, which have caused substantial damage to parts of the
Caribbean Basin and have harmed the region's economies. The possibility exists
that another natural disaster could materially disrupt and adversely affect the
economies of Caribbean Basin Countries. In addition, companies and industries in
which the Fund invests may experience substantial disruptions in operations as a
result of any such natural disasters.
-24-
Other Caribbean Basin market risks include foreign exchange controls,
difficulties in pricing securities, defaults on sovereign debt, difficulties in
enforcing favorable legal judgments in local courts and political and social
instability. Legal remedies available to investors in certain Caribbean Basin
countries may be less extensive than those available to investors in the United
States or other foreign countries.
Geographic Concentration Risk
The Fund may invest from time to time a substantial amount of its assets in
issuers located in a single country or a limited number of countries. If the
Fund concentrates its investments in this manner, it assumes the risk that
economic, political and social conditions in those countries will have a
significant impact on its investment performance. The Fund's investment
performance may also be more volatile if it concentrates its investments in
certain countries, especially emerging market countries.
Foreign Securities Risk
Securities traded in foreign markets have often (though not always) performed
differently from securities traded in the United States. However, such
investments often involve special risks not present in U.S. investments that can
increase the chances that the Fund will lose money. In particular, the Fund is
subject to the risk that because there may be fewer investors on foreign
exchanges and a smaller number of securities traded each day, it may be more
difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may go up and down more than prices of
securities traded in the United States.
Foreign Economy Risk
The economies of certain foreign markets may not compare favorably with the
economy of the United States with respect to such issues as growth of gross
national product, reinvestment of capital, resources and balance of payments
position. Certain foreign economies may rely heavily on particular industries or
foreign capital and are more vulnerable to diplomatic developments, the
imposition of economic sanctions against a particular country or countries,
changes in international trading patterns, trade barriers and other
protectionist or retaliatory measures. Investments in foreign markets may also
be adversely affected by governmental actions such as the imposition of capital
controls, nationalization of companies or industries, expropriation of assets or
the imposition of punitive taxes. In addition, the governments of certain
countries may prohibit or impose substantial restrictions on foreign investments
in their capital markets or in certain industries. Any of these actions could
severely affect securities prices or impair the Fund's ability to purchase or
sell foreign securities or transfer the Fund's assets or income back into the
United States, or otherwise adversely affect the Fund's operations.
Other potential foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing legal judgments in foreign courts and political and
social instability. Legal remedies available to investors in certain foreign
countries may be less extensive than those available to investors in the United
States.
-25-
Currency Risk
Securities and other instruments in which the Fund invests may be denominated or
quoted in currencies other than the U.S. Dollar. Changes in foreign currency
exchange rates may affect the value of the Fund's portfolio. Because the Fund's
assets are primarily invested in securities of Caribbean Basin Companies, and
because some portion of revenues and income may be received in foreign
currencies while Fund distributions will be made in dollars, the dollar
equivalent of the Fund's net assets and distributions would be adversely
affected by reductions in the value of the foreign currencies relative to the
dollar. For this reason, changes in foreign currency exchange rates can affect
the value of the Fund's portfolio. Generally, when the U.S. Dollar rises in
value against a foreign currency, a security denominated in that currency loses
value because the currency is worth fewer U.S. Dollars. Conversely, when the
U.S. Dollar decreases in value against a foreign currency, a security
denominated in that currency gains value because the currency is worth more U.S.
Dollars. This risk, generally known as "currency risk," means that a strong U.S.
Dollar may reduce returns for U.S. investors while a weak U.S. Dollar may
increase those returns. The Fund is managed with the assumption that most of its
stockholders hold their assets in U.S. Dollars. As a result, and because
distributions are made in U.S. Dollars, other non-U.S. investors will be
adversely affected by reductions in the value of the U.S. Dollar relative to
their home currency.
Governmental Supervision and Regulation/Accounting Standards
Foreign issuers are generally not bound by uniform accounting, auditing, and
financial reporting requirements and standards of practice comparable to those
applicable to U.S. issuers. Some of the securities held by the Fund may not be
registered with the U.S. Securities and Exchange Commission nor may the issuers
be subject to the SEC's reporting requirements. Thus, there may be less
available information concerning foreign issuers of securities held by the Fund
than is available concerning U.S. issuers. Adequate public information on
foreign issuers may not be available, and it may be difficult to secure
dividends and information regarding corporate actions on a timely basis. In
general, there is less overall governmental supervision and regulation of
securities exchanges, brokers, and listed companies than in the United States.
OTC markets tend to be less regulated than stock exchange markets and, in
certain countries, may be totally unregulated. Regulatory enforcement may be
influenced by economic or political concerns, and investors may have difficulty
enforcing their legal rights in foreign countries.
In addition, the U.S. Government has from time to time imposed restrictions,
through penalties and otherwise, on foreign investments by U.S. investors,
including current prohibitions on U.S. investment in Cuba. Investments in
securities of Cuban companies, if permitted by U.S. law, may be subject to
certain political and economic risks in addition to the risks associated with
investment in the securities of issuers domiciled in other foreign countries.
The risks include (i) less social, political and economic stability; (ii) the
small current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) the absence of
developed legal structures governing private or foreign investment or allowing
for judicial redress for injury to private property; (V) the absence of a
capital market structure or market-oriented economy; and (vi) the possibility
that recent favorable economic developments may be slowed or reversed by
unanticipated political or social events in such countries. Investments in
securities of Cuban companies, if and when the Fund is permitted to invest in
such securities, will be speculative and involve risks not usually associated
with investments in securities of issuers in more developed market economies.
See "Emerging Markets Risk" below.
-26-
Some foreign securities or nations impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to such transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
Accounting standards in other countries are not necessarily the same as in the
United States. If the accounting standards in another country do not require as
much detail as U.S. accounting standards, it may be harder for the Adviser to
completely and accurately determine a company's financial condition. In
instances where the financial statements of an issuer are not deemed to reflect
accurately the financial situation of the issuer, the Adviser will take
appropriate steps to evaluate the proposed investment, which may include on-site
inspection of the issuer (including Cuba, if U.S. restrictions on travel to Cuba
are lifted), interviews with its management and consultation with accountants,
bankers and other specialists.
Certain Risks of Holding Fund Assets Outside the United States
The Fund generally holds its foreign securities and cash in foreign banks and
securities depositories. Some foreign banks and securities depositories may be
recently organized or new to the foreign custody business. In addition, there
may be limited or no regulatory oversight of their operations. Also, the laws of
certain countries limit the Fund's ability to recover its assets if a foreign
bank, depository or issuer of a security, or any of their agents, goes bankrupt.
In addition, it is often more expensive for the Fund to buy, sell and hold
securities in certain foreign markets than in the United States. The increased
expense of investing in foreign markets reduces the amount the Fund can earn on
its investments and typically results in a higher operating expense ratio for
the Fund than for investment companies invested only in the United States.
Settlement Risk
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement and clearance
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically associated with the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates in markets that still rely on
physical settlement. At times, settlements in certain foreign countries have not
kept pace with the number of securities transactions. These problems may make it
difficult for the Fund to carry out transactions. If the Fund cannot settle or
is delayed in settling a purchase of securities, it may miss attractive
investment opportunities and certain of its assets may be uninvested with no
return earned thereon for some period. If the Fund cannot settle or is delayed
in settling a sale of securities, it may lose money if the value of the security
then declines or, if it has contracted to sell the security to another party,
the Fund could be liable for any losses incurred. Dividends or interest on, or
proceeds from the sale of, foreign securities may be subject to foreign
withholding taxes.
-27-
Emerging Markets Risk
The risks of foreign investments are usually much greater for emerging markets.
Investments in emerging markets, including many Caribbean Basin Countries, may
be considered speculative. Emerging markets are riskier than more developed
markets because they tend to develop unevenly and may never fully develop. Since
these markets are often small, they may be more likely to suffer sharp and
frequent price changes or long-term price depression because of adverse
publicity, investor perceptions or the actions of a few large investors. Many
emerging markets have histories of political instability and abrupt changes in
policies. As a result, their governments are more likely to take actions that
are hostile or detrimental to private enterprise or foreign investment than
those of more developed countries. Certain emerging markets may also face other
significant internal or external risks, including the risk of war, and civil
unrest. In addition, governments in many emerging market countries participate
to a significant degree in their economies and securities markets, which may
impair investment and economic growth.
Investments in the securities of issuers domiciled in countries with emerging
capital markets involve certain additional risks that do not generally apply to
investments in securities of issuers in more developed capital markets, such as
(i) low or non-existent trading volume, resulting in a lack of liquidity and
increased volatility in prices for such securities, as compared to securities of
comparable issuers in more developed capital markets; (ii) uncertain national
policies and social, political and economic instability, increasing the
potential for expropriation of assets, confiscatory taxation, high rates of
inflation or unfavorable diplomatic developments; (iii) possible fluctuations in
exchange rates, differing legal systems and the existence or possible imposition
of exchange controls, custodial restrictions or other foreign or U.S.
governmental laws or restrictions applicable to such investments; (iv) national
policies that may limit the Fund's investment opportunities such as restrictions
on investment in issuers or industries deemed sensitive to national interests;
and (v) the lack or relatively early development of legal structures governing
private and foreign investments and private property. In addition to withholding
taxes on investment income, some countries with emerging markets may impose
differential capital gains taxes on foreign investors.
Emerging capital markets are developing in a dynamic political and economic
environment brought about by events over recent years that have reshaped
political boundaries and traditional ideologies. In such a dynamic environment,
there can be no assurance that any or all of these capital markets will continue
to present viable investment opportunities for the Fund. In the past,
governments of such nations have expropriated substantial amounts of private
property, and most claims of the property owners have never been fully settled.
There is no assurance that such expropriations will not reoccur. In such an
event, it is possible that the Fund could lose the entire value of its
investments in the affected market.
Also, there may be less publicly available information about issuers in emerging
markets than would be available about issuers in more developed capital markets,
and such issuers may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those to which U.S. companies
are subject. In certain countries with emerging capital markets, reporting
standards vary widely. As a result, traditional investment measurements used in
the United States, such as price/earnings ratios, may not be applicable.
Emerging market securities may be substantially less liquid and more volatile
than those of mature markets, and company shares may be held by a limited number
of persons. This may adversely affect the timing and pricing of the Fund's
acquisition or disposal of securities. Communications between the United States
and emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates.
-28-
Practices in relation to settlement of securities transactions in emerging
markets involve higher risks than those in developed markets, in part because
the Fund may need to use brokers and counterparties that are less well
capitalized, and custody and registration of assets in some countries may be
unreliable. The possibility of fraud, negligence, undue influence being exerted
by the issuer or refusal to recognize ownership exists in some emerging markets,
and, along with other factors, could result in ownership registration being
completely lost. The Fund would absorb any loss resulting from such registration
problems and may have no successful claim for compensation.
INVESTMENT OBJECTIVE AND POLICIES
Investment Policies - General
The Fund's investment objective is to obtain long-term capital appreciation.
This objective may not be changed without the prior approval of the holders of a
majority of the Fund's outstanding voting securities. 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, (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 (collectively referred to herein as
"Caribbean Basin Companies"). Current income through receipt of interest or
dividends from the Fund's securities is incidental to the Fund's efforts to
attain its investment objective. The Fund invests in Caribbean Basin Companies
that are likely, in the opinion of the Adviser, to benefit from political, legal
and economic developments in the Caribbean Basin Countries. Under normal market
conditions, the Fund invests at least 80% of its total assets in equity and
equity-linked securities of Caribbean Basin Companies. The Fund may invest more
than 25% of its total assets in the securities of U.S.-based companies. U.S. law
currently prohibits the Fund from investing its assets in securities of
companies that benefit from free trade with Cuba ("companies strategically
linked to Cuba"). Companies strategically linked to Cuba may include a company
that benefits from free trade with Cuba, but does not meet the definition of
Caribbean Basin Company set forth above. If permitted to make such investments
upon a lifting or easing of the U.S. trade embargo against Cuba or pursuant to
regulations promulgated by a department or agency of the U.S. Government, the
Fund may invest up to 20% of its assets in equity and equity-linked securities
of non-Caribbean Basin Companies strategically linked to Cuba.
The Fund's investment objective is fundamental and may not be changed without
the approval of the Fund's outstanding voting securities. As used in this
Prospectus, a majority of the Fund's outstanding voting securities means the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are present in person or represented by proxy or (ii)
more than 50% of the outstanding shares. The Fund's investment policies may be
changed by its Board without stockholder approval, but the Fund will not change
its investment policies without notice to its stockholders. The Fund is designed
primarily for long-term investment, and investors should not consider it a
trading vehicle. An investment in the Fund's shares should not constitute a
complete investment program. The Fund's NAV can be expected to fluctuate, and no
assurance can be given that the Fund will continue to achieve its investment
objective.
-29-
Equity securities of public and private companies that may be purchased by the
Fund consist of common stock, convertible and non-convertible preferred stock
(whether voting or non-voting), debt with equity warrants and unattached
warrants. Debt issued with a warrant entitles the holder to purchase equity
shares and differs from convertible debt because the conversion feature is in
the form of a separately traded warrant. Equity-linked securities of public and
private companies that may be purchased by the Fund consist of debt securities
convertible into equity and securities such as warrants, options and futures,
the prices of which are functions of the value of the equity securities
receivable upon exercise or settlement thereof.
The Fund may also invest in the shares of other registered investment companies,
some of which may be Caribbean Basin Companies. By investing in shares of
investment companies, the Fund would indirectly pay a portion of the operating
expenses, management expenses and brokerage costs of such companies as well as
the expense of operating the Fund. Thus, the Fund's investors may indirectly pay
higher total operating expenses and other costs than they might pay by owning
the underlying investment companies directly. The Adviser will continue to
attempt to identify investment companies that have demonstrated superior
management in the past, thus possibly offsetting these factors by producing
better results and/or lower expenses than other investment companies. There can
be no assurance that this result will continue to be achieved. In addition,
Section 12(d)(1)(A) of the 1940 Act imposes limits on the amount of the
investment of the Fund's assets, and those of its affiliates, in any investment
company and that provision may adversely affect the Fund's ability to purchase
or redeem shares issued by an investment company.
The Fund may invest in securities that lack an established secondary trading
market or otherwise are considered illiquid. Liquidity of a security relates to
the ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays a distribution, and could result in the
Fund borrowing to meet short-term cash requirements or incurring capital losses
on the sale of illiquid investments.
The Fund may invest in securities that are not registered under the Securities
Act of 1933, as amended ("restricted securities"). Restricted securities may be
sold in private placement transactions between issuers and their purchasers and
may be neither listed on an exchange nor traded in other established markets. In
many cases, privately placed securities may not be freely transferable under the
laws of the applicable jurisdiction or due to contractual restrictions on
resale. As a result of the absence of a public trading market, privately placed
securities may be less liquid and more difficult to value than publicly traded
securities. To the extent that privately placed securities may be resold in
privately negotiated transactions, the prices realized from the sales, due to
illiquidity, could be less than those originally paid by the Fund or less than
their fair market value. In addition, issuers whose securities are not publicly
traded may not be subject to the disclosure and other investor protection
requirements that may be applicable if their securities were publicly traded. If
any privately placed securities held by the Fund are required to be registered
under the securities laws of one or more jurisdictions before being resold, the
Fund may be required to bear the expenses of registration. Certain of the Fund's
investments in private placements may consist of direct investments and may
include investments in smaller, less seasoned issuers, which may involve greater
risks. These issuers may have limited product lines, markets or financial
resources, or they may be dependent on a limited management group. In making
investments in such securities, the Fund may obtain access to material nonpublic
information, which may restrict the Fund's ability to conduct portfolio
transactions in such securities.
-30-
The Fund may vary its investment policy for temporary defensive purposes when,
in the opinion of the Adviser, such a change is warranted due to changes in the
securities markets in which the Fund may invest or other economic or political
conditions affecting such markets. For temporary defensive purposes, the Fund
may reduce its position in equity and equity-linked securities and invest in
U.S. Treasury bills and U.S. Dollar denominated bank time deposits and
certificates of deposit rated high quality or better by any nationally
recognized statistical rating service or, if unrated, of equivalent investment
quality as determined by the Adviser. The banks whose obligations may be
purchased by the Fund will include any member of the U.S. Federal Reserve
System. The Fund does not seek to achieve its stated investment objective when
it has assumed a temporary defensive position.
Special Leverage Considerations
Hedging Transactions
The Fund may employ one or more of the hedging techniques described below,
primarily to protect against a decrease in the U.S. Dollar equivalent value of
its portfolio securities denominated in foreign currencies or in the payments
thereon that may result from an adverse change in foreign currency exchange
rates. Conditions in the securities, futures, options and foreign currency
markets will continue to determine whether and under what circumstances the Fund
will employ any of the techniques or strategies described below. The Fund's
ability to pursue certain of these strategies may be limited by applicable
regulations of the Commodity Futures Trading Commission ("CFTC") and the Federal
tax requirements applicable to regulated investment companies. See
"Taxation-General".
Pursuant to applicable law and subject to certain restrictions, the Fund may
effect hedging transactions on a variety of U.S. and foreign exchanges. The
operations of U.S. exchanges are considered to be subject to more stringent
regulation and supervision than those of certain non-U.S. exchanges.
-31-
If any percentage limitations applicable to the transactions described below are
exceeded due to market fluctuations after an initial investment, the Fund may
not enter into new transactions of the type to which the exceeded limitation
applies until the total of the Fund's commitments with respect to such
transactions falls within the applicable limitation.
Forward Foreign Currency Exchange Contracts
The Adviser believes that in some circumstances the purchase and sale of forward
foreign currency exchange contracts ("forward contracts") may help offset
declines in the U.S. Dollar equivalent value of the Fund's assets denominated in
foreign currencies and in the income available for distribution to the Fund's
stockholders that would result from adverse changes in the exchange rate between
the U.S. Dollar and such foreign currencies. For example, the U.S. Dollar
equivalent value of the principal of and rate of return on, the Fund's foreign
denominated securities will decline if the exchange rate fluctuates between the
U.S. Dollar and such foreign currency whereby the U.S. Dollar increases in
value. Such a decline could be partially or completely offset by an increase in
the value of a foreign currency forward contract. The Fund may purchase forward
contracts involving either the currencies in which certain of its portfolio
securities are denominated or, in cross-hedging transactions, other currencies,
changes in the value of which correlate closely with the changes in the value of
the currencies in which its portfolio securities are denominated. The Fund will
enter into such cross-hedging transactions (i) only with respect to currencies
whose foreign exchange rate changes historically have shown a high degree of
correlation to changes in the foreign exchange rate of the currency in which the
hedged asset is denominated (a "correlated currency") and (ii) only when the
Adviser believes that the increase in correlation risk is offset by the lower
transaction costs and increased liquidity available for financial instruments
denominated in the correlated currency.
The Fund may enter into forward contracts or maintain a net exposure on such
contracts only if (i) the consummation of the contracts would not obligate the
Fund to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in that currency or (ii)
the Fund maintains cash, U.S. Government securities or other liquid, high-grade
debt securities in a segregated account in an amount not less than the value of
the Fund's total assets committed to the consummation of the contract.
Although the use of forward contracts may protect the Fund against declines in
the U.S. Dollar equivalent value of the Fund's assets, such use may reduce the
possible gain from advantageous changes in the value of the U.S. Dollar against
particular currencies in which the Fund's assets are denominated. Moreover, the
use of forward contracts will not eliminate fluctuations in the underlying U.S.
Dollar equivalent value of the prices of, or rates of return on, the assets held
in the Fund's portfolio.
The use of forward contracts subjects the Fund to certain risks. The matching of
the increase in value of a forward contract and the decline in the U.S. Dollar
equivalent value of the asset that is the subject of the hedge generally is not
precise. The success of any of these techniques depends on the ability of the
Adviser to predict correctly movements in foreign currency exchange rates. If
the Adviser incorrectly predicts the direction of such movements or if
unanticipated changes in foreign currency exchange rates occur, the Fund's
performance may be poorer than if it had not entered into such contracts. The
cost to the Fund of engaging in forward contracts varies with such factors as
the foreign currency involved, the length of the contract period and the
prevailing market conditions, including general market expectations as to the
direction of the movement of various foreign currencies against the U.S. Dollar.
Consequently, because the Fund may not always be able to enter into forward
contracts at attractive prices, it may be limited in its ability to use such
contracts to hedge its assets or for other risk management purposes. In
addition, there can be no assurance that historical correlations between the
movements of certain foreign currencies relative to the U.S. Dollar will
continue.
-32-
Options on Foreign Currencies
The Fund may purchase and write put and call options on foreign currencies to
protect against a decline in the U.S. Dollar equivalent value of its portfolio
securities or payments due thereon or a rise in the U.S. Dollar equivalent cost
of securities that it intends to purchase. A foreign currency put option grants
the holder the right, but not the obligation, at a future date to sell a
specified amount of a foreign currency to its counterparty at a predetermined
price. A foreign currency call option grants the holder the right, but not the
obligation, to purchase at a future date a specified amount of a foreign
currency at a predetermined price.
As in the case of other types of options, the benefit to the Fund from purchases
of foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, if currency exchange rates do not move
in the direction or to the extent anticipated, the Fund could sustain losses on
transactions in foreign currency options which would require it to forego a
portion or all of the benefits of advantageous changes in such rates.
Any options on foreign currencies written by the Fund will be covered. A call
option is "covered" if the Fund owns the underlying foreign currency covered by
the call or has an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash consideration held
in a segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Fund has a call on the same foreign currency and in the same principal amount as
the call written, so long as the exercise price of the call held (i) is equal to
or less than the exercise price of the call written or (ii) is greater than the
exercise price of the call written if the difference is maintained by the Fund
in cash, U.S. government securities or other liquid, high-grade debt securities
in a segregated account with its custodian. The Fund covers any put option it
writes on foreign currencies by holding with its custodian, in a segregated
account, cash, U.S. government securities or other liquid, high-grade debt
securities in an amount equal to the option price.
The Fund may not purchase or write options on foreign currencies if, as a
result, the Fund will have more than 20% of the value of its total assets
invested in, or at risk with respect to, such options.
Futures Contracts
The Fund may enter into contracts for the purchase or sale for future delivery (
"futures contracts") of foreign stock or bond indices or other financial indices
that the Adviser and the Manager determine are appropriate to hedge the risks
associated with changes in interest rates or general fluctuations in the value
of the Fund's portfolio securities.
-33-
Pursuant to the regulations of the CFTC, and subject to certain restrictions,
the Fund may purchase or sell futures contracts that are traded on U.S.
exchanges that have been designated as contract markets by the CFTC. The Fund
may also generally purchase or sell futures contracts that are subject to the
rules of any foreign board of trade ("foreign futures contracts"). The Fund may
not, however, trade a foreign futures contract based on a foreign stock index
unless the contract has been approved by the CFTC for trading by U.S. persons.
The Fund is required to make a margin deposit in cash or government securities
with a broker or custodian to initiate and maintain positions in futures
contracts. Minimal initial margin requirements are established by the futures
exchange and brokers may establish margin requirements which are higher than the
exchange requirements. After a futures contract position is opened, the value-
of the contract is marked to market daily. If the futures contract price changes
to the extent that the margin on deposit does not satisfy margin requirements,
payment of additional "variation" margin is required. Conversely, reduction in
the contract value may reduce the required margin resulting in a repayment of
excess margin to the Fund. Variation margin payments are made to and from the
futures broker for as long as the contract remains open.
In accordance with CFTC regulations, the Fund may not purchase or sell futures
contracts if immediately thereafter the sum of the amounts of initial margin
deposits and premiums on the Fund's existing futures contracts would exceed 5%
of the fair market value of the Fund's total assets. The Adviser reserves the
right to comply with such different standards as may be established by the CFTC
with respect to the purchase or sale of futures contracts and foreign futures
contracts.
Options on Securities and Options on Indices
The Fund may purchase or sell exchange traded or over-the-counter put and call
options on its portfolio securities.
The Fund may write covered put and call options on portfolio securities to
generate additional revenue for the Fund and, in certain circumstances, as a
partial hedge (to the extent of the premium received less transaction costs)
against a decline in the value of portfolio securities and in circumstances in
which the Adviser anticipates that the price of the underlying securities will
not increase above or fall below (in the case of put options) the exercise price
of the option by an amount greater than the premium received (less transaction
costs incurred) by the Fund. Although writing put and call options may generate
additional revenue for the Fund, such revenue is incidental to the Fund's
efforts to achieve its investment objective. The Fund's strategy limits
potential capital appreciation in the portfolio securities subject to the
options.
The Fund may write only covered options. "Covered" means that, so long as the
Fund is obligated as the writer of a call option, it will own either the
underlying securities or an option to purchase the same underlying securities
having an expiration date not earlier than the expiration date of the covered
option and an exercise price equal to or less than the exercise price of the
covered option, or establish or maintain with its custodian for the term of the
option a segregated account consisting of cash, U.S. government securities or
other liquid, high-grade debt obligations having a value equal to the
fluctuating market value of the option securities. The Fund will continue to
cover any put option it writes by maintaining a segregated account with its
custodian as described above.
-34-
The Fund may not purchase or write options on securities or options on indices
if, as a result, the Fund will have more than 5% of the value of its total
assets invested in, or at risk with respect to, either such class of options.
The Fund's successful use of options and futures depends on the ability of the
Adviser to predict the direction of the market, and is subject to various
additional risks. The investment techniques and skills required to use options
and futures successfully are different from those required to select equity and
equity-linked securities for investment. The correlation between movements in
the price of the option or future and the price of the securities being hedged
is imperfect and the risk from imperfect correlation increases, with respect to
stock index futures and options, as the composition of the Fund's portfolio
diverges from the composition of the index underlying such index futures and
options. In addition, the ability of the Fund to close out a futures or options
position depends on a liquid secondary market. There is no assurance that liquid
secondary markets will exist for any particular option or futures contract at
any particular time. The securities the Fund are required to maintain in
segregated accounts in connection with its hedging transactions are not
available for investment in accordance with the Fund's investment objective of
long-term capital appreciation.
On U.S. exchanges, once an option contract has been accepted for clearance, the
exchange clearing organization is substituted as both buyer and seller of the
contract, thereby guaranteeing the financial integrity of the option contract.
Options on securities and on indices traded on certain non-U.S. exchanges may
not be so guaranteed by a clearing organization. The absence of such a role for
a clearing organization on such a non-U.S. exchange would expose the Fund to the
credit risk of its counterparty. If its counterparty were to default on its
obligations, the Fund could lose the expected benefit of the transaction.
Repurchase Agreements
When cash may be available to the Fund for only a few days, the Fund may invest
such cash in repurchase agreements until such time as it otherwise may be
invested or used for payments of obligations of the Fund. In these transactions,
the Fund purchases a security and simultaneously commits to resell that security
to the seller at an agreed-upon price and date. The resale price reflects the
purchase price plus an agreed-upon market rate of interest, which is unrelated
to the coupon rate or maturity of the security purchased. The obligation of the
seller to pay the agreed-upon price is secured by the value of the underlying
securities, which is maintained at the Fund's custodian at a value at least
equal to the resale price. The Adviser monitors the adequacy of the collateral
on a daily basis to ensure that the collateral always equals or exceeds the
repurchase price. Repurchase agreements could involve certain risks in the event
of default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
The Fund could suffer a loss to the extent proceeds from the sale of collateral
were less than the value of the contract. The Fund may not invest its assets in
repurchase agreements with a maturity of more than seven days, but the
collateral securities may have maturities of more than one year. The Fund has
not adopted an investment restriction limiting the value of its total assets not
invested in accordance with its fundamental investment policy that may be
invested in repurchase agreements. To minimize the risks of such investments,
however, the Fund enters into repurchase agreements only with its custodian,
other member banks of the Federal Reserve System having assets in excess of $1
billion, and recognized primary U.S. Government securities dealers determined by
the Adviser, subject to review by the Board of the Fund, to be creditworthy.
Repurchase agreements do not constitute cash, cash items, receivables or
government securities for purposes of the federal tax diversification test.
Therefore, the Fund limits its investments in repurchase agreements with any one
bank, dealer, broker or other entity in order to comply with the federal tax
diversification test.
-35-
Debt Securities
The Fund may invest up to 20% of its assets in non-equity linked debt securities
including foreign denominated corporate debt and sovereign debt issued by
foreign governments, their agencies or instrumentalities, or other
government-related entities. Debt securities, such as bonds, involve credit
risk. This is the risk that the issuer will not make timely payments of
principal and interest. The degree of credit risk depends on the issuer's
financial condition and on the terms of the debt securities. Changes in an
issuer's credit rating or the market's perception of an issuer's
creditworthiness may also affect the value of a Fund's investment in that
issuer. All debt securities are subject to interest rate risk. This is the risk
that the value of the security may fall when interest rates rise. If interest
rates move sharply in a manner not anticipated by the Adviser, a Fund's
investments in debt securities could be adversely affected and the Fund could
lose money. In general, the market price of debt securities with longer
maturities will go up or down more in response to changes in interest rates than
will the market price of shorter-term debt securities. In addition, debt
securities issued in foreign currency denominations will be subject to currency
risk.
Investment in sovereign debt can involve a high degree of risk. The governmental
entity that controls the repayment of sovereign debt may not be able or willing
to repay the principal and/or interest when due in accordance with the terms of
such debt. A governmental entity's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the governmental entity's
policy towards the International Monetary Fund and the political constraints to
which a governmental entity may be subject. Governmental entities may also be
dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearages on their
debt. The commitment on the part of these governments, agencies and others to
make such disbursements may be conditioned on the implementation of economic
reforms and/or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to timely service its debts. Consequently, governmental entities may
default on their sovereign debt. Holders of sovereign debt may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. In the event of a default by a governmental entity, there
may be few or no effective legal remedies for collecting on such debt.
-36-
Securities Lending
The Fund may lend portfolio securities with a value not exceeding 33 1/3% of its
total assets or the limit prescribed by applicable law to banks, brokers and
other financial institutions. In return, the Fund receives collateral in cash or
securities issued or guaranteed by the U.S. Government, which will be maintained
at all times in an amount equal to at least 100% of the current market value of
the loaned securities. The Fund maintains the ability to obtain the right to
vote or consent on proxy proposals involving material events affecting
securities loaned. The Fund receives the income on the loaned securities. Where
the Fund receives securities as collateral, the Fund receives a fee for its
loans from the borrower and does not receive the income on the collateral. Where
the Fund receives cash collateral, it may invest such collateral and retain the
amount earned, net of any amount rebated to the borrower. As a result, the
Fund's yield may increase. Loans of securities are terminable at any time and
the borrower, after notice, is required to return borrowed securities within the
standard time period for settlement of securities transactions. The Fund is
obligated to return the collateral to the borrower at the termination of the
loan. The Fund could suffer a loss in the event the Fund must return the cash
collateral and there are losses on investments made with the cash collateral. In
the event the borrower defaults on any of its obligations with respect to a
securities loan, the Fund could suffer a loss where there are losses on
investments made with the cash collateral or where the value of the securities
collateral falls below the market value of the borrowed securities. The Fund
could also experience delays and costs in gaining access to the collateral. The
Fund may pay reasonable finder's, lending agent, administrative and custodial
fees in connection with its loans.
Portfolio Turnover
It is the Fund's policy to sell any security whenever, in the opinion of the
Adviser, the appreciation possibilities of the security have been substantially
realized or the business or market prospects for the issuer of such security
have deteriorated, irrespective of the length of time that such security has
been held. In addition, the Fund from time to time may engage in short-term
transactions in order to take advantage of what the Adviser believes to be
market inefficiencies in the pricing of equity and equity-linked securities. The
Adviser expects that the Fund's annual rate of portfolio turnover may exceed
100% at times when the Fund is taking advantage of short-term trading
opportunities or if a complete reallocation of the Fund's investment portfolio
becomes advisable. A 100% annual turnover rate would occur if all of the
securities in the Fund's portfolio were replaced once within a period of one
year. The turnover rate has a direct effect on the transaction costs borne by
the Fund.
Investment Restrictions
The Fund has adopted certain investment restrictions that may not be changed
without the prior approval of a majority of the Board. For purposes of the
non-fundamental restrictions listed below and other investment restrictions of
the Fund described in this Prospectus, all percentage limitations apply
immediately after a purchase or initial investment, and any subsequent change in
any applicable percentage resulting from market fluctuations does not require
elimination of any security from the Fund's portfolio. Under its investment
restrictions, the Fund may not:
1. Purchase any securities (other than obligations of the U.S.
government, its agencies or instrumentalities or securities of other
regulated investment companies) if as a result more than 25% of the
Fund's total assets would be invested in securities of any single
issuer.
-37-
2. Invest 25% or more of the value of its total assets in a particular
industry. This restriction does not apply to securities issued or
guaranteed by the U.S. government, its agencies or
instrumentalities, but will apply to foreign government obligations
until such time as the Securities and Exchange Commission permits
their exclusion.
3. Purchase more than 10% of the outstanding voting securities of any
one issuer.
4. Issue senior securities, pledge its assets or borrow money in excess
of 10% of the total value of its assets (including the amount
borrowed) less its liabilities (not including its borrowings) and
other than for temporary or emergency purposes or for the clearance
of transactions, except that the Fund may borrow from a bank or
other entity in a privately arranged transaction for repurchases
and/or tenders for its shares, if after such borrowing there is
asset coverage of at least 300% as defined in the 1940 Act, and may
pledge its assets to secure any permitted borrowing. For the
purposes of this investment restriction, the Fund will not purchase
additional portfolio securities while borrowings exceed 5% of the
Fund's total assets; and collateral arrangements with respect to the
writing of options or the purchase or sale of futures contracts are
not deemed a pledge of assets or the issuance of a senior security.
5. Make loans, except through purchasing debt obligations, lending
portfolio securities and entering into repurchase agreements
consistent with the Fund's investment objective and policies.
6. Purchase or sell real estate or real estate mortgage loans, except
that the Fund may purchase and sell securities secured by real
estate or interests therein.
7. Make short sales of securities or maintain a short position in any
security.
8. Purchase securities on margin, except such short-term credits as may
be necessary or routine for the clearance or settlement of
transactions, and except that the Fund may engage in transactions as
described under "Investment Objective and Policies--Hedging
Transactions" and post margin in connection therewith consistent
with its investment policies.
9. Underwrite securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in
selling portfolio securities.
10. Buy or sell commodities, commodity contracts or futures contracts
(other than as described under "Investment Objective and
Policies--Hedging Transactions").
-38-
11. Buy, sell or write put or call options (other than as described
under "Special Leverage Considerations--Hedging Transactions").
The Fund is also subject to certain diversification requirements under the
Internal Revenue Code of 1986, as amended, with respect to its qualification as
a "regulated investment company" under the Code. See "Taxation--U.S. Taxation
General".
As an additional non-fundamental investment restriction, the Fund will not
guarantee the obligations of third parties. The Fund may invest in other
investment companies, subject to limitations set forth in the 1940 Act.
MANAGEMENT OF THE FUND
Board of Directors
The Board is responsible for the overall management of the Fund,
including oversight of the Adviser and other service providers. There are three
directors of the Fund. One of the directors is an "interested person" (as
defined in the 1940 Act). Information about both the Fund's directors and
officers is set forth in the tables below.
Information About Directors and Officers
Number of
Portfolios in
Principal Fund Other
Position(s) Length of Occupation(s) Complex Directorships
Held With Term Served, and During the PastFive Overseen by Held by
Name, Address, Age Fund Term of Office Years Director Director
------------------------------ ----------- ---------------- ------------------- ------------- -------------------
Disinterested Directors
Ann S. Lieff Director Director since President of the 1 Hastings
c/o The Herzfeld Caribbean 1998. Three Lieff Company, a Entertainment,
Basin Fund, Inc. year term of management Inc; and
P.O. Box 161465 office. consulting firm Birks &
Miami, Florida 33116 that offers ongoing Mayors, Inc.
Age: 55 advisory services
as a corporate
director to
several leading
regional and
national
retail operations,
1998 to present;
former CEO Spec's
Music, 1980-1998, a
retailer of
recorded music.
Michael A. Rubin Director Director since Partner of Michael 1 Margo Caribe,
c/o The Herzfeld Caribbean 2002. Three A. Rubin, P.A., Inc.
Basin Fund, Inc. year term of attorney at law;
P.O. Box 161465 office. Broker, Oaks
Miami, Florida 33116 Management & Real
Age: 65 Estate Corp., a
real estate
brokerage
corporation
Interested Directors and
Officers
Thomas J. Herzfeld * President, Director of Fund Chairman and 1** None
P.O. Box 161465 Chairman of since 1993. President of
Miami, Florida 33116 the Board, Three year term Thomas J. Herzfeld
Age: 62 and of office. & Co., Inc., and
Director
Thomas J. Herzfeld
Advisors, Inc.
Cecilia Gondor * Secretary, Officer since Executive Vice N/A None
P.O. Box 161465 Treasurer 1993. President of
Miami, Florida 33116 and Chief Thomas J. Herzfeld
Age: 45 Compliance & Co., Inc., and
Officer Thomas J. Herzfeld
Advisors, Inc.
* Each of Mr. Herzfeld and Ms. Gondor is an "interested person" of the Fund
because each is an officer of the Fund's Adviser.
-39-
** Mr. Herzfeld also serves as a director of The Cuba Fund, Inc., a
registered closed-end investment company which has not yet commenced
operations.
Committees of the Board
The Board has formed an Audit Committee and a Nominating Committee.
The Board has adopted a written charter for the Audit Committee, which became
effective February 5, 2004. The Audit Committee of the Board currently consists
of each Ms. Lieff and Mr. Rubin, none of whom is an "interested person" of the
Fund. Each member of the Audit Committee is considered independent under the
applicable NASDAQ Capital Market listing standards. During the fiscal year ended
June 30, 2007 the Audit Committee met twice. The Audit Committee reviews the
scope of the audit by the Fund's independent accountants, confers with the
accountants with respect to the audit and the internal accounting controls of
the Fund and with respect to such other matters as may be important to an
evaluation of the audit and the financial statements of the Fund, and makes
recommendations with respect to the selection of accountants for the Fund.
The Nominating Committee is comprised of Ms. Lieff and Mr. Rubin, each of whom
is an independent director under the 1940 Act and under NASDAQ Capital Market
listing standards. During the fiscal year ended June 30, 2007 the Audit
Committee met once. The Nominating Committee is responsible for reviewing and
recommending qualified candidates in the event that a directorship is vacated or
created. The Nominating Committee will not consider nominees recommended by
stockholders. The Nominating Committee believes that candidates for director
should have certain minimum qualifications, including (i) the ability to apply
good business judgment; (ii) the ability to properly exercise their duties of
loyalty and care; (iii) proven leadership capabilities, high integrity and moral
character, significant business experience and a high level of responsibility
within their chosen fields; (iii) the ability to quickly grasp complex
principles of business, finance, international transactions and the regulatory
environment in which investment companies must operate; and (iv) the ability to
read and understand basic financial statements. The Committee retains the right
to modify these minimum qualifications from time to time. In general, candidates
will be preferred who hold an established senior or executive level position in
business, finance, law, education, research or government. The Committee's
process for identifying and evaluating nominees is as follows: In the case of
incumbent directors whose terms of office are set to expire, the Nominating
Committee reviews such directors' overall service to the Fund during their term,
including the number of meetings attended, level of participation, quality of
performance, and transactions of such directors with the Fund, if any, during
their term, and confirms their independence, if applicable. In the case of new
director candidates, the committee first determines whether the nominee must be
independent for purposes of The NASDAQ Capital Market and whether the candidate
must be considered a disinterested director under the 1940 Act. In either case,
determinations are based upon the Fund's charter and bylaws, applicable
securities laws, the rules and regulations of the SEC, and the advice of
counsel, if necessary. The Committee then uses its network of contacts to
compile a list of potential candidates, but may also engage, if it deems
appropriate, a professional search firm. The Committee then meets to discuss and
consider such candidates' qualifications and recommend the nominee.
-40-
Ownership of the Fund By Directors
Set forth in the following table are the directors of the Fund, together with
the dollar range of equity securities beneficially owned by each director as of
June 30, 2007, as well as the aggregate dollar range of equity securities in all
funds overseen or to be overseen in a family of investment companies (i.e.,
funds managed by the Adviser).
Aggregate Dollar Range of
Equity Securities in All Funds
Dollar Range of Equity in Family of Investment
Name of Director Securities in the Fund Companies
----------------------- ---------------------- ------------------------------
Disinterested Directors
Ann S. Lieff........... $10,001- $50,000 $10,001- $50,000
Michael A. Rubin....... $10,001- $50,000 $10,001- $50,000
Interested Directors
Thomas J. Herzfeld..... Over $100,000 Over $100,000
None of the disinterested directors, and no immediate family member of any
disinterested director, own beneficially or of record any securities of the
Fund's Adviser, or any person directly or indirectly controlling, controlled by,
or under common control with the Adviser.
As of June 30, 2007, directors and executive officers (5 persons) beneficially
owned an aggregate of less than 1% of the Fund's outstanding shares on that
date.
-41-
DIRECTOR COMPENSATION
The Fund pays the disinterested directors of the Fund $1,000 per year in
addition to $400 for each meeting of the board, plus reimbursement for expenses.
Such fees totaled $7,800 for the fiscal year ended June 30, 2007. The aggregate
compensation paid by the Fund to each of its directors serving during the fiscal
year ended June 30, 2007 is set forth in the compensation table below. Mr.
Herzfeld serves on the Fund's Board. Mr. Herzfeld does not receive direct
compensation for his services on either board. None of the other directors
serves on the board of any other registered investment company to which the
Fund's investment adviser or an affiliated person of the Fund's investment
adviser provides investment advisory services. Directors and executive officers
of the Fund do not receive pension or retirement benefits from the Fund.
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued from the Fund and
Name of Person and Compensation As Part of Fund Fund Complex Paid
Position with the Fund from the Fund Expenses to Directors
----------------------- ------------- ---------------- -------------------
Disinterested Directors
Ann S. Lieff......... $2,600 $0 $2,600
Michael A. Rubin..... $2,600 $0 $2,600
Albert L. Weintraub*. $2,600 $0 $2,600
Interested Directors
Thomas J. Herzfeld..... $ 0 $0 $ 0
* Mr. Weintraub resigned his position as a director of the Fund on July 23,
2007.
Investment Adviser and Portfolio Manager
Investment Adviser
The Fund is advised by HERZFELD/CUBA (the "Adviser"), a division of Thomas J.
Herzfeld Advisors, Inc., whose principal business address is The Herzfeld
Building, P.O. Box 161465, Miami, Florida 33116. The Adviser has been providing
advisory services to the Fund since September 1993. Thomas J. Herzfeld Advisors,
Inc. has provided advisory services since 1984 and is beneficially owned by
Thomas J. Herzfeld.
Pursuant to an investment advisory agreement with the Fund (the "Investment
Advisory Agreement") and under the direction and control of the Board, the
Adviser manages the Fund's portfolio and makes investment decisions pursuant to
the Fund's stated investment objective, policies and restrictions. The Adviser
is authorized to transmit purchase and sale orders and select brokers and
dealers to execute portfolio transactions on behalf of the Fund. The Adviser
determines the timing of portfolio transactions and other matters related to
execution.
-42-
Portfolio Manager
Thomas J. Herzfeld is primarily responsible for the day-to-day management of the
Fund. Mr. Herzfeld currently serves as the Chairman, President and Director of
the Fund. In addition, Mr. Herzfeld also serves as the Chairman and President of
Thomas J. Herzfeld & Co., Inc. and Thomas J. Herzfeld Advisors, Inc. since 1981
and 1984, respectively. Prior to these positions he was Executive Vice President
and Director of a New York Stock Exchange member firm. Mr. Herzfeld has authored
or edited a number of books, including The Investors Guide to Closed-End Funds
(McGraw Hill, 1980), Herzfeld's Guide to Closed End Funds (McGraw Hill, 1993)
and co-authored High Return, Low Risk Investment (1st edition, G.P. Putnam's
Sons, 1981 and 2nd edition, McGraw Hill, 1993). He is considered the first and a
leading expert in the field of closed-end funds. Mr. Herzfeld has been quoted in
thousands of articles and written hundreds of articles on the subject of closed
end funds. He has written periodically for Barron's and has made television
appearances on Wall Street Week, The Nightly Business Report and CNBC.
Other Accounts Managed. Thomas J. Herzfeld is primarily responsible for the
day-to-day management of the Fund's portfolio. As of June 30, 2007, Mr. Herzfeld
was primarily responsible for the day-to-day management of the following other
accounts in addition to the Fund:
Total Assets
Type of Account Number of Accounts (in millions)
------------------------------- ------------------ ------------------------
Registered Investment Companies 0 $ 0
Pooled Investment Vehicles 0 $ 0
Other Accounts 44 $54.1
The advisory fee for these accounts is based on assets under management for
these accounts and is not based on the performance of the accounts.
Material conflicts of interest that may arise in connection with Mr. Herzfeld's
management of the Fund's investments and investments in other accounts include
conflicts between the investment strategy of the Fund and the investment
strategy of the other accounts managed by Mr. Herzfeld, and conflicts associated
with the allocation of investment opportunities between the Fund and other
accounts managed by Mr. Herzfeld. The Adviser has adopted policies and
procedures to address conflicts of interest to ensure compliance with securities
regulations and to ensure fair and equitable treatment of the Fund and other
accounts should any conflict arise.
Compensation. Mr. Herzfeld receives a quarterly fixed salary from the Adviser's
affiliated broker/dealer firm, Thomas J. Herzfeld & Co., Inc. Mr. Herzfeld is
the sole beneficial owner of the Adviser and the affiliated broker/dealer. Mr.
Herzfeld may also receive bonuses from the broker/dealer firm and/or the
Adviser, as determined by the terms of his contract with the firm. Mr. Herzfeld
does not receive compensation as portfolio manager from the Adviser. In addition
Mr. Herzfeld's compensation is not based on the value of assets held by the
Fund.
Ownership of Securities. As of the June 30, 2007, Mr. Herzfeld beneficially
owned between $100,000 and $500,000 of equity securities of the Fund.
-43-
Investment Advisory Agreement
The Investment Advisory Agreement sets forth the services to be provided by the
Adviser as described above. The Fund pays the Adviser an advisory fee at the
annual rate of 1.45% of the Fund's average monthly net assets and payable at the
end of each quarter. That fee is higher than the advisory fee paid by most
investment companies. For the fiscal years ended June 30, 2007, 2006 and 2005,
the Adviser received $208,505, $196,852 and $153,114, respectively, for
investment advisory services provided to the Fund pursuant to the Investment
Advisory Agreement.
The Investment Advisory Agreement was last approved by the Board on [____],
2007. A discussion regarding the basis for the Board's approval of the
Investment Advisory Agreement is provided in the Fund's semi-annual report to
stockholders for the semi-annual periods ended December 31.
The Investment Advisory Agreement provides that the Adviser bears all expenses
of its employees and overhead incurred by it in connection with its duties
thereunder. The Fund reimburses approximately $13,000 per year for compliance
services performed by the Chief Compliance Officer. The Adviser pays the
salaries and expenses of such of the Fund's officers and employees and any fees
and expenses of such of the Fund's directors as are interested persons (as such
term is defined in the 1940 Act) of the Adviser. The Fund bears all of its own
expenses (See "Expenses of the Fund" below).
The services of the Adviser under the Investment Advisory Agreement are not
deemed to be exclusive, and nothing in the Investment Advisory Agreement prevent
the Adviser or any affiliate thereof, from providing similar services to other
investment companies and other clients (whether or not their investment
objectives and policies are similar to those of the Fund) or from engaging in
other activities. When other clients of the Adviser desire to purchase or sell a
security at the same time the security is purchased for or sold by the Fund,
such purchases and sales are to the extent feasible, allocated among such
clients and the Fund in a manner believed by the Adviser to be equitable to the
Fund. The allocation of securities may adversely affect the price and quality of
purchases and sales of securities by the Fund. Purchase and sale orders for the
Fund may be combined with those of other clients of the Adviser in the interest
of the most favorable results for the Fund.
-44-
The Investment Advisory Agreement was initially approved by the Board on June
24, 1993. The Agreement continued in effect for a period of two years from the
effective date and thereafter it is required to be approved annually by the
Board. The Investment Advisory Agreement continues in effect for successive
periods of 12 months, provided that its continuance is specifically approved
annually by (i) the vote of a majority of the Board who are not parties to such
agreement or interested persons (as such term is defined in the 1940 Act) of the
Adviser, cast in person at a meeting called for the purpose of voting on such
approval and (ii) either (a) the vote of a majority of the outstanding voting
securities of the Fund or (b) the vote of a majority of the Board. The
Investment Advisory Agreement may be terminated by the Fund, without the payment
of any penalty, upon vote of a majority of the Board or a majority of the
outstanding voting securities of the Fund at any time upon net less than 60
days' prior written notice to the Adviser, or by the Adviser upon not less than
60 days' prior written notice to the Fund. The Investment Advisory Agreement
terminates automatically in the event of its assignment (as such term is defined
in the 1940 Act) by either party or upon its termination.
The Adviser is not liable for any act of omission, error of judgment, mistake of
law or loss suffered by the Fund or its investors in connection with the matters
to which the Investment Advisory Agreement relates, except for a loss resulting
from willful misfeasance, bad faith or gross negligence in the performance of,
or from reckless disregard of, its obligations and duties under the Investment
Advisory Agreement, or a loss resulting from a breach of fiduciary duty with
respect to receipt of compensation for services (in which case any award of
damages shall be limited to the period and the amount set forth in Section 36
(b) (3) of the 1940 Act).
The Adviser also performs and arranges for the performance of certain
administrative and accounting functions for the Fund, including (i) providing
persons satisfactory to the Directors of the Fund to serve as officers and, in
that capacity, manage the daily operations of the Fund; (ii) processing the
payment of expenses for the Fund; (iii) supervising the preparation of periodic
reports to the Fund's stockholders; (iv) preparing materials for Fund Board and
Committee meetings; (v) supervising the pricing of the Fund's investment
portfolio and the publication of the NAV of the Fund's shares, earnings reports
and other financial data; (vi) monitoring relationships with organizations
providing services to the Fund, including the custodian, transfer agent, auction
agent and printers; (vii) supervising compliance by the Fund with record-keeping
requirements under the 1940 Act and regulations thereunder, maintaining books
and records for the Fund (other than those maintained by the Adviser, custodian
and/or transfer agent) and preparing and filing of tax reports other than the
Fund's income tax returns; and (viii) providing executive, clerical and
secretarial help needed to carry out these responsibilities.
Benefit to the Adviser
The Fund's Adviser will benefit from the Offer because the Adviser's fee is
based on the average net assets of the Fund. It is not possible to state
precisely the amount of additional compensation the Adviser will receive as a
result of the Offer because the proceeds of the Offer will be invested in
additional portfolio securities which will fluctuate in value. However, assuming
all Rights are exercised and that the Fund receives the maximum proceeds of the
Offer, the annual compensation to be received by the Adviser would be increased
by approximately $[____].
The Fund may, in the future and at its discretion, choose to make additional
rights offerings from time to time for a number of shares and on terms which may
or may not be similar to the Offer. Any such future rights offering will be made
in accordance with the 1940 Act. Under the laws of Maryland, the state in which
the Fund is organized, the Board is authorized to approve rights offerings
without obtaining stockholder approval. The staff of the Securities and Exchange
Commission has interpreted the 1940 Act as not requiring stockholder approval of
a rights offering at a price below the then current NAV so long as certain
conditions are met, including a good faith determination by a Board that such
offering would result in a net benefit to existing stockholders.
-45-
Expenses of the Fund
Except as indicated above, the Fund pays all of its expenses, including but not
limited to the following: organizational and certain offering expenses (but not
overhead or employee costs of the Adviser); advisory fees payable to the
Adviser; fees and out-of-pocket travel expenses of the Fund's directors who are
not interested persons (as such term is defined in the 1940 Act) of any other
party and other expenses incurred by the Fund in connection with directors'
meetings; interest expense; charges and expenses of the Fund's legal counsel and
independent accountants; taxes and governmental fees; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; expenses of repurchasing shares; expenses of issuing any
preferred shares or indebtedness; expenses connected with negotiating, effecting
purchase or sale, or registering privately issued portfolio securities;
membership dues to professional organizations; premiums allocable to fidelity
bond and D&O insurance coverage; expenses of preparing stock certificates;
expenses of registering and qualifying the Fund's shares for sale with the
Securities and Exchange Commission and in various states and foreign
jurisdictions; custodian, sub-custodian, dividend paying agent, transfer agency
expenses; payment for portfolio pricing services to a pricing agent; expenses of
printing and mailing share certificates, stockholder reports, notices, proxy
statements and reports to governmental offices; expenses of stockholders'
meetings and preparing and distributing proxies and reports to stockholders; any
litigation expenses; expenses relating to investor and public relations; and
NASDAQ Capital Market listing fees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
In portfolio transactions involving equity securities, the Adviser places orders
on behalf of the Fund directly with brokers, which may include brokers
affiliated with the Adviser, except that the purchase of shares in rights
offerings is made directly from the issuer. The Adviser may manage other
accounts and funds that invest in equity securities of Caribbean Basin
Companies. Although investment decisions for the Fund are made independently
from those of other accounts or funds managed by the Adviser, investments of the
type the Fund may make may also be made by those other accounts and funds. When
the Fund and one or more accounts or funds managed by the Adviser are prepared
to invest in, or desire to dispose of, the same security, available investments
or opportunities for each will be allocated in a manner believed by the Adviser
to be equitable to each. In some cases, this procedure may affect adversely the
price paid or received by the Fund or the size of the position obtained or
disposed of by the Fund.
The primary objective of the Adviser in placing orders for the purchase and sale
of securities for the Fund's portfolio is to obtain best execution taking
into account such factors as price, commission, size of order, difficulty of
execution and skill required of the broker or dealer. The capability and
financial condition of the broker or dealer may also be criteria for the choice
of that broker or dealer. Subject to obtaining the best execution, brokers,
including affiliates of the Adviser, who provide investment research services to
the Adviser, including market and statistical information and quotations for
portfolio evaluation purposes, may receive orders for transaction of the Fund.
The terms "investment research" and "market and statistical information and
quotations" include advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities and potential buyers or sellers of securities, as well as the
furnishing of analyses and reports concerning issuers, industries, securities,
economic factors and trends, and portfolio strategy. Neither the Fund nor the
Adviser is obligated to deal with any broker or group of brokers for the
execution of portfolio transactions, and there is no intention to place
portfolio transactions with particular brokers or groups thereof.
-46-
Research provided to the Adviser in advising the Fund will be in addition to and
not in lieu of the services required to be performed by the Adviser itself, and
the Adviser's fees will not be reduced as a result of the receipt of
supplemental information. This information is regarded as only supplementary to
the Adviser's own research effort, since the information must be analyzed,
weighed and reviewed by the Adviser's staff. This information may be useful to
the Adviser in providing services to clients other than the Fund, and not all
such information will necessarily be used by the Adviser in connection with the
Fund. Conversely, information provided to the Adviser by brokers and dealers
through whom other clients of the Adviser effect securities transactions may
prove useful to the Adviser in providing services to the Fund. The Board will
review at least annually the commissions allocated by the Adviser on behalf of
the Fund to determine if such allocations were reasonable in relation to the
benefits inuring to the Fund.
Brokerage commissions paid by the Fund for the fiscal years ended June 30, 2007,
2006 and 2005 were: $13,518, $17,171, $12,867, respectively, of which $12,076,
$15,800 and $12,671, respectively , was paid to the Adviser, in connection with
portfolio transactions. The percentage of the Fund's aggregate brokerage
commissions paid to the affiliated broker for the one-year period ending June
30, 2007 was 89%. The percentage of the Fund's aggregate dollar amount of
transactions involving the payment of commissions effected through the
affiliated broker for this period was 91%.
CODE OF ETHICS
The Fund and the Adviser have adopted a joint Code of Ethics pursuant to Rule
17j-1 under the 1940 Act. The code of ethics permits personnel subject to the
code to invest in securities, including securities that may be purchased or held
by the Fund, following certain black-out periods specified in the code, and
subject to certain other conditions and restrictions.
The code of ethics can be reviewed and copied at the SEC's Public Reference Room
in Washington, D.C. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at (202) 551-8090 or toll free at
(800) 732-0330 and this code of ethics is available on the EDGAR database on the
SEC's internet site at: http://www.sec.gov. Copies of this code of ethics may be
obtained, after paying a duplicating fee, by electronic request at the following
e-mail address: publicinfo@sec.gov or by writing the SEC's Public Reference
Section, Washington, D.C. 20549-0102.
PROXY VOTING POLICIES AND PROCEDURES
The Fund's and the Adviser's proxy voting policies and procedures are attached
hereto as Appendices A and B, respectively. 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
800-TJH-FUND (800-854-3863); and on the SEC's website at http:/www.sec.gov.
-47-
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Persons or organizations beneficially owning 25% or more of the outstanding
shares of the Fund could be presumed to "control" the Fund. As a result, those
persons or organizations could have the ability to take action with respect to
the Fund without the consent or approval of other stockholders. To the knowledge
of the Fund, as of June 30, 2007, no persons were known to own, either
beneficially or of record, 5% or more of the outstanding shares of the Fund.
DESCRIPTION OF COMMON STOCK
The Fund is authorized to issue up to 100,000,000 shares of capital stock, at
$.001 par value per share, all of which shares are classified as common stock.
The Board is authorized, however, to classify and reclassify any unissued shares
of capital stock by setting or changing in any one or more respects the
designation and number of shares of any such class or series, and the nature,
rates, amounts and times at which and the conditions under which dividends shall
be payable on, and the voting, conversion, redemption and liquidation rights of,
such class or series and any other preferences, rights, restrictions and
qualifications applicable thereto.
The Fund's shares have no preemptive, conversion, exchange or redemption rights.
Each share has equal voting, dividend, distribution and liquidation rights. The
shares outstanding are fully paid and nonassessable. Stockholders are entitled
to one vote per share. All voting rights for the election of directors are
noncumulative, which means that the holders of more than 50% of the shares can
elect 100% of the directors then nominated for election if they choose to do so.
In such event, the holders of the remaining shares will not be able to elect any
directors. The foregoing description and the description under "Certain
Provisions of Articles of Incorporation and Bylaws" are subject to the
provisions contained in the Fund's Articles of Incorporation and Bylaws.
The Fund will consider offering additional shares in the future based on, among
other things, the lifting or easing of economic sanctions against Cuba. Other
offerings of the Fund's shares, if made, will require approval of the Board. Any
additional offering will be subject to the requirement of the 1940 Act that
shares may not be sold at a price below the then current NAV, exclusive of
underwriting discounts and commissions, except in connection with an offering to
existing stockholders or with the consent of the holders of a majority of the
Fund's outstanding voting securities.
Share Repurchases and Tender Offers
In recognition of the possibility that the Fund's shares might trade at a
discount to NAV, the Board may determine that it would be in the best interest
of stockholders of the Fund to take action to attempt to reduce or eliminate a
market value discount from NAV. To that end, the Board may take action from time
to time either to repurchase Fund shares in open market or private transactions
or to make a tender offer for Fund shares at NAV. No assurance can be given that
the directors will decide to undertake such repurchases or tender offers, or
that any such repurchases or tender offers would reduce any market discount. The
Board does not currently intend to undertake repurchase or tenders offers.
-48-
The Fund anticipates that the market price of its shares generally will continue
to vary from NAV. The market price of the Fund's shares is determined by a
number of factors, including the relative demand for and supply of such shares
in the market, the Fund's investment performance, the Fund's distributions and
investor perception of the Fund's overall attractiveness as an investment as
compared with other investment alternatives. The fact that the Fund's shares may
be the subject of share repurchases or tender offers at NAV from time to time
may reduce the spread between market price and NAV that otherwise might exist.
In the opinion of the Adviser, stockholders may be less inclined to accept a
significant discount on sales of the Fund's shares if they have a reasonable
expectation of being able to recover NAV in conjunction with a possible share
repurchase or tender offer.
Subject to the Fund's investment restriction with respect to borrowing, the Fund
may incur debt to finance repurchases and tenders. See "Investment
Restrictions". If the Fund incurs debt to finance such repurchases and tenders,
interest on any such borrowings will reduce the Fund's net income. In addition,
although the Board believes that share repurchases and tenders generally would
have a favorable effect on the market price of the Fund's shares, the
acquisition of shares by the Fund will decrease the total assets of the Fund and
therefore would have the effect of increasing the Fund's ratio of expenses to
average net assets.
It is the Directors' announced policy, which may be changed by the Directors,
that the Fund cannot accept tenders or effect repurchases if (1) such
transactions, if consummated, would (a) impair the Fund's status as a regulated
investment company under the Code (which would make the Fund a taxable entity,
causing the Fund's income to be taxed at the Fund level in addition to the
taxation of stockholders who receive dividends from the Fund) or (b) result in a
failure to comply with applicable asset coverage requirements; (2) the amount of
securities tendered would require liquidation of such a substantial portion of
the Fund's securities that the Fund would not be able to liquidate portfolio
securities in an orderly manner in light of the existing market conditions and
such liquidation would have an adverse effect on the NAV of the Fund to the
detriment of non-tendering stockholders; (3) there is any (a) in the Board's
judgment, material legal action or proceeding instituted or threatened
challenging such transactions or otherwise materially adversely affecting the
Fund, (b) declaration of a banking moratorium by federal or state authorities or
any suspension of payment by banks in the United States, (c) limitation
affecting the Fund or the issuers of its portfolio securities imposed by federal
or state authorities on the extension of credit by lending institutions, (d)
commencement of war, armed hostilities or other international or national
calamity directly or indirectly involving the United States, or (e) in the
Board's judgment, other event or condition which would have a material adverse
effect on the Fund or its holders of Common Stock if shares of Common Stock were
repurchased; or (4) the Board determines that effecting any such transaction
would constitute a breach of their fiduciary duty owed the Fund or its
stockholders. The Directors may modify these conditions in light of experience.
Any tender offer made by the Fund for its shares will be at a price equal to at
least 90% of the NAV of the shares as of the close of business on the date the
offer ends. Each offer will be made and stockholders notified in accordance'
with the requirements of the Securities Exchange Act of 1934 and the 1940 Act,
either by publication or mailing or both. Each offering document will contain
such information as is prescribed by such laws and the rules and regulations
promulgated thereunder, including information stockholders should consider in
deciding whether or not to tender their shares and detailed instructions on how
to tender shares. When a tender offer is authorized to be made by the Board, a
stockholder wishing to accept the offer will be required to tender all (but not
less than all) of the shares owned by such stockholder (or attributed to the
stockholder for Federal income tax purposes under Section 318 of the Code). The
Fund will purchase all shares tendered by a holder of shares at any time during
the period of the tender offer in accordance with the terms of the offer unless
it determines to accept none of the shares tendered in the tender offer (based
upon one of the conditions set forth above). Each person tendering shares will
pay to the Fund a reasonable service charge currently anticipated to be $25.00,
subject to change, to help defray the costs associated with affecting the tender
offer. It is the position of the staff of the SEC that such service charge may
not be deducted from the proceeds of the purchase. The Fund's transfer agent
will receive the fee as an offset to these costs. The Fund expects that the cost
to the Fund of affecting a tender offer will exceed the aggregate amount of all
service charges received from those who tender their shares. Such excess costs
associated with the tender offer will be charged against capital. During the
period of a tender offer, the Fund's stockholders will be able to determine the
Fund's current NAV by use of a toll-free telephone number.
-49-
Shares that have been accepted and purchased by the Fund pursuant to a tender
offer or share repurchase will be held in the treasury until retired by
direction of the Board. Treasury shares will be recorded and reported as an
offset to stockholder' equity and, accordingly, will reduce the Fund's total
assets. If treasury shares are retired, Common Stock issued and outstanding and
capital in excess of par will be reduced.
Because of the nature of the Fund's investment objective and policies, if the
Adviser anticipates that a share repurchase or tender offer might have an
adverse effect on the Fund's investment performance and anticipate any material
difficulty disposing of portfolio securities in order to consummate such share
repurchase or tender offer, the Board would consider deferring the share
repurchase or tender offer. If the Fund must liquidate portfolio securities in
order to effect a share repurchase or tender offer, the Fund's ability to
achieve its investment objective may be adversely affected.
If the Fund must liquidate portfolio securities in order to purchase shares
tendered, the Fund may realize gains and losses. Such gains may be realized on
securities held for less than three months. Because of the limitation of 30% on
the portion of the Fund's gross income that may be derived from the sale or
disposition of stocks and securities held less than three months (in order to
retain the Fund's tax status as a regulated investment company under the Code),
such gains would reduce the ability of the Fund to sell other securities held
for less than three months that the Fund may wish to sell in the ordinary course
of its portfolio management, which may adversely affect the Fund's yield. The
portfolio turnover rate of the Fund may or may not be affected by the Fund's
repurchases of shares pursuant to a tender offer.
In the event that the Fund engages in financial leveraging, the asset coverage
requirements of the 1940 Act may restrict the Fund's ability to engage in
repurchases of its shares. With respect to senior securities consisting of debt,
such requirements provide that no purchases of shares may be made by the Fund
unless, at the time of the purchase, the senior securities consisting of debt
have an asset coverage of at least 300% after deducting the amount of the
purchase price.
-50-
Certain Provisions of Articles of Incorporation and Bylaws
The Fund presently has provisions in its Articles of Incorporation and Bylaws
(together, the "Charter Documents") that could have the effect of limiting (i)
the ability of other entities or persons to acquire control of the Fund, (ii)
the Fund's freedom to engage in certain transactions or (iii) the ability of the
Fund's directors or stockholders to amend the Charter Documents or effect
changes in the Fund's management. The Charter Documents also contain provisions
which would inhibit any conversion to an open-end investment company. The
provisions of the Charter Documents may be regarded as "anti-takeover"
provisions.
The Board is divided into three classes. The term of office of the first class
expired on the date of the second annual meeting of stockholders, the term of
office of the second class expired on the date of the third annual meeting of
stockholders and the term of office of the third class expired on the date of
the fourth annual meeting of stockholders, etc. Upon the expiration of the term
of office of each class as set forth above, the Directors in such class will be
elected for a term of three years to succeed the Directors whose terms of office
expired. Accordingly, only those Directors in one class may be changed in any
one year, and such classification may prevent replacement of a majority of the
Board for up to a two-year period (although under Maryland law procedures are
available for the removal of Directors even if they are not then standing for
re-election, and under Securities and Exchange Commission regulations,
procedures are available for including stockholder proposals in the annual proxy
statement). Such system of electing Directors is intended to have the effect of
maintaining the continuity of management and, thus, make it more difficult for
the Fund's stockholders to change the majority of the Directors. A director may
be removed from office only by a vote of at least 75% of the outstanding shares
of the Fund entitled to vote for the election of Directors.
Under the Fund's Articles of Incorporation, a vote of 75% (which is higher than
that required under Maryland law or the 1940 Act) of the outstanding shares of
Common Stock of the Fund is required to authorize (i) any merger or
consolidation of the Fund with or into any other corporation; (ii) any sale,
lease, exchange, mortgage, pledge, transfer or other disposition of assets of
the Fund having an aggregate fair market value of $1,000,000 or more (other than
in the regular course of its investment activities); and (iii) any amendment to
the Articles of Incorporation of the Fund which converts the Fund to an open-end
investment company. Any amendment to the Articles of Incorporation of the Fund
which reduces the 75% vote required to authorize the enumerated actions also
must be approved by vote of the holders of 75% of the outstanding shares of
Common Stock. If any of the foregoing actions is approved by a vote of
two-thirds of the directors who have served on the Board for a period of at
least 12 months, however, the affirmative vote of the holders of a majority of
the Fund's outstanding common stock will be sufficient to approve such actions.
The provisions of the Charter Documents described above could have the effect of
depriving the owners of shares of opportunities to sell their shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund in a tender offer or similar transaction. The
overall effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a principal
stockholder. However, they provide the advantage of potentially requiring
persons seeking control of the Fund to negotiate with its management regarding
the price to be paid and facilitating continuity of the Fund's management,
objective and policies. The Board of the Fund has considered the forgoing
provisions and concluded that they are in the best interests of the Fund and its
stockholders.
-51-
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
Dividends and Distributions. The Fund currently intends to distribute to
stockholders, at least annually at such time so as to avoid imposition of excise
taxes, substantially all of its investment company taxable income (i.e. net
investment income and any net short-term capital gains less expenses). Net
investment income for this purpose is income other than realized net capital
gain (i.e. the extent of net long-term capital gains over net short-term capital
losses).
The Fund's current policy is 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.
Dividend Reinvestment Plan. Registered stockholders of shares of Common Stock of
the Fund will automatically be enrolled ("Participants") in the Fund's Dividend
Reinvestment Plan (the "Plan"). The terms and conditions of the Plan are as
follows:
1. State Street Bank and Trust (the "Agent") will act as agent for each
Participant. The Agent will open an account for each registered
stockholder as a Participant under the Plan in the same name in which such
Participant's shares of Common Stock are registered.
2. CASH OPTION. Pursuant to the Fund's Plan, unless a holder of Common Stock
otherwise elects, all dividend and capital gains distributions
("Distributions") will be automatically reinvested by the Agent in
additional Common Stock of the Fund. Stockholders who elect not to
participate in the Plan will receive all distributions in cash paid by
check mailed directly to the stockholder of record (or, if the shares are
held in street or other nominee name then to such nominee) by the Agent,
as dividend paying agent. Stockholders and Participants may elect not to
participate in the Plan and to receive all distributions of dividends and
capital gains in cash by sending written instructions to the Agent, as
dividend paying agent, at the address set forth below.
3. MARKET PREMIUM ISSUANCES. If on the payment date for a Distribution, the
NAV per share of Common Stock is equal to or less than the market price
per Common Stock plus estimated brokerage commissions, the Agent shall
receive newly issued Common Stock ("Additional Common Stock") from the
Fund for each Participant's account. The number of Additional Common Stock
to be credited shall be determined by dividing the dollar amount of the
Distribution by the greater of (i) the NAV per share of Common Stock on
the payment date, or (ii) 95% of the market price per share of Common
Stock on the payment date.
4. MARKET DISCOUNT PURCHASES. If the NAV per share of Common Stock exceeds
the market price plus estimated brokerage commissions on the payment date
for a Distribution, the Agent (or a broker-dealer selected by the Agent)
shall endeavor to apply the amount of such Distribution on each
Participant's Common Stock to purchase Common Stock on the open market. In
the event of a market discount on the payment date, the Agent will have 30
days after the dividend payment date (the "last purchase date") to invest
the dividend amount in shares acquired in open-market purchases. The
weighted average price (including brokerage commissions) of all Common
Stock purchased by the Agent as Agent shall be the price per Common Stock
allocable to each Participant. If, before the Agent has completed its
purchases, the market price plus estimated brokerage commissions exceeds
the NAV of the Common Stock as of the payment date, the purchase price
paid by Agent may exceed the NAV of the Common Stock, resulting in the
acquisition of fewer Common Stock than if such Distribution had been paid
in Common Stock issued by the Fund. Because of the foregoing difficulty
with respect to open-market purchases, the Plan provides that if the Plan
Agent is unable to invest the full dividend amount in open-market
purchases during the purchase period or if the market discount shifts to a
market premium during the purchase period, the Plan Agent may cease making
open-market purchases and may invest the uninvested portion of the
dividend amount in newly issued Common Stock at the NAV per share of
Common Stock at the close of business on the last purchase date.
Participants should note that they will not be able to instruct the Agent
to purchase Common Stock at a specific time or at a specific price.
Open-market purchases may be made on any securities exchange where Common
Stock are traded, in the over-the-counter market or in negotiated
transactions, and may be on such terms as to price, delivery and otherwise
as the Agent shall determine. Each Participant's uninvested funds held by
the Agent will not bear interest. The Agent shall have no liability in
connection with any inability to purchase Common Stock within the time
provided, or with the timing of any purchases effected. The Agent shall
have no responsibility for the value of Common Stock acquired. The Agent
may commingle Participants' funds to be used for open-market purchases of
the Fund's shares and the price per share allocable to each Participant in
connection with such purchases shall be the average price (including
brokerage commissions and other related costs) of all Fund shares
purchased by Agent. The rules and regulations of the Securities and
Exchange Commission may require the Agent to limit the Agent's market
purchases or temporarily cease making market purchases for Participants.
-52-
5. The market price of Common Stock on a particular date shall be the last
sales price on the securities exchange where the Common Stock are listed
on that date (currently the NASDAQ Capital Market)(the "Exchange"), or, if
there is no sale on the Exchange on that date, then the average between
the closing bid and asked quotations on the Exchange on such date will be
used. The NAV per share of Common Stock on, a particular date shall be the
amount calculated on that date (or if not calculated on such date, the
amount most recently calculated) by or on behalf of the Fund.
6. Whenever the Agent receives or purchases shares or fractional interests
for a Participant's account, the Agent will send such Participant a
notification of the transaction as soon as practicable. The Agent will
hold such shares and fractional interests as such Participant's agent and
may hold them in the Agent's name or the name of the Agent's nominee. The
Agent will not send a Participant stock certificates for shares unless a
Participants so requests in writing or unless a Participant's account is
terminated as stated below. The Agent will vote any shares so held for a
Participant in accordance with any proxy returned to the Fund by such
Participant in respect of the shares of which such Participant is the
record holder.
-53-
7. There is presently no service charge for the Agent serving as
Participants' agent and maintaining Participants' accounts. The Agent may,
however, charge Participants for extra services performed at their
request. The Plan may be amended in the future to impose a service charge.
In acting as Participants' agent under the Plan, the Agent shall be liable
only for acts, omissions, losses, damages or expenses caused by the
Agent's willful misconduct or gross negligence. In addition, the Agent
shall not be liable for any taxes, assessments or governmental charges
which may be levied or assessed on any basis whatsoever in connection with
the administration of the Plan.
8. The Agent may hold each Participant's Common Stock acquired pursuant to
the Plan together with the Common Stock of other Stockholders of the Fund
acquired pursuant to the Plan in non-certificated form in the Agent's name
or that of the Agent's nominee. Each Participant will be sent a
confirmation by the Agent of each acquisition made for his or her account
as soon as practicable, but in no event later than 60 days, after the date
thereof. Upon a Participant's request, the Agent will deliver to the
Participant, without charge, a certificate or certificates for the full
Common Stock. Although each Participant may from time to time have an
undivided fractional interest in a Common Share of the Fund, no
certificates for a fractional share will be issued. Similarly,
Participants may request to sell a portion of the Common Stock held by the
Agent in their Plan accounts by calling the Agent, writing to the Agent,
or completing and returning the transaction form attached to each Plan
statement. The Agent will sell such Common Stock through a broker-dealer
selected by the Agent within 5 business days of receipt of the request.
The sale price will equal the weighted average price of all Common Stock
sold through the Plan on the day of the sale, less brokerage commissions.
Participants should note that the Agent is unable to accept instructions
to sell on a specific date or at a specific price. Any share dividends or
split shares distributed by the Fund on Common Stock held by the Agent for
Participants will be credited to their accounts. In the event that the
Fund makes available to its Stockholders rights to purchase additional
Common Stock, the Common Stock held for each Participant under the Plan
will be added to other Common Stock held by the Participant in calculating
the number of rights to be issued to each Participant.
If a Participant holds more than one Common Stock Certificate registered
in similar but not identical names or if more than one address is shown
for a Participant on the Fund's records, all of such Participant's shares
of Common Stock must be put into the same name and address if all of them
are to be covered by one account. Additional shares subsequently acquired
by a Participant otherwise than through the Plan will be covered by the
Plan.
9. The reinvestment of Distributions does not relieve Participants of any
federal, state or local taxes which may be payable (or required to be
withheld on Distributions.) Participants will receive tax information
annually for their personal records and to help them prepare their federal
income tax return. For further information as to tax consequences of
participation in the Plan, Participants should consult with their own tax
advisors.
-54-
10. Each registered Participant may terminate his or her account under the
Plan by notifying the Agent in writing at State Street Bank and Trust,
P.O. Box 642, Mail Code: OPS22, Boston, MA 02117, or by calling the Agent
at (617) 937-6870. Such termination will be effective with respect to a
particular Distribution if the Participant's notice is received by the
Agent prior to such Distribution Record Date. The Plan may be terminated
by the Agent or the Fund upon notice in writing mailed to each Participant
at least 60 days prior to the effective date of the termination. Upon any
termination, the Agent will cause a certificate or certificates to be
issued for the full shares held for each Participant under the Plan and
cash adjustment for any fraction of a Common Share at the then current
market value of the Common Shares to be delivered to him. If preferred, a
Participant may request the sale of all of the Common Shares held by the
Agent in his or her Plan account in order to terminate participation in
the Plan. If any Participant elects in advance of such termination to have
Agent sell part or all of his shares, Agent is authorized to deduct from
the proceeds the brokerage commissions incurred for the transaction. If a
Participant has terminated his or her participation in the Plan but
continues to have Common Shares registered in his or her name, he or she
may re-enroll in the Plan at any time by notifying the Agent in writing at
the address above.
11. These terms and conditions may be amended by the Agent or the Fund at any
time but, except when necessary or appropriate to comply with applicable
law or the rules or policies of the Securities and Exchange Commission or
any other regulatory authority, only by mailing to each Participant
appropriate written notice at least 30 days prior to the effective date
thereof. The amendment shall be deemed to be accepted by each Participant
unless, prior to the effective date thereof, the Agent receives notice of
the termination of the Participant's account under the Plan. Any such
amendment may include an appointment by the Agent of a successor Agent,
subject to the prior written approval of the successor Agent by the Fund.
TAXATION
The following summary reflects the existing provisions of the Internal Revenue
Code (the "Code") and other relevant federal income tax authorities as of the
date of this prospectus and is subject to any subsequent changes therein. The
federal income tax consequences described below are merely statements of general
tax principles. The discussion does not deal with the federal income tax
consequences applicable to all categories of investors, some of whom may be
subject to special rules.
IN VIEW OF THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH STOCKHOLDER IS
ADVISED TO CONSULT THE STOCKHOLDER'S OWN TAX ADVISER WITH RESPECT TO THE
SPECIFIC TAX CONSEQUENCES OF BEING A STOCKHOLDER OF THE FUND, INCLUDING THE
EFFECT AND APPLICABILITY OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES THEREIN.
-55-
Federal Taxation of the Fund and its Distributions
The Fund has elected to be treated and intends to qualify annually as a
regulated investment company under the U.S. Internal Revenue Code of 1986, as
amended (the "Code"). To qualify as a regulated investment company, the Fund
must, among other things, (A) derive in each taxable year at least 90% of its
gross income from dividends, interest, payments with respect to securities
loans, net income from certain publicly traded partnerships and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in stocks, securities
or currencies; (B) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. Government securities, securities of other regulated
investment companies and investments in other securities which, with respect to
any one issuer do not represent more than 5% of the value of the Fund's total
assets nor more than 10% of the outstanding voting securities of such issuer and
(ii) not more than 25% of the value of its total assets is invested in (a) the
securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies); (b) two or more controlled
issuers in the same or similar trade or business or (c) certain publicly traded
partnerships; and (C) distribute at least 90% of its investment company taxable
income (which includes, among other items for this purpose, dividends, interest
and net short-term capital gains in excess of net long-term capital losses) each
taxable year.
As a regulated investment company, the Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net capital
gains (net long-term capital gains in excess of the sum of net short-term
capital losses and capital loss carryovers from prior years, if any) that it
distributes to Stockholders. The Fund currently intends to distribute to its
Stockholders, at least annually, substantially all of its investment company
taxable income, as computed for U.S. federal income tax purposes. To the extent
the Fund retains its net capital gains for investment, it will be subject under
current tax rates to a federal income tax at a maximum effective rate of 35% on
the amount retained. See "Dividend and Distributions" above.
Amounts not distributed on a timely basis in accordance with a calendar-year
distribution requirement are subject to a nondeductible 4% federal excise tax
payable by the Fund. To avoid the tax, the Fund must distribute, or be deemed to
have distributed, during each calendar-year at least an amount equal to the sum
of (1) 98% of its ordinary income (not taking into account any capital gains or
losses) for the calendar year, (2) 98% of its capital gains in excess of its
capital losses (adjusted for certain ordinary losses) for the twelve-month
period ending on October 31 of the calendar year, and (3) all ordinary income
and capital gains for previous years that were not distributed or taxed during
such years. To prevent application of the non-deductible excise tax, the Fund
currently intends to make its distributions in accordance with the calendar-year
distribution requirement. Compliance with the calendar year distribution
requirement may limit the extent to which the Fund will be able to retain its
net capital gains for investment.
A distribution will be treated as paid on December 31 of a calendar year if it
is declared by the Fund in October, November or December of that year to
Stockholders of record on a date in such a month and paid by the Fund during
January of the following calendar year. Such distributions will be taxable to
Stockholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
-56-
If in any taxable year the Fund fails to qualify as a regulated investment
company under the Code, the Fund will be taxed in the same manner as an ordinary
corporation and distributions to its Stockholders will not be deductible by the
Fund in computing its taxable income. In addition, in the event of a failure to
qualify, the Fund's distributions, to the extent derived from the Fund's current
or accumulated earnings and profits, will constitute dividends (eligible for the
corporate dividends-received deduction in the case of corporate stockholders and
eligible for treatment as qualified dividend income in the case of individual
stockholders) which are taxable to Stockholders as ordinary income, even though
those distributions might otherwise (at least in part) have been treated in the
Stockholders' hands as long-term capital gains. If the Fund fails to qualify as
a regulated investment company in any year, it will be required to pay out its
earnings and profits accumulated in that year in order to qualify again as a
regulated investment company and may in certain circumstances be required to pay
tax on unrealized gains.
If the Fund utilizes leverage through borrowings, it may be restricted by loan
covenants with respect to the declaration and payment of dividends in certain
circumstances. Limits on the Fund's payment of dividends may prevent the Fund
from distributing at least 90% of its net income and may therefore jeopardize
the Fund's qualification for taxation as a regulated investment company and/or
may subject the Fund to the nondeductible 4% federal excise tax. The Fund will
endeavor to avoid restrictions on its ability to make dividend payments.
Gain or loss on the sales of securities by the Fund will generally be long-term
capital gain or loss if the securities have been held by the Fund for more than
one year. Gain or loss on the sale of securities held for one year or less will
be short-term capital gain or loss.
The Fund's investment in so-called "section 1256 contracts," such as regulated
futures contracts, certain foreign currency contracts, options on most stock
indices and any listed non-equity options, are subject to special tax rules. Any
such section 1256 contracts held by the Fund at the end of its taxable year are
required to be marked to their market value, and any unrealized gain or loss on
those positions will be included in the Fund's income as if each position had
been sold for its fair market value at the end of the taxable year. The
resulting gain or loss will be combined with any gain or loss realized by the
Fund from positions in section 1256 contracts closed during the taxable year.
Provided such positions are held as capital assets and are not part of a
"hedging transaction" nor part of a "straddle," 60% of the resulting net gain or
loss will be treated as long-term capital gain or loss, and 40% of such net gain
or loss will be treated as short-term capital gain or loss, regardless of the
period of time the positions were actually held by the Fund.
Certain of the Fund's investment practices are subject to special and complex
U.S. federal income tax provisions that may, among other things, (i) disallow,
suspend or otherwise limit the allowance of certain losses or deductions,
including the dividends received deduction, (ii) convert lower taxed long-term
capital gains and qualified dividend income into higher taxed short-term capital
gains or ordinary income, (iii) convert ordinary loss or a deduction into
capital loss (the deductibility of which is more limited), (iv) cause the Fund
to recognize income or gain without a corresponding receipt of cash, (v)
adversely affect the time as to when a purchase or sale of stock or securities
is deemed to occur, (vi) adversely alter the characterization of certain complex
financial transactions and (vii) produce income that will not qualify as good
income for purposes of the 90% annual gross income requirement described above.
The Fund monitors its transactions and may make certain tax elections and may be
required to borrow money or dispose of securities to mitigate the effect of
these rules and prevent disqualification of the Fund as a regulated investment
company.
-57-
Because the Fund may invest in foreign securities, its income from such
securities may be subject to non-U.S. taxes. Tax conventions may reduce or
eliminate such taxes. If the Fund invests more than 50% of its total assets in
non-U.S. securities as of year-end, the Fund may elect to have its foreign tax
deduction or credit for foreign taxes paid with respect to qualifying taxes to
be taken by its shareholders instead of on its own tax return. If the Fund so
elects, each shareholder would be required to include in gross income, even
though not actually received, his pro rata share of the foreign taxes paid by
the Fund, but would be treated as having paid his pro rata share of such foreign
taxes and would therefore be allowed to either deduct such amount in computing
taxable income or use such amount (subject to various Code limitations) as a
foreign tax credit against federal income tax (but not both). For purposes of
the foreign tax credit limitation rules of the Code, each shareholder would
treat as foreign source income his pro rata share of such foreign taxes plus the
portion of dividends received from the Fund representing income derived from
foreign sources. Each shareholder should consult his own tax adviser regarding
the potential application of foreign tax credits.
The Fund may invest in securities of non-U.S. corporations that could be
classified as "passive foreign investment companies" as defined for U.S. federal
income tax purposes. A passive foreign investment company is, very generally, a
non-U.S. corporation if (i) 75% or more of the gross income of such corporation
for the taxable year is passive income (ii) the average percentage of assets
held by such corporation during the taxable year that produce passive income or
that are held for the production of passive income at least 50%. For U.S.
federal income tax purposes, the Fund's investment in a passive foreign
investment company may, among other things, cause the Fund to recognize taxable
income without a corresponding receipt of cash, to incur an interest charge on
taxable income that is deemed to have been deferred and/or to recognize ordinary
income that would have otherwise been treated as capital gains. The Fund will
monitor any investments in passive foreign investment companies in order to
comply with the U.S. federal income tax rules applicable to regulated investment
companies.
Gains or losses attributable to fluctuations in exchange rates between the time
the Fund accrues income or receivables or expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
income or receivables or pays such liabilities are generally treated as ordinary
income or loss. Similarly, gains or losses on foreign currency forward contracts
and the disposition of debt securities denominated in a foreign currency, to the
extent attributable to fluctuations in exchange rates between the acquisition
and disposition dates, are also treated as ordinary income or loss.
Dividends paid out of the Fund's investment company taxable income (which
includes any net short-term capital gains) will be taxable to a U.S. Stockholder
as ordinary income. Distributions of net capital gains (net long-term capital
gains in excess of the sum of net short-term capital losses and any capital loss
carryovers from prior years), if any, designated by the Fund as capital gain
dividends, are taxable as long-term capital gains, regardless of how long the
Stockholder has held the Fund's Shares.
-58-
Ordinarily, dividends paid by the Fund will not qualify for the deduction for
dividends received by corporations because the Fund's income will not consist of
dividends paid by U.S. corporations. A portion of the Fund's dividends may
qualify for the 15% rate on "qualified dividend income" applicable to individual
shareholders to the extent that the Fund's income is derived from qualified
dividends and to the extent that both the Fund and the individual Stockholder
satisfy, among other requirements, a more than 60 day holding period
requirement. There can be no assurance as to what portion of the Fund's
distributions will qualify for favorable treatment as qualified dividend income.
These special rates that apply to ordinary income dividends paid to individuals
are set to expire for taxable years beginning in 2011.
The Fund may retain for investment its net capital gain. However, if the Fund
retains any net capital gain or any investment company taxable income, it will
be subject to a tax of 35% of such amount. If the Fund retains any net capital
gain, it expects to designate the retained amount as undistributed capital gains
in a notice to its shareholders, each of whom, if subject to U.S. federal income
tax on long-term capital gains, (i) will be required to include in income for
U.S. federal income tax purposes its share of such undistributed long-term
capital gain, (ii) will be entitled to credit its proportionate share of the tax
paid by the Fund against their U.S. federal income tax liability, if any, and to
claim refunds to the extent that the credit exceeds such liability and (iii)
will increase its tax basis in its common shares for the Fund by an amount equal
to 65% of the amount of undistributed capital gain included in such
shareholder's gross income.
Investment company taxable income will be increased or decreased by the amount
of foreign currency gains or losses realized by the Fund in connection with the
disposition of foreign currency-denominated debt securities as well as changes
in foreign exchange rates between the time the Fund accrues a receivable
(typically, dividends, interest and payments for securities sold) or payable
(typically, expenses and payments for securities purchased) and the time such
receivable or payable is satisfied. The Fund cannot predict the impact of such
transactions on company taxable investment income.
See "The Offering - Federal Income Tax Consequences Associated With the Offer"
above for a discussion regarding certain United States Federal income tax
consequences of the Offer generally applicable to citizens or residents of the
United States and U.S. trusts, estates, corporations and any other person who is
generally subject to U.S. Federal income tax ("U.S. Stockholders").
-59-
Sales of Shares
Upon the sale or other disposition of Shares of the Fund, a Stockholder
generally will realize a taxable gain or loss in an amount equal to the
difference between the proceeds of the sale or other dispositions and the
Stockholder's adjusted tax basis in the Shares. Such gain or loss will be a
capital gain or loss if the Shares are capital assets in the Stockholder's hands
and generally will be long-term or short-term depending upon the Stockholder's
holding period for the Shares. Any loss realized on a sale or exchange will be
disallowed to the extent the Shares disposed of are replaced (including
replacement through the Dividend Reinvestment Plan) within a period of 61 days,
beginning 30 days before and ending 30 days after the Shares are disposed of. In
such a case, the basis of the Shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a Stockholder on a disposition of Fund
Shares held by the Stockholder for six months or less will be treated as a
long-term capital loss to the extent of any distributions of capital gain
dividends received or treated as having received by the Stockholder with respect
to such shares.
Backup Withholding
The Fund may be required to withhold for U.S. federal income taxes 28% of all
taxable distributions payable to Stockholders who fail to provide the Fund with
their certified U.S. taxpayer identification number (or certificate regarding
foreign status) or to Stockholders otherwise subject to U.S. backup withholding.
Similarly, proceeds from the sale or other disposition of Shares of the Fund in
the United States may be subject to backup withholding if the Stockholder fails
to provide a certified U.S. taxpayer identification number (or certificate
regarding foreign status) and make other certifications in connection with the
transaction, or if the Stockholder is otherwise subject to U.S. backup
withholding. Corporate Stockholders and other Stockholders specified in the Code
are exempt from such backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be refunded or credited against the Stockholder's
U.S. federal income tax liability, provided that the required information is
furnished to the Internal Revenue Service.
-60-
Other Tax Considerations
Distributions from the Fund and sales or other dispositions of Shares of the
Fund may be subject to additional state, local and foreign taxes depending on
each Stockholder's particular situation. Stockholders are advised to consult
their own tax advisers with respect to the particular tax consequences to them
of an investment in the Fund.
DETERMINATION OF NET ASSET VALUE
The Fund's NAV per share will be calculated by the Adviser (i) no less
frequently than monthly, (ii) on the last business day of each month and (iii)
at any other times determined by the Board. NAV per share is calculated by
dividing the value of the Fund's net assets (the value of its assets less its
liabilities) by the total number of shares of Common Stock outstanding.
An unaudited NAV per share is posted daily on the Fund's website at
www.herzfeld.com.
In calculating the NAV per share at any time:
(i) the value of any cash on hand or on deposit, bills and demand notes
and accounts receivable, prepaid expenses, cash dividends and
interest declared or accrued and not yet received, will be its face
amount, unless the Adviser has determined that its value is less, in
which case its value will be deemed to be such amount as the Adviser
determines to be reasonable;
(ii) the value of any security which is traded on a stock exchange
(except as specified in (iii) below) will be determined by taking
the latest available sales price on the primary exchange on which
the security is traded or, if no such price is available, by taking
the last quoted bid price;
(iii) the value of any security traded in the unregulated market will be
determined, by taking the last quoted bid price;
(iv) investments (if any) in securities of the U.S. government, its
agencies and instrumentalities having a maturity of 60 days or less
are valued at amortized cost;
(v) the value of a forward contract is calculated by reference to the
price quoted at the date of valuation of the contract by the
customary banking sources of the Fund;
-61-
(vi) the value of commodity futures or option contracts entered into by
the Fund are the margin deposit plus or minus the difference between
the value of the contract on the date NAV is calculated and the
value on the date the contract originated, value being that
established on a recognized commodity or options exchange, or by
reference to other customary sources, with a gain or loss being
recognized;
(vii) the value of any security or property for which no price quotation
is available as provided above is the fair value determined in such
manner as the Board, acting in good faith, deems appropriate,
although the actual calculation may be done by others; and
(viii) the liabilities of the Fund are deemed to include, without
limitation, all bills and accounts payable, all other contractual
obligations for the payment of money, including the amount of
distributions declared and unpaid, all accrued and unpaid management
fees, advisory fees and other expenses, all reserves for taxes or
contingencies and all other liabilities of the Fund determined in
accordance with generally accepted accounting principles.
In valuing securities or property for which no price quotation is available, the
Board considers various factors, including the fundamental analytical data
relating to the investment, the nature and duration of any restriction on
disposition of the investment, and the forces that influence the market in which
such investment is purchased and sold.
Any assets or liabilities initially expressed in terms of foreign currencies are
translated into dollars at a quoted exchange rate or at such other appropriate
rate as may be determined by the Adviser.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND REGISTRAR
State Street Bank and Trust Company acts as custodian for the Fund's assets. The
principal address of the Custodian is 200 Clarendon Street, P.O. Box 9130, Mail
Code DPG-112, Boston, Massachusetts 02117. The Custodian employs sub-custodians
in each of the jurisdictions in which the Fund invests. The custodian's services
include, in addition to the custody of all cash and securities owned by the
Fund, the maintenance of a custody account in the custodian's Fund department,
the segregation of all certificated securities owned by the Fund, the
appointment of authorized agents as sub-custodians, disbursement of funds from
the custody account of the Fund, releasing and delivering securities from the
custody account of the Fund, maintain records with respect to such custody
account, delivering to the Fund a daily and monthly statement with respect to
such custody account, and causing proxies to be executed. The custodian's fee is
paid by the Fund.
State Street Bank and Trust Company also serves as the Fund's transfer agent,
dividend/distribution disbursing agent, dividend reinvestment plan agent and as
registrar for the Fund's common stock.
-62-
LEGAL MATTERS
Pepper Hamilton LLP, 3000 Two Logan Square, 18th and Arch Streets, Philadelphia,
PA 19103 serves as counsel to the Fund.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The independent registered accounting firm of the Fund is [_______] located at
500 Ygnacio Valley Road, Suite 200, Walnut Creek, CA 94596.
FINANCIAL STATEMENTS
The financial statements of the Fund as of June 30, 2007 (which have been
incorporated into this Prospectus and the registration statement, of which this
Prospectus forms a part, by reference to the Fund's 2007 Annual Report to
Stockholders), and the financial highlights for each of the five years in the
period ended June 30, 2007, included in this Prospectus, have been so
incorporated and included in reliance on the reports of [____], independent
accountants, for the one year periods ended June 30, 2007 and 2006, and of
[FORMER AUDITOR], independent accountants for the one year periods ended June
30, 2005, 2004, and 2003, given on the authority of said firms as experts in
auditing and accounting. The address of [FORMER AUDITOR] is 2699 S. Bayshore
Drive, Miami, FL 33133.
FURTHER INFORMATION
Further information concerning these securities and the Fund may be found in the
Registration Statement on file with the Commission, of which this Prospectus and
the SAI incorporated by reference herein constitute a part. Financial statements
of the Fund for the fiscal year ended June 30, 2007 are included in the Fund's
annual reports to stockholders for such years, copies of which are on file with
and may be inspected at the Commission as indicated below.
The Fund is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the 1940 Act, and in
accordance therewith, is required to file periodic reports, proxy statements and
other information with the Commission relating to its business, financial
condition and other matters. Such information is available for inspection at the
public reference facilities of the Commission at Room 1024, 100 F Street, NE,
Washington, DC 20549. Copies of such information are obtainable by mail, upon
payment of the Commission's customary charges, by writing to the Commission's
principal office at 100 F Street, NE, Washington, DC 20549 at prescribed rates.
The Commission maintains a web site (http://www.sec.gov) that contains periodic
reports, proxy statements and other information regarding registrants that file
documents electronically with the Commission. Such reports and other information
concerning the Fund may also be inspected at the offices of the NASDAQ Capital
Market.
-63-
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.(1) 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.
----------
(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.
A-1
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.
----------
(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..
A-2
APPENDIX B
THOMAS J. HERZFELD ADVISORS, INC.
PROXY VOTING
POLICIES AND PROCEDURES
II. 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 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.
III. 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.
IV. 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-1
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.
V. 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)(7); (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.
VI. 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.
----------
(7) 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.
B-2
--------------------------------------------------------------------------------------------------
(1) Issues regarding the issuer's Board entrenchment and anti-takeover Oppose
measures 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 Approve
proxy fight.
--------------------------------------------------------------------------------------------------
(4) Election of auditors recommended by management, unless seeking to replace Approve
if there exists a dispute over policies.
--------------------------------------------------------------------------------------------------
(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 Approve
annual 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.
--------------------------------------------------------------------------------------------------
B-3
--------------------------------------------------------------------------------------------------
(11) Employee Stock Purchase Plan Approve
--------------------------------------------------------------------------------------------------
(12) Establish 401(k) Plan Approve
--------------------------------------------------------------------------------------------------
(13) Rotate annual meeting location/date Approve
--------------------------------------------------------------------------------------------------
(14) Establish a staggered Board Approve
--------------------------------------------------------------------------------------------------
(15) Eliminate director mandatory retirement policy Case-by-Case
--------------------------------------------------------------------------------------------------
(16) Option and stock grants to management and directors Case-by-Case
--------------------------------------------------------------------------------------------------
(17) Allowing indemnification of directors and/or officers after reviewing the Case-by-Case
applicable laws and extent of protection requested.
--------------------------------------------------------------------------------------------------
B-4
PART C - OTHER INFORMATION
ITEM 25. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements:
(a) Schedule of Investments as of June 30, 2007 to be filed by
amendment.
(b) Statement of Assets and Liabilities as of June 30, 2007 to be filed
by amendment.
(c) Statement of Operations Year Ended June 30, 2007 to be filed by
amendment.
(d) Statements of Changes in Net Assets for the Years Ended June 30,
2007 and 2006 to be filed by amendment.
(e) Financial Highlights Years Ended June 30, 2003 through 2007 to be
filed by amendment.
(f) Notes to Financial Statements to be filed by amendment.
(g) Report of Independent Registered Public Accounting Firm to be filed
by amendment.
(2) Exhibits
(a) (1) Articles of Incorporation filed with the State of Maryland
dated March 10, 1992.
(2) Articles of Amendment to Articles of Incorporation as filed
with the State of Maryland on July 23, 1993.
(b) By Laws.
(c) Not applicable.
(d) (1) Form of Specimen Certificate of Common Stock.
(2) Articles Sixth, Eighth, Ninth and Tenth of the Registrant's
Articles of Incorporation filed hereto as exhibit (a)(1).
(3) Articles II and III of the Registrant's By Laws filed hereto
as exhibit (a)(3).
(e) Dividend Reinvestment Plan is incorporated by reference to
Exhibit 99.2 to Form 8-K/A filed with the Securities and
Exchange Commission ("SEC") on November 22, 2006 (File No.
811-06445).
(f) Not applicable.
(g) Investment Advisory Agreement between HERZFELD/CUBA, a
division of Thomas J. Herzfeld Advisors, Inc. and the
Registrant dated September 10, 1993.
(h) Not applicable.
(i) Not applicable.
(j) Custodian Agreement between Investors Bank & Trust Company and
the Registrant dated March 28, 2003.
(k) Subscription Agent Agreement between Colbent Corporation and
the Registrant.
(l) Opinion and Consent of Pepper Hamilton LLP to be filed by
amendment.
(m) Not applicable.
(n) Consent of Independent Registered Public Accounting Firm to be
filed by amendment.
(o) Not applicable.
(p) Not applicable.
(r) Joint Code of Ethics of the Registrant and Thomas J. Herzfeld
Advisors, Inc.
ITEM 26. MARKETING ARRANGEMENTS
None.
ITEM 27. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the Offer described in this Registration Statement.
Estimated
Description of Expense Expense*
---------------------- --------
Securities and Exchange Commission registration fees...............$[____]
NASDAQ listing fees for additional shares..........................$[____]
Printing (other than stock certificates) ..........................$[____]
Engraving and printing of stock certificates.......................$[____]
Accounting fees and expenses.......................................$[____]
Legal fees and expenses............................................$[____]
Subscription agent's fees and expenses.............................$[____]
Miscellaneous......................................................$[____]
Total.........................................................$[____]
* To be provided by amendment.
ITEM 28. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 29. NUMBER OF HOLDERS OF SECURITIES
Number Of
Record Holders
As Of
Title Of Class June 30, 2007*
------------------------------------------- ---------------------
Common Stock, $0.001 par value [____]
* To be provided by amendment.
ITEM 30. INDEMNIFICATION
The General Corporation Law of the State of Maryland, Article VII Registrant's
By-laws filed as exhibit (b) hereto, and Section 5 of the Investment Advisory
Agreement filed as exhibit (g) hereto provide for indemnification. The
Registrant has purchased insurance insuring its directors and officers against
certain liabilities incurred in their capacities as such, and insuring the
Registrant against any payments which it is obligated to make to such persons
under the foregoing indemnification provisions.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant, pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 31. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
Registrant is fulfilling the requirement of this Item 31 to provide a list of
the officers and directors of its investment adviser, together with information
as to any other business, profession, vocation or employment of a substantial
nature engaged in by those entities or those of its officers and directors
during the past two years, by incorporating herein by reference the information
contained in the current Form ADV filed on February 12, 2007 with the Securities
and Exchange Commission by Thomas J. Herzfeld Advisors, Inc. (File No. 801-
20866) pursuant to the Investment Advisers Act of 1940, as amended.
ITEM 32. LOCATION OF ACCOUNTS AND RECORDS
All such books and other documents required to be maintained by Section 31(a) of
the Investment Company Act of 1940 and Rules 31a-1 through 31a-3 thereunder are
maintained at the following locations:
Thomas J. Herzfeld Advisors, Inc., P.O. Box 161465, Miami, FL 33116; and
State Street Bank and Trust Company, P.O. Box 642, Mail Code OPS22,
Boston, MA 02116.
ITEM 33 MANAGEMENT SERVICES
Not applicable.
ITEM 34. UNDERTAKINGS
(1) Registrant undertakes to suspend the offering of its shares until it
amends its prospectus if: (a) subsequent to the effective date of this
Registration Statement, the net asset value per share declines more than
10% from its net asset value per share as of the effective date of this
Registration Statement; or (b) the net asset value increases to an amount
greater than its net proceeds as stated in the Prospectus.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) Registrant undertakes that: (a) for purposes of determining any liability
under the Securities Act of 1933, as amended, the information omitted from
the form of prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective; and (b) that for the purpose of determining any
liability under the Securities Act of 1933, as amended, each
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(6) Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, as amended, the Registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the city of Miami, and state of Florida, on the 23rd day of
July 2007.
HERZFELD CARIBBEAN BASIN FUND, INC.
By: /s/ Thomas J. Herzfeld
-----------------------------------
Thomas J. Herzfeld
President and Chairman of the
Board of Directors
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
Name Title Date
/s/Ann S. Lieff Director July 23, 2007
-----------------------
Ann S. Lieff
/s/Michael A. Rubin Director July 23, 2007
-----------------------
Michael A. Rubin
Director and President
/s/Thomas J. Herzfeld (Principal Executive Officer) July 23, 2007
-----------------------
Thomas J. Herzfeld
Secretary and Treasurer
/s/Cecilia Gondor (Principal Financial Officer) July 23, 2007
-----------------------
Cecilia Gondor
EXHIBIT INDEX
Exhibit No. Description of Exhibit
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(a)(1) Articles of Incorporation
(a)(2) Articles of Amendment to Articles of Incorporation
(b) By Laws
(d) Form of Specimen Certificate of Common Stock
(g) Investment Advisory Agreement
(j) Custodian Agreement
(k) Subscription Agent Agreement
(r) Joint Code of Ethics of Registrant and Adviser