THE HERZFELD
CARIBBEAN BASIN
FUND, INC.
ANNUAL REPORT
JUNE 30, 1999
<PAGE>
================================================================================
THE HERZFELD CARIBBEAN BASIN FUND, INC.
The Herzfeld Building
PO Box 161465
Miami, FL 33116
(305) 271-1900
INVESTMENT ADVISOR
HERZFELD / CUBA
a division of Thomas J. Herzfeld Advisors, Inc.
PO Box 161465
Miami, FL 33116
(305) 271-1900
TRANSFER AGENT & REGISTRAR
Investors Bank & Trust Company
200 Clarendon Street, 16th Floor
Boston, MA 02116
(617) 443-6870
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street, 5th Floor
Boston, MA 02116
COUNSEL
Pepper Hamilton LLP
3000 Two Logan Square
18th and Arch Streets
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Kaufman, Rossin & Co.
2699 South Bayshore Drive
Miami, FL 33133
Listed NASDAQ SmallCap Market
Symbol: CUBA
- --------------------------------------------------------------------------------
The Herzfeld Caribbean Basin Fund's investment objective is long-term capital
appreciation. To achieve its objective, the Fund invests in issuers that are
likely, in the Advisor's view, to benefit from economic, political, structural
and technological developments in the countries in the Caribbean Basin, which
consist of Cuba, Jamaica, Trinidad and Tobago, the Bahamas, the Dominican
Republic, Barbados, Aruba, Haiti, the Netherlands Antilles, the Commonwealth of
Puerto Rico, Mexico, Honduras, Guatemala, Belize, Costa Rica, Panama, Colombia
and Venezuela. The fund invests at least 65% 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.
- --------------------------------------------------------------------------------
OFFICERS AND DIRECTORS
================================================================================
THOMAS J. HERZFELD
Chairman of the Board, President
and Portfolio Manager
CECILIA L. GONDOR-MORALES
Secretary, Treasurer and Director
BERGTHOR F. ENDRESEN
Director
ANN S. LIEFF
Director
KENNETH A.B. TRIPPE
Director
<PAGE>
LETTER TO SHAREHOLDERS
================================================================================
[PHOTO]
Thomas J. Herzfeld
Chairman and President
August 11, 1999
Dear Fellow Shareholders:
PERFORMANCE
For the fiscal year-ending June 30, 1999, our Fund's net asset value closed at a
record high of $6.12. This represented a gain of 6.2% for the 12-months
(adjusted for the year-end distribution of $0.709 per share). Over the same
period, our share price moved ahead by 11.8% (also adjusted for the
distribution).
Our performance earned an achievement award from Lipper Analytical. That firm
ranked The Herzfeld Caribbean Basin Fund, Inc. the number one performer among
closed-end Latin American Funds for the one- and five-year periods ended
December 31, 1998, and the number one performer among Latin American Equity
Funds for the two and five year periods ended December 31, 1998.
The portfolio's level of investment increased from 80.3% to 97.88%. This is the
first year that we were so fully invested. Our strategy going forward remains
the same--to continue to emphasize investments in companies doing business in
the Caribbean which we feel have strong merit even if there is no political
change in Cuba. The companies we select, however, are also chosen with a view
towards the economic benefit they would receive if U.S. trade with Cuba is
resumed. I believe the Fund is well positioned to achieve our investment
objectives.
Cuba, of course, continues to be of the highest level of interest. The subject
of the lifting of the embargo, and the impact of that event on our portfolio,
are discussed at every Board meeting. Potential new investments and portfolio
changes are also reviewed in this context.
3
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LETTER TO SHAREHOLDERS (CONTINUED)
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PREMIUM/DISCOUNT
During the fiscal year the Fund's shares traded at both a premium and a discount
to net asset value. Since inception in 1994, the Fund has traded at a premium
for at least a portion of any given year.
CHART
[OMITTED]
LARGEST ALLOCATIONS
The following tables present our largest investments and geographic allocations
as of June 30, 1999.
TABLES
- ----------------------------------------------
Geographic Allocation % of Net Assets
- ----------------------------------------------
USA 46.96%
Mexico 17.06%
Panama 10.50%
Belize 5.93%
Puerto Rico 4.83%
Cayman Islands 3.83%
Dominican Republic 2.04%
Latin American Regional 1.95%
Venezuela 1.56%
Netherlands Anitlles 1.16%
Colombia 0.99%
Costa Rica 0.69%
Virgin Islands 0.38%
Cuba 0.00%
- ----------------------------------------------
- ----------------------------------------------
Largest Portolio Positions % of Net Assets
- ----------------------------------------------
Florida East Coast Industries Inc. 25.93%
PanAmerican Beverage Inc. Cl. A 7.37%
The Mexico Fund, Inc. 6.74%
Carlisle Holdings Inc. 5.93%
Royal Caribbean Cruises Ltd. 5.88%
Carnival Corp. 5.19%
Banco Latinoamericano de Exportaciones 3.13%
Florida Rock Industries, Inc. 3.10%
Seaboard Corporation 2.65%
Consolidated Water Co. 2.60%
- ----------------------------------------------
4
<PAGE>
LETTER TO SHAREHOLDERS (CONTINUED)
================================================================================
Daily net asset values and press releases on the Fund are now available on the
internet at www.herzfeld.com.
I would like to take this time to thank the members of the Board of Directors
for their hard work and guidance and also to thank my fellow shareholders for
their continued support and suggestions.
Sincerely,
/s/ Thomas J. Herzfeld
Thomas J. Herzfeld
Chairman of the Board and President
5
<PAGE>
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999
================================================================================
Shares or
Principal Amount Description Value
- ---------------- ----------- -----
Common stocks - 97.88% of net assets
Banking and finance - 5.17%
8,000 Bancolombia S.A. $ 38,000
3,500 Banco Ganadero S.A. 63,219
12,000 Banco Latinoamericano de Exportaciones 321,000
6,000 Doral Financial 103,125
26,000 Grupo Financiero Serfin SA ADR 5,200
Communications - 5.72%
3,000 Able Telecom Holdings* 21,750
2,400 Atlantic Tele-Network* 25,200
2,000 Cellular Communications of Puerto Rico 57,000
3,000 Corecomm, Inc.* 144,750
16,000 Grupo Radio Centro S.A. ADR 84,000
1,000 Grupo Televisa S.A. GDR 44,813
19,000 Tricom S.A. ADR 210,188
Conglomerates - 5.96%
42,024 Carlisle Holdings, Inc. 609,348
200 Grupo Imsa S.A. 3,200
Construction and related - 6.44%
12,000 Bufete Industrial S.A. ADR 21,750
1,936 Ceramica Carabobo Cl. A ADR 2,234
13,000 Empresas ICA Sociedad Controladora ADR 87,750
7,000 Florida Rock Industries, Inc. 318,500
7,000 Florida Rock Industries, Inc. rights --
4,300 Mastec, Inc. 121,475
3,300 Puerto Rican Cement Co. 109,519
Consumer products and related manufacturing - 16.37%
800,000 Atlas Electricas S.A. 70,945
1,918 Buenos Aires Embotelladora S.A. (Note 2)* --
5,000 Coca Cola Femsa S.A. 96,875
6,400 Grupo Casa Autrey S.A. ADR 23,200
42,218 Mavesa S.A. ADR 137,209
31,800 PanAmerican Beverage Inc. Cl. A 757,238
7,146 Pepsi Cola Puerto Rico 39,303
11,500 Savia S.A. ADR 263,063
13,000 Vitro Sociedad Anonima ADR 66,625
13,850 Watsco Incorporated 266,794
See accompany notes.
- -----------------------------------
* Non-income producing
6
<PAGE>
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (continued)
================================================================================
Shares or
Principal Amount Description Value
- ---------------- ----------- -----
Investment companies - 11.24%
10,000 The Latin America Equity Fund, Inc. $ 103,750
6,100 The Latin America Investment Fund, Inc. 68,244
3,000 The Latin American Discovery Fund, Inc. 28,125
34,050 The Mexico Equity and Income Fund, Inc. 261,759
40,000 The Mexico Fund, Inc. 692,500
Leisure - 11.07%
11,000 Carnival Corp. 533,500
13,800 Royal Caribbean Cruises Ltd. 603,750
Medical - 1.16%
8,000 Orthofix International N.V.* 119,000
Railroad and landholdings - 25.93%
60,200 Florida East Coast Industries Inc. 2,663,846
Retail - 0.13%
20,000 Little Switzerland Inc.* 13,750
Trucking and marine freight - 3.26%
800 Seaboard Corporation 272,000
5,000 Trailer Bridge, Inc. 10,313
10,000 Transportacion Maritima Mexicana ADR 52,500
Utilities - 3.83%
12,000 Caribbean Utilities Ltd. Cl. A 126,000
35,600 Consolidated Water, Inc. 267,000
Other - 1.60%
33,000 Consorcio G Grupo Dina ADR 49,500
24,000 Hvide Marine, Inc. 51,751
2,414 Mantex S.A.I.C.A. 17,606
14,200 Margo Caribe, Inc.* 42,600
833 Siderurgica Venezolana Sivensa ADR 2,499
75 Siderurgica Venezolana Sivensa "B" 255
-----------
Total common stocks (cost $7,767,232) 10,053,521
Bonds - 0% of net assets
$ 165,000 Republic of Cuba - 4.5%, 1977 - in default
(cost $63,038) (Note 2)* --
Other assets less liabilities - 2.12% of net assets 218,123
-----------
Net assets - 100% $10,271,644
===========
See accompanying notes.
- -----------------------------------
* Non-income producing
7
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
================================================================================
ASSETS
Investment in securities, at value (cost $7,830,270) (Note 2) $ 10,053,521
Cash 234,734
Dividends and interest receivable 5,174
Other assets 46,331
------------
TOTAL ASSETS 10,339,760
LIABILITIES
Accrued investment advisor fee (Note 3) $ 33,495
Other payables 34,621
------------
TOTAL LIABILITIES 68,116
------------
NET ASSETS (Equivalent to $6.12 per share
based on 1,677,636 shares outstanding) $ 10,271,644
============
Net assets consist of the following:
Common stock, $.001 par value; 100,000,000
shares authorized; 1,677,636 shares issued
and outstanding $ 1,678
Additional paid-in capital 8,362,502
Undistributed net investment loss (322,921)
Undistributed net realized gain on investments 7,134
Net unrealized gain on investments 2,223,251
------------
TOTAL $ 10,271,644
============
See accompanying notes.
8
<PAGE>
STATEMENT OF OPERATIONS YEAR ENDED JUNE 30, 1999
================================================================================
INVESTMENT INCOME
Dividends $ 102,771
Interest 19,983
---------
Total income 122,754
EXPENSES
Investment advisor fee (Note 3) $ 131,032
Custodian fees 49,500
Professional fees 28,616
Amortization 17,182
Transfer agent 16,042
Insurance 14,333
Directors fees 8,700
Printing 7,060
Proxy services 7,010
Postage 5,996
Listing fees 4,000
Transaction fees 1,591
Miscellaneous 10,041
---------
Total expenses 301,103
---------
INVESTMENT LOSS - NET (178,349)
REALIZED LOSS AND UNREALIZED GAIN
ON INVESTMENTS
Net realized loss on investments (51,999)
Change in unrealized gain on investments 906,939
---------
NET GAIN ON INVESTMENTS 854,940
---------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 676,591
=========
See accompanying notes.
9
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED JUNE 30, 1998 AND 1999
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<TABLE>
<CAPTION>
1999 1998
------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
<S> <C> <C>
Investment loss - net ($ 178,349) ($ 16,324)
Net realized gain (loss) on investments (51,999) 1,902,656
Change in unrealized gain (loss) on investments 906,939 (992,602)
------------ ------------
Net increase in net assets from operations 676,591 893,730
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Realized gains - short-term (94,673) --
Realized gains - mid-term -- (8,484)
Realized gains - long-term (1,094,771) (728,837)
------------ ------------
Total distributions (1,189,444) (737,321)
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ($ 512,853) $ 156,409
NET ASSETS:
Beginning of year $ 10,784,497 $ 10,628,088
------------ ------------
End of year $ 10,271,644 $ 10,784,497
============ ============
</TABLE>
See accompanying notes.
10
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
YEARS ENDED JUNE 30, 1995 THROUGH 1999
================================================================================================================================
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 6.43 $ 6.34 $ 5.32 $ 4.82 $ 4.98
Operations:
Net investment income (loss) (0.11) (0.01) (0.04) (0.03) 0.02
Net realized and unrealized gain (loss) on investments 0.51 0.54 1.14 0.53 (0.13)
-------- -------- -------- -------- --------
Total from (to) operations 0.40 0.53 1.10 0.50 (0.11)
-------- -------- -------- -------- --------
Distributions:
From net investment income -- -- -- -- (0.02)
From net realized gains (0.71) (0.44) (0.08) -- (0.03)
-------- -------- -------- -------- --------
Total distributions (0.71) (0.44) (0.08) -- (0.05)
-------- -------- -------- -------- --------
Net asset value, end of period $ 6.12 $ 6.43 $ 6.34 $ 5.32 $ 4.82
-------- -------- -------- -------- --------
Per share market value, end of period $ 6.00 $ 6.00 $ 5.25 $ 5.38 $ 5.25
-------- -------- -------- -------- --------
Total investment return (loss) based on
market value per share 11.83% 23.54% (0.90%) 2.48% (15.17%)
-------- -------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $ 10,272 $ 10,784 $ 10,628 $ 8,927 $ 8,085
-------- -------- -------- -------- --------
Ratio of expenses to average net assets 3.30% 3.21% 3.01% 3.32% 3.51%
-------- -------- -------- -------- --------
Ratio of investment income (loss) - net to average
net assets (1.95%) (0.14%) (0.78%) (0.62%) 0.36%
-------- -------- -------- -------- --------
Portfolio turnover rate 59% 40% 23% 26% 6%
-------- -------- -------- -------- --------
</TABLE>
See accompanying notes.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Related Matters
- --------------------------------
The Herzfeld Caribbean Basin Fund, Inc. (the Fund) is a non-diversified,
closed-end management investment company incorporated under the laws of the
State of Maryland on March 10, 1992, and registered under the Investment Company
Act of 1940. The Fund commenced investing activities in January 1994. The Fund
is listed on the NASDAQ SmallCap Market and trades under the symbol "CUBA".
The Fund's investment objective is to obtain long-term capital appreciation. The
Fund pursues its objective by investing primarily in equity and equity-linked
securities of public and private companies, including U.S.-based companies, (i)
whose securities are traded principally on a stock exchange in a Caribbean Basin
Country or (ii) that have at least 50% of the value of their assets in a
Caribbean Basin Country or (iii) that derive at least 50% of their total revenue
from operations in a Caribbean Basin Country. The Fund's investment objective is
fundamental and may not be changed without the approval of a majority of the
Fund's outstanding voting securities.
The Fund's custodian and transfer agent is Investors Bank & Trust Company, based
in Boston, Massachusetts.
Security Valuation
- ------------------
Investments in securities traded on a national securities exchange (or reported
on the NASDAQ national market) are stated at the last reported sales price on
the day of valuation; other securities traded in the over-the-counter market and
listed securities for which no sale was reported on that date are stated at the
last quoted bid price. Short-term notes are stated at amortized cost, which is
equivalent to value. Restricted securities and other securities for which
quotations are not readily available are valued at fair value as determined by
the Board of Directors.
Income Recognition
- ------------------
Security transactions are recorded on the trade date. Gains and losses on
securities sold are determined on the basis of identified cost. Dividend income
is recognized on the ex-dividend date, and interest income is recognized on an
accrual basis. Discounts and premiums on securities purchased are amortized over
the life of the respective securities.
Deposits with Financial Institutions
- ------------------------------------
The Fund may, during the course of its operations, maintain account balances
with financial institutions in excess of federally insured limits.
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
================================================================================
Income Taxes
- ------------
The Fund qualifies as a "regulated investment company" and as such (and by
complying with the applicable provisions of the Internal Revenue Code of 1986,
as amended) is not subject to federal income tax on taxable income (including
realized capital gains) that is distributed to shareholders.
The Fund has adopted a June 30 year-end for federal income tax purposes.
Distributions to Shareholders
- -----------------------------
Distributions to shareholders are recorded on the ex-dividend date. Income and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
NOTE 2. NON-MARKETABLE SECURITES OWNED
Investment in securities includes the following securities for which readily
ascertainable market values were not available:
$165,000 principal, 4.5%, 1977 Republic of Cuba bonds purchased for $63,038. The
bonds are listed on the New York Stock Exchange and had been trading in default
since 1960. A "regulatory halt" on trading was imposed by the New York Stock
Exchange in July, 1995. As of June 30, 1999 the position was valued at -0- by
the Board of Directors, which believes approximates the bonds' fair value.
1,918 shares of Buenos Aires Embotelladora S.A., an Argentine bottling company,
which were issued (at no cost) as part of a settlement for a class action suit
against Pepsi Cola Puerto Rico. Buenos Aires Embotelladora S.A. shares were
delisted from the New York Stock Exchange in May 1997. As of June 30, 1999, the
position was valued at -0- by the Board of Directors, which believes
approximates the stock's fair value.
NOTE 3. TRANSACTIONS WITH AFFILIATES
HERZFELD / CUBA (the Advisor), a division of Thomas J. Herzfeld Advisors, Inc.,
is the Fund's investment advisor and charges a monthly fee at the annual rate of
1.45% of the Fund's average monthly net assets.
During the year ended June 30, 1999, the Fund paid $33,495 of brokerage
commissions to Thomas J. Herzfeld & Co., Inc., an affiliate of the Advisor.
NOTE 4. INVESTMENT TRANSACTIONS
During the fiscal year ended June 30, 1999, purchases and sales of investment
securities, other than government securities, were $5,781,908 and $5,173,049,
respectively, while sales of government securities were $975,740.
At June 30, 1999, the Fund's investment portfolio had gross unrealized gains of
$3,204,583 and gross unrealized losses of $981,332, resulting in a net
unrealized gain of $2,223,251.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
================================================================================
NOTE 5: CHANGES TO BY-LAWS
In July 1998, the Fund's Board of Directors approved certain changes to the
Fund's By-Laws. The first change involves the requirements necessary for
shareholders to call a special meeting of shareholders. Now, in order to call
such a meeting, the holders of at least 50% of the Fund's outstanding capital
stock must submit a written request for a meeting to the Secretary of the Fund.
Previously, holders of 10% of the Fund's capital stock could call a special
meeting.
The second change in the By-Laws involves the requirements necessary for
shareholders to have proposals brought before an annual or special meeting. Such
proposals must involve a fundamental change in the Fund's structure, as
determined by the Chairman of the Fund. Additionally, a written notice of a
shareholder's proposal must be delivered to or mailed and received at the
principal offices of the Fund at least 60 days, and no more than 90 days, prior
to the date of the meeting. Such notice must (1) describe the business desired
to be brought before the meeting and state the reasons for conducting such
business; (2) state the name and address of the proposing shareholder; (3) state
the number of Fund shares which the shareholder owns; and (4) describe any
material interest the shareholder has in the business.
NOTE 6: IMPACT OF THE YEAR 2000 COMPUTER ISSUE
Because computers frequently use only two digits to recognize years, on January
1, 2000, many computer systems, as well as equipment that uses embedded computer
chips, may be unable to distinguish between years 1900 and 2000. If not
remedied, this problem could create system errors and failures resulting in the
disruption of normal business operations. In the event the Fund fails to
identify or correct a material Year 2000 problem, there could be disruptions in
normal business operations, which could have a material adverse effect on the
Fund's results of operations, liquidity or financial condition. Further, there
may be some third parties, such as government agencies, utilities,
telecommunications companies, brokers and custodians that may not be able to
continue business with the Fund due to their own Year 2000 problems.
Additionally, if a company in which the Fund is invested is adversely affected
by Year 2000 problems, it is possible that the price of that company's
securities will be adversely affected. The risks associated with some foreign
third parties and portfolio companies may be greater since there is general
concern that some entities operating outside the United States are not
addressing Year 2000 issues on a timely basis. There can be no assurance that
any efforts made will fully mitigate the effect of Year 2000 issues.
The Fund's investment advisor, an entity related by virtue of common control,
has represented to the Fund that its internal computers will function properly
in the year 2000. The Fund's custodian and transfer agent has represented to the
Fund that its bank-wide proprietary systems, including mission-critical systems,
are Year 2000 ready. The Fund's advisor is not able to audit any company and its
major suppliers to verify their Year 2000 preparedness.
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
================================================================================
To the Board of Directors and Shareholders
The Herzfeld Caribbean Basin Fund, Inc.
We have audited the accompanying statement of assets and liabilities of The
Herzfeld Caribbean Basin Fund, Inc., including the schedule of investments, as
of June 30, 1999, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and the financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1999, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of The
Herzfeld Caribbean Basin Fund, Inc. as of June 30, 1999, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principals.
Kaufman, Rossin & Co.
Miami, Florida
July 30, 1999
15
