Registration No. 33-56696
811-6446
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. _____ [ ]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 1 [X]
THE CUBA FUND, INC.
(Exact Name of Registrant as Specified in Charter)
The Herzfeld Building
P.O. Box 161465
Miami, Florida 33116
(Address of Principal Executive Offices)
(305) 271-1900
(Registrant's Telephone Number, including Area Code)
Thomas J. Herzfeld
The Herzfeld Building
P.O. Box 161465
Miami, FL 33116
(Name and Address of Agent for Service)
Copies to:
Joseph V. Del Raso, Esquire
Pepper Hamilton LLP
3000 Two Logan Square
Eighteenth and Arch Streets
Philadelphia, PA 19103-2799
- --------------------------------------------------------------------------------
Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Title Of Proposed Maximum Proposed Maximum Amount of
Securities Amount Being Offering Price Aggregate Offering Registration
Being Registered Registered (1) Per Unit (2) Price (2) Fee ( )
---------------- -------------- ------------ --------- -------
Common Stock
<S> <C> <C> <C> <C>
($.001 par value) _________ $__ $__________ $_________
</TABLE>
(1) Includes ______ shares subject to the Underwriter's over-allotment option.
(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 which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
Pursuant To Rule 404(c)
Item Number, Form N-2 Caption in Prospectus
--------------------- ---------------------
<C> <S> <S>
1. Cover Page............................................Cover Page
2. Synopsis..............................................Prospectus Summary
3. Condensed Financial Information.......................Not Applicable
4. Plan of Distribution..................................Underwriting
5. Use of Proceeds.......................................Use of Proceeds
6. General Information and History.......................The Fund; Prospectus Summary; Special Leverage
Considerations; Recent Developments
7. Investment Objectives and Policies....................Investment Objectives and Policies
8. Tax Status............................................Taxation
9. Brokerage Allocation and Other........................Portfolio Transactions
10. Pending Legal Proceedings.............................Not Applicable
11. Control Persons and Principal
Holders of Securities...............................Not Applicable
12. Directors, Officers and Advisory
Board Members.......................................Directors and Officers
13. Remuneration of Directors and Others..................Directors and Officers
14. Custodian, Transfer Agent and
Dividend-Paying Agent...............................Management of the Fund; Custodian; Transfer Agent
and Registrar; Dividend Paying Agent
15. Investment Advisory and Other Services ...............Management of the Fund
16. Defaults and Arrears on Senior Securities.............Not Applicable
17. Capital Stock.........................................Description of Capital Stock
18. Long-Term Debt........................................Not Applicable
19. Other Securities......................................Not Applicable
20. Financial Statements..................................Independent Auditors' Report; Statement of Assets and
Liabilities
</TABLE>
Part II
Information required to be included in Part II is set forth under the
appropriate Item, so numbered, in Part II to this Registration Statement.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED _______ __, 1998
_________ Shares
THE CUBA FUND, INC.
Common Stock
The Cuba Fund, Inc. (the "Fund"), is a non-diversified, closed-end
management investment company. The Fund's investment objective is to seek
maximum total return by investing in securities of issuers and companies that
are likely, in the opinion of the Adviser, to benefit from political, legal and
economic developments in Cuba. The Fund's investment adviser is HERZFELD / CUBA
(the "Adviser"), a division of Thomas J. Herzfeld Advisors, Inc.
To achieve its investment objective, the Fund initially will invest at
least 65% of its total assets in securities issued by telecommunication and
postal delivery service companies doing business in Cuba and, to the extent
permissible under United States law, in a broad range of securities of issuers
that engage in substantial trade with and derive substantial revenues from
operations in Cuba. If and when the U.S. embargo against Cuba is lifted, the
Fund will invest directly in securities of issuers that are strategically linked
to Cuba, including companies domiciled in Cuba. Additionally, the Fund may
invest up to 35% of its assets in equity and fixed income securities of various
other issuers that are not strategically linked to Cuba. The Fund's net asset
value can be expected to fluctuate, and no assurance can be given that the Fund
will achieve its investment objective. An investment in the Fund's shares should
not constitute a complete investment program. See "Investment Objective and
Policies."
U.S. law currently prohibits direct or indirect investment in Cuba, subject
to limited exceptions, and there is no assurance that such prohibition will be
changed in the foreseeable future. Until the U.S. trade embargo against Cuba is
lifted, the Fund will not make any investments prohibited by such embargo. If
the prohibition is lifted, the Fund will invest directly in the equity
securities of issuers that are strategically linked to Cuba, including issuers
domiciled in Cuba. Investment in the Fund's shares involves special
considerations that are not normally associated with investments in securities
of U.S. companies or in shares of investment companies that invest primarily in
the securities of foreign countries. Investment in the Fund may result in
greater price volatility and lesser liquidity because of the uncertainties of
the securities markets in Central and South America and the Caribbean Basin. If
later permitted by U.S. law, an investment in the securities of an issuer
domiciled in Cuba would be speculative. See "Risk Factors/Special
Considerations."
Prior to this Offering, there has been no public market for the Common
Stock. Preference will be given to shareholders of the Herzfeld Caribbean Basin
Fund, Inc., another closed-end investment company advised by the Adviser,
enabling such shareholders to purchase the Common Stock at a lower sales
commission. Shares of the Fund are offered by the Fund's underwriter on a
best-efforts basis. The underwriter intends to apply for listing of the Common
Stock on the NASDAQ Small Cap Market.
Shares of closed-end investment companies have in the past frequently
traded at discounts from their net asset values and initial offering prices. The
risks associated with this characteristic of closed-end investment companies may
be greater for investors expecting to sell shares of a closed-end investment
company soon after the completion of an initial public offering of the company's
shares.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-1-
<PAGE>
<TABLE>
<CAPTION>
Maximum Price to Maximum Underwriting Proceeds to
Public(1) Discount(1)(2) Fund(3)
--------- -------------- -------
<S> <C> <C> <C>
Per Share................................. $__ $____ $_____
Total..................................... $__________ $_________ $__________
</TABLE>
(1) The "Maximum Price to Public" and "Maximum Underwriting Discount" per share
will be reduced to $_____ and $_____, respectively, for purchases in single
transactions of between $_______ and up to $______, to $______ and $______,
respectively, for purchases in single transactions of between $_______ up
to $_________ and to $____ and $____, respectively, for purchases in single
transactions of over $_________. See "Underwriting."
(2) The Fund and the Adviser have agreed to indemnify Thomas J. Herzfeld & Co.,
Inc. against certain liabilities under the Securities Act of 1933. See
"Underwriting."
(3) Before deducting organizational and offering expenses payable by the Fund
estimated at $______.
The shares are offered by Thomas J. Herzfeld & Co., Inc. (the
"Underwriter"), subject to prior sale, when, as and if issued by the Fund and
accepted by the Underwriter, subject to approval of certain legal matters by
counsel for the Underwriter and certain other conditions. The Underwriter
reserves the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the shares will be made in
Miami, Florida on or about _________________, 1998.
The address of the Fund is The Herzfeld Building, P.O. Box 161465, Miami,
Florida 33116. The Fund's telephone number is (305) 271-1900. Investors are
advised to read this Prospectus and to retain it for future reference.
Thomas J. Herzfeld & Co., Inc.
The date of this Prospectus is _____________, 1998
-2-
<PAGE>
No person has been authorized to give any information or to make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offering of any securities
other than the registered securities to which it relates or an offer to any
person in any State or jurisdiction of the United States or any country where
such offer would be unlawful.
-------------------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary...................................... 4
The Fund................................................ 8
Use of Proceeds......................................... 8
Investment Objective and Policies....................... 8
Special Leverage Considerations......................... 9
Investment Restrictions................................ 13
Risk Factors/Special Considerations.....................14
Management of the Fund..................................17
Portfolio Transactions..................................19
Dividends and Distributions.............................20
Net Asset Value.........................................20
Taxation................................................21
Description of Common Stock.............................25
Underwriting............................................28
Custodian...............................................28
Transfer Agent and Registrar;
Dividend Paying Agent.................................28
Legal Matters...........................................28
Independent Auditors....................................28
Further Information.....................................29
Independent Auditors' Report............................30
Statement of Assets and Liabilities.....................31
------------------------------
Until _________, 1998, all dealers effecting
transactions in the Common Stock, whether or not
participating in this distribution, may be required to
deliver a Prospectus.
_________ Shares
THE CUBA FUND, INC.
Common Stock
PROSPECTUS
Thomas J. Herzfeld & Co., Inc.
_________________, 1998
-3-
<PAGE>
PROSPECTUS SUMMARY
The following is qualified by more detailed information contained in the
Prospectus.
<TABLE>
<CAPTION>
<S> <C>
The Fund The Cuba Fund, Inc. (the "Fund") is a non-diversified, closed-end
investment company designed for U.S. and other investors desiring to
participate in the potential benefits from political, legal and economic
developments in Cuba. See "The Fund" and "Investment Objective and
Policies."
Investment Objective and Policies The Fund's investment objective is to seek maximum total return. The
Fund initially will seek to achieve this objective by investing in
securities issued by telecommunication and postal delivery service
companies doing business in Cuba and, to the extent permissible under
U.S. law, in a broad range of securities of issuers that engage in
substantial trade with and derive substantial revenues from operations
in Cuba. If and when the U.S. trade embargo against Cuba is lifted, the
Fund will invest directly in securities of issuers that are
strategically linked to Cuba, including companies domiciled in Cuba.
Additionally, the Fund may invest up to 35% of its assets in equity and
fixed income securities of various other issuers which are not
strategically linked to Cuba. United States law currently prohibits
investment in Cuba, with limited exceptions. No assurances can be given
that the U.S. trade embargo against Cuba will be lifted or that the Fund
will achieve its investment objective. See "Risk Factors/Special
Considerations" and "Investment Objective and Policies."
The Offering The Fund is offering _________ shares of its Common Stock ($0.001 par
value) through Thomas J. Herzfeld & Co., Inc. (the "Underwriter") on a
best-efforts basis. Shares of the Fund will be offered at a maximum
offering price of $10 per share during the initial offering period which
is expected to terminate on ______________, 1998, unless extended. The
maximum underwriting fee shall be $0.80 per share sold. The Fund will
issue to purchasers in the initial offering, warrants to purchase _____
additional shares of Common Stock at the offering price. Such warrants
will expire 120 days after their date of issuance. Additionally, at the
discretion of the Fund's Board of Directors, the Fund intends to conduct
a rights offering when the U.S. embargo against Cuba is lifted. Pursuant
to such an offering, the Fund would grant rights to its existing
stockholders to purchase additional shares of Common Stock at a discount
to the Fund's net asset value per share, subject to the approval of
stockholders and the requirements of the 1940 Act. The issuance of
additional shares of Common Stock through warrants and rights may dilute
a stockholder's interest in the Fund. Also, if there is little demand
-4-
<PAGE>
for the Common Stock in the trading market, the additional shares
issued through warrants or a rights offering may depress the market
price of the Common Stock. All payments received prior to the initial
offering termination date will be held in a separate escrow account. The
Fund intends to issue shares and commence investment operations on the
initial offering termination date. The Fund intends to apply for a
listing of the Common Stock on the NASDAQ Small Cap Market.
Investment Adviser HERZFELD/CUBA (the "Adviser"), a division of Thomas J. Herzfeld
Advisors, Inc. (Herzfeld Advisors), a Miami-based U.S. investment
adviser established in 1984, will act as investment adviser to the Fund.
The Adviser has acted as investment adviser to The Herzfeld Caribbean
Basin Fund, Inc., a closed-end investment company, since 1993. Herzfeld
Advisors has served a number of individual clients with regard to advice
relating to investment in securities of other closed-end funds. The
Adviser expects that if the U.S. trade embargo against Cuba is lifted,
it will advise the Fund and possibly other clients with respect to other
investment opportunities in Cuba. See "Adviser." The Fund will pay the
Adviser a monthly fee at the annual rate of 1.5% of the Fund's average
monthly net assets. That fee is higher than the advisory fee paid by
most investment companies. See "Adviser."
Risk Factors/Special Considerations Investing in the securities of non-U.S. issuers will involve 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 companies and issuers
located in Central and South America and in the Caribbean Basin may
involve special considerations, such as limited liquidity and small
market capitalization of the securities markets in those regions,
currency devaluations, high inflation and repatriation restrictions.
Most investments in Cuba, directly or indirectly, are currently
prohibited under U.S. law, with limited exceptions. However, if
investment in Cuba is 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
-5-
<PAGE>
expropriation of assets and the risk of civil war; (6) the absence of a
developed legal structure governing private or foreign investments and
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. There can be no assurances
that the U. S. trade embargo will ever be lifted or, if and when such
normalization commences, that the Adviser will be able to identify
direct investments in issuers domiciled in Cuba that are acceptable for
the Fund.
As a non-diversified investment company, the Fund's investments will
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 percentage of
its assets that may be invested in the assets of a single issuer, and,
as a result, may be subject to greater risk with respect to portfolio
securities. The Fund will seek to qualify for registered investment
company status under Subchapter M of the Internal Revenue Code, except
if such qualification would severely restrict the Fund's investment
opportunities. However, the Fund may have difficulties meeting the
diversification requirements under Subchapter M and, therefore, may not
qualify for favorable tax treatment under the Internal Revenue Code. See
"Risk Factors/Special Considerations" and "Taxation."
Certain corporate actions that may be taken by the Board of Directors
may result in dilution of the value of a shareholder's investment in the
Fund. Such actions include the payment of dividends in additional shares
of Common Stock through the Dividend Reinvestment Plan and issuance of
additional shares in a rights offering. Additionally, the Board may
authorize the issuance of a preferred class of stock which would
adversely affect the rights of owners of the Common Stock. See
"Description of Common Stock."
Secondary Market Trading The Fund intends to apply for listing of its Common Stock on the NASDAQ
Small Cap Market. To the extent shares of the Fund are traded, an
investor should be aware that shares of closed-end investment companies
frequently trade at a discount from net asset value. During the periods
when shares of a closed-end fund trade at a discount from net asset
value, the market price of such shares is less than the value of such
fund's net assets attributable thereto. This characteristic of shares of
a closed-end fund is a risk separate and distinct from the risk that the
Fund's net asset value may decrease. The Fund cannot predict whether its
shares will trade at, above, or below net asset value. In the event that
Fund shares trade at a discount to net asset value, the Fund has a
policy that it will
-6-
<PAGE>
not use any artificial means to narrow the discount. Consequently,
during the first fifteen years of the Fund's operations, the Board of
Directors does not intend to make any share repurchases, tender offers,
buybacks, or to liquidate the Fund, convert to an open-end investment
company, merge with another company, or adopt high payout policies.
After fifteen years of operations, the Board will review and reconsider
this policy.
Certain Charter Provisions The Fund's Articles of Incorporation include provisions that could have
the affect 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 Fund's adviser or the composition
of its Board of Directors; and depriving shareholders 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."
Dividends and Distributions The Fund intends to distribute annually to its shareholders
substantially all of its net investment income and net short term
capital gains. The Fund will determine annually whether to distribute
any net realized net long-term capital gains in excess of net realized
short-term capital losses; however, it currently expects to distribute
any excess annually to its shareholders. See "Taxation."
Pursuant to the Fund's Dividend Reinvestment and Cash Plan, stockholders
have the option of having all distributions automatically reinvested in
shares of Common Stock to be issued by the Fund. If the market price per
share on the valuation date equals or exceeds the net asset value per
share on that date, the Fund will issue the new shares to Plan
participants at net asset value. If the market price per share on the
valuation date is less than net asset value, the Fund will issue the new
shares to Plan participants at the average market price per share for a
week commencing on the valuation date. The valuation date generally
shall be the payment date of the dividend or distribution.
Transfer Agent and Registrar;
Dividend Paying Agent ___________ will act as the Fund's transfer agent and registrar and
dividend paying agent. See "Transfer Agent and Registrar; Dividend
Paying Agent."
Custodian _____________ will act as the custodian of the Fund's assets. See
"Custodian."
</TABLE>
-7-
<PAGE>
THE FUND
The Cuba Fund, Inc. (the "Fund") is a non-diversified, closed-end
management investment company incorporated under the laws of the State of
Maryland on October 10, 1991, and registered under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund will seek to achieve its objective
of maximum total return by investing in securities of issuers and companies that
are likely, in the opinion of the Adviser, to benefit from political, legal and
economic developments in Cuba. See "Investment Objective and Policies." The Fund
maintains its principal offices at The Herzfeld Building, P.O. Box 161465,
Miami, Florida 33116.
The Fund's adviser is HERZFELD/CUBA (the "Adviser"), a division of Thomas J.
Herzfeld Advisors, Inc., a Miami-based U.S. investment adviser. See "Management
of the Fund."
USE OF PROCEEDS
The net proceeds of the Offering, after underwriting discounts and
organizational and offering expenses payable by the Fund, are estimated to be
$__________ and will be invested in accordance with the policies set forth under
"Investment Objective and Policies." Pending such investments, it is anticipated
that the proceeds will be invested in short-term money market instruments. All
proceeds of the Offering will be paid to the Fund in U.S. dollars. The
organizational and offering expenses of the Fund have been advanced by the
Adviser and will be repaid by the Fund from the proceeds of the Offering.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek maximum total return. The Fund
will pursue its objective by investing primarily in securities of issuers and
companies that are likely, in the opinion of the Adviser, to benefit from
political, legal and economic developments in Cuba. Under normal market
conditions, the Fund initially will invest at least 65% of its total assets in
securities issued by telecommunication and postal delivery service companies
doing business in Cuba and, to the extent permissible under U.S. law, in a broad
range of securities of issuers that engage in substantial trade with and derive
substantial revenues from operations in Cuba. As long as the U.S. embargo
prohibiting trade with Cuba is in effect, the Fund will not make any investments
prohibited by such embargo. The Fund also may invest up to 35% of its assets in
equity and fixed income securities of various other issuers which are not
strategically linked to Cuba. At such time as it becomes legally permissible for
U.S. entities to invest in Cuba, the Fund will invest directly in securities of
issuers that are strategically linked to Cuba, including companies domiciled in
Cuba.
The Fund's investment objective and its policy of investing at least 65% of
its total assets in Cuban-related securities and up to 35% of its total assets
in other issuers are non-fundamental and may be changed by the Board of
Directors without the approval of a majority 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.
However, the Fund will not change its investment objective or investment
policies without notice to its shareholders. 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 net asset value can be expected to fluctuate, and no
assurance can be given that the Fund will achieve its investment objective.
-8-
<PAGE>
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 will not be seeking 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, risk management and revenue
enhancement 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 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").
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.
If any percentage limitations applicable to the transactions described
below are exceeded due to market fluctuations after an initial investment, the
Fund will 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 shareholders 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 crosshedging
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
-9-
<PAGE>
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 or liquid 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 will
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 will subject 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 will not be precise. The success of any of these techniques will
depend 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 will be poorer than if it had not entered into
such contracts. The cost to the Fund of engaging in forward contracts will vary
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 will 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 movement of certain foreign currencies relative to the U.S. dollar
will continue.
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 counterpart 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
-10-
<PAGE>
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 or liquid securities in a segregated account with
its custodian. The Fund will cover any put option it writes on foreign
currencies by holding with its custodian, in a segregated account, cash or
liquid securities in an amount equal to the option price.
The Fund will 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 determines are appropriate to hedge the risks
associated with changes in interest rates or general fluctuations in the value
of the Fund's portfolio securities.
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.
In accordance with CFTC regulations, to the extent that the Fund invests in
futures contracts and options thereon for other than bona fide hedging purposes,
the Fund will not enter into such transactions if immediately thereafter the sum
of the amounts of initial margin deposits and premiums paid for such contracts
or options 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, this strategy will limit potential capital
appreciation in the portfolio securities subject to the options.
-11-
<PAGE>
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 will establish or maintain with its custodian for the term of
the option a segregated account consisting of cash or liquid securities having a
value equal to the fluctuating market value of the option securities. The Fund
will cover any put option it writes by maintaining a segregated account with its
custodian as described above.
The Fund will 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 will be required to maintain in
segregated accounts in connection with its hedging transactions will not be
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 counterpart. If its counterpart 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. A repurchase agreement
is a short-term investment by which the purchaser acquires ownership of a debt
security and the seller agrees to repurchase the obligation at a future time and
set price, thereby determining the yield during the purchaser's holding period.
Should an issuer of a repurchase agreement fail to repurchase the underlying
security, the loss to the Fund, if any, would be the difference between the
repurchase price and the market value of the security. The Fund will limit its
investments in repurchase agreements to those which the Adviser, under the
guidelines of the Board of Directors, determines present minimal credit risks
and which are of high quality. In addition, the Fund must have collateral of at
least 100% of the repurchase price, including the portion representing the
Fund's yield under such agreements, which is monitored on a daily basis.
-12-
<PAGE>
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 upon the lifting of the U.S. embargo. 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 fundamental investment restrictions that may
not be changed without the prior approval of the holders of a majority of the
Fund's outstanding voting securities (as such term is defined in the 1940 Act).
For purposes of the 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 fundamental
restrictions, the Fund may not:
1. Purchase any securities (other than obligations of the U.S. government,
its agencies or instrumentalities) if as a result more than 25% of the Fund's
total assets would be invested in securities of any single issuer.
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. Issue senior securities other than preferred shares issued in accordance
with Section 18 of the 1940 Act, 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 permitted borrowings. For the purposes of this investment
restriction, 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.
4. Make loans, except through (i) the purchase of debt obligations
consistent with the Fund's investment policies, (ii) investment in repurchase
agreements consistent with its investment policies and (iii) lending portfolio
securities in a manner consistent with the Fund's investment policies and the
provisions of the Investment Company Act and SEC positions thereunder.
-13-
<PAGE>
5. Purchase or sell real estate or real estate mortgage loans, except that
the Fund may purchase and sell securities of companies that deal in real estate
or interests therein.
6. Make short sales of securities or maintain a short position in any
security.
7. 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.
8. Underwrite securities of other issuers, except insofar as the Fund may
be deemed an underwriter under the U.S. Securities Act of 1933 in selling
portfolio securities.
9. Buy or sell commodities, commodity contracts or futures contracts (other
than as described under "Investment Objective and Policies--Hedging
Transactions").
10. Buy, sell or write put or call options (other than as described under
"Investment Objective and Policies--Hedging Transactions").
As a non-fundamental policy, the Fund will not use any artificial means to
reduce the discount in the Fund's trading price from its net asset value such as
share repurchases, tender offers, buybacks, liquidate the Fund, convert to an
open-end investment company, merge with another company, or adopt high payout
policies. After 15 years of operations, the Fund's Board will review this policy
and may eliminate it if it deems it advisable.
The Fund may invest in other investment companies, subject to limitations
set forth in the 1940 Act.
The Fund may issue additional shares of its Common Stock or hold a rights
offering, when the Board of Directors determines that it would be in the best
interests of the Fund's stockholders.
RISK FACTORS/SPECIAL CONSIDERATIONS
Investment in securities of Cuban or other foreign companies involves
certain considerations set forth below that are not typically associated with
investments in securities of U.S. companies or in shares of investment companies
that invest primarily in the securities of a number of foreign countries.
Investments in Cuba
Most investments in Cuba, directly or indirectly, are currently prohibited
under U.S. law, with only limited exceptions. However, if investment in
securities issued by companies domiciled in Cuba is permitted under U.S. law,
the following considerations not typically associated with investing in
securities of U.S. companies should be considered. Cuba is the largest country
in the Caribbean Basin region and has a population of nearly 11 million. The
Cuban economy, centrally planned and largely state owned, is highly dependent on
the agricultural sector, tourism and foreign trade. Sugar currently provides
about 55% of export revenues and over half was exported to the former Soviet
Union. Since the dissolution of the Soviet Union, Cuba is no longer able to rely
on price supports for sugar imported into the Soviet Union and on discounts from
the price of oil exported from the Soviet Union to Cuba. In part because of
-14-
<PAGE>
economic conditions in the former Soviet Union, subsidized oil shipments to Cuba
have been severely if not entirely suspended. Also, Cuba is no longer offered
financial assistance by way of price supports or discounts from the former
Soviet bloc countries. The trading bloc of Communist countries which, for a long
time, sheltered Cuba's economy no longer exists.
Currently, Cuba relies heavily on sugar exports in order to earn hard
currency. However, sugar has become a depressed commodity in world markets for
two reasons. First, the principal importing nations, including both the United
States and Russia (including Commonwealth countries), have increased their own
sugar production. Second, the worldwide trend to replace sugar with artificial
sweeteners is affecting the demand for natural sugar.
Tourism is another important source of hard currency earned by Cuba.
However, since U.S. citizens face substantial restrictions on travel and tourist
spending in Cuba, the profitable U.S. tourist market is not currently available
to Cuba which has impeded the growth of Cuban tourist facilities.
Because Cuba is in default on billions of dollars of outstanding loans
advanced by foreign commercial banks, it is no longer able to borrow in the
world markets. As an alternative to raising cash, foreign investors are being
sought to undertake joint venture projects, including tourist facilities.
However, these ventures appear to have limited economic impact and are not
likely to rescue Cuba from the financial problems it now faces. Because of these
serious financial problems Cuba may find it increasingly more difficult to
survive as a Marxist socialist government. Should the Communist regime fail and
a free market economy develop, immediate opportunities for investment should
develop in areas where Cuba has been traditionally competitive, including sugar,
tourism, mining, tobacco, fisheries, agricultural products, and rum. These
products and services lend themselves to development with relatively little
investment with the possibility of an economic return in the short to
intermediate term. However, no assurance can be given that a smooth transition
from the Communist form of government to a free market economy would occur and
some difficulties might develop with an attempted privatization of these
services and industries. Moreover, there can be no assurance that such
developments will be economically favorable to achievement of the Fund's
investment objective.
There are currently no known corporate disclosure standards in Cuba because
the Communist form of government prohibits private ownership of property. Some
disclosure standards may become available as more information is made public
with regard to joint ventures that have developed between the Cuban government
and certain private entities. Also, corporate disclosure standards will develop
if the government/economic structure shifts to capitalism and privatization of
industry occurs.
Political and Economic Risks
The Fund's investments could be adversely affected by political, legal or
economic developments in the foreign markets in which the Fund will invest. In
particular, should political, legal and economic conditions in Cuba shift to a
democratic form of government with a free market economy, thereby creating
generally favorable investment conditions, investments may involve substantial
elements of risk for achievement of the Fund's investment objective.
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. Investments in securities of Cuban companies upon a
-15-
<PAGE>
conversion to capitalism will be speculative and involve risks not usually
associated with investments in securities of issuers in more developed market
economies. 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 or institutions governing private or foreign
investment or allowing for judicial redress for injury to private property;
(v)the absence of a capitalmarket 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.
Communist governments in a number of countries have expropriated large
amounts of private property in the past, in many cases without adequate
compensation. There can be no assurance that such expropriation will not occur
in the future. In the event of such expropriation, the Fund could lose a
substantial portion of its investments in the affected countries.
The Fund's Investments and Operations
The Fund may invest up to 100% of its total assets in securities which are
not readily marketable. Under current market conditions, many investments by the
Fund are likely to be in such securities. Investments by the Fund in
over-the-counter options on equity securities and indices also may not be
readily marketable.
The Fund initially intends to invest at least 65% of its total assets in
securities issued by telecommunication and postal delivery service companies
doing business in Cuba and, to the extent permissible under U.S. law, in a broad
range of securities of issuers that engage in substantial trade with and derive
substantial revenues from operations in Cuba. As a result of this investment
strategy, the Fund may be subject to greater risk with respect to portfolio
securities than investment companies that seek diversification through
investment in the securities of a number of foreign countries.
The Fund's ratio of expenses to average net assets is expected to be higher
than that of many other U.S. investment companies, because the costs
attributable to foreign investing frequently are higher than those attributable
to domestic investing. The Fund will bear the cost of converting foreign
currency to U.S. dollars. Also, because of the lack of a trading market in Cuba,
the Adviser is unable to determine what market and commission structures will
develop and how they would compare to commissions charged on U.S. exchanges.
The Fund is a non-diversified, closed-end management investment company
with no previous operating history. Shares of closed-end investment companies
frequently trade at a discount from net asset value, but in certain instances
have traded above net asset value. The net asset value of the Fund's shares is
expected to fluctuate, and the Fund cannot predict whether and the extent to
which its shares will trade at, below or above their net asset value. In the
event that Fund shares trade at a discount to net asset value, the Fund has a
fundamental policy that it will not use any artificial means to narrow the
discount. Therefore, during the first fifteen years of the Fund's operations,
the Board of Directors shall not be obligated to make any share repurchases,
tender offers, buybacks, liquidate the Fund, convert to an open-end investment
company, merge with another company, or adopt high payout policies. After
fifteen years of operations, the Board will review and reconsider this policy.
-16-
<PAGE>
The Fund will seek to qualify for registered investment company status
under Subchapter M of the Internal Revenue Code, except if such qualification
would severely restrict the Fund's investment opportunities. However, the Fund
may have difficulties meeting the diversification requirements under Subchapter
M and, therefore, may not qualify for favorable tax treatment under the Internal
Revenue Code. See "Taxation."
Certain corporate actions that may be taken by the Board of Directors may
result in dilution of the value of a shareholder's investment in the Fund. Such
actions include issuance of warrants, authorizing payment of dividends in
additional shares of Common Stock through the Dividend Reinvestment Plan and
issuance of additional shares through a rights offering. Additionally, the Board
has the authority to issue a preferred class of stock which would adversely
affect the rights of owners of the Common Stock.
Non-Diversified Status
The Fund is classified as a "non-diversified" investment company under the
1940 Act, which means the Fund is not limited by the 1940 Act in the proportion
of its assets that may be invested in the securities of a single issuer. Because
the Fund, as a non-diversified investment company, may invest in a smaller
number of individual issuers than a diversified investment company, an
investment in the Fund presents greater risk to an investor than an investment
in a similar diversified company.
Lending of Portfolio Securities
The Fund may from time to time lend securities from its portfolio, with a
value not exceeding one-third of its total assets, to banks, brokers and other
financial institutions and receive collateral in cash, a letter of credit issued
by a bank 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 lending of securities is a common
practice in the securities industry. The Fund engages in security loan
arrangements with the primary objective of increasing the Fund's income either
through investing the cash collateral in money market mutual funds, and
short-term interest bearing obligations or by receiving a loan premium from the
borrower. Under the securities loan agreement, the Fund continues to be entitled
to all dividends or interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail financially. The Fund's
policy regarding lending of portfolio securities is fundamental.
During the period of such a loan, the Fund receives the income on both the
loaned securities and the collateral and thereby increase its yield. In the
event that the borrower defaults on its obligation to return borrowed securities
because of insolvency or otherwise, the Fund could experience delays and costs
in gaining access to the collateral and could suffer a loss to the extent the
value of the collateral falls below the market value of the borrowed securities.
Year 2000
The services provided to the Fund and its shareholders by the Adviser,
Transfer Agent and Custodian depend on the smooth functioning of their computer
systems and those of their outside service providers. Many computer software
systems in use today cannot distinguish the year 2000 from the year 1900 because
of the way dates are encoded and calculated. Such an event could have a negative
impact on handling securities trades, payments of interest and dividends,
-17-
<PAGE>
pricing and account services. Although at this time, there can be no assurance
that there will be no adverse impact on the Fund, the Adviser, Transfer Agent
and Custodian have advised the Fund that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of their outside service providers, will be
adapted in time for that event.
Money Laundering and Drug Smuggling
The Castro government in Cuba has been accused over the past several years
of cooperating, either directly or indirectly, with various illegal activities.
These activities range from harboring fugitives from other countries accused of
committing financial fraud, such as money laundering, tax evasion and theft of
corporate assets, to participating in drug smuggling and trafficking
enterprises. There is no assurance that these activities will cease or that law
enforcement will succeed in curtailing this problem in a post-Castro Cuba. These
activities could impede the growth of legitimate businesses and hamper future
efforts to develop a vibrant and successful free market economy in Cuba.
The Adviser does not have any particular expertise in detecting the nature
and extent of these activities, other than gleaning it from information
generally available to the public. Also, it would be difficult to detect which
enterprises in Cuba might be connected with these activities, even in a
post-Castro economy.
Defaulted Cuban Bonds
There has been a limited market in defaulted pre-Castro Cuban government
bonds. However, the market for these bonds is thin and pricing them is
difficult. There is no assurance that should the Adviser purchase these debt
instruments for the Fund's account they would appreciate or ultimately be worth
anything should the market for them disappear completely.
MANAGEMENT OF THE FUND
Directors and Principal Officers
The names and birth dates of the directors and principal officers of the
Fund are set forth below, together with their positions and their principal
occupations during the past five years. Unless otherwise noted, the address of
each director and executive officer is The Herzfeld Building, P.O. Box 161465,
Miami, Florida 33116.
Thomas J. Herzfeld, (2/19/45) - President and Director*. Chairman and
President of Thomas J. Herzfeld & Co., Inc. since 1981 and prior to that was
Executive Vice President and Director of a New York Stock Exchange member firm.
Chairman and Director of The Herzfeld Caribbean Basin Fund, Inc. since 1993.
Since 1980, Mr. Herzfeld has authored or edited a number of books, including
"The Investors Guide to Closed- end Funds" (McGraw Hill, 1980) and co-authored
"High Return, Low Risk Investment" (G.P. Putnam's Sons, 1981).
-18-
<PAGE>
Cecilia Gondor-Morales, (8/15/62) - Director*, Treasurer and Secretary.
Since 1983, Ms. Gondor-Morales has been associated with Thomas J. Herzfeld &
Co., Inc. and Thomas J. Herzfeld Advisors, Inc., and currently serves in the
capacity of Executive Vice President of both companies. Director of The Herzfeld
Caribbean Basin Fund, Inc. since 1993. She also serves as Editor of "The Thomas
J. Herzfeld Encyclopedia of Closed-End Funds."
Kenneth A.B. Trippe, (1/3/33) - Director.+ Chairman of Cruise Brokers, Inc.
(financial adviser and broker to the cruise industry) and Trippe & Company, Inc.
(financial adviser and provider of marketing services to companies who provide
products and services to cruise lines), both of Coral Gables, Florida. From 1983
to 1991, Mr. Trippe was Chairman of Cruiseship Information Systems, Inc. (an
automated information and booking system for the travel industry) of Coral
Gables, Florida.
Bergthor F. Endresen, (4/23/21) - Director.+ Consultant and Former Chairman
of Aerotech World Trade Corp. of White Plains, NY, which was founded in 1976 by
Mr. Endresen. Aerotech markets and distributes aviation and aerospace equipment,
systems and spare parts to the international marketplace.
Ted Williams, (2/10/62) - Director*, Vice President of Thomas J. Herzfeld &
Co., Inc. and Thomas J. Herzfeld Advisors, Inc. since 1991. Director of The
Herzfeld Caribbean Basin Fund, Inc. since 1997.
- ----------------------
* Interested Person, as defined in the 1940 Act, of the Fund.
+ Member of the Audit Committee of the Board of Directors.
Adviser
The Fund has retained HERZFELD/CUBA, a division of Thomas J. Herzfeld
Advisors, Inc. to provide investment advice. Herzfeld Advisors, a U.S.
registered investment adviser, maintains principal offices at The Herzfeld
Building, P.O. Box 161465, Miami, Florida 33116. Herzfeld Advisors, formed in
1984, is beneficially owned by Thomas J. Herzfeld. The Adviser currently serves
as the investment adviser of The Herzfeld Caribbean Basin Fund, Inc., another
closed-end investment company. The Adviser provides investment advice to
individuals, corporations, and employee benefit plans. In addition, the advisory
personnel of the Adviser have experience managing investment portfolios that
invest mainly in shares of other closed-end funds. The investment policies and
restrictions of the Fund are not the same as those of such investment
portfolios.
Pursuant to an investment advisory agreement with the Fund (the "Investment
Advisory Agreement") and under the direction and control of the Fund's Board of
Directors, the Adviser will make recommendations for purchases and sales of
portfolio securities by the Fund pursuant to the Fund's stated investment
objective, policies and restrictions. The Adviser transmits purchase and sale
orders and selects brokers and dealers to execute portfolio transactions on
behalf of the Fund. The Adviser will determine the timing of portfolio
transactions and other matters related to execution.
Investment Advisory Agreement and Fees
The Investment Advisory Agreement sets forth the services to be provided by
the Adviser as described above. The Fund will pay the Adviser an advisory fee at
-19-
<PAGE>
the annual rate of 1.5% of the Fund's average weekly net assets based on the net
asset value at the end of each week and payable at the end of each calendar
month. That fee is higher than the advisory fee paid by most investment
companies.
The Investment Advisory Agreement provides that the Adviser will bear all
expenses of its employees and overhead incurred by it in connection with its
duties thereunder. The Adviser will pay 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 will bear all of its own 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; taxes and governmental fees; brokerage commissions
incurred in acquiring or disposing of the Fund's portfolio securities;
membership dues to professional organizations; premiums allocable to fidelity
bond 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; charges and
expenses of the Fund's legal counsel and independent accountants; custodian,
subcustodian, dividend paying agent, transfer agent and sub-transfer agent
expenses; expenses of obtaining and maintaining stock exchange listings of the
Fund's shares; payment for portfolio pricing services to a pricing agent, if
any; expenses of shareholders' meetings and preparing and distributing proxies
and reports to shareholders; any litigation expenses; and expenses relating to
investor and public relations.
The services of the Adviser under the Investment Advisory Agreement are not
deemed to be exclusive, and nothing in the Investment Advisory Agreement will
prevent any party, 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 will, to the extent feasible, be 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 obtaining the most favorable results for the Fund.
The Investment Advisory Agreement was approved by the Fund's Board of
Directors and its initial shareholder on _________, 1998. The Agreement will
initially continue in effect for a period of two years from its effective date.
If not sooner terminated, the Investment Advisory Agreement will continue in
effect for successive periods of twelve months, provided that each continuance
is specifically approved annually by (i) the vote of a majority of the Fund's
Board of Directors who are not parties to such agreement or interested persons
(as such term is defined in the 1940 Act) of any such party, 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 Fund's Board of Directors. The Investment Advisory
Agreement may be terminated by the Fund, without the payment of any penalty,
upon vote of a majority of the Fund's Board of Directors or a majority of the
outstanding voting securities of the Fund at any time upon not 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
will terminate automatically in the event of its assignment (as such term is
defined in the 1940 Act) by either party or upon its termination.
-20-
<PAGE>
The Adviser will not be 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).
Estimated Expenses
On the basis of the anticipated size of the Fund immediately following the
Offering described in this Prospectus, the Adviser estimates that the Fund's
annual operating expenses, exclusive of amortization of organizational expenses,
will be approximately $_________. In light of the Fund's investment objective
and policies, however, no assurance can be given that actual annual operating
expenses will not be substantially more or less than the estimate.
The Fund's estimated annual operating expenses, which are higher than
annual operating expenses of many other U.S. investment companies of comparable
size, reflect the specialized nature of the Fund's investment policies and
strategies and are comparable to expenses paid by recently organized closed-end
investment companies registered under the 1940 Act that have been formed to
invest primarily in the securities of a single foreign country.
PORTFOLIO TRANSACTIONS
The primary objective in placing orders for the purchase and sale of
securities for the Fund's portfolio is to obtain best price together with
efficient execution, taking into account such factors as commission, size of
order, difficulty of execution and skill required of the broker. Because of the
lack of a securities exchange in Cuba, it is not possible to compare brokerage
commissions with those in the U.S.
Subject to best price together with efficient execution, orders will be
placed with brokers and dealers who supply research, market and statistical
information ("research" as defined in Section 28(e) of the Securities Exchange
Act of 1934) to the Fund and the Adviser. The Fund's commissions to such brokers
may not represent the lowest obtainable commission rates, although they must be
reasonable in relation to the benefits received. Research furnished to the Fund
may be useful to the Adviser in providing services to clients other than the
Fund, and not all such information will be used by the Adviser in connection
with the Fund. Conversely, research provided to the Adviser by brokers and
dealers through whom other clients of the Adviser effect securities transactions
may be useful to the Adviser in providing services to the Fund.
The Fund's Board of Directors will review periodically the commissions paid
by the Fund to determine if the commissions paid over representative periods of
time were reasonable in relation to the benefits inuring to the Fund.
-21-
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute to shareholders, at least annually,
substantially all of its net investment income and any net realized capital
gains. Net investment income for this purpose is income other than net realized
long-term and short-term capital gains net of expenses.
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each stockholder will be deemed to have elected, unless the Plan Agent is
otherwise instructed by the stockholder in writing, to have all distributions
automatically reinvested by ___________ (the "Plan Agent"), in Fund shares
pursuant to the Plan. Stockholders who do not participate in the Plan will
receive all distributions in cash paid by check in U.S. dollars mailed directly
to the stockholder by the Plan Agent. Stockholders who do not wish to have
distributions automatically reinvested should notify the Fund, c/o the Plan
Agent for The Cuba Fund, Inc.
The Plan Agent will serve as agent for the stockholders in administering
the Plan. If the Directors of the Fund declare an income dividend or realized
capital gains distribution payable either in the Fund's Common Stock or in cash,
as stockholders may have elected, non-participants in the Plan will receive cash
,and participants in the Plan will receive Common Stock, to be issued by the
Fund . If the market price per share on the valuation date equals or exceeds net
asset value per share on that date, the Fund will issue new shares to
participants at net asset value. If the market price per share on the valuation
date is less than net asset value, the Fund will issue new shares to
participants at the average market price of the shares for a week commencing on
the valuation date. The valuation date will be the dividend or distribution
payment date or, if that date is not a trading day on the exchange on which the
Fund's shares are then listed, the next preceding trading day.
Participants in the Plan have the option of making additional payments to
the Plan Agent, annually, in any amount from $100 to $3,000, for investment in
the Fund's Common Stock. The Plan Agent will use all funds received from
participants (as well as any dividends and capital gains distributions received
in cash) to purchase Fund shares in the open market on or about January 15 of
each year. No participant will have any authority to direct the time or price at
which the Plan Agent may purchase the Common Stock on its behalf. Any voluntary
cash payments received more than thirty days prior to January 15 will be
returned by the Plan Agent, and interest will not be paid on any uninvested cash
payments. To avoid unnecessary cash accumulations, and also to allow ample time
for receipt and processing by the Plan Agent, it is suggested that participants
send in voluntary cash payment by written notice, if the notice is received by
the Plan Agent not less than forty-eight hours before such payment is to be
invested. All voluntary cash payments should be made by check drawn on a U.S.
bank (or a non-U.S. bank, if U.S. currency is imprinted on the check) made
payable to ____________ payable in U.S. dollars and should be mailed to the Plan
Agent for The Cuba Fund, Inc. at __________.
The Plan Agent will maintain all stockholder accounts in the Plan and will
furnish written confirmations of all transactions in the account, including
information needed by stockholders for personal and tax records. Shares in the
account of each Plan participant will be held by the Plan Agent in
non-certificated form in the name of the participant, and each stockholder's
proxy will include those shares purchased pursuant to the Plan.
In the case of stockholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
stockholder as representing the total amount registered in the stockholder's
name and held for the account of beneficial owners who are participating in the
Plan.
-22-
<PAGE>
There is no charge to participants for reinvesting dividends or
distributions. However, a participant will pay brokerage commissions incurred in
purchases from voluntary cash payments made by the participant. The Plan Agent's
fees for the handling of the reinvestment of dividends and distributions will be
paid by the Fund. The automatic reinvestment of dividends and distributions will
not relieve participants of any income tax which may be payable on such
dividends and distributions. See "Taxation - U.S. Federal Income Taxation of
Shareholders."
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any voluntary cash payment made and any dividend or distribution paid
subsequent to notice of the change sent to all stockholders at least 90 days
before the record date for the dividend or distribution. The Plan also may be
amended or terminated by the Plan Agent upon at least 90 days' written notice to
all stockholders. All correspondence concerning the Plan should be directed to
the Plan Agent for The Cuba Fund, Inc. at ________________.
NET ASSET VALUE
The Fund's net asset value will be calculated (i) no less frequently than
weekly, (ii) on the last business day of each month and (iii) at any other times
determined by the Fund's Board of Directors. Net asset value 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.
In calculating the net asset value 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 deemed to 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, first, by taking the mean between the last current bid
and asked prices or, second, by taking the closing price;
(iii) the value of any security traded in an unregulated market will be
determined, if bid and asked quotations are available, by taking the current 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 will be
valued at amortized cost;
(v) the value of a forward contract will be calculated by reference to the
price quoted at the date of valuation of the contract by the customary banking
sources of the Fund;
(vi) the value of commodity futures or option contracts entered into by the
Fund will be the margin deposit plus or minus the difference between the value
of the contract on the date net asset value 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 when the contract closes or expires;
-23-
<PAGE>
(vii) the value of any security or property for which no price quotation is
available as provided above will be fair value determined in such manner as the
Board of Directors, acting in good faith, deems appropriate, although the actual
calculation may be done by others; and
(viii) the liabilities of the Fund will be deemed to include, without
duplication, 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 of Directors will consider 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 will be translated into dollars at a quoted exchange rate or at such
other appropriate rate as may be determined by the Adviser.
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 SHAREHOLDER IS
ADVISED TO CONSULT THE SHAREHOLDER'S OWN TAX ADVISER WITH RESPECT TO THE
SPECIFIC TAX CONSEQUENCES OF BEING A SHAREHOLDER OF THE FUND, INCLUDING THE
EFFECT AND APPLICABILITY OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES THEREIN.
General
The Fund will seek to qualify and elect to be treated for each taxable year
as a "regulated investment company" under Subchapter M of the U.S. Internal
Revenue Code of 1986, as amended (the "Code") except if, in the judgment of the
Adviser, such qualification would severely restrict the Fund's investment
opportunities. To qualify under Subchapter M, an investment company must, among
other things, (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of stock or securities or foreign currencies, or certain other
income (including but not limited to gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies; and (b) diversify its holdings so that, at the end of
each quarter of its taxable year, the following two conditions are met: (i) at
least 50% of the market value of the company's assets is represented by cash,
-24-
<PAGE>
U.S. government securities, securities of other regulated investment companies,
and other securities, with such other securities limited, in respect of any one
issuer, to an amount not greater in value than 5% of the company's total assets
and 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of the company's assets is invested in the securities of
any one issuer (other than U.S. government securities and securities of other
regulated investment companies).
The Treasury Department is authorized to issue regulations to provide that
foreign currency gains and income from options, futures and forward contracts
that are "not directly related" to the Fund's principal business of investing in
stock or securities may be excluded from the income that qualifies for purposes
of the 90% of gross income requirement and 30% of gross income limitation
described above.
If the Fund qualifies as a regulated investment company, the Fund will not
be subject to U.S. Federal income tax on the portion of its income and gains
that it distributes to shareholders, provided it meets the gross income and
diversification tests described above and distributes at least 90% of its
investment company taxable income (which includes the Fund's income, other than
net capital gains) each year. For this purpose, foreign taxes that the Fund
elects to pass through to its shareholders for foreign tax credit purposes will
be treated as distributed. See "U.S. Shareholders -- Foreign Taxes". The Fund
may retain for investment its net capital gains (which consist of the excess of
net long-term capital gains over net short-term capital losses). However, if the
Fund retains such net capital gains, the amount retained will be subject to a
tax at the corporate tax rate then in effect for the Fund. In that event, the
Fund expects to designate the retained amount as undistributed capital gains in
a notice to its shareholders who (i) if subject to U.S. Federal income tax on
long-term capital gains, will be required to include in income for tax purposes,
as long-term capital gains, their shares of such undistributed amount, and (ii)
will be entitled to credit their proportionate share of the tax paid by the Fund
against their U.S. Federal income tax liabilities, if any, and to claim refunds
to the extent the credit exceeds such liabilities. Foreign shareholders who are
not subject to U.S. Federal income tax on net capital gain can obtain a refund
of their proportionate shares of the tax paid by the Fund by filing a U.S.
Federal income tax return. For U.S. Federal Income Tax purposes, the tax basis
of shares owned by a shareholder of the Fund will be increased by an amount
equal to 65% of the amount of undistributed capital gains included in the
shareholder's gross income. The Fund intends to distribute at least annually to
its shareholders substantially all of its investment company taxable income and
net capital gains.
The Fund will be subject to a non-deductible 4% excise tax to the extent
that the Fund does not distribute by the end of each calendar year an amount
equal to the sum of (a) 98% of the Fund's ordinary income for such calendar
year; (b) 98% of the capital gains net income for the one-year period ending on
October 31 of each year; and (c) the undistributed income and gains, if any,
from the previous years.
United States Federal Income Taxation of Shareholders
Distributions. Dividends from net investment income and net realized
short-term capital gains will be taxable to shareholders as ordinary income,
whether received in cash or reinvested in additional Fund shares. Distributions
of net realized long-term capital gains that the Fund designates as "capital
gain dividends" in a notice to its shareholders, if any, will be taxable to
shareholders as long-term capital gains, whether received in cash or reinvested
in additional shares, regardless of the length of time the shareholder has owned
-25-
<PAGE>
Fund shares. For individuals, long-term capital gains are subject to a maximum
tax rate of 20%, while ordinary income is subject to a maximum rate of 39.6%.
For a corporate shareholder, it is anticipated that only a small portion of
the dividends paid by the Fund from net investment income will qualify for the
corporate dividends-received deduction. The portion of dividends paid by the
Fund that so qualifies will be designated each year in a notice from the Fund to
its shareholders, and cannot exceed the gross amount of the dividends received
by the Fund from domestic (U.S.) corporations that would have qualified for the
dividends-received deduction in the hands of the Fund if the Fund were a regular
corporation. To the extent that the Fund pays dividends which qualify for this
deduction, the availability of the deduction is subject to certain restrictions.
For example, the deduction is eliminated unless Fund shares have been held (or
deemed held) for at least 46 days. The dividends-received deduction may also be
reduced to the extent interest paid or accrued by a corporate shareholder is
directly attributable to its investment in Fund shares. The entire dividend,
including the portion which is treated as a deduction, is includable in the tax
base on which the alternative minimum tax is computed and may also result in a
reduction in the shareholder's tax basis in its Fund shares, under certain
circumstances, if the shares have been held for less than two years. The
dividends-received deduction may be reduced for stock held that is
"debt-financed," as that term is defined in the Code.
Although dividends generally will be treated as distributed when paid,
dividends declared by the Fund in October, November or December payable to
shareholders of record on a specified date in one of those months and paid
during the following January will be treated as having been distributed by the
Fund (and received by the shareholders) on December 31 of the year declared.
Shareholders will be notified not later than 60 days after the close of the
Fund's taxable year as to the federal tax status of dividends and distributions
from the Fund.
Shareholders should consider the tax implications of buying shares of the
Fund just prior to a distribution by the Fund. The price of shares purchased at
that time may reflect the amount of the forthcoming distribution. Such
distribution may have the effect of reducing the net asset value of shares below
a shareholder's cost and thus would be a return on investment in an economic
sense, but would nevertheless be taxable to the shareholder.
Sale of Shares. A shareholder may realize a taxable gain or loss on the
sale of shares in the Fund depending on the shareholder's basis in the shares
for federal income tax purposes. If the shares are capital assets in the
shareholder's hands, the gain or loss will be treated as a capital gain or loss
and will be long-term or short-term, depending on the shareholder's holding
period for the shares. As a general rule, a shareholder's gain or loss will be a
long-term capital gain or loss if the shares have been held for more than one
year and a short-term capital gain or loss if the shares have been held one year
or less. Any loss incurred on sale or exchange of the Fund's shares, held for
six months or less, will be treated as a long-term capital loss to the extent of
any distributions or deemed distributions of long-term capital gains received by
the shareholder with respect to such shares. Any loss realized on a sale or
exchange will also be disallowed to the extent the shares disposed of are
replaced within a period of 61 days beginning 30 days before and ending 30 days
after the disposition of the shares. In such case, the basis of the shares
acquired will be increased to reflect the disallowed loss.
Offers to Purchase Shares. A shareholder who, pursuant to a tender offer,
tenders all shares owned or considered owned by such shareholder will realize a
taxable gain or loss depending upon the shareholder's basis in the shares. Such
gain or loss will be treated as capital gain or loss if the shares are capital
-26-
<PAGE>
assets in the shareholder's hands and will be long-term or short-term depending
upon the shareholder's holding period for the shares.
Back-up Withholding. Under certain provisions of the Code, some
shareholders may be subject to a 31% "back-up withholding" on reportable
dividends, capital gains distributions and redemption payments. Generally,
shareholders subject to back-up withholding will be those for whom a taxpayer
identification number is not on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that he or she is not otherwise subject to back-up withholding. An individual's
taxpayer identification number is his or her Social Security number.
Back-up withholding is not an additional tax and may be credited against a
taxpayer's federal income tax provided the shareholder provides the necessary
information.
Foreign Tax Credits. Income received by the Fund may also be subject to
foreign income taxes, including withholding taxes. The United States has entered
into tax treaties with many foreign countries which entitle the Fund to a
reduced rate of such taxes or exemption from taxes on such income. It is
impossible to determine the effective rate of foreign tax in advance since the
amount of the Fund's assets to be invested within various countries is not
known. If more than 50% of the value of the Fund's total assets at the close of
its taxable year consists of stocks or securities of foreign corporations (which
for this purpose should include obligations issued by foreign governments), the
Fund will be eligible and intends to file an election with the Internal Revenue
Service to pass through to its shareholders the amount of foreign taxes paid by
the Fund. However, there can be no assurance that the Fund will be able to do
so. Pursuant to this election a shareholder will be required to (i) include in
gross income (in addition to taxable dividends actually received) his pro rata
share of foreign taxes paid by the Fund, (ii) treat his pro rata share of such
foreign taxes as having been paid by him, and (iii) either deduct such pro rata
share of foreign taxes in computing his taxable income or treat such foreign
taxes as a credit against United States federal income taxes. Shareholders who
are not liable for federal income taxes, such as retirement plans qualified
under Section 401 of the Code, will not be affected by any such pass through of
taxes by the Fund. No deduction for foreign taxes may be claimed by an
individual shareholder who does not itemize deductions. In addition, certain
individual shareholders may be subject to rules which limit or reduce their
availability to fully deduct their pro rata share of the foreign taxes paid by
the Fund. Each shareholder will be notified within 60 days after the close of
the Fund's taxable year whether the foreign taxes paid by the Fund will pass
through for that year and, if so, such notification will designate (i) the
shareholder's portion of the foreign taxes paid to each such country and (ii)
the portion of dividends that represents income derived from sources within each
such country.
Generally, a credit for foreign taxes may not exceed the shareholder's
United States tax attributable to the shareholder's total foreign source taxable
income. The overall limitation on a foreign tax credit is also applied
separately to specific categories of foreign source income, including foreign
source "passive income," including dividends, interest and capital gains.
Further, the foreign tax credit is allowed to offset only 90% of any alternative
minimum tax to which a shareholder may be subject. As a result of these rules,
certain shareholders may be unable to claim a credit for the full amount of
their proportionate share of the foreign taxes paid by the Fund. If a
shareholder could not credit his full share of the foreign tax paid, double
taxation of such income could be mitigated only by deducting the foreign tax
paid, which may be subject to limitation as described above.
-27-
<PAGE>
Other Taxation. Dividends and capital gains distributions may also be
subject to state, local and foreign taxes.
Taxation of Foreign Shareholders
Dividends paid by the Fund from net investment income and net realized
short-term capital gains to a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or a foreign partnership (a "foreign shareholder") will be subject to U.S.
withholding tax at a rate of 30% unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Foreign
shareholders are urged to consult their own tax advisers concerning the
applicability of the U.S. withholding tax and any foreign taxes.
-------------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations thereunder presently in effect.
These provisions are subject to change by legislative or administrative action,
and any such changes may be effective either prospectively or retroactively.
Shareholders are advised to consult with their own tax advisers for more
detailed information concerning federal, state and local income tax matters.
DESCRIPTION OF COMMON STOCK
The Fund is authorized to issue up to 100,000,000 shares of Common Stock,
at $.001 par value per share. 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, and the shares
of Common Stock when issued will be, fully paid and nonassessable. Shareholders
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 Board of Directors may authorize the issuance of a class of preferred
shares which would have precedence over the Common Stock in terms of liquidation
rights and the payment of dividends. Depending upon the terms of the preferred
stock, the existence of outstanding preferred shares may disenfranchise holders
of Common Stock with regard to certain voting matters such as proposals to
convert to an open-end investment company.
The Underwriter has no present intention to make a market for the Fund's
shares. The Fund and the Underwriter intend to apply for listing of the Fund's
shares on the NASDAQ Small Cap Market.
As of the date of this Prospectus, the Adviser owned of record and
beneficially 100% of the outstanding shares of the Common Stock of the Fund, and
thus, until the public offering of the Fund's shares is completed, will control
the Fund.
-28-
<PAGE>
Warrants
With each share of Common Stock that is purchased in the initial offering,
the purchaser shall receive a warrant to purchase _____ additional shares of
Common Stock at the same offering price. As required under Section 18(d) of the
1940 Act, the warrants will expire 120 days after their date of issuance. The
issuance of additional shares of Common Stock through warrants may have a
dilutive effect on the value of the Fund's outstanding Common Stock. Also, if
there is little demand for the Common Stock in the trading market, the
additional shares issued through warrants may depress the market price of the
Common Stock.
Rights Offering
The Board of Directors of the Fund intends to offer additional shares of
Common Stock to shareholders of record through a rights offering. When the U.S.
embargo against Cuba is lifted and if it is deemed to be advisable by the Board
of Directors, the Fund will grant rights to its existing holders to purchase
additional shares of Common Stock at the net asset value per share on the date
of the rights offering subject to the requirements of the 1940 Act. The Board
also may authorize the issuance of rights to buy shares at a discount to net
asset value upon receipt of necessary stockholder and regulatory approvals. The
issuance of additional shares through a rights offering may substantially dilute
the aggregate net asset value of the shares owned by stockholders who do not
fully exercise their rights, and such stockholders will own a smaller
proportional interest in the Fund after the offering than they did before.
Furthermore, if there is little demand for the Common Stock in the trading
market, the additional shares issued through a rights offering may depress the
market price of the Common Stock.
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 and (iii) the
ability of the Fund's directors or shareholders to amend the Charter Documents
or effect changes in the Fund's investment adviser or management. The Charter
Documents also contain provisions which would inhibit any conversion of the Fund
to an open-end investment company. The provisions of the Charter Documents may
be regarded as "anti-takeover" provisions. Commencing with the first annual
meeting of shareholders, the Board of Directors will be divided into three
classes. The term of office of the first class will expire on the date of the
second annual meeting of shareholders, the term of office of the second class
will expire on the date of the third annual meeting of shareholders and the term
of office of the third class will expire on the date of the fourth annual
meeting of shareholders. 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 expire. Accordingly,
only those directors in one class may be changed in any one year, and it would
require two years to change a majority of the Board of Directors (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 shareholder
proposals in management's annual proxy statement). This system of electing
directors may have the effect of maintaining the continuity of management and,
thus, make it more difficult for the Fund's shareholders to change the majority
of directors.
Under the Fund's Articles of Incorporation, a vote of 80% of the
outstanding shares of Common Stock of the Fund is required to authorize (i) a
merger or consolidation of the Fund with or into any other corporation; (ii) the
liquidation or dissolution of the Fund; (iii) the sale, lease, exchange or other
-29-
<PAGE>
transfer of all or substantially all of the assets of the Fund (other than in
the regular course of its investment activities); and (iv) any amendment to the
Articles of Incorporation of the Fund which converts the Fund to an open-end
investment company or provides for fewer than three classes of directors. 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 of Directors for a period of at least one full term,
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
shareholder. The Board of Directors of the Fund has considered the foregoing
provisions and concluded that they are in the best interests of the Fund and its
shareholders.
UNDERWRITING
Thomas J. Herzfeld & Co., Inc. will serve as underwriter of the Fund's
shares on a best-efforts basis.
The Underwriter has advised the Fund that it proposes initially to offer
the Common Stock at the public offering price set forth on the cover page of
this Prospectus on a firm commitment basis and to selected dealers at such price
less a concession not in excess of $_______ per share. Such dealers may reallow
a concession not in excess of $_______ per share to certain other dealers. After
the initial public offering, the public offering price, concession and discount
may be changed.
Prior to this Offering, there has been no public market for the Common
Stock of the Fund. Consequently, the initial public offering price has been
determined through negotiation among the Fund, the Adviser and the Underwriter.
The Fund and the Adviser have agreed to indemnify the Underwriter against
losses arising out of certain liabilities, including liabilities under the
applicable securities laws in the United States or to contribute to payments the
Underwriter may be required to make in respect thereof.
The Fund has agreed to pay the Underwriter up to $__________ as
reimbursement of a portion of the expenses incurred by it in connection with the
Offering, provided that this amount will not exceed the amount of expenses
actually incurred by the Underwriter in connection with the Offering.
CUSTODIAN
______________ acts as custodian of the Fund's cash and securities. The
Custodian also maintains certain accounts and records of the Fund.
TRANSFER AGENT AND REGISTRAR; DIVIDEND-PAYING AGENT
_________________ acts as the Fund's transfer agent and registrar and
dividend-paying agent.
-30-
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the offering of the shares of
Common Stock, with respect to matters of U.S. law, will be passed upon for the
Fund and for the Underwriter by Pepper Hamilton LLP.
INDEPENDENT AUDITORS
The Statement of Assets and Liabilities of the Fund dated ___________, 1998
included in this Prospectus and Registration Statement, has been examined by
_________________________________, independent accountants, as stated in their
report appearing herein, and is included herein in reliance upon such report
given on their authority as experts in auditing and accounts.
FURTHER INFORMATION
Further information concerning these securities may be found in the
Registration Statement, of which this Prospectus constitutes a part, on file
with the U.S. Securities and Exchange Commission.
-31-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of The Cuba Fund, Inc.:
We have audited the statement of assets and liabilities of The Cuba Fund,
Inc., as of ____________, 1998. This financial statement is the responsibility
of the Fund's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities presents fairly, in
all material respects, the financial position of The Cuba Fund, Inc. at
_______________, 1998 in conformity with generally accepted accounting
principles.
_________________, 1998
-32-
<PAGE>
THE CUBA FUND, INC.
Statement of Assets and Liabilities
_________________ 1998
ASSETS
Cash $_________
Deferred organization and offering
expenses (Note 1) _________
Total assets
LIABILITIES
Deferred organization and offering
expenses payable (Note 1) _________
NET ASSETS (Applicable to _____ shares of
common stock, $.001 par value, issued
and outstanding; 100,000,000 shares
authorized) (Note 1) _________
Net asset value per share of Common Stock
($_____:______ shares of Common Stock) $_________
Notes to Statement of Asset and Liabilities
Note 1. Organization
The Fund was incorporated under the laws of the State of Maryland on
October 10, 1991 as a closed-end, non-diversified management investment company
and has had no operations other than the sale to HERZFELD/CUBA of an aggregate
of _________ shares for $______________ on ___________, 1998.
Deferred organization costs will be amortized on a straight-line basis over
a five-year period beginning with the commencement of operations of the Fund.
Direct costs relating to the public offering of the Fund's shares will be
charged to capital at the time of issuance of shares.
Note 2. Management Arrangements
The Fund has engaged HERZFELD/CUBA (the "Investment Adviser"), a subsidiary
of Thomas J. Herzfeld Advisors, Inc. to provide investment advisory and
management services to the Fund. The Investment Adviser will receive an annual
fee in an amount equal to ____% of the average weekly net assets of the Fund.
Note 3. Federal Income Taxes
-33-
<PAGE>
[To be inserted]
-34-
<PAGE>
PART II
OTHER INFORMATION
Item 1. Marketing Arrangements.
To be furnished by amendment.
Item 2. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
U.S. Securities and Exchange Commission Fee........................*
Printing (other than stock certificates)...........................*
Engraving and printing stock certificates..........................*
Fees and expenses of qualifications under state
securities laws (including fees of counsel)................*
Legal fees and expenses............................................*
Accounting fees and expenses.......................................*
NASDAQ Listing Fee.................................................*
National Association of Securities Dealers, Inc. Fee...............*
Miscellaneous......................................................*
Total................................................$______
- ------------------
* To be furnished by amendment.
Item 3. Indemnification.
The General Corporation Law of the State of Maryland, the Fund's By-Laws
and the Investment Advisory Agreement filed as Exhibit 6 provide for
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be provided to directors, officers and controlling persons of the
Fund, pursuant to the foregoing provisions or otherwise, the Fund has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Investment Company
Act of 1940, as amended (the "Act"), and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Fund of expenses incurred or paid by a director, officer or
controlling person of the Fund in connection with any 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 Fund 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.
Reference is made to Section Six of the Purchase Agreement, a form of which
is filed as Exhibit 7(a) hereto, for provisions relating to the indemnification
of the Underwriter.
-35-
<PAGE>
Item 4. Financial Statements and Exhibits.
(a) Financial Statements
Independent Auditors' Report
Statements of Assets and Liabilities as of ___________, 1998**
(b) Exhibits:
(1) Articles of Incorporation-Incorporated by reference to the
Fund's initial registration statement on Form N-2 which was
filed with the Commission on December 31, 1992.
(2) By-Laws**
(3) Not applicable
(4) Specimen Certificate for Common Stock**
(5) Not applicable
(6) Form of Investment Advisory Agreement between the Fund and the
Investment Adviser**
(7) (a) Form of Purchase Agreement**
(b) Form of Standard Dealer Agreement**
(8) Not applicable
(9) Form of Custodian Agreement**
(10) Form of Transfer Agency and Service Agreement**
(11) Opinion of Counsel**
(12) Consent of _____________________________, Independent Auditors for
the Fund**
(13) Not applicable
(14) Not applicable
(15) Not applicable
- ------------------
** To be filed by amendment.
Item 5. Persons Controlled by or Under Common Control with Registrant.
The information in the Prospectus under the caption "Investment Advisory
Agreement" and in Note 1 to the Statement of Assets and Liabilities is
incorporated herein by reference.
Item 6. Number of Holders of Securities.
There will be one record holder of the Common Stock, par value $.001 per
share, as of the effective date of this Registration Statement.
Item 7. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Act and the rules promulgated thereunder are maintained at
the office of the registrant, its investment adviser, custodian and transfer
agent.
-36-
<PAGE>
Item 8. Business and Other Connections of the Investment Adviser.
Set forth below is a list of each officer and director of the Investment
Adviser, indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged for the past five
years for his own account or in the capacity of director, officer, partner or
trustee:
<TABLE>
<CAPTION>
Other Substantial
Positions with Business, Profession,
Name Investment Adviser Vocation or Employment
---- ------------------ ----------------------
<S> <C> <C>
Thomas J. Herzfeld President & Director Chairman and President of Thomas J. Herzfeld
& Co., Inc.
Cecilia L. Gondor-Morales Executive Vice Executive Vice President of Thomas J. Herzfeld
President & Co., Inc.
</TABLE>
Item 9. Management Services.
Not applicable.
Item 10. Undertakings.
(a) Registrant undertakes to suspend offering of the shares of Common Stock
covered hereby until it amends its Prospectus contained herein if (1) subsequent
to the effective date of this Registration Statement, the net asset value per
share of Common Stock declines more than 10 percent from its net asset value per
share of Common Stock as of the effective date of this Registration Statement,
or (2) its net asset value per share of Common Stock increases to an amount
greater than its net proceeds as stated in the Prospectus contained herein.
(b) Registrant undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 497(h) under the Securities
Act shall be deemed to be part of the registration statement as of the time it
was declared effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
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.
-37-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Pre-effective Amendment No. 1 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the county of Dade, the
State of Florida, and on the 7th day of October, 1998.
The Cuba Fund, Inc.
(Registrant)
By: Thomas J. Herzfeld
-----------------------
(Thomas J. Herzfeld, President)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacity and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Thomas J. Herzfeld President and Director October 7, 1998
- ---------------------------- (Principal Executive Officer)
(Thomas J. Herzfeld)
/s/ Cecilia L. Gondor-Morales Treasurer, Secretary and October 7, 1998
- ---------------------------- Director (Principal Financial
(Cecilia L. Gondor-Morales) and Accounting Officer)
</TABLE>
-38-
<PAGE>
