UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06445
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The Herzfeld Caribbean Basin Fund, Inc.
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(Exact name of registrant as specified in charter)
P.O. BOX 161465, MIAMI, FLORIDA 33116
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(Address of principal executive offices) (Zip code)
THOMAS J. HERZFELD
P.O. BOX 161465, MIAMI, FL 33116
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(Name and address of agent for service)
Registrant's telephone number, including area code: 305-271-1900
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Date of fiscal year end: 06/30/06
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Date of reporting period: 07/01/05 - 12/31/05
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. SHAREHOLDER REPORT
[FRONT COVER]
THE HERZFELD
CARIBBEAN BASIN
FUND, INC.
SEMI-ANNUAL REPORT
December 31, 2005
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The Herzfeld Caribbean Basin Fund, Inc.
The Herzfeld Building
PO Box 161465
Miami, FL 33116
(305) 271-1900
Investment Advisor
HERZFELD/CUBA
a division of Thomas J. Herzfeld Advisors, Inc.
PO Box 161465
Miami, FL 33116
(305) 271-1900
Transfer Agent & Registrar
Investors Bank & Trust Company
200 Clarendon Street, 16th Floor
Boston, MA 02116
(617) 443-6870
Custodian
Investors Bank & Trust Company
200 Clarendon Street, 5th Floor
Boston, MA 02116
Counsel
Pepper Hamilton LLP
3000 Two Logan Square
18th and Arch Streets
Philadelphia, PA 19103
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The Herzfeld Caribbean Basin Fund's investment objective is long-term capital
appreciation. To achieve its objective, the Fund invests in issuers that are
likely, in the Advisor's view, to benefit from economic, political, structural
and technological developments in the countries in the Caribbean Basin, which
consist of Cuba, Jamaica, Trinidad and Tobago, the Bahamas, the Dominican
Republic, Barbados, Aruba, Haiti, the Netherlands Antilles, the Commonwealth of
Puerto Rico, Mexico, Honduras, Guatemala, Belize, Costa Rica, Panama, Colombia
and Venezuela. The fund invests at least 80% of its total assets in a broad
range of securities of issuers, including U.S.-based companies which engage in
substantial trade with, and derive substantial revenue from, operations in the
Caribbean Basin Countries.
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Listed NASDAQ Capital Market
Symbol: CUBA
Letter to Stockholders
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[PICTURE]
Thomas J. Herzfeld
Chairman and President
February 7, 2006
Dear Fellow Shareholders:
I am pleased to report to you that our Fund continues to do well on all fronts:
net asset value performance, price performance and shareholder value.
As of December 31, 2005, the end of the first half of our fiscal year, our
Fund's net asset value stood at $7.83 per share, a gain of 9.21% (adjusted for a
year-end distribution of $0.1748 per share; not annualized, unaudited). Over the
12 month period ended Dec- ember 31, 2005, the net asset value increased 14.52%.
We are now up over 100% from inception (adjusted for distributions). The Fund's
share price, over the 6 and 12 month periods, gained 28.87% (not annualized) and
32.33%, respectively, adjusted for the distribution.
Since calendar year-end, the Fund's net asset value has continued to climb,
reaching a record high of $8.39 on February 1st. Eleven companies of our
portfolio have made the new high list so far this year: Bancolombia, S.A.;
Cemex, ADR; Consolidated Water Co.; Florida East Coast Industries; Grupo
Televisa S.A.; Grupo TMM, S.A. ADR; Latin America Equity Fund; Mastec, Inc.;
Mexico Fund; Telefonos de Mexico ADR; and Watsco Incorporated. Two stocks which
had been disappointments have come back nicely; these include Grupo TMM, which
is currently changing hands at $4.72, up 52% from a year ago, and CancerVax,
which is trading above $3 today, up from $1.31 last October.
Herzfeld Caribbean's discount to net asset value is currently 6.5%, four
percentage points narrower than it was a year ago. At the beginning of January,
our shares traded at a slight premium. This is the 12th year of the Fund's
existence, and in each year, it has attained a premium to net asset value. In
December, when the share price made a record high at $8.85 per share, we were
trading at over a 10% premium to net asset value.
-3-
Letter to Stockholders (continued)
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Portfolio Commentary
We have made some significant changes in our portfolio since December 31st. We
took some rather large profits in three of our closed-end fund holdings: Latin
American Equity Fund, Latin America Discovery Fund and Mexico Fund. For seasonal
reasons, January is usually a good time of the year to sell closed-end funds.
Historically, in December closed-end funds become undervalued due to year-end
tax selling and in January they tend to snap back, just like a stretched
rubberband which has been released. For instance, our gain in Latin American
Discovery Fund was $158,000; in addition, from that holding we received a large
year-end distribution of $5.7595 per share, or $77,920. The January sales have
boosted our cash position from zero at year-end to approximately 6%. For the
time being I prefer to keep this somewhat reduced investment level.
There are two new companies in our portfolio: the first is Copa Holdings, S.A.
and the second is Cuban Electric Company.
Copa Holdings, based in Panama, is a leading Latin American airline providing
passenger and cargo service to twenty countries, primarily in Central America,
South America and the Caribbean, including daily flights to Havana.
We have been expanding our research into companies that have had property
confiscated by the Castro government; it is a very long list. About 9000 claims
have been filed, of which just under 6000 have been certified by the Foreign
Claims Settlement Commission of the United States for a total value of $1.8
billion, and with accumulated interest for 46 years the total approaches $20
billion! These certified claims are by U.S. companies and citizens and do not
include another $20 billion in Cuban exile claims. Cuban Electric, a U.S.
company, is our first investment which targets this area. As of June 30, 2005,
Cuban Electric had approximately $18 million in assets (outside of Cuba) in cash
and equivalents, and with 3.6 million shares outstanding, that represents about
$5 per share. We have been buying stock in the $8 per share range. The company
filed a claim under the Cuban Claims Act which has been certified; the claim
amounts to over $267 million, about $74 per share (not including interest). Of
course, whether or not any Cuban prior claims or the defaulted Republic of Cuba
debt* will ever be paid, even in part, is impossible to predict. I do believe,
however, that before the U.S.
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* We hold $165,000 of the Republic of Cuba, 4.5%, 1977 bonds, which our board is
currently valuing at zero.
-4-
Letter to Stockholders (continued)
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government would consider lifting the embargo, the subject of prior claims will
have to be addressed. These investments are in keeping with our investment
strategy of trying to position a significant part of the Fund's portfolio in
companies that would benefit from any resumption of trade with Cuba.
Largest Allocations
The following tables present our largest investment and geographic allocations
as of December 31, 2005.
------------------------------ --------------------------------------------
Geographic % of Net Assets Largest Portfolio Positions % of Net Assets
Allocation
USA 55.33% Florida East Coast Industries, Inc. 15.97%
Mexico 13.48% Watsco Incorporated 8.42%
Cayman Islands 8.59% Consolidated Water Co. 7.51%
Latin American Regional 8.08% Seaboard Corporation 7.36%
Puerto Rico 3.09% Florida Rock Industries, Inc. 6.20%
Panama 3.05% Royal Caribbean Cruises Ltd. 6.00%
Netherlands Antilles 2.48% The Latin American Equity Fund, Inc. 5.74%
Belize 2.08% Banco Latinoamericano de
Colombia 1.76% Exportaciones, S.A. 3.05%
Virgin Islands 1.31% Garmin Ltd. 3.03%
Costa Rica 0.25% Trailer Bridge Inc. 2.94%
Venezuela 0.03% -------------------------------------------
Cuba 0.00%
Other 1.28%
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Daily net asset values and press releases on the Fund are available on the
Internet at www.herzfeld.com.
I would like to thank the members of the Board of Directors for their hard work
and guidance and also to thank my fellow stockholders for their continued
support and suggestions.
Sincerely,
/s/ Thomas J. Herzfeld
Thomas J. Herzfeld
Chairman of the Board and President
-5-
Schedule of Investments as of December 31, 2005
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Shares or Principal Amount Description Market Value
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Common stocks - 100.81% of net assets
Banking and finance - 5.34%
8,000 Bancolombia, S.A. $ 230,640
21,920 Banco Latinoamericano de Exportaciones, S.A. 401,136
2,000 Doral Financial Corp. 21,200
16,000 Grupo Financiero Banorte, S.A. de C.V. Series O 33,123
9,500 Grupo Financiero Inbursa, S.A. de C.V. Series O 16,201
Communications - 10.97%
35,000 America Movil, S.A. de C.V. Series A 50,838
135,900 America Movil, S.A. de C.V. Series L 198,428
12,200 America Telecom, S.A. de C.V. Series A1* 59,299
4,100 Atlantic Tele-Network, Inc. 171,790
11,900 Carso Global Telecom, S.A. de C.V. Series A1 30,654
6,000 Garmin Ltd. 398,100
725 Grupo Iusacell, S.A. de C.V. Series V* 1,637
16,800 Grupo Radio Centro, S.A. ADR 116,928
2,500 Grupo Televisa, S.A. ADR 201,250
13,000 Grupo Televisa, S.A. Series CPO 51,948
1,000 Telefonos de Mexico ADR Series L 24,680
23,400 Telefonos de Mexico, S.A. de C.V. Series A 28,819
78,600 Telefonos de Mexico, S.A. de C.V. Series L 97,173
13,900 TV Azteca, S.A. de C.V. Series CPO 9,082
Conglomerates - 2.97%
5,300 Alfa, S.A. de C.V. Series A 29,399
40,400 BB Holdings* 273,508
13,000 Carlisle Holdings, Inc.* 24,393
3,200 Corporacion Interamericana de Entretenimiento,
S.A. de C.V. Series B* 6,860
1,580 Desc, S.A. de C.V. Series B* 1,976
10,700 Grupo Carso, S.A. de C.V. 26,044
500 Grupo Imsa, S.A. de C.V., Series UBC 1,645
3,300 U.S. Commercial Corp., S.A. de C.V.* 1,210
2,900 Vitro, S.A. Series A 3,572
6,000 Vitro Sociedad Anonima ADR 21,780
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* Non-income producing
See accompanying notes.
-6-
Schedule of Investments as of December 31, 2005 (continued)
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Shares or Principal Amount Description Market Value
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Construction and related - 9.43%
22,416 Cemex, S.A. de C.V. Series CPO $ 132,918
500 Cemex, ADR 29,665
2,032 Ceramica Carabobo Class A ADR* 3,143
4,200 Consorcio ARA, S.A. de C.V.* 18,361
3,283 Empresas ICA, Sociedad Controladora, S.A. de C.V.* 8,024
16,600 Florida Rock Industries, Inc. 814,396
600 Grupo Cementos de Chichuahua, S.A. de C.V. 1,798
100 Hylsamex S.A. de C.V. Series B* 323
21,950 Mastec, Inc.* 229,817
Consumer products and related manufacturing - 9.48%
800,000 Atlas Electricas, S.A. 32,536
5,900 Grupo Casa Saba, S.A. ADR 105,905
18,500 Watsco Incorporated 1,106,485
Food, beverages and tobacco - 1.76%
200 Alsea, S.A. de C.V. 522
4,800 Coca Cola Femsa, S.A. de C.V. ADR 129,648
200 Coca Cola Femsa, S.A. de C.V., Series L 559
6,200 Fomento Economico Mexicano, S.A. de C.V., Series UBD 44,883
600 Gruma, S.A. de C.V., Series B 1,946
7,500 Grupo Bimbo, S.A. de C.V., Series A 26,089
7,600 Grupo Modelo, S.A. de C.V., Series C 27,509
Housing - 0.06%
1,300 Corporacion Geo, S.A. de. C.V., Series B 4,583
100 Desarrolladora Homex, S.A. de C.V. 513
200 Sare Holding, S.A. de C.V., Series B 212
300 Urbi Desarrollos Urbanos, S.A. de C.V. 2,073
Investment companies - 10.21%
13,529 The Latin American Discovery Fund, Inc. 307,244
24,745 The Latin America Equity Fund, Inc. 753,733
4,784 The Mexico Fund, Inc. 135,722
4,100 Salomon Brothers Global High Income Fund 52,275
5,096 Salomon Brothers Emerging Markets Debt Fund 91,830
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*Non-income producing
See accompanying notes.
-7-
Schedule of Investments as of December 31, 2005 (continued)
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Shares or Principal Amount Description Market Value
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Leisure - 8.24%
5,500 Carnival Corp. $ 294,085
17,500 Royal Caribbean Cruises Ltd. 788,550
Medical - 2.74%
25,159 CancerVax Corp. 34,719
8,160 Orthofix International N.V.* 325,502
Pulp and paper - 0.16%
6,000 Kimberly-Clark de Mexico, S.A. de C.V. Series A 21,436
Railroad and landholdings - 15.97%
49,500 Florida East Coast Industries, Inc. 2,097,315
Retail - 1.06%
3,700 Controladora Comercial Mexicana,
S.A. de C.V. Series UBC 5,663
1,380 Grupo Elektra, S.A. de C.V. 12,196
22,006 Wal-Mart de Mexico, S.A. de C.V. Series V 122,065
Trucking and marine freight - 10.74%
14,800 Grupo TMM, S.A. ADR* 56,980
640 Seaboard Corporation 967,040
41,799 Trailer Bridge, Inc.* 386,641
Utilities - 8.64%
12,000 Caribbean Utilities Ltd. Class A 142,800
48,600 Consolidated Water, Inc. 986,094
700 Cuban Electric 6,055
Other - 3.04%
600 Grupo Aeroportuario del Sureste,
S.A. de C.V., Series B 1,931
900 Grupo Mexico, S.A. de C.V., Series B 2,098
54,921 Margo Caribe, Inc.* 384,447
843 Siderurgica Venezolana Sivensa ADR 1,326
75 Siderurgica Venezolana Sivensa Series B 118
45,000 Xcelera, Inc.* 9,000
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Total common stocks (cost $7,545,379) $ 13,242,086
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* Non-income producing
See accompanying notes.
-8-
Schedule of Investments as of December 31, 2005 (continued)
================================================================================
Shares or Principal Amount Description Market Value
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Bonds - 0% of net assets
165,000 Republic of Cuba - 4.5%, 1977 - in default
(cost $63,038) (Note 2)* $ --
Other assets less liabilities - (0.81%) of net assets ($ 106,761)
------------
Net assets - 100% (a) $ 13,135,325
============
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* Non-income producing
(a) The cost for federal income tax purposes was $7,608,417. At December 31,
2005, net unrealized gain for all securities based on tax cost was
$5,633,669. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess value over tax cost of
$6,107,676 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value of $474,007.
See accompanying notes
-9-
Statement of Assets and Liabilities as of
December 31, 2005 (unaudited)
================================================================================
ASSETS
Investments in securities, at market value (cost $7,608,417)
(Note 2) $ 13,242,086
Cash 204,630
Dividends receivable 128,034
Receivable for investments sold 3,395
Other assets 33,249
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TOTAL ASSETS $ 13,611,394
============
LIABILITIES
Payable for investments purchased $ 68,195
Distributions payable 293,251
Accrued investment advisor fee (Note 3) 47,232
Other payables 67,391
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TOTAL LIABILITIES 476,069
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NET ASSETS (Equivalent to $7.83 per share
based on 1,677,636 shares outstanding) $ 13,135,325
============
Net assets consist of the following:
Common stock, $.001 par value; 100,000,000
shares authorized; 1,677,636 shares issued
and outstanding $ 1,678
Additional paid-in capital 8,362,502
Accumulated net investment loss (1,425,429)
Accumulated net realized gain on investments 562,905
Net unrealized gain on investments 5,633,669
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TOTAL $ 13,135,325
============
See accompanying notes
-10-
Statement of Operations
Six Months Ended December 31, 2005 (unaudited)
================================================================================
INVESTMENT INCOME
Dividends $ 188,664
EXPENSES
Investment advisor fees (Note 3) $ 93,430
Professional fees 42,424
Custodian fees 27,000
Insurance 14,038
Transfer agent fees 8,775
Listing fees 7,500
CCO Expense 6,476
Proxy services 6,000
Printing 4,248
Director fees 3,900
Postage 3,011
Miscellaneous 4,269
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Total investment expenses 221,071
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INVESTMENT LOSS - NET ($ 32,407)
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain on investments and foreign
currency 427,184
Change in unrealized gain on investments and
foreign currency 741,843
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NET GAIN ON INVESTMENTS 1,169,027
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NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 1,136,620
============
See accompanying notes
-11-
Statements of Changes in Net Assets (unaudited)
================================================================================
Six Months
Ended Year Ended
12/31/05 6/30/05
(unaudited)
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS:
Net investment loss ($ 32,407) ($ 155,794)
Net realized gain on investments and
foreign currency 427,184 700,005
Change in unrealized gain on investments
and foreign currency 741,843 2,638,583
------------ ------------
Net increase in net assets resulting from
operations 1,136,620 3,182,794
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Investment income and short-term realized gains -- --
Realized gains - long-term (293,251) --
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Total Distributions (293,251) --
NET INCREASE IN NET ASSETS $ 843,369 $ 3,182,794
NET ASSETS:
Beginning of year $ 12,291,956 $ 9,109,162
------------ ------------
End of year $ 13,135,325 $ 12,291,956
============ ============
See accompanying notes
-12-
Financial Highlights
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Six Months Ended Year Ended June 30
12/31/05 -------------------------------------------------------
(unaudited) 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(For a share of capital stock outstanding for each time period indicated)
Net asset value, beginning of year $ 7.33 $ 5.43 $ 3.95 $ 3.92 $ 5.15
---------- ---------- ---------- ---------- ----------
Operations:
Net investment loss(1) (0.02) (0.09) (0.07) (0.11) (0.10)
Net realized and unrealized gain (loss) on investment
transactions(1) 0.69 1.99 1.55 0.22 (0.98)
---------- ---------- ---------- ---------- ----------
Total from operations 0.67 1.90 1.48 0.11 (1.08)
---------- ---------- ---------- ---------- ----------
Distributions:
From net investment income -- -- -- -- (0.10)
From net realized gains (0.17) -- -- (0.08) (0.05)
---------- ---------- ---------- ---------- ----------
Total distributions (0.17) -- -- (0.08) (0.15)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 7.83 $ 7.33 $ 5.43 $ 3.95 $ 3.92
---------- ---------- ---------- ---------- ----------
Per share market value, end of year $ 7.94 $ 6.30 $ 4.87 $ 3.49 $ 3.48
---------- ---------- ---------- ---------- ----------
Total investment return (loss) based on
market value per share 57.73%(2) 29.36% 39.54% 2.70% (13.45%)
---------- ---------- ---------- ---------- ----------
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (in 000's) $ 13,135 $ 12,292 $ 9,109 $ 6,626 $ 6,568
---------- ---------- ---------- ---------- ----------
Ratio of expenses to average net assets 3.41%(2) 3.55% 3.67% 4.46% 3.77%
---------- ---------- ---------- ---------- ----------
Ratio of net investment loss
to average net assets (0.50%)(2) (1.47%) (1.39%) (3.15%) (2.45%)
---------- ---------- ---------- ---------- ----------
Portfolio turnover rate 11% 30% 23% 3% 18%
---------- ---------- ---------- ---------- ----------
(1) Computed by dividing the respective period's amounts from the Statement of
Operations by the average outstanding shares for each time period
presented.
(2) This figure has been annualized; however, the percentage shown is not
necessarily indicative of results for a full year.
See accompanying notes
-13-
Notes to Financial Statements
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Related Matters
The Herzfeld Caribbean Basin Fund, Inc. (the "Fund") is a non-diversified,
closed-end management investment company incorporated under the laws of the
State of Maryland on March 10, 1992, and registered under the Investment Company
Act of 1940. The Fund commenced investing activities in January, 1994. The Fund
is listed on the NASDAQ Capital Market and trades under the symbol "CUBA".
The Fund's investment policy is to invest at least 80% of its assets in
investments that are economically tied to Caribbean Basin Countries. The Fund's
investment objective is to obtain long-term capital appreciation. The Fund
pursues its objective by investing primarily in equity and equity-linked
securities of public and private companies, including U.S.-based companies, (i)
whose securities are traded principally on a stock exchange in a Caribbean Basin
Country or (ii) that have at least 50% of the value of their assets in a
Caribbean Basin Country or (iii) that derive at least 50% of their total revenue
from operations in a Caribbean Basin Country. The Fund's investment objective is
fundamental and may not be changed without the approval of a majority of the
Fund's outstanding voting securities.
At December 31, 2005, the Fund had foreign investments in companies operating
principally in Mexico and the Cayman Islands, representing approximately 13.48%
and 8.59% of the Fund's net assets, respectively.
The Fund's custodian and transfer agent is Investors Bank & Trust Company, based
in Boston, Massachusetts.
Security Valuation
Investments in securities traded on a national securities exchange (or reported
on the NASDAQ National Market or Capital Market) are stated at the last reported
sales price on the day of valuation (or at the NASDAQ official closing price);
other securities traded in the over-the-counter market and listed securities for
which no sale was reported on that date are stated at the last quoted bid price.
Restricted securities and other securities for which quotations are not readily
available are valued at fair value as determined by the Board of Directors.
-14-
Notes to Financial Statements
================================================================================
Income Recognition
Security transactions are recorded on the trade date. Gains and losses on
securities sold are determined on the basis of identified cost. Dividend income
is recognized on the ex-dividend date, and interest income is recognized on an
accrual basis. Discounts and premiums on debt securities purchased are amortized
over the life of the respective securities. It is the Fund's practice to include
the portion of realized and unrealized gains and losses on investments
denominated in foreign currencies as components of realized and unrealized gains
and losses on investments and foreign currency.
Deposits with Financial Institutions
The Fund may, during the course of its operations, maintain account balances
with financial institutions in excess of federally insured limits.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Income Taxes
The Fund's policy is to continue to comply with the provisions of the Internal
Revenue Code that are applicable to regulated investment companies and to
distribute all its taxable income to its stockholders. Under these provisions,
the Fund is not subject to federal income tax on its taxable income and no
federal tax provision is required.
The Fund has adopted a June 30 year-end for federal income tax purposes.
Distributions to Stockholders
Distributions to stockholders are recorded on the ex-dividend date. Income and
capital gain distributions are determined in accordance with income tax
regulations which may differ from accounting principles generally accepted in
the United States of America. For the six months ended December 31, 2005, a
distribution from long-term capital gains of $0.1748 per share was declared on
November 16, 2005, payable on January 13, 2006 to shareholders of record
December 31, 2005.
-15-
Notes to Financial Statements
================================================================================
NOTE 2. NON-MARKETABLE SECURITY OWNED
Investments in securities include $165,000 principal, 4.5%, 1977 Republic of
Cuba bonds purchased for $63,038. The bonds are listed on the New York Stock
Exchange and had been trading in default since 1960. A "regulatory halt" on
trading was imposed by the New York Stock Exchange in July, 1995. As of December
31, 2005, the position was valued at $0 by the Board of Directors, which
approximates the bonds' fair value.
NOTE 3. TRANSACTIONS WITH AFFILIATES
HERZFELD / CUBA (the "Advisor"), a division of Thomas J. Herzfeld Advisors,
Inc., is the Fund's investment advisor and charges a monthly fee at the annual
rate of 1.45% of the Fund's average daily net assets. Total fees for the six
months ended December 31, 2005 amounted to $93,430, of which $47,232 was payable
as of December 31, 2005.
During the six months ended December 31, 2005, the Fund paid $3,968 of brokerage
commissions to Thomas J. Herzfeld & Co., Inc., an affiliate of the Advisor.
NOTE 4. INVESTMENT TRANSACTIONS
During the six months ended December 31, 2005, purchases and sales of investment
securities were $1,475,080 and $1,652,020, respectively.
At December 31, 2005, the Fund's investment portfolio had gross unrealized gains
of $6,107,676 and gross unrealized losses of $474,007, resulting in a net
unrealized gain of $5,633,669 for financial statement purposes.
NOTE 5. INCOME TAX INFORMATION
The cost of securities owned for financial statement purposes is lower than the
cost basis for income tax purposes by approximately $19,280 due to wash sale
adjustments.
The income tax basis of distributive earnings as of December 31, 2005, include
$1,425,429 of accumulated net investment loss, $562,905 of accumulated net
realized gain on investments and $5,633,669 of net unrealized gain on
investments.
For the six months ended December 31, 2005, the Fund had net realized gains of
$427,184.
-16-
Notes to Financial Statements
================================================================================
NOTE 6: RESIGNATION OF AUDITOR
Kaufman, Rossin & Co., P.A. ("KRC"), the independent auditors and independent
registered public accounting firm to Herzfeld Caribbean Basin Fund, Inc. (the
"Registrant") informed the Registrant in a letter dated February 7, 2006 that it
has resigned as independent auditors and independent registered public
accounting firm to the Registrant.
KRC's reports on the Registrant's financial statements for the two most recent
fiscal years contained no adverse opinion or disclaimer of opinion nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
During the Registrant's two most recent fiscal years and through February 7,
2006: (i) there were no disagreements with KRC on any matter of accounting
principles, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of KRC, would have caused it
to make reference to the subject matter of the disagreements in connection with
its reports on the Registrant's financial statements for such years; and (ii)
there were no "reportable events" of the kind described in Item 304(a)(1)(v) of
Regulation S-K under the Securities Exchange Act of 1934, as amended.
-17-
Discussion Regarding the Approval of the Investment
Advisory Agreement
================================================================================
The Fund's Board of Directors including a majority of those directors who are
not "interested persons" as such term is defined in the 1940 Act ("Independent
Directors") unanimously approved the continuance of the investment advisory
agreement between the Fund and the Advisor (the "Agreement") at a meeting held
on August 17, 2005.
Before meeting to determine whether to approve the Agreement, the Board had the
opportunity to review written materials provided by the Advisor and by legal
counsel to the Fund which contained information to help the Board evaluate the
Agreement. The materials included (i) a memorandum from the Fund's legal counsel
regarding the Directors' responsibilities in evaluating and approving the
Agreement, (ii) a letter from the Advisor containing detailed information about
the Advisor's services to the Fund, Fund performance, allocation of Fund
transactions, compliance and administration information, and the compensation
received by the Advisor from the Fund; (iii) a copy of the current investment
advisory agreement between the Fund and the Advisor; (iv) audited financial
statements for the Advisor for the year-ended December 31, 2004 and unaudited
financial statements for the six months ended June 30, 2005; (v) the Advisor's
Form ADV Parts I and II; (v) comparative performance data for the Fund relative
to peer funds (small closed-end funds and foreign funds invested in the Latin
American region); and (vi) comparative statistics and fee data for the Fund
relative to peer funds.
During its deliberations on whether to approve the continuance of the Agreement,
the Board considered many factors. The Board considered the nature, extent and
quality of the services to be provided by the Advisor and determined that such
services will meet the needs of the Fund and its shareholders. The Board
reviewed the services provided to the Fund by the Advisor as compared to
services provided by other advisors, which manage investment companies with
investment objectives, strategies and policies similar to those of the Fund. The
Board concluded that the nature, extent and quality of the services provided by
the Advisor were appropriate and consistent with the terms of the advisory
agreement, that the quality of those services had been consistent with industry
norms and that the Fund was likely to benefit from the continued provision of
those services. The Board also concluded that the Advisor had sufficient
personnel, with the appropriate education and experience, to serve the Fund
effectively and had demonstrated its continuing ability to attract and retain
qualified personnel
Both at the meeting and on an ongoing basis throughout the year, the Board
considered and evaluated the investment performance of the Fund and reviewed the
Fund's performance relative to other investment companies and funds with similar
investment objectives, strategies and policies, and its respective benchmark
index. The Board considered both the short-term and long-term performance of the
Fund. They concluded that the performance of the Fund was within an acceptable
range of performance relative to other funds with similar investment objectives,
strategies and policies.
-18-
Discussion Regarding the Approval of the Investment
Advisory Agreement (continued)
================================================================================
The Board considered the costs of the services provided by the Advisor, the
compensation and benefits received by the Advisor providing services to the
Fund, as well as the Advisor's profitability. In addition, the Board considered
any direct or indirect revenues received by affiliates of the Advisor including
the commissions paid to the Fund's affiliated broker/dealer, Thomas J. Herzfeld
& Co., Inc. The Board considered the advisory fees paid to the Advisor by the
Fund and relevant comparable fee data and statistics of a sampling of small
closed-end funds and foreign funds invested in the Latin American region. The
Board further discussed the services by the Advisor and concluded that the
advisory services performed were efficient and satisfactory and that the fee
charged was reasonable and not excessive. The Board concluded that the Advisor's
fees and profits derived from its relationship with the Fund in light of its
expenses, were reasonable in relation to the nature and quality of the services
provided, taking into account the fees charged by other advisors for managing
comparable funds with similar strategies. The Directors also concluded that the
overall expense ratio of the Fund was reasonable, taking into account the size
of the Fund, the quality of services provided by the Advisor, and the investment
performance of the Fund.
The Board also considered the extent to which economies of scale would be
realized relative to fee levels as the Fund grows, and whether the advisory fee
levels reflect these economies of scale for the benefit of shareholders. The
Board recognized that because of the closed-end structure of the Fund, and the
fact that there is no influx of capital, this particular factor is less relevant
to the Fund than it would be to an open-end fund. The Board concluded that only
marginal economies of scale could be achieved through the growth of assets since
the Fund is closed-ended.
The Board also considered its deliberations regarding the Advisor's services and
performance from the regular Board meetings held throughout the year, including
the Board's discussion of the Fund's investment objective, long-term
performance, investment style and process. The Board noted the high level of
diligence with which it reviews and evaluates the Advisor throughout the year
and the extensive information provided with respect to Advisor's performance and
the Fund's expenses on a quarterly basis. The Board also considered whether
there have occurred any events that would constitute a reason not to renew the
Agreement and concluded there were not.
After deliberation and further consideration of the factors discussed above and
information presented at the August 17, 2005 meeting and at previous meetings of
the Board, the Board and the Independent Directors determined to continue the
Agreement for an additional one-year period. In arriving at this decision, the
Board and the Independent Directors did not identify any single matter as
controlling, but made their determination in light of all the circumstances. The
Board and the Independent Directors did not consider any one of the factors and
considerations identified above to be determinative. The Board based its
decision to approve the Agreement on all the relevant factors in light of its
reasonable business judgment, and with a view to future long-term
considerations.
-19-
Results of November 10, 2005 Stockholder Meeting
================================================================================
The annual meeting of stockholders of the Fund was held on November 10, 2005. At
the meeting two nominees for Director posts were elected as follows:
Votes for Votes withheld
Thomas J. Herzfeld 1,436,222 35,360
Michael A. Rubin 1,391,507 80,075
The terms of office as directors of Ann Lieff and Albert L. Weintraub continued
after the meeting.
-20-
Proxy Voting Policies and Procedures
================================================================================
Information regarding how the Fund voted proxies relating to portfolio
securities from July 1, 2004 to June 30, 2005, and a description of the policies
and procedures used to determine how to vote proxies relating to portfolio
securities is available without charge, upon request, by calling the Fund at
800-TJH-FUND, or by accessing the SEC's website at www.sec.gov.
Quarterly Portfolio Reports
================================================================================
The Fund files quarterly schedules of portfolio holdings with the Securities and
Exchange Commission (SEC) for the first and third quarters of each fiscal year
on Form N-Q. The Form N-Q is available by link on the Fund's website at
www.herzfeld.com, by calling the Fund at 800-TJH-FUND, or on the SEC's EDGAR
database at www.sec.gov. In addition, the Form N-Q can be reviewed and copied at
the SEC's public reference room in Washington, D.C. More information about the
SEC's website or the operation of the public reference room can be obtained by
calling the SEC at 1-800-732-0330.
-21-
Privacy Policy
================================================================================
Information We Collect
We collect nonpublic information about you from applications or other account
forms you complete, from your transactions with us, our affiliates or others
through transactions and conversations over the telephone.
Information We Disclose
We do not disclose information about you, or our former customers, to our
affiliates or to service providers or other third parties except on the limited
basis permitted by law. For example, we may disclose nonpublic information about
you to third parties to assist us in servicing your account with us and to send
transaction confirmations, annual reports, prospectuses and tax forms to you. We
may also disclose nonpublic information about you to government entities in
response to subpoenas.
Our Security Procedures
To ensure the highest level of confidentiality and security, we maintain
physical, electronic and procedural safeguards that comply with federal
standards to guard your personal information. We also restrict access to your
personal and account information to those employees who need to know that
information to provide services to you.
-22-
Officers and Directors
================================================================================
Officers
THOMAS J. HERZFELD
Director, Chairman of the Board, President and Portfolio Manager
CECILIA GONDOR
Secretary, Treasurer, Chief Compliance Officer
Independent Directors
ANN S. LIEFF
Director
MICHAEL A. RUBIN
Director
ALBERT L. WEINTRAUB
Director
-23-
THE HERZFELD CARIBBEAN BASIN FUND, INC.
The Herzfeld Building
P.O. Box 161465
Miami, FL 33116
ITEM 2. CODE OF ETHICS
(a) Not applicable.
(c) There have been no amendments, during the period covered by this report,
to a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, and that relates to any element of the code of ethics
description.
(d) The registrant has not granted any waivers, including an implicit waiver,
from a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, that relates to one or more of the items set forth in
paragraph (b) of this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable as schedule is included as part of the report to shareholders
filed under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
A copy of the registrant's proxy voting policies and procedures as well as its
adviser's policies and procedures are attached hereto as Appendix A.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END FUND MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the stockholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR
240.14a-101), or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's last fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report)
that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(2) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section
302 of the Sarbanes-Oxley Act of 2002 are filed herewith as Exhibits
99.302 Cert.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section
906 of the Sarbanes-Oxley Act of 2002 are filed herewith as Exhibits
99.906 Cert.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
The Herzfeld Caribbean Basin Fund, Inc.
By: /s/ Thomas J. Herzfeld
-------------------------
Thomas J. Herzfeld
President and Chairman
Date: March 3, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Thomas J. Herzfeld
-------------------------
Thomas J. Herzfeld
President and Chairman
Date: March 3, 2006
By: /s/ Cecilia L. Gondor
-------------------------
Cecilia L. Gondor
Secretary and Treasurer
(Principal Financial Officer)
Date: March 3, 2006
APPENDIX A
THE HERZFELD CARIBBEAN BASIN FUND, INC.
Proxy Voting Policy and Procedures
The Board of Directors of The Herzfeld Caribbean Basin Fund, Inc. (the
"Fund") hereby adopts the following policy and procedures with respect to voting
proxies relating to portfolio securities held by the Fund:
Policy
It is the policy of the Board of Directors of the Fund (the "Board") to
delegate the responsibility for voting proxies relating to portfolio securities
held by the Fund to the Fund's investment adviser (the "Adviser") as a part of
the Adviser's general management of the Fund, subject to the Board's continuing
oversight.' The voting of proxies is an integral part of the investment
management services that the Adviser provides pursuant to the advisory contract.
The Adviser may, but is not required to, delegate the responsibility for
voting proxies relating to portfolio securities held by the Fund to a
sub-adviser ("Sub-Adviser") retained to provide investment advisory services, if
applicable. If such responsibility is delegated to a Sub-Adviser, then the
Sub-Adviser shall assume the fiduciary duty and reporting responsibilities of
the Adviser under these policy guidelines.
Fiduciary Duty
The right to vote a proxy with respect to portfolio securities held by the
Fund is an asset of the Fund. The Adviser, to which authority to vote on behalf
of the Fund is delegated, acts as a fiduciary of the Fund and must vote proxies
in a manner consistent with the best interest of the Fund and its shareholders.
Procedures
The following are the procedures adopted by the Board for the
administration of this policy:
A. Review of Adviser Proxy Voting Procedures. The Adviser with authority
to vote proxies on behalf of the Fund shall present to the Board its policies,
procedures and other guidelines for voting proxies at least annually, and must
notify the Board promptly of material changes to any of these documents.
B. Voting Record Reporting. No less than annually, the Adviser shall
report to the Board a record of each proxy voted with respect to portfolio
securities of the Fund during the year. With respect to those proxies that the
Adviser has identified as involving a conflict of interest(2), the Adviser shall
submit a separate report indicating the nature of the conflict of interest and
how that conflict was resolved with respect to the voting of the proxy.
Revocation
The delegation by the Board of the authority to vote proxies relating to
portfolio securities of the Fund is entirely voluntary and may be revoked by the
Board, in whole or in part, at any time.
Annual Filing
The Fund shall file an annual report of each proxy voted with respect to
its portfolio securities during the twelve-month period ended June 30 on Form
N-PX not later than August 31 of each year.
Disclosures
The Fund shall include in its annual report to stockholders:
A description of this policy and of the policies and procedures used by
the Adviser to determine how to vote proxies relating to portfolio securities
(3); and
A statement disclosing that information regarding how the Fund voted
proxies relating to portfolio securities during the most recent 12-month period
ended June 30 is available without charge, upon request, by calling the Fund's
toll-free telephone number and on the SEC website(4).
The Fund shall also include in its annual and semi-annual reports to
stockholders:
A statement disclosing that a description of the policies and procedures
used by or on behalf of the Fund to determine how to vote proxies relating to
portfolio securities of the Funds is available without charge, upon request, by
calling the Fund's toll-free telephone number and on the SEC website.(5)
A statement disclosing that information regarding how the Fund voted
proxies relating to portfolio securities during the most recent 12-month period
ended June 30 is available without charge, upon request, by calling the Fund's
toll-free telephone number and on the SEC website.(6)
Review of Policy.
At least annually, the Board shall review this Policy to determine its
sufficiency and shall make and approve any changes that it deems necessary from
time to time
----------
(1) This policy is adopted for the purpose of the disclosure requirements
adopted by the Securities and Exchange Commission, Release Nos. 33-8188,
34-47304, IC-25922.
(2) As it is used in this document, the term "conflict of interest" refers to
a situation in which the Adviser or Sub-Adviser or affiliated persons of
the Adviser or Sub-Adviser have a financial interest in a matter presented
by a proxy other than the obligation it incurs as investment adviser to
the Fund which compromises the Adviser's or Sub-Adviser's independence of
judgment and action with respect to the voting of the proxy.
(3) This disclosure shall be included in the annual report next filed by the
Fund, on Form N-CSR on or after July 1, 2003.
(4) Id.
(5) This disclosure shall be included in the report next filed by the Fund on
or after July 1, 2003.
(6) Id..
THOMAS J. HERZFELD ADVISORS, INC.
PROXY VOTING
POLICIES AND PROCEDURES
I. POLICY
Thomas J. Herzfeld Advisors, Inc. (the "Adviser") acts as discretionary
investment adviser for various clients, including The Herzfeld Caribbean Basin
Fund, Inc. an investment company registered under the Investment Company Act of
1940, as amended, and clients governed by the Employee Retirement Income
Security Act of 1974 ("ERISA").
Selected clients, including The Herzfeld Caribbean Basin Fund, Inc. have elected
to have the Adviser vote proxies or act on the other shareholder actions on
their behalf, while other clients vote proxies themselves.
When voting proxies or acting on corporate actions for clients, the Adviser's
utmost concern is that all decisions be made in the best interest of its clients
(for ERISA accounts, plan beneficiaries and participants, in accordance with the
letter and spirit of ERISA). The Adviser will act in a manner deemed prudent and
diligent and which is intended to enhance the economic value of the assets of
its clients' accounts.
II. PURPOSE
The purpose of these Policies and Procedures is to memorialize the procedures
and policies adopted by the Adviser to enable it to comply with its
responsibilities and the requirements of Rule 206(4)-6 under the Investment
Advisers Act of 1940, as amended ("Advisers Act"). These Policies and Procedures
also reflect the fiduciary standards and responsibilities set forth by the
Department of Labor for ERISA accounts.
III. PROCEDURES
Cecilia Gondor, Executive Vice President of the Adviser, is ultimately
responsible for ensuring that all proxies received by the Adviser are voted in a
timely manner and voted consistently across all portfolios. Although many proxy
proposals can be voted in accordance with the Adviser's established guidelines
(see Section V. below) (the "Guidelines"), the Adviser recognizes that some
proposals require special consideration, which may dictate that the Adviser
makes an exception to the Guidelines.
Cecilia Gondor is also responsible for ensuring that all corporate actions
received by the Adviser are addressed in a timely manner and consistent action
is taken across all portfolios.
A. Conflicts of Interest. Where a proxy proposal raises a material
conflict of interest between the Adviser's interests and that of one or more its
clients, the Adviser shall resolve such conflict in the manner described below.
1. Vote in Accordance with the Guidelines. To the extent that the
Adviser has little or no discretion to deviate from the Guidelines with respect
to the proposal in question, the Adviser shall vote in accordance with such
pre-determined voting policy.
2. Obtain Consent of Clients. To the extent that the Adviser has
discretion to deviate from the Guidelines with respect to the proposal in
question, the Adviser shall disclose the conflict to the relevant clients and
obtain their consent to the proposed vote prior to voting the securities. The
disclosure to the clients will include sufficient detail regarding the matter to
be voted on and the nature of our conflict that the clients would be able to
make an informed decision regarding the vote. When a client does not respond to
such a conflict disclosure request or denies the request, the Adviser will
abstain from voting the securities held by that client's account.
B. Limitations. In certain circumstances, in accordance with a client's
investment advisory contract (or other written directive) or where the Adviser
has determined that it is in the client's best interest, the Adviser will not
vote proxies received. The following are some circumstances where the Adviser
will limit its role in voting proxies received on client securities:
1. Client Maintains Proxy Voting Authority: Where a client has not
specifically delegated the authority to vote proxies to the Adviser or that it
has delegated the right to vote proxies to a third party, the Adviser will not
vote the securities and will direct the relevant custodian to send the proxy
material directly to the client. If any proxy material is received by the
Adviser, it will promptly be forwarded to the client.
2. Terminated Account: Once a client account has been terminated
with the Adviser in accordance with its investment advisory agreement, the
Adviser will not vote any proxies received after the termination. However, the
client may specify in writing that proxies should be directed to the client for
action.
3. Limited Value: If the Adviser concludes that the client's
economic interest or the value of the portfolio holding is indeterminable or
insignificant, the Adviser will abstain from voting a client's proxies. The
Adviser does not vote proxies received for securities which are no longer held
by the client's account. In addition, the Adviser generally does not vote
securities where the economic value of the securities in the client's account is
less than $500.
4. Securities Lending Programs: When securities are out on loan,
they are transferred into the borrower's name and are voted by the borrower, in
its discretion. However, where the Adviser determines that a proxy vote (or
shareholder action) is materially important to the client's account, the Adviser
may recall the security.
5. Unjustifiable Costs: In certain circumstances, after doing a
cost-benefit analysis, the Adviser may abstain from voting where the cost of
voting a client's proxy would exceed any anticipated benefits of the proxy
proposal.
IV. RECORD KEEPING
In accordance with Rule 204-2 under the Advisers Act, the Adviser will maintain
for the time periods set forth in the Rule (i) these proxy voting procedures and
policies, and amendments thereto; (ii) all proxy statements received regarding
client securities (provided however, that the Adviser may rely on the proxy
statement filed on EDGAR as its records)(1); (iii) a record of votes cast on
behalf of clients; (iv) records of client requests for proxy voting information;
(v) any documents prepared by the adviser that were material to making a
decision how to vote or that memorialized the basis for the decision; and (vi)
records relating to requests made to clients regarding conflicts of interest in
voting the proxy.
The Adviser will describe in its Part II of Form ADV (or other brochure
fulfilling the requirement of Rule 204-3) its proxy voting policies and
procedures and advising clients how they may obtain information on how the
Adviser voted their securities. Clients may obtain information on how their
securities were voted or a copy of our Policies and Procedures by written
request addressed to the Adviser.
V. GUIDELINES
Each proxy issue will be considered individually. The following guidelines are a
partial list to be used in voting proposals contained in the proxy statements,
but will not be used as rigid rules.
-----------------------------------------------------------------------------------------------------------------------------------
(1) Issues regarding the issuer's Board entrenchment and anti-takeover measures such as the following: Oppose
b. Proposals to limit the ability of shareholders to call special meetings;
c. Proposals to require super majority votes;
d. Proposals requesting excessive increases in authorized common or preferred shares where
management provides no explanation for the use or need for these additional shares;
e. Proposals regarding "poison pill" provisions; and
f. Permitting "green mail".
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(1) Providing cumulative voting rights. Oppose
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(2) "Social issues," unless specific client guidelines supersede, e.g., restrictions regarding South Oppose
Africa.
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(3) Election of directors recommended by management, except if there is a proxy fight. Approve
-----------------------------------------------------------------------------------------------------------------------------------
(4) Election of auditors recommended by management, unless seeking to replace if there exists a Approve
dispute over policies.
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(5) Date and place of annual meeting. Approve
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(6) Limitation on charitable contributions or fees paid to lawyers. Approve
-----------------------------------------------------------------------------------------------------------------------------------
(7) Ratification of directors' actions on routine matters since previous annual meeting. Approve
-----------------------------------------------------------------------------------------------------------------------------------
(8) Confidential voting Approve
-----------------------------------------------------------------------------------------------------------------------------------
----------
(1) Because the Adviser primarily invests its clients' assets in
securities of foreign issuers, the Adviser generally has not been receiving
proxy statements from such issuers because the laws of the countries in which
these issuers are domiciled respecting delivery of proxy statements to
shareholders are different than those of the U.S.
------------------------------------------------------------------------------------------------------------------------------------
Confidential voting is most often proposed by shareholders as a means of eliminating undue management
pressure on shareholders regarding their vote on proxy issues.
The Adviser will generally approve these proposals as shareholders can later divulge their votes to
management on a selective basis if a legitimate reason arises.
------------------------------------------------------------------------------------------------------------------------------------
(9) Limiting directors' liability Approve
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(10) Eliminate preemptive right Approve
Preemptive rights give current shareholders the opportunity to maintain their current percentage ownership
through any subsequent equity offerings. These provisions are no longer common in the U.S., and can restrict
management's ability to raise new capital.
The Adviser approves the elimination of preemptive rights, but will oppose the elimination of limited
preemptive rights, e.g., on proposed issues representing more than an acceptable level of total dilution.
------------------------------------------------------------------------------------------------------------------------------------
(11) Employee Stock Purchase Plan Approve
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(12) Establish 401(k) Plan Approve
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(13) Rotate annual meeting location/date Approve
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(14) Establish a staggered Board Approve
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(15) Eliminate director mandatory retirement policy Case-by-Case
------------------------------------------------------------------------------------------------------------------------------------
(16) Option and stock grants to management and directors Case-by-Case
------------------------------------------------------------------------------------------------------------------------------------
(17) Allowing indemnification of directors and/or officers after reviewing the applicable laws and Case-by-Case
extent of protection requested.
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