SEC Form N-CSRS/A filed by Herzfeld Caribbean Basin Fund Inc. (Amendment)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM N-CSR/A

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT

COMPANIES

 

Investment Company Act file number 811-06445

 

The Herzfeld Caribbean Basin Fund, Inc.

(Exact name of registrant as specified in charter)

 

119 Washington Ave. Suite 504, Miami Beach, FL 33139

(Address of principal executive offices) (Zip code)

 

Erik M. Herzfeld

119 Washington Ave. Suite 504, Miami Beach, FL 33139

(Name and address of agent for service)

 

Copies to:

 

Joseph V. Del Raso, Esq.

Troutman Pepper Hamilton Sanders LLP

3000 Two Logan Square

18th and Arch Streets

Philadelphia, PA 19103

 

Registrant's telephone number, including area code: 305-777-1660

 

Date of fiscal year end: June 30

 

Date of reporting period: July 1, 2023 to December 31, 2023

 

Explanatory Note: The Registrant is filing this amendment to its Form N-CSR for the fiscal period ended December 31, 2023, originally filed with the Securities and Exchange Commission on March 7, 2024 (Accession Number 0001580642-24-001504). The sole purpose of this amendment is to add iXBRL tagging to the financial statements included in the filing.  Except as set forth above, this amendment does not amend, update or change any other items or disclosures found in the original Form N-CSR filing.

 

 

ITEM 1. REPORT TO STOCKHOLDERS.

 

The Semi-Annual Report to Stockholders is filed herewith.

 

(a)

 

 

 

 

 

The Herzfeld Caribbean
Basin Fund, Inc.

119 Washington Avenue, Suite 504
Miami Beach, FL 33139
(305) 777-1660

 

Investment Advisor

HERZFELD/CUBA
a division of Thomas J. Herzfeld Advisors, Inc.
119 Washington Avenue, Suite 504
Miami Beach, FL 33139
(305) 777-1660

 

Administrator, Transfer Agent
and Fund Accountant

Ultimus Fund Solutions, LLC
225 Pictoria Drive, Suite 450
Cincinnati, OH 45246

 

Sub-Transfer Agent

Equiniti Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219

 

Custodian

Fifth Third Bank N.A.
Fifth Third Center
38 Fountain Square Plaza
Cincinnati, OH 45263

 

Counsel

Troutman Pepper Hamilton Sanders LLP
3000 Two Logan Square
18th and Arch Streets
Philadelphia, PA 19103

 

Independent Registered Public Accounting Firm

Tait, Weller & Baker LLP
50 South 16th Street, Suite 2900
Philadelphia, PA 19102

 

The Herzfeld Caribbean Basin Fund, Inc.’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 include, among others, Cuba, Jamaica, Trinidad and Tobago, the Bahamas, the Dominican Republic, Barbados, Aruba, Haiti, the former Netherlands Antilles, the Commonwealth of Puerto Rico, Mexico, Honduras, Guatemala, Belize, Costa Rica, Panama, Colombia, the United States, Guyana and Venezuela (“Caribbean Basin Countries”). The Fund invests at least 80% of its total assets in equity and equity-linked securities of issuers, including U.S.-based companies which engage in substantial trade with, and derive substantial revenue from, operations in Caribbean Basin Countries.

 

Listed NASDAQ Capital Market
Symbol: CUBA

 

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Letter to Stockholders (unaudited)

 

 

Dear Fellow Stockholders,

 

We are pleased to present our Semi-Annual Report for the six-month period ended December 31, 2023. On that date, the Fund’s net asset value (“NAV”) per share (reflecting NAV dilution from the Rights Offering (defined below)) was $3.49, down 27.07% over the six months then ended, adjusted for distributions. The Fund’s share price closed the period at $2.78 per share, a decline of 26.24% over the same semi-annual time period, adjusted for distributions. For calendar year 2023, the Fund’s net asset value per share (reflecting NAV dilution from the Rights Offering) and market price declined 14.45% and 13.60%, respectively, in each case adjusted for distributions. During the six-month period, the discount to NAV was relatively unchanged narrowing from -20.52% to -20.34%. Notwithstanding the NAV dilution from the Rights Offering, the underlying holdings performed well during the period and for the calendar year as evidenced by aggregate increases in net assets of 6.48% for the period and 24.98% for the calendar year.

 

Thomas J. Herzfeld Chairman and Portfolio Manager

 

The Fund completed a non-transferable rights offering (the “Rights Offering”) on December 13, 2023 which resulted in the issuance of nine million (9,000,000) additional shares of common stock at a price of $2.31 per share, reflecting NAV dilution per share of $1.6053.

 

The Fund seeks long-term capital appreciation through investment in companies that we believe are poised to benefit from economic, political, structural, and technological developments in the Caribbean Basin. Part of the investment strategy focuses on companies in the region that we believe would benefit from the resumption of U.S. trade with Cuba. Since it is impossible to predict when the U.S. embargo will be lifted, we have concentrated on investments that we believe can do well even if there is no political or economic change with respect to Cuba.

 

Caribbean Basin Update

 

Growth in the Caribbean Basin economies was strong in 2023 providing a positive investment backdrop. The main drivers of growth have been increases in American tourist arrivals, oil production, and “nearshoring” of supply chains.

 

“Nearshoring” of U.S. supply chains refers to a shift from the use of off-shore suppliers (particularly suppliers located in Asia) to suppliers that are more strategically located in the Western Hemisphere. There are a number of factors that have led to this shift including continuing political tensions with China and historical difficulties in receiving

 

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Letter to Stockholders (unaudited) (continued)

 

 

inventories from Asian suppliers during the COVID and post-COVID period. As a result, Caribbean economies are benefitting as U.S. companies shift to supply partners closer to home. For example, Mexico is now the largest U.S. trading partner in dollars, surpassing China. Responding to nearshoring trends, Jamaica is making strategic investments in its ports to enable increased export of Jamaican agricultural products to the U.S. and abroad. We believe the nearshoring trend will provide a long-term positive impact in the region and add diversity to an economic base that was previously heavily weighted to tourism, banking, and commodities.

 

Erik M. Herzfeld President and Portfolio Manager

 

Positive movements in the region’s oil and gas industry have also been a driver of growth during the period. Guyana’s massive offshore oil discovery is turning one of the most impoverished countries in Latin America into one of its richest, driving not only oil related industries but the general service sector as well. The newfound riches for Guyana have inflamed tensions with neighboring Venezuela as the Maduro government has claimed the Essequibo area of Guyana as part of Venezuela. However, the border dispute has not stopped oil production offshore which is nearly 400 thousand barrels a day and expected to triple over the next few years.

 

With respect to the important tourism sector, the majority of Caribbean nations continue to see double-digit year-over-year growth in visitors as a result of the resilient economy in the U.S. Only the U.S. Virgin Islands saw a decline of 3.8% in visitors while the Cayman Islands and British Virgin Islands both saw visitors increase 60.5% combined year-over-year. As recession fears abate in the U.S. and the Federal Reserve is poised to start cutting rates, we believe continued growth in arrivals to the Caribbean will continue.

 

Cuba also saw a sharp uptick in visitor arrivals in 2023 after a disastrous few years since the pandemic. The number of tourism arrivals in Cuba still remains well below its pre-pandemic high which has contributed to a shrinking economy. With U.S. trade restrictions still in place, the Cuban economy continues to weaken, resulting in an acceleration of the number of Cubans fleeing the country for the U.S. Over the last two years, an estimated 400,000 Cubans have emigrated to the U.S., further impacting Cuba’s economy.

 

The Cuban government is arguably at its weakest point in the last 60 years. This has led to a loosening of socialist policies that allow for more capitalism, resulting in a growing entrepreneurial small business sector. In our annual report, we mentioned a shift in U.S. policy may be coming soon per discussions we have had with private citizens currently doing business in Cuba and signs emanating from the Biden Administration. Among the specific policy shifts expected is a proposal to allow Cuban citizens to open bank accounts with U.S. banks. This would provide fuel for entrepreneurial small business owners, helping to drive growth in Cuba. While we believe that a policy shift may still come to pass, we are concerned that these issues will take a back seat to other issues facing the administration, including the expanding war in the Middle East, the continuing war in the Ukraine, and of course the upcoming November elections.

 

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Letter to Stockholders (unaudited) (continued)

 

 

Portfolio

 

With the Federal Reserve pausing interest rate hikes and signaling three cuts by the end of 2024, our bank holdings continued to rebound after the March 2023 banking crisis that engulfed U.S. banks. Energy also saw strong gains in the period. Our holdings in utilities were mixed as higher rates continued to compete with defensive stocks for investment dollars. Additionally, a slow start to infrastructure spending in the U.S. following the landmark passage of the Inflation Reduction Act and Bipartisan Infrastructure Law resulted in weak performance from companies expected to benefit from that legislation.

 

Ryan M. Paylor Portfolio Manager

 

The largest gainer in the period was Consolidated Water Co. Ltd. (CWCO), which gained 47.81% on the back of record revenues of $49.85 million for the most recent quarter. The company has seen significant growth in its services segment which now makes up 50% of revenues. Additionally, water scarcity is becoming a more visible issue globally as drought threatens agriculture, global population increases, and manufacturing growth draws on supply. As a result, water desalination, recycling and reuse technologies are seeing significant investments which are benefitting CWCO. The negative effects of climate change along with the factors impacting supply cited above are resulting in more demand for CWCO’s products and services which we do not see changing anytime in the near-term.

 

Our bank holdings all saw double-digit gains in the period, increasing between 14.69% and 45.61%. OFG Bancorp (OFG) was the biggest gainer in the period while Popular Inc. (BPOP) and First Bancorp (FBP) were not far behind rising 37.90% and 37.27% respectively. As we stated in previous communications, we believed Puerto Rican banks were well insulated from the turmoil on the mainland and our portfolio was rewarded over the period. Banco Latinoamericano de Comercio Exterior (BLX), known as Bladex, gained 14.69% in the period. We continue to believe banks servicing the Caribbean and Latin America are poised for a pickup in growth as nearshoring leads to more investment in the region. Additionally, the region is expected to benefit from stronger growth relative to the rest of the world and war in the Middle East is increasing demand for alternative routes for trade. Bladex’s expertise is in trade finance for Latin America and the Caribbean, which is expected to expand due to changes in supply chains but also global increases in commodity demand.

 

Another top performer in the period was PGT Innovations Inc. (PGTI) which gained 39.62% over the last half of 2023. PGTI has been the target of a bidding war between Masonite and Miter Brands which has resulted in a $41 bid from Masonite and a $41.5 bid from Miter Brands. At the present time, PGTI has not decided which offer to accept but we believe there to be limited price upside from the most recent bids.

 

The largest detractor over the six-month period was MasTec Inc. (MTZ) which declined 35.81%. We are among the investors expecting a boom in infrastructure spending following the passage of the Inflation Reduction Act and Bipartisan Infrastructure Law

 

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Letter to Stockholders (unaudited) (continued)

 

 

and have been disappointed so far as rising interest rates and rising inflation costs resulted in cancellations and postponements of proposed projects. MasTec’s acquisition spree over the course of the last few years helped diversify the company’s business away from large clients like AT&T and should bode well for future growth. However, increased debt interest as part of this growth initiative has resulted in a decline in free cash flow and a pause in share repurchases since 2020. With inflation declining and the Fed poised to cut rates in 2024, we expect a pickup in infrastructure projects as the economics improve. MasTec should therefore be able to concentrate on paying down debt and resuming share repurchases.

 

Marriot Vacations Worldwide Corporation (VAC) also struggled in the second half, declining 29.71%. The vacation ownership, rental, and property manager saw record revenues in 2022 only for growth to stagnate in 2023. VAC was able to weather the pandemic without having to add significant debt like many of its peers in the hospitality and lodging business. This allowed the company to repurchase shares and continue to raise its dividend. While the flat growth was not part of our forecast, the company is generating enough free cash flow to increase share repurchases and the dividend. At a 1 year forward PE of 10, manageable debt maturities, and increasing return of capital to shareholders, we believe the stock price will rise even if revenues remain unchanged for the second year in a row.

 

Becle SAB de CV (CUERVO) was another weak performer in the period, declining 18.69%. The Mexican beverage company experienced its first annual decline in revenues since it went public in 2017. An appreciating Mexican peso along with higher input costs led to declines in sales and lower gross margins as foreign buyers’ purchasing power decreased. Also, overall weakness in the alcoholic beverage market due to inflation and changing tastes weighed on valuations as CUERVO’s peers saw similar weakness in 2023. The company is poised to rebound as inflation declines and currency volatility decreases. CUERVO is the leader in the tequila market with 30% of market share. They have also diversified their brands into vodka, whiskey, gin, rum, and ready-to-drink offerings. The company is estimated to return to sales growth in 2024 and with a lower leverage profile than its peers. As a result, we believe CUERVO should trade at a premium to its peer group.

 

Outlook

 

After two years of interest rate hikes across the globe implemented to combat inflation, global central banks are projecting interest rate cuts over the next year. Even with tightening monetary policy at its peak, the Caribbean was able to deliver real GDP growth of 9.8% in 2023. With less restrictive monetary policy going forward in 2024 and the resulting increasing chances of a “soft landing” in the Americas, Caribbean economies should be major beneficiaries of discretionary spending on travel along with increased investment in commodities and nearshoring infrastructure. The Fund’s recent Rights Offering that was concluded in December has increased our ability to deploy capital in the region to take advantage of what we view as an attractive investment backdrop. Guyana is already seeing a “gold rush” of sorts with investors flocking to the country to invest in the fastest growing economy in the world. We believe there will be ancillary benefits

 

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Letter to Stockholders (unaudited) (continued)

 

 

in surrounding countries as banking, infrastructure, and trade finance will be needed to support growth.

 

There has already been significant investment in nearshoring in Mexico as U.S. trade decouples from China and other overseas supply chains reliant upon adversarial countries. As discussed above, we believe there are significant opportunities in the Caribbean to take advantage of nearshoring.

 

We continue to be bullish on cruise lines, maintaining an overweight position in the industry. The return of profitability should allow them to retire and refinance higher cost debt issued during the pandemic. The potential for lower rates also provides them a tailwind to lower financing costs. We also remain overweight companies we believe will benefit from the Inflation Reduction Act and Bipartisan Infrastructure Law as lower rates should result in more projects coming back online as cost of capital declines.

 

Largest Allocations

 

The following tables present our largest investment and geographic allocations¹ as of December 31, 2023.

 

Geographic Allocation	% of Net Assets	Largest Portfolio Positions	% of Net Assets
USA	33.55%	Royal Caribbean Cruises Ltd.	6.88%
Mexico	20.88%	Norwegian Cruise Line Holdings Ltd.	6.65%
Puerto Rico	14.78%	New Fortress Energy, Inc.	6.28%
Panama	8.12%	MasTec, Inc.	5.24%
Liberia	6.88%	First BanCorp.	4.99%
Bermuda	6.65%	Popular, Inc.	4.69%
Netherlands	6.61%	NextEra Energy, Inc.	4.40%
Bahamas	1.07%	Martin Marietta Materials, Inc.	4.30%
Cayman Islands	0.83%	Cemex S.A.B. de C.V.	4.15%
Cuba	0.00%	Playa Hotels and Resorts	3.46%
Money Market	12.65%
Liabilities in excess of other assets	-12.02%
	100.00%

 

Quarterly Distributions in Stock and Cash

 

On December 29, 2023, under the Fund’s managed distribution policy (the “Policy”), we announced a quarterly distribution in the amount of $0.135375 per share for common stockholders to be paid January 31, 2024. The distribution will be paid in cash or shares

 

1	Geographic allocation is determined by the issuer’s legal domicile.

 

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Letter to Stockholders (unaudited) (continued)

 

 

of our common stock at the election of stockholders. The distribution in stock and cash is consistent with the Fund’s most recent prior quarterly distributions.

 

The total amount of cash distributed to all stockholders will be limited to 20% of the total distribution to be paid excluding any cash paid for fractional shares. The remainder of the distribution (approximately 80%) will be paid in the form of shares of our common stock. The exact distribution of cash and stock to any given stockholder will be dependent upon his/her election as well as elections of other stockholders, subject to the pro-rata limitations.

 

We believe this cash and stock distribution will allow the Fund to strengthen its balance sheet and to be in position to capitalize on potential future investment opportunities.

 

The primary purpose of the Policy is to provide stockholders with a constant, but not guaranteed, fixed minimum rate of distribution each quarter (currently set at the annual rate of 15% of the Fund’s net asset value as determined on December 19, 2023 and payable in quarterly installments). The Fund cannot predict what effect, if any, the Policy will have on the market price of its shares or whether such market price will reflect a greater or lesser discount to net asset value as compared to prior to the adoption of the Policy.

 

Results of Rights Offering

 

On December 18, 2023, the Fund announced the final results of its non-transferable rights offering (the “Offering”) that expired on December 13, 2023 (the “Expiration Date”). The Fund issued a total of 9,000,000 new shares of common stock as a result of the Offering. The Offering’s final subscription price per share was determined to be $2.31. The subscription price was established pursuant to the terms of the Offering and based on a formula equal to 92% of the volume weighted average closing sales price of a share of common stock on the NASDAQ Capital Market on the Expiration Date of the Offering and the four preceding trading days. The Offering was oversubscribed and the over-subscription requests exceeded the primary subscription shares available (i.e., 7,150,673 shares). The Board of Directors of the Fund determined to issue an additional 25.86% of the number of shares issued in the primary subscription, or 1,849,327 additional shares, for a total issuance of 9,000,000 new shares of common stock. The shares issued as part of the oversubscription privilege of the Offering were allocated pro rata among record

 

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Letter to Stockholders (unaudited) (continued)

 

 

date stockholders who submitted over-subscription requests based on the number of rights originally issued to them by the Fund. Gross proceeds from the Offering, before any expenses of the Offering, totaled approximately $20.8 million.

 

Thomas J. Herzfeld Chairman of the Board and Portfolio Manager	Erik M. Herzfeld President and Portfolio Manager	Ryan M. Paylor Portfolio Manager

 

The above commentary is for informational purposes only and does not represent an offer, recommendation or solicitation to buy, hold or sell any security. The commentary is intended to assist stockholders in understanding our performance during the six months ended December 31, 2023. The views and opinions in this letter were current as of February 29, 2024. Statements other than those of historical facts included herein may constitute forward-looking statements regarding management’s future expectations, beliefs, intentions, goals, strategies, plans or prospects, including statements relating to management’s beliefs that the cash and stock distribution will allow the Fund to strengthen its balance sheet and to be in a position to capitalize on potential future investment opportunities, when there can be no assurance either will occur, and other factors may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act, with respect to the Fund’s future financial or business performance, strategies or expectations. Nothing herein should be relied upon as a representation as to the future performance or portfolio holdings of the Fund. We undertake no duty to update any forward-looking statement made herein. The specific securities identified and described do not represent all of the securities purchased or sold and you should not assume that investments in the securities identified and discussed will be profitable. Portfolio composition is subject to change.

 

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Investment Results (unaudited)

 

 

Average Annual Total Returns*
(For the periods ended December 31, 2023)

 

	Six Months	One Year	Five Year	Ten Year
The Herzfeld Caribbean Basin Fund
Net asset value per share	-27.07%	-14.45%	0.08%	-1.44%
Market value per share	-26.24%	-13.60%	3.68%	-1.04%
S&P 500® Index**	8.04%	26.29%	15.69%	12.03%
MSCI Emerging Markets ex Asia Index ***	8.95%	18.17%	2.55%	0.16%

 

Total annual operating expenses, as disclosed in the Herzfeld Caribbean Basin Fund (the “Fund”) Form N-2 dated August 23, 2023, as amended October 24, 2023, were 3.45% of average daily net assets. During the six months ended December 31, 2023, the Advisor’s voluntarily waived its management fee by 10 basis points (from 1.45% to 1.35%) in support of the Fund’s initiative to attempt to reduce the stock price discount to net asset value. Effective November 22, 2023, the Advisor has further agreed to voluntarily waive its management fee on the Fund’s net assets in excess of $30 million by an additional ten (10) basis points. Accordingly, the Adviser’s management fee after the voluntary waivers is (i) 1.35% of the Fund’s assets up to and including $30 million and (ii) 1.25% of the Fund’s assets in excess of $30 million. Additional information pertaining to the Fund’s expense ratios as of December 31, 2023 can be found in the financial highlights.

 

The performance quoted represents past performance, which does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. The Fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling (305) 777-1660.

 

*

Return figures reflect any change in price per share and assume the reinvestment of all distributions. The Fund’s returns reflect any fee reductions during the applicable periods. If such fee reductions had not occurred, the quoted performance would have been lower. Total returns for periods less than 1 year are not annualized.

**

The S&P 500® Index is a widely recognized unmanaged index of equity securities and is representative of a broader domestic equity market and range of securities than is found in the Fund’s portfolio. Individuals cannot invest directly in the index; however, an individual can invest in exchange traded funds or other investment vehicles that attempt to track the performance of a benchmark index.

***

The MSCI Emerging Markets ex Asia Index (the “Index”) captures large and mid cap representation across 15 Emerging Markets countries (Brazil, Chile, Colombia, Czech Republic, Egypt, Greece, Hungary, Mexico, Peru, Poland, Qatar, Saudi Arabia, South Africa, Turkey and United Arab Emirates). With 247 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country excluding Asia. The index is representative of a broader domestic equity market and range of securities than is found in the Fund’s portfolio. Individuals cannot invest directly in the index; however, an individual can invest in exchange traded funds or other investment vehicles that attempt to track the performance of a benchmark index.

 

The Fund’s investment objectives, strategies, risks, charges and expenses must be considered carefully before investing. The prospectus contains this and other important information about the Fund and may be obtained by calling the same number as above. Please read it carefully before investing.

 

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Schedule of Investments as of December 31, 2023 (unaudited)

 

 

	Shares or Principal Amount			Description		Fair Value
Common Stocks — 99.37% of net assets
Aerospace and Defense — 2.92%
		129,206		AerSale Corp.*		$	1,640,270
Airlines — 3.45%
		18,250		Copa Holdings, S.A.			1,940,157
Banking and finance — 16.82%
		62,089		Banco Latinoamericano de Comercio Exterior, S.A.			1,536,082
		16,956		Evertec, Inc.			694,179
		170,604		First BanCorp. (Puerto Rico)			2,806,436
		47,454		OFG Bancorp			1,778,576
		32,123		Popular, Inc.			2,636,335
Communications — 0.93%
		10,698		América Móvil, S.A.B. de C.V. Class B ADR			198,127
		209,144		América Móvil, S.A.B. de C.V.			193,869
		479,175		Fuego Enterprises, Inc.*1			20,652
		207,034		Grupo Radio Centro S.A.B. de C.V.*			40,845
		2		Sitios LatinoAmerica S.A.B. de C.V.			1
		31,172		Spanish Broadcasting System, Inc.*			22,756
		33,226		Telesites S.A.B. Series B-1			46,590
Construction and related — 18.44%
		300,645		Cemex, S.A.B. de C.V. ADR*			2,329,999
		20		Ceramica Carabobo Class A ADR*1			—
		4,840		Martin Marietta Materials, Inc.			2,414,724
		38,872		MasTec, Inc.*			2,943,388
		32,117		PGT Innovations, Inc.*			1,307,162
		6,019		Vulcan Materials Company			1,366,373
Food, beverages and tobacco — 5.77%
		725,025		Becle, S.A.B. de C.V.			1,419,717
		18,900		Fomento Económico Mexicano, S.A.B. de C.V. Series UBD			246,499
		12,110		Fomento Económico Mexicano, S.A.B. de C.V. ADR			1,578,538

 

 

See accompanying notes to the financial statements.

 

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Schedule of Investments as of December 31, 2023 (unaudited)

 

 

	Shares or Principal Amount			Description		Fair Value
Housing — 2.78%
		10,500		Lennar Corporation		$	1,564,920
Investment companies — 0.04%
		70,000		Waterloo Investment Holdings Ltd.*1			24,500
Leisure — 21.87%
		58,603		Carnival Corporation*			1,086,500
		12,424		Marriott Vacations Worldwide Corporation			1,054,673
		18,657		Norwegian Cruse Line Holdings Ltd.*			3,739,023
		224,558		Playa Hotels and Resorts N.V.*			1,942,427
		42,765		OneSpaWorld Holdings Ltd.*			602,987
		29,863		Royal Caribbean Cruises Ltd.*			3,866,960
Machinery — 0.72%
		228,237		Grupo Rotoplas S.A.B. de C.V.			406,332
Mining — 1.17%
		117,872		Grupo México, S.A.B. de C.V. Series B			655,161
Oil & Gas Services & Equipment — 3.15%
		129,000		SBM Offshore N.V.			1,773,074
Real Estate Owners & Developers — 2.71%
		38,412		Corporacion Inmobilaria Vesta SAB de CV ADR			1,521,883
Retail — 3.33%
		14,270		Grupo Elektra, S.A.B. de C.V. Series CPO			987,526
		210,222		Wal-Mart de México, S.A.B. de C.V. Series V			883,838
Transportation infrastructure — 2.19%
		4,175		Grupo Aeroportuario ADR			1,228,577
Trucking and marine freight — 0.87%
		137		Seaboard Corporation			489,104

 

 

See accompanying notes to the financial statements.

 

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Schedule of Investments as of December 31, 2023 (unaudited)

 

 

	Shares or Principal Amount			Description		Fair Value
Utilities — 11.51%
		23,200		Caribbean Utilies Ltd. Class A		$	247,544
		6,092		Consolidated Water Company Ltd.			216,875
		700		Cuban Electric Company*1			—
		40,697		NextEra Energy, Inc.			2,471,936
		93,602		New Fortress Energy, Inc., Class A			3,531,603
Other — 0.70%
		55,921		Margo Caribe, Inc.*			391,447
		79		Siderurgica Venezolana Sivensa, S.A. Series B*1			—
Total common stocks (cost $39,658,345)							55,848,165
		Bonds — 0.00% of net assets
	$	165,000		Republic of Cuba - 4.5%, 1977 - in default*1			—
Total bonds (cost $63,038)							—
Money Market Funds — 12.65%
		7,111,962		Federated Hermes Government Obligations Fund, Institutional Class, 5.23%2			7,111,962
Total money market funds (cost $7,111,962)							7,111,962
Total investments (cost $46,833,345) — 112.02% of net assets							62,960,127
Liabilities in excess of other assets — (12.02)% of net assets							(6,757,777	)
Net assets — 100%						$	56,202,350

 

 

See accompanying notes to the financial statements.

 

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Schedule of Investments as of December 31, 2023 (unaudited)

 

 

The investments are concentrated in the following geographic regions³ (as percentages of net assets)(unaudited):

 

USA	33.55%
Mexico	20.88%
Puerto Rico	14.78%
Panama	8.12%
Liberia	6.88%
Bermuda	6.65%
Netherlands	6.61%
Other, individually under 5%**	2.53%
	100.00%

 

1	Securities have been fair valued in good faith, by the Advisor as “valuation designee”, using fair value methodology approved by the Board of Directors. Fair valued securities comprised 0.08% of net assets.

2	Rate disclosed is the seven day effective yield as of December 31, 2023.

3	Geographic allocation is determined by the isser’s legal domicile.

*	Non-income producing

**	Amount includes liabilities in excess of other assets of (12.02)%.

 

See accompanying notes to the financial statements.

 

- 14 -

 

 

Statement of Assets and Liabilities as of December 31, 2023 (unaudited)

 

 

ASSETS
Investments in securities, at fair value (cost $46,833,345) (Notes 2 and 3)						$	62,960,127
Dividends receivable							55,144
Deferred offering costs (shelf) (Note 7)							67,342
Other assets							38,119
TOTAL ASSETS							63,120,732
LIABILITIES
Distributions payable		$	2,186,397
Payable for investments purchased			4,578,083
Accrued investment advisor fee (Note 4)			49,676
Accrued administrator fees			5,981
Accrued professional fees			14,572
Accrued trustee fees			34,152
Accrued other expenses			49,521
TOTAL LIABILITIES							6,918,382
NET ASSETS (Equivalent to $3.48 per share based on 16,150,673 shares outstanding)						$	56,202,350
Net assets consist of the following:
Common stock, $0.001 par value; 100,000,000 shares authorized; 16,150,673 shares issued and outstanding
Paid-in capital							42,663,901
Accumulated earnings							13,538,449
NET ASSETS						$	56,202,350

 

 

See accompanying notes to the financial statements.

 

- 15 -

 

 

Statement of Operations For the Six Months Ended December 31, 2023 (unaudited)

 

 

INVESTMENT INCOME
Dividends (net of foreign withholding tax of $9,732)						$	309,750
Total investment income							309,750
EXPENSES
Investment advisor fees (Note 4)		$	259,712
Director fees			64,674
Legal fees			51,888
Administration fees (Note 4)			34,898
Compliance and operational support services fees (Note 4)			30,164
Tender offer fees (Note 7)			29,519
Audit fees			20,779
Listing fees			17,598
Insurance fees			15,225
Transfer agent fees			15,084
Printing and postage fees			12,508
Quarterly distribution fees			8,755
Proxy mailing and filing fees			6,745
Custodian fees			3,013
Other fees			21,277
Total expenses							591,839
Fees voluntarily waived by investment advisor							(19,149	)
Net operating expenses							572,690
NET INVESTMENT LOSS							(262,940	)
NET REALIZED AND CHANGE IN UNREALIZED GAIN/LOSS ON INVESTMENTS
Net realized gain on investments and foreign currency			113,550
Change in unrealized appreciation/depreciation on investments and foreign currency			2,355,329
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY							2,468,879
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS						$	2,205,939

 

 

See accompanying notes to the financial statements.

 

- 16 -

 

 

Statements of Changes in Net Assets

 

 

		Six Months Ended December 31, 2023 (unaudited)				For the Year Ended June 30, 2023
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
Net investment loss		$	(262,940	)		$	(419,266	)
Net realized gain on investments and foreign currency			113,550				725,551
Change in unrealized appreciation/depreciation on investments and foreign currency			2,355,329				7,533,181
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS			2,205,939				7,839,466
DISTRIBUTIONS TO STOCKHOLDERS
From earnings			—				(714,706	)
Return of capital			(2,186,397	)			(3,893,734	)
TOTAL DISTRIBUTIONS			(2,186,397	)			(4,608,440	)
CAPITAL TRANSACTIONS
Proceeds from rights offering of 9,000,000 and 0 shares of newly issued common stock, respectively (Note 7)			20,607,216				—
Reinvestment of distributions, 0 and 935,753 shares issued, respectively			—				3,686,258
Payments for 0 and 338,382 shares repurchased, respectively			—				(1,685,921	)
NET INCREASE (DECREASE) IN NET ASSETS FROM COMMON STOCK TRANSACTIONS			20,607,216				2,000,337
TOTAL INCREASE (DECREASE) IN NET ASSETS			20,626,758				5,231,363
NET ASSETS
Beginning of period			35,575,592				30,344,229
End of period		$	56,202,350			$	35,575,592

 

 

See accompanying notes to the financial statements.

 

- 17 -

 

 

Financial Highlights

 

 

		Six Months Ended December 31, 2023*				Year Ended June 30
		(unaudited)				2023				2022				2021				2020				2019
Selected Per Share Data:
Net asset value, beginning of period		$	4.98			$	4.63			$	7.06			$	4.76			$	7.59			$	8.00
Operations:
Net investment loss1			(0.03	)			(0.06	)			(0.14	)			(0.13	)			(0.10	)			(0.08	)
Net realized and unrealized gain (loss) on investment			0.27				1.19				(1.07	)			3.04				(1.72	)			(0.02	)
Total from investment operations			0.24				1.13				(1.21	)			2.91				(1.82	)			(0.10	)
Less distributions to shareholders from:
Net realized gains			—				(0.10	)			(0.23	)			—				(0.11	)			(0.31	)
Return of capital			(0.14	)			(0.59	)			(0.83	)			(0.62	)			(0.90	)			—
Total distributions			(0.14	)			(0.69	)			(1.06	)			(0.62	)			(1.01	)			(0.31	)
Anti-dilutive effect due to common stock repurchases			—				0.01				0.01				0.01				—				—
Dilutive effect due to dividend reinvestment			—				(0.10	)			(0.17	)			—				—				—
Dilutive effect due to rights offering			(1.60	)			—				—				—				—				—
Net asset value, end of period		$	3.48			$	4.98			$	4.63			$	7.06			$	4.76			$	7.59
Per share market value, end of period		$	2.78			$	3.95			$	4.01			$	6.27			$	3.70			$	6.36
Total Investment return based on market value per share2			(27.28)	%3			16.24	%			(22.50	)%			91.31	%			(27.37	)%			2.16	%
Ratios and Supplemental Data:
Net assets, end of period (000 omitted)		$	56,202			$	35,576			$	30,344			$	41,147			$	29,196			$	46,542
Ratio of expenses to average net assets after waiver			3.56	%4			3.35	%			3.47	%			3.15	%5			3.10	%			2.79	%
Ratio of expenses to average net assets before waiver			3.66	%4			3.45	%			3.57	%			3.25	%5			3.20	%			2.79	%
Ratio of net investment loss to average net assets after waiver			(1.46)	%4			(1.30	)%			(2.17	)%			(2.14	)%5			(1.51	)%			(1.06	)%
Portfolio turnover rate			2	%3			7	%			9	%			12	%			8	%			6	%

 

*

Includes adjustments in accordance with accounting principles generally accepted in the United States and, consequently, the net asset values for financial reporting purposes and the returns based upon those net asset values may differ from the net asset values and returns for shareholder transactions.

1	Computed by dividing the respective period’s amounts from the Statement of Operations by the average outstanding shares for each period presented.

2

Total investment return is calculated assuming a purchase of common stock at the current market price on the first day and a sale at the current market price on the last day of each period reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at actual prices pursuant to the Fund’s Dividend Reinvestment Plan.

3	Not Annualized.

4	Annualized.

5	This figure includes expenses incurred as a result of the expiration of the Fund’s shelf registration. The overall impact on the Fund’s ratios is an increase of 0.06% (Note 7).

 

 

 

 

See accompanying notes to the financial statements.

 

- 18 -

 

 

Notes to Financial Statements (unaudited)

 

 

NOTE 1. 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, as amended, and follows accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, “Financial Services - Investment Companies”. 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 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 (collectively, “Caribbean Basin Companies”). Under normal conditions, the Fund invests at least 80% of its total assets in equity and equity-linked securities of Caribbean Basin Countries. This 80% policy may be changed without stockholder approval upon sixty days written notice to stockholders. 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.

 

Under the Fund’s organizational documents, its Officers and Directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would involve any future potential claims that may be made against the Fund. However, based on experience, management expects the risk of loss to be remote.

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Security Valuation

 

In accordance with accounting principles generally accepted in the United States of America (“GAAP”), fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

 

In determining fair value, the Fund uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.

 

Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s assumptions about the inputs market participants

 

- 19 -

 

 

Notes to Financial Statements (unaudited) (continued)

 

 

would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:

 

Level 1:

Unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access.

 

Level 2:

Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. These inputs may include quoted prices for the identical instrument on an active market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates, and similar data.

 

Level 3:

Unobservable inputs for the asset or liability to the extent that relevant observable inputs are not available, representing the Fund’s own assumptions about the assumptions that a market participant would use in valuing the asset or liability, and that would be based on the best information available.

 

The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Fund in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls, is determined based on the lowest level input that is significant to the fair value measurement.

 

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Fund’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Fund uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.

 

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

 

- 20 -

 

 

Notes to Financial Statements (unaudited) (continued)

 

 

for which quotations are not readily available are valued at fair value as determined, in good faith, by the Advisor, as “valuation designee” under the oversight of the Board of Directors.

 

The following table summarizes the classification of the Fund’s investments by the above fair value hierarchy levels as of December 31, 2023:

 

		Level 1				Level 2				Level 3				Total
Assets (at fair value)
Common Stocks
USA		$	18,806,909			$	—			$	45,152			$	18,852,061
Mexico			11,737,502				—				—				11,737,502
Puerto Rico			7,915,526				391,447				—				8,306,973
Panama			4,562,739				—				—				4,562,739
Liberia			3,866,960				—				—				3,866,960
Bermuda			3,739,023				—				—				3,739,023
Netherlands			3,715,501				—				—				3,715,501
Bahamas			602,987				—				—				602,987
Cayman			464,419				—				—				464,419
Bonds
Cuba			—				—				—				—
Money Market Funds			7,111,962				—				—				7,111,962
Total Investments in securities		$	62,523,528			$	391,447			$	45,152			$	62,960,127

 

The fair valued securities (Level 3) held in the Fund consisted of Cuban Electric Company, Ceramica Carabobo, Fuego Enterprises, Inc., Siderurgica Venezolana Sivensa S.A., Waterloo Investment Holdings Ltd. and Republic of Cuba 4.5% bond.

 

The following is a reconciliation of assets in which significant unobservable inputs (Level 3) were used to determine fair value as of December 31, 2023:

 

		Level 3
Balance as of 6/30/23		$	45,152
Sales			—
Realized gain/(loss)			—
Change in unrealized gain/(loss)			—
Transfer into Level 3			—
Transfer out of Level 3			—
Balance as of 12/31/23		$	45,152

 

Under procedures approved by the Board of Directors, the Advisor provides administration and oversight of the Fund’s valuation policies and procedures, which are reviewed at least

 

- 21 -

 

 

Notes to Financial Statements (unaudited) (continued)

 

 

annually by the Directors. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers and other market sources to determine fair value.

 

The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available. Under these procedures, the Advisor convenes on a regular and ad hoc basis to review such securities and considers a number of factors, including valuation methodologies and significant unobservable valuation inputs, when determining a fair value. The Advisor may employ a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discount may be applied due to the nature or duration of any restrictions on the disposition of investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The Advisor employs various methods for calibrating these valuation approaches including a regular view of valuation methodologies, key inputs and assumptions, transactional back-testing or disposition analysis and reviews of any related market activity.

 

The Fund adopted policies to comply with the SEC’s new Rule 2a-5 under the 1940 Act, which establishes a regulatory framework for registered investment company fair valuation practices. The Fund’s fair value policies and procedures and valuation practices were updated prior to the rule’s required compliance date of September 8, 2022. Under Rule 2a-5, the Fund’s Board of Directors designated the Advisor as the Fund’s “Valuation Designee” to make fair value determinations.

 

Income Recognition

 

Security transactions are recorded on the trade date. Gains and losses on securities sold are determined on the basis of identified cost. Dividend income is recognized on the ex- dividend date or in the case of certain foreign securities, as soon as the Fund is notified, and interest income is recognized on an accrual basis. 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. Withholding on foreign taxes have been provided for in accordance with the Fund’s understanding of the applicable country’s tax rules and rates.

 

Foreign Currency

 

The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts and investments denominated in a foreign currency, if any, are translated into U.S. dollar amounts at current exchange rates on the valuation date. Purchases and sales

 

- 22 -

 

 

Notes to Financial Statements (unaudited) (continued)

 

 

of investments denominated in foreign currencies are translated into U.S. dollar amounts at the exchange rate on the respective dates of such transactions.

 

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.

 

Counterparty Brokers

 

In the normal course of business, substantially all of the Fund’s money balances and security positions are custodied with the Fund’s custodian, Fifth Third Bank N.A. The Fund also transacts with other brokers. The Fund is subject to credit risk to the extent any broker with which it conducts business is unable to fulfill contractual obligations on its behalf. The Fund’s management monitors the financial condition of such brokers and does not anticipate any losses from these counterparties.

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with GAAP 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 of 1986, as amended, that are applicable to regulated investment companies and to distribute substantially all of 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 income or excise tax provision is required.

 

The Fund has adopted a June 30 year-end for federal income tax purposes.

 

Distributions to Stockholders

 

Under a managed distribution plan, for the six months ended December 31, 2023 the Fund paid distributions to stockholders payable in quarterly installments at an annual rate set at 15% of the Fund’s December 19, 2023 NAV. The quarterly distributions may be sourced from income, paid-in capital, and/or capital gains, if any. To the extent that sufficient investment income is not available on a quarterly basis, the Fund may distribute paid-in capital and/or capital gains, if any, in order to maintain its managed distribution level. The Board suspended the managed distribution plan in August 2023 and reinstated the managed distribution plan effective November 22, 2023.

 

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

 

- 23 -

 

 

Notes to Financial Statements (unaudited) (continued)

 

 

differ from GAAP. For the six months ended December 31, 2023, a distribution from return of capital of $0.135375 per share was declared on December 29, 2023.

 

Due to the timing of dividend distributions and the differences in accounting for income and realized gains and losses for financial statement and federal income tax purposes, the fiscal year in which the amounts are distributed may differ from the year in which the income and realized gains and losses are recorded by the Fund.

 

Derivatives Risk Management Program

 

The Fund adopted policies and procedures to comply with the SEC’s new Rule 18f-4 under the 1940 Act, which limits the amount of derivatives a fund can enter into, eliminates the asset segregation framework previously used by funds to comply with Section 18 of the 1940 Act, treats derivatives as senior securities and requires funds whose use of derivatives is more than a limited specified exposure amount to establish and maintain a comprehensive derivatives risk management program and when applicable, appoint a derivatives risk manager. The Fund adopted a derivatives risk management program to implement and comply with Rule 18f-4 prior to the SEC’s required compliance date of August 19, 2022 in the event it is required to rely on Rule 18f-4.

 

NOTE 3. RESTRICTED SECURITIES OWNED

 

Investments in securities include $165,000 principal, 4.5%, 1977 Republic of Cuba bonds, $140,000 purchased for $52,850 on February 15, 1995 and $25,000 purchased for $10,188 on April 27, 1995, that are currently segregated and restricted from transfer. The bonds were listed on the New York Stock Exchange (“NYSE”) and had been trading in default since 1960. A “regulatory halt” on trading was imposed by the NYSE in July 1995 and trading in the bonds was suspended as of December 28, 2006. The NYSE has stated that following the suspension of trading, application will be made to the Securities and Exchange Commission to delist the issue. As of December 31, 2023 the position was valued at $0 under procedures approved by the Board of Directors.

 

Investments in securities also include 700 shares of Cuban Electric Company, 482 shares purchased for $4,005 on September 30, 2005 and 218 shares purchased for $1,812 on September 30, 2005, which are currently segregated and restricted from transfer. As of December 31, 2023, the position was valued at $0 under procedures approved by the Board of Directors.

 

NOTE 4. TRANSACTIONS WITH AFFILIATES AND OTHER SERVICE PROVIDERS

 

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, 2023 amounted to $259,712, before the waiver described below. Mr. Thomas J. Herzfeld is the owner of the Advisor.

 

- 24 -

 

 

Notes to Financial Statements (unaudited) (continued)

 

 

The Advisor has agreed to voluntarily waive its management fee by ten basis points, in support of the Fund’s initiative to attempt to reduce the stock price discount to NAV. Effective November 22, 2023, the Adviser has further agreed to voluntarily waive its management fee on the Fund’s net assets in excess of $30 million by an additional ten basis points. Accordingly, the Adviser’s management fee after the voluntary waivers is (i) 1.35% of the Fund’s assets up to and including $30 million and (ii) 1.25% of the Fund’s assets in excess of $30 million. For the six months ended December 31, 2023, the Advisor waived fees in the amount of $19,149. As of December 31, 2023 the Fund owed the Advisor $49,676.

 

TMorgan Advisers, LLC (“TMA”) has been engaged by the Advisor to provide, among other things, certain compliance and operational support services with respect to the Fund, including the services of Mr. Thomas K. Morgan as the Fund’s chief compliance officer. The fees charged by TMA for services to the Fund are billed directly to the Fund by TMA. Fees charged by TMA and/or Mr. Morgan for services provided to the Advisor are paid directly by the Advisor. For the six months ended December 31, 2023, the total compliance and operational support services fees paid or payable by the Fund to TMA amounted to $30,164.

 

Other Service Providers

 

Under a Master Services Agreement between Ultimus Fund Solutions, LLC (“Ultimus”) and the Fund, Ultimus is responsible for fund administration, including generally managing the administrative affairs of the Fund, and supervising the preparation of reports to stockholders, reports to and filings with the SEC and materials for meetings of the Board. Ultimus is also responsible for fund accounting, including calculating the net asset value per share and maintaining the financial books and records of the Fund. Ultimus also serves as the transfer agent and provides shareholder services to the Fund. The Master Services Agreement permits Ultimus to subcontract for the provision of services it has contracted for under the Master Services Agreement, and Ultimus has subcontracted transfer agency services to Equiniti Trust Company, LLC. Ultimus is entitled to receive a fee in accordance with the agreement and was paid $34,898 for the six months ended December 31, 2023.

 

The Fund has entered into an agreement with Fifth Third Bank N.A. to serve as the custodian for the Fund’s assets.

 

NOTE 5. INVESTMENT TRANSACTIONS

 

During the six months ended December 31, 2023, purchases and sales of investment securities were $19,006,350 and $579,889, respectively.

 

NOTE 6. INCOME TAX INFORMATION

 

The cost basis of securities owned for financial statement purposes is lower than the cost basis for income tax purposes by $233,171 due to wash sale adjustments, passive foreign investment companies and book-to-tax adjustments to partnership investment. As of

 

- 25 -

 

 

Notes to Financial Statements (unaudited) (continued)

 

 

December 31, 2023 gross unrealized gains were $16,472,405 and gross unrealized losses were $(578,794) for income tax purposes.

 

Permanent differences accounted for during the year ended June 30, 2023, result from differences between book and tax accounting for the characterization of foreign currency losses, partnership adjustments, and the reclassification of the Fund’s net investment loss for tax purposes. Such amounts have been reclassified as follows:

 

		Total Distributable Earnings				Additional Paid in Capital
Year ended June 30, 2023		$	804,272			$	(804,272	)

 

As of June 30, 2023, the Fund had no post-October losses which are deferred until fiscal year 2023 for tax purposes. Capital losses incurred after October 31 (“post-October losses”) within that taxable year are deemed to arise on the first day of the Fund’s next taxable year.

 

As of June 30, 2023, the Fund had $19,375 of qualified late-year ordinary losses, which are deferred until fiscal year 2023 for tax purposes. Net late-year losses incurred after December 31 within the taxable year are deemed to arise on the first day of the Fund’s next taxable year.

 

In accordance with GAAP, the Fund is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Fund files an income tax return in the U.S. federal jurisdiction and may file income tax returns in various U.S. states and foreign jurisdictions. Generally the Fund is no longer subject to income tax examinations by major taxing authorities for years before June 30, 2020. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

 

De-recognition of a tax benefit previously recognized results in the Fund recording a tax liability that reduces ending net assets.

 

The Fund’s policy would be to recognize accrued interest expense to unrecognized tax benefits in interest expense and penalties in operating expenses. There were none for the fiscal year ended June 30, 2023.

 

The tax character of distributions paid to stockholders during the years ended June 30, 2023 and June 30, 2022 were as follows: ordinary income of $0 and $194,711, respectively, long-term capital gains of $714,706 and $1,148,768, respectively, and a return of capital of $3,893,734 and $4,951,954, respectively.

 

- 26 -

 

 

Notes to Financial Statements (unaudited) (continued)

 

 

NOTE 7. CAPITAL SHARE TRANSACTIONS

 

Shares of Common Stock

 

The Fund has 100,000,000 shares of common stock authorized and 16,150,673 issued and outstanding at December 31, 2023. Transactions in common stock for the six months ended December 31, 2023, were as follows:

 

Shares at beginning of period			7,150,673
Shares issued in connection with rights offering			9,000,000
Shares issued in revinvestment of dividends and distributions			—
Shares at end of period			16,150,673

 

2023 Rights Offering

 

On December 19, 2023, the Fund issued 9,000,000 shares of common stock in connection with a rights offering. Stockholders of record November 3, 2023 were issued one non-transferable right for every share owned on that date. The rights entitled the stockholders to purchase one new share of common stock for every one right held. In addition, the Fund had the discretion to increase the number of shares of common stock subject to subscription by up to 200% of the shares offered, or up to an additional 14,301,346 shares of common stock.

 

The subscription price was equal to 92% of the average volume-weighted closing sales price per share of the Fund’s common stock on the NASDAQ Capital Market on December 13, 2023, and the four preceding trading days. The final subscription price was $2.31 per share. The offering was oversubscribed and the oversubscription requests exceeded the primary shares available. The Fund issued an additional 25.86% of the number of shares issued in the primary subscription, or 1,849,327 additional shares, for a total issuance of 9,000,000 new shares of common stock. Net proceeds to the Fund were $20,607,216, after deducting rights offering costs of $182,784. The net asset value of the Fund’s common shares was decreased by approximately $1.60 per share, as a result of the share issuance.

 

2022 Tender Offer

 

The Fund’s Board of Directors determined to commence an offer to purchase up to 5%, or 338,382 Shares of the Fund’s issued and outstanding Common Stock. The offer was a cash offer at a price equal to 97.5% of the Fund’s net asset value per share (“NAV”) as of the close of ordinary trading on the NASDAQ Capital Market on November 8, 2022. As a result of Tender Offer 338,382 shares were purchased.

 

2021 Shelf Registration

 

The Fund has incurred approximately $67,342 of offering costs in association with a shelf registration, which is recorded as deferred offering costs and will be amortized over the life of the shelf registration if and when new shares are issued. These costs are categorized

 

- 27 -

 

 

Notes to Financial Statements (unaudited) (continued)

 

 

as deferred offering costs (shelf) on the Statement of Assets and Liabilities. As of December 31, 2023, $0 has been amortized.

 

NOTE 8. INVESTMENT RISKS

 

Foreign Securities Risk

 

Securities traded in foreign markets have often (though not always) performed differently from securities traded in the United States. However, such investments often involve special risks not present in U.S. investments that can increase the chances that the Fund will lose money. In particular, the Fund is subject to the risk that because there may be fewer investors on foreign exchanges and a smaller number of securities traded each day, it may be more difficult for the Fund to buy and sell securities on those exchanges. In addition, prices of foreign securities may go up and down more than prices of securities traded in the United States.

 

Foreign Economy Risk

 

The economies of certain foreign markets may not compare favorably with the economy of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources and balance of payments position. Certain foreign economies may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers and other protectionist or retaliatory measures. Investments in foreign markets may also be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets or the imposition of punitive taxes. In addition, the governments of certain countries may prohibit or impose substantial restrictions on foreign investments in their capital markets or in certain industries. Any of these actions could severely affect securities prices or impair the Fund’s ability to purchase or sell foreign securities or transfer the Fund’s assets or income back into the United States, or otherwise adversely affect the Fund’s operations.

 

Other potential foreign market risks include foreign exchange controls, difficulties in pricing securities, defaults on foreign government securities, difficulties in enforcing legal judgments in foreign courts and political and social instability. Legal remedies available to investors in certain foreign countries may be less extensive than those available to investors in the United States.

 

Currency Risk

 

Securities and other instruments in which the Fund invests may be denominated or quoted in currencies other than the U.S. Dollar. Changes in foreign currency exchange rates may affect the value of the Fund’s portfolio. Because the Fund’s assets are primarily invested in securities of Caribbean Basin Companies, and because some portion of revenues and income may be received in foreign currencies while Fund distributions will be made in dollars, the dollar equivalent of the Fund’s net assets and distributions would be adversely affected by reductions in the value of the foreign currencies relative to the dollar. For this reason, changes in foreign currency exchange rates can affect the value of the Fund’s portfolio. Generally,

 

- 28 -

 

 

Notes to Financial Statements (unaudited) (continued)

 

 

when the U.S. Dollar rises in value against a foreign currency, a security denominated in that currency loses value because the currency is worth fewer U.S. Dollars. Conversely, when the U.S. Dollar decreases in value against a foreign currency, a security denominated in that currency gains value because the currency is worth more U.S. Dollars. This risk, generally known as “currency risk,” means that a strong U.S. Dollar may reduce returns for U.S. investors while a weak U.S. Dollar may increase those returns. The Fund is managed with the assumption that most of its stockholders hold their assets in U.S. Dollars. As a result, and because distributions are made in U.S. Dollars, other non-U.S. investors will be adversely affected by reductions in the value of the U.S. Dollar relative to their home currency.

 

Geographic Concentration Risk

 

The Fund may invest from time to time a substantial amount of assets in issuers located in a single country or a limited number of countries. If the Fund concentrates its investments in this manner, it assumes the risk that economic, political and social conditions in those countries will have a significant impact on its investment performance. The Fund’s investment performance may also be more volatile if it concentrates its investments in certain countries, especially emerging market countries.

 

Managed Distribution Risk

 

Under the managed distribution plan, the Fund makes quarterly distributions to stockholders at a rate set once a year that is a percentage of the Fund’s NAV at its most recent fiscal year-end, that may be sourced from income, paid-in capital, and/or capital gains, if any. To the extent that sufficient investment income is not available on a quarterly basis, the Fund may distribute paid-in capital and/or capital gains, if any, in order to maintain its managed distribution level. No conclusions should be drawn about the Fund’s investment performance from the amount of the Fund’s distributions or from the terms of the managed distribution plan. A return of capital occurs when some or all of the money that stockholders invested in the Fund is paid back to them. A return of capital does not reflect the Fund’s investment performance and should not be confused with “yield” or “income.” Any such returns of capital will decrease the Fund’s total assets and, therefore, could have the effect of increasing the Fund’s expense ratio. In addition, in order to make such distributions, the Fund may have to sell a portion of its investment portfolio at a less than opportune time. There is a risk that amendment or termination of the managed distribution plan could have an adverse effect on the market price of the Fund’s shares.

 

Market Risk

 

The value of the securities in which the Fund invests may be affected by political, regulatory, economic and social developments, and developments that impact specific economic sectors, industries or segments of the market. In addition, turbulence in financial markets and reduced liquidity in equity, credit and/or fixed income markets may negatively affect many issuers, which could adversely affect the Fund. Global economies and financial markets are becoming increasingly interconnected, and conditions and events in one country, region or financial market may adversely impact issuers in a different country, region or financial market. These risks may be magnified if certain

 

- 29 -

 

 

Notes to Financial Statements (unaudited) (continued)

 

 

events or developments adversely interrupt the global supply chain; in these and other circumstances, such risks might affect companies world-wide. Recent examples include pandemic risks related to coronavirus outbreaks and aggressive measures taken world-wide in response by governments, and by businesses, including changes to operations and reducing staff.

 

The impact of pandemic risks may last for an extended period of time and result in a substantial economic downturn. Any such impact could adversely affect the Fund’s performance.

 

NOTE 9. SUBSEQUENT EVENTS

 

The Fund announced that the Board had approved a tender offer to purchase up to 10% of the net asset value of the Fund’s common stock at a price equal to 97.5% of the Fund’s net asset value as of the close of ordinary trading on the NASDAQ Capital Market on March 19, 2024. The Fund commenced its tender offer on February 20, 2024, and the expiration of the tender offer is March 19, 2024, unless the offer is extended.

 

Management has evaluated the impact of subsequent events on the Fund, through the date the financial statements were issued, and has determined that there were no additional subsequent events that required disclosure in the financial statements.

 

- 30 -

 

 

Section 19(a) Notices (unaudited)

 

 

The Herzfeld Caribbean Basin Fund, Inc.’s (CUBA) (the “Fund”) amounts and sources of distributions reported are estimates and are being provided to you pursuant to regulatory requirements and are not being provided for tax reporting purposes. The actual amounts and sources for tax reporting purposes will depend upon the Fund’s investment experience during the remainder of its fiscal year and may be subject to changes based on tax regulations. The Fund will provide a Form 1099-DIV each calendar year that will tell you how to report these distributions for U.S. federal income tax purposes.

 

		Currency Distribution				% Breakdown of the Current Distribution				Total Cumulative Distributions for the Fiscal Year to Date				% Breakdown of the Total Cumulative Distributions for the Fiscal Year to Date
Net Investment Income		$	0.00				0	%		$	0.00				0	%
Net Realized Short-Term Capital Gains		$	0.00				0	%		$	0.00				0	%
Net Realized Long-Term Capital Gains		$	0.00				0	%		$	0.00				0	%
Return of Capital (a)		$	0.1354				100	%		$	0.1354				100	%
Total (per common share)		$	0.1354				100	%		$	0.1354				100	%

 

(a)

The Fund estimates that it has distributed more than the amount of earned income and net realized gains; therefore, a portion of the distribution may be a return of capital. A return of capital may occur, for example, when some or all of the shareholder’s investment in the Fund are returned to the shareholder. A return of capital does not necessarily reflect the Fund’s investment performance and should not be confused with “yield” or “income”. When distributions exceed total return performance, the difference will reduce the Fund’s net asset value per share.

 

Section 19(a) notices for the Fund, are available on the Fund’s website http://www.herzfeld.com/cuba.

 

- 31 -

 

 

Results of November 16, 2023 Stockholders Meeting (unaudited)

 

The annual meeting of stockholders of the Fund was held on November 16, 2023. At the meeting, one nominee for Board of Directors posts was elected, as follows:

 

		Votes For				Votes Withheld or Against
Thomas J. Herzfeld			4,211,350				537,390

 

 

Quarterly Portfolio Reports (unaudited)

 

The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (the “SEC”) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s complete schedule of portfolio holdings are on the Fund’s Form N-PORT reports available on the SEC’s website at http://www.sec.gov or on the Fund’s website at http://www.herzfeld.com/cuba.

 

Proxy Voting Policies and Procedures (unaudited)

 

Information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve month period ended June 30, and a description of the Fund’s policies and procedures used to determine how to vote proxies relating to its 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.

 

- 32 -

 

 

Privacy Policy (unaudited)

 

 

We consider customer privacy to be an essential part of our investor relationships and are committed to maintaining the confidentiality, integrity and security of our current, prospective and former stockholders’ non-public personal information. We have developed policies that are designed to protect this confidentiality, while permitting stockholder needs to be served.

 

Obtaining Personal Information

 

While providing stockholders with products and services, we, and certain service providers, such as the Fund’s Transfer Agents and/or Administrators, may obtain non-public personal information about stockholders, which may come from sources such as (i) account applications, subscription agreements and other forms, (ii) written, electronic or verbal correspondence, (iii) stockholder transactions, (iv) a stockholder’s brokerage or financial advisory firm, financial advisor or consultant, and/or (v) from information captured on applicable websites. The non-public personal information that may be collected from stockholders may include the stockholder’s name, address, tax identification number, birth date, investment selection, beneficiary information, and possibly the stockholder’s personal bank account information and/or email address if the stockholder has provided that information, as well as the stockholder’s transaction and account history with the Fund.

 

Respecting Your Privacy

 

We do not disclose any non-public personal information provided by stockholders or gathered by us to third parties, except as required or permitted by law or as necessary for such third parties to perform their agreements with respect to the Fund. Non-affiliated companies may from time to time be used to provide certain services, such as maintaining stockholder accounts, preparing and mailing prospectuses, reports, account statements and other information, and gathering stockholder proxies. In many instances, the stockholders will be clients of a third party, but we may also provide a stockholder’s personal and account information to the stockholder’s respective brokerage or financial advisory firm and/or financial advisor or consultant.

 

Sharing Information with Third Parties

 

We reserve the right to report or disclose personal or account information to third parties in circumstances where we believe in good faith that disclosure is required or permitted under law, to cooperate with regulators or law enforcement authorities, to protect their rights or property, or upon reasonable request by the Fund’s Investment Advisor. In addition, we may disclose information about a stockholder or a stockholder’s accounts to a third party at the stockholder’s request or with the consent of the stockholder.

 

Procedures to Safeguard Private Information

 

We are committed to our obligation to safeguard stockholder non-public personal information. In addition to this policy, we have implemented procedures that are designed to limit access to a stockholder’s non-public personal information to internal personnel who require the information to complete tasks, such as processing transactions, maintaining

 

- 33 -

 

 

Privacy Policy (unaudited) (continued)

 

 

stockholder accounts or otherwise providing services the stockholder requested. Physical, electronic and procedural safeguards are in place to guard a stockholder’s non-public personal information.

 

Information Collected from Websites

 

Websites maintained by the Fund, the Investment Advisor or their service providers may use a variety of technologies to collect information that helps the Fund, the Investment Advisor and their service providers understand how the website is used. Information collected from your web browser (including small files stored on your device that are commonly referred to as “cookies”) allow the websites to recognize your web browser and help to personalize and improve your user experience and enhance navigation of the website. If you are a registered user of the Fund’s or the Investment Advisor’s and/ or their service providers’ website, the Fund or the Investment Advisor, their service providers, or third party firms engaged by the Fund or the Investment Advisor and/or their service providers, may collect or share information submitted by you, which may include personally identifiable information. You can change your cookie preferences by changing the setting on your web browser to delete or reject cookies. If you delete or reject cookies, some website pages may not function properly. The Fund and the Investment Advisor do not look for web browser “do not track” requests.

 

Changes to the Privacy Policy

 

From time to time, we may update or revise this privacy policy. If there are changes to the terms of this privacy policy, documents containing the revised policy on the relevant website will be updated.

 

- 34 -

 

 

Dividend Reinvestment Plan (unaudited)

 

 

Registered holders (“Stockholders”) of shares of common stock, $0.001 par value (“Common Stock”) of Herzfeld Caribbean Basin Fund, Inc. (the “Fund”) will automatically be enrolled (“Participants”) in the Fund’s Dividend Reinvestment Plan (the “Plan”) and are advised as follows:

 

1.	Equiniti Trust Company, LLC (the “Agent”) will act as agent for each Participant. The Agent will open an account for each registered shareholder as a Participant under the Plan in the same name in which such Participant’s shares of Common Stock are registered.

 

2.

CASH OPTION. Pursuant to the Fund’s Plan, unless a holder of Common Stock otherwise elects, all dividend and capital gains distributions payable in cash (“Distributions”) will be automatically reinvested by the Agent in additional Common Stock of the Fund. Stockholders who elect not to participate in the Plan will receive all cash distributions in cash paid by check mailed directly to the shareholder of record (or, if the shares are held in street or other nominee name then to such nominee) by the Agent, as dividend paying agent. Stockholders and Participants may elect not to participate in the Plan and to receive all cash distributions of dividends and capital gains in cash by sending written instructions to the Agent, as dividend paying agent, at the address set forth below.

 

3.

MARKET PREMIUM ISSUANCES. If on the payment date for a Distribution, the net asset value per Common Stock is equal to or less than the market price per Common Stock plus estimated brokerage commissions, the Agent shall receive newly issued Common Stock (“Additional Common Stock”) from the Fund for each Participant’s account. The number of Additional Common Stock to be credited shall be determined by dividing the dollar amount of the Distribution by the greater of (i) the net asset value per Common Share on the payment date, or (ii) 95% of the market price per Common Share on the payment date.

 

4.

MARKET DISCOUNT PURCHASES. If the net asset value per Common Stock exceeds the market price plus estimated brokerage commissions on the payment date for a Distribution, the Agent (or a broker-dealer selected by the Agent) shall endeavor to apply the amount of such Distribution on each Participant’s Common Stock to purchase Common Stock on the open market. In the event of a market discount on the payment date, the Agent will have 30 days after the dividend payment date (the “last purchase date”) to invest the dividend amount in shares acquired in open-market purchases. The weighted average price (including brokerage commissions) of all Common Stock purchased by the Agent as Agent shall be the price per Common Stock allocable to each Participant. If, before the Agent has completed its purchases, the market price plus estimated brokerage commissions exceeds the net asset value of the Common Stock as of the payment date, the purchase price paid by Agent may exceed the net asset value of the Common Stock, resulting in the acquisition of fewer Common Stock than if such Distribution had been paid in Common Stock issued by the Fund. Because of the foregoing difficulty with respect to open-market purchases, the Plan provides that if the Plan Agent is unable to invest the full dividend amount in open-market purchases during the purchase period or if the market discount shifts

 

- 35 -

 

 

Dividend Reinvestment Plan (unaudited) (continued)

 

 

to a market premium during the purchase period, the Plan Agent may cease making open-market purchases and may invest the uninvested portion of the dividend amount in newly issued Common Stock at the net asset value per Common Stock at the close of business on the last purchase date. Participants should note that they will not be able to instruct the Agent to purchase Common Stock at a specific time or at a specific price. Open-market purchases may be made on any securities exchange where Common Stock are traded, in the over-the-counter market or in negotiated transactions, and may be on such terms as to price, delivery and otherwise as the Agent shall determine. Each Participant’s uninvested funds held by the Agent will not bear interest. The Agent shall have no liability in connection with any inability to purchase Common Stock within the time provided, or with the timing of any purchases effected. The Agent shall have no responsibility for the value of Common Stock acquired. The Agent may commingle Participants’ funds to be used for open- market purchases of the Fund’s shares and the price per share allocable to each Participant in connection with such purchases shall be the average price (including brokerage commissions and other related costs) of all Fund shares purchased by Agent. The rules and regulations of the Securities and Exchange Commission may require the Agent to limit the Agent’s market purchases or temporarily cease making market purchases for Participants.

 

5.

The market price of Common Stock on a particular date shall be the last sales price on the securities exchange where the Common Stock are listed on that date (currently the NASDAQ Capital Market)(the “Exchange”), or, if there is no sale on the Exchange on that date, then the average between the closing bid and asked quotations on the Exchange on such date will be used. The net asset value per Common Stock on a particular date shall be the amount calculated on that date (or if not calculated on such date, the amount most recently calculated) by or on behalf of the Fund.

 

6.

Whenever the Agent receives or purchases shares or fractional interests for a Participant’s account, the Agent will send such Participant a notification of the transaction as soon as practicable. The Agent will hold such shares and fractional interests as such Participant’s agent and may hold them in the Agent’s name or the name of the Agent’s nominee. The Agent will not send a Participant stock certificates for shares unless a Participant so requests in writing or unless a Participant’s account is terminated as stated below. The Agent will vote any shares so held for a Participant in accordance with any proxy returned to the Fund by such Participant in respect of the shares of which such Participant is the record holder.

 

7.

There is presently no service charge for the Agent serving as Participants’ agent and maintaining Participants’ accounts. The Agent may, however, charge Participants for extra services performed at their request. The Plan may be amended in the future to impose a service charge. In acting as Participants’ agent under the Plan, the Agent shall be liable only for acts, omissions, losses, damages or expenses caused by the Agent’s willful misconduct or gross negligence. In addition, the Agent shall not be liable for any taxes, assessments or governmental charges which may be levied or assessed on any basis whatsoever in connection with the administration of the Plan.

 

- 36 -

 

 

Dividend Reinvestment Plan (unaudited) (continued)

 

 

8.

The Agent may hold each Participant’s Common Stock acquired pursuant to the Plan together with the Common Stock of other Stockholders of the Fund acquired pursuant to the Plan in non-certificated form in the Agent’s name or that of the Agent’s nominee. Each Participant will be sent a confirmation by the Agent of each acquisition made for his or her account as soon as practicable, but in no event later than 60 days, after the date thereof. Participants may request to sell a portion of the Common Stock held by the Agent in their Plan accounts by calling the Agent, writing to the Agent, or completing and returning the transaction form attached to each Plan statement. The Agent will sell such Common Stock through a broker-dealer selected by the Agent within 5 business days of receipt of the request. The sale price will equal the weighted average price of all Common Stock sold through the Plan on the day of the sale, less brokerage commissions. Participants should note that the Agent is unable to accept instructions to sell on a specific date or at a specific price. Any share dividends or split shares distributed by the Fund on Common Stock held by the Agent for Participants will be credited to their accounts. In the event that the Fund makes available to its Stockholders rights to purchase additional Common Stock, the Common Stock held for each Participant under the Plan will be added to other Common Stock held by the Participant in calculating the number of rights to be issued to each Participant.

 

If a Participant holds more than one Common Stock Certificate registered in similar but not identical names or if more than one address is shown for a Participant on the Fund’s records, all of such Participant’s shares of Common Stock must be put into the same name and address if all of them are to be covered by one account. Additional shares subsequently acquired by a Participant otherwise than through the Plan will be covered by the Plan.

 

9.

The reinvestment of Distributions does not relieve Participants of any federal, state or local taxes which may be payable (or required to be withheld on Distributions.) Participants will receive tax information annually for their personal records and to help them prepare their federal income tax return. For further information as to tax consequences of participation in the Plan, Participants should consult with their own tax advisors.

 

10.

Each registered Participant may terminate his or her account under the Plan by calling the Agent at (877) 283-0317. Such termination will be effective with respect to a particular Distribution if the Participant’s notice is received by the Agent prior to such Distribution record date. The Plan may be terminated by the Agent or the Fund upon notice in writing mailed to each Participant at least 60 days prior to the effective date of the termination. Upon any termination, the Agent will cause a certificate or certificates to be issued for the full shares held for each Participant under the Plan and cash adjustment for any fraction of a Common Share at the then current market value of the Common Shares to be delivered to him. If preferred, a Participant may request the sale of all of the Common Shares held by the Agent in his or her Plan account in order to terminate participation in the Plan. If any Participant elects in advance of such termination to have Agent sell part or all of his shares, Agent is authorized to

 

- 37 -

 

 

Dividend Reinvestment Plan (unaudited) (continued)

 

 

deduct from the proceeds the brokerage commissions incurred for the transaction. If a Participant has terminated his or her participation in the Plan but continues to have Common Shares registered in his or her name, he or she may re-enroll in the Plan at any time by notifying the Agent in writing at the address above.

 

11.

These terms and conditions may be amended by the Agent or the Fund at any time but, except when necessary or appropriate to comply with applicable law or the rules or policies of the Securities and Exchange Commission or any other regulatory authority, only by mailing to each Participant appropriate written notice at least 30 days prior to the effective date thereof. The amendment shall be deemed to be accepted by each Participant unless, prior to the effective date thereof, the Agent receives notice of the termination of the Participant’s account under the Plan. Any such amendment may include an appointment by the Agent of a successor Agent, subject to the prior written approval of the successor Agent by the Fund.

 

12.	These terms and conditions shall be governed by the laws of the State of Maryland.

 

Dividend Reinvestment Plan terms are as of December 13, 2019.

 

The Board of Directors of the Fund has suspended the dividend reinvestment plan for the March 31, 2024 quarterly distribution, in connection with the Fund’s cash or stock distribution as previously announced to stockholders in the Fund’s press release dated February 12, 2024. The dividend reinvestment plan was previously suspended for the quarterly distributions paid on September 30, 2021, December 31, 2021, March 31, 2022, June 30, 2022, September 30, 2022, December 31, 2022, March 31, 2023, June 30, 2023, and December 31, 2023 in connection with stock or cash distributions made on such dates. The Board of Directors may suspend the dividend reinvestment plan in connection with future cash or stock distributions, and any such suspension will be announced to shareholders via press release. In a stock or cash distribution, distributions will be paid in cash or shares of our common stock at the election of stockholders. The total amount of cash distributed to all stockholders will be limited to 20% of the total distribution to be paid, excluding any cash paid for fractional shares. The remainder of the distribution (approximately 80%) will be paid in the form of shares of our common stock. The exact distribution of cash and stock to any given stockholder will be dependent upon his/her election as well as elections of other stockholders, subject to the pro-rata limitation.

 

- 38 -

 

 

Discussion Regarding the Approval of the Investment Advisory Agreement (unaudited)

 

 

The Fund’s Board of Directors (the “Board”), 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 “Advisory Agreement”) at a meeting held on August 10, 2023.

 

In connection with its approval of the continuance of the Advisory Agreement, the Independent Directors noted that they were provided with written materials provided by the Advisor and by the Fund’s legal counsel including (i) a memorandum from the Fund’s legal counsel regarding the Directors’ responsibilities in evaluating and approving the Advisory Agreement, (ii) responses 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 Advisory Agreement between the Fund and the Advisor; (iv) the Advisor’s Form ADV Parts 1A and 2A; (v) audited financial statements for the Advisor for the year-ended December 31, 2022 and unaudited financial statements for the six months ended June 30, 2023; (vi) comparative performance data for the Fund relative to peer funds (foreign equity funds including emerging market and Latin American regional and single country funds) for the six-month and the twelve-month periods ended June 30, 2023 and (vii) comparative statistics and expense ratios and fee data for the Fund relative to foreign equity closed-end peer funds.

 

During its deliberations on whether to approve the continuance of the Advisory 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 continue to meet the needs of the Fund and its stockholders. The Board reviewed the services provided to the Fund by the Advisor as compared to services provided by other advisers that manage investment companies with investment objectives, strategies and policies similar to those of the Fund, the Advisor’s history and experience providing investment services to the Fund, and its knowledge of the closed-end fund industry. 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 an ability to 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 investing in emerging markets, Latin America, and foreign issuers. The Board considered performance of the Fund, noting that the Fund’s net asset value performance was reasonable compared to funds used in the comparative data for the six-month and twelve-month periods ended June 30, 2023, but noted that there were no other funds focused on the Caribbean Basin region. The Board concluded that the performance of the Fund was within an acceptable range of performance relative to other funds used in the comparisons.

 

- 39 -

 

 

Discussion Regarding the Approval of the Investment Advisory Agreement (unaudited) (continued)

 

 

The Board considered the costs of the services provided by the Advisor, the compensation and benefits received by the Advisor as a result of providing services to the Fund, as well as the Advisor’s profitability. The Board considered the advisory fees paid to the Advisor by the Fund and relevant comparable fee data and statistics of Latin American-specialist and small foreign equity funds. The Board noted that there are no funds with which to make a direct comparison because of the Fund’s unique strategy. The Board also noted that the Fund is smaller than many Latin American regional funds, and therefore its total expense ratio is higher than funds presented in the comparison. The Board further discussed the services provided by the Advisor and concluded that the advisory services performed were 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, quality and extent of the services provided, taking into account the fees charged by other advisers for managing comparable funds.

 

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 stockholders. The Board recognized that because of the closed-end structure of the Fund, this particular factor is less relevant to the Fund than it would typically be to an open-end fund. The Board also discussed the anticipated additional assets in the Fund as a result of the upcoming rights offering. The Board discussed that the potential for the Fund to achieve economies of scale was limited because the Fund is a closed-end fund.

 

The Board also considered in its deliberations the Advisor’s services and performance as discussed during 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 the Advisor’s performance and the Fund’s expenses on a quarterly basis. The Board also considered whether any events occurred or whether additional information or data was necessary for their review that would constitute a reason not to renew the Agreement and concluded there were not.

 

After further consideration of the factors discussed above and information presented at the August 10, 2023 meeting and at previous meetings of the Board, the Board and the Independent Directors determined to continue the Advisory Agreement for an additional one-year period. In arriving at its decision, the Board and the Independent Directors did not identify any single matter, factor or consideration as controlling.

 

- 40 -

 

 

Officers and Directors

 

 

Officers

 

ERIK M. HERZFELD
President

THOMAS K. MORGAN
Chief Compliance Officer and
Assistant Secretary

ALICE H. THAM
Secretary

ZACHARY P. RICHMOND
Treasurer

Directors

 

THOMAS J. HERZFELD
Interested Director, and Chairman
of the Board

JOHN A. GELETY
Independent Director

CECILIA L. GONDOR
Independent Director

ANN S. LIEFF
Independent Director

KAY W. TATUM, Ph.D.
Independent Director

Portfolio Managers

 

THOMAS J. HERZFELD
Portfolio Manager

ERIK M. HERZFELD
Portfolio Manager

RYAN M. PAYLOR
Portfolio Manager

 

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THE HERZFELD CARIBBEAN BASIN FUND, INC.

119 Washington Avenue
Suite 504
Miami Beach, FL 33139

 

Herzfeld-SAR-23

 

 

ITEM 2. CODE OF ETHICS

 

Not applicable – disclosed with annual report

 

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT

  

Not applicable – disclosed with annual report

 

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Not applicable – disclosed with annual report

 

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS

 

Not applicable – disclosed with annual report

 

ITEM 6. INVESTMENTS

 

(a) Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this Form.

 

(b) Not applicable. 

  

ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES

 

Not applicable – disclosed with annual report

 

ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES

 

Not applicable – disclosed with annual report

 

ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.

 

None.

 

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. DISCLOSURE OF SECURITIES LENDING ACTIVITIES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES

 

None.

 

ITEM 13. RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION

 

(a) Not applicable.

 

(b) Not applicable.

 

ITEM 14. EXHIBITS

 

(a)(1) Not applicable – filed with annual report

 

(a)(2) Certifications by the registrant’s principal executive officer and principal financial officer, pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 and required by Rule 30a-2under the Investment Company Act of 1940 are filed herewith.

(1) Not applicable.

(2) Change in the registrant’s independent public accountants: Not applicable.

 

(a)(3) Not applicable.

 

(b) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is filed herewith

 

 

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/ Erik M. Herzfeld
		Erik M. Herzfeld
		President
		(principal executive officer)
		Date:	March 12, 2024

 

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/ Erik M. Herzfeld
		Erik M. Herzfeld
		President
		(principal executive officer)
		Date:	March 12, 2024

 

	By:	/s/ Zachary P. Richmond
		Zachary P. Richmond
		Treasurer
		(principal financial officer)
		Date:	March 12, 2024