Listed NASDAQ Capital Market
Symbol: CUBA

 

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Thomas J. Herzfeld

Chairman, President and

Portfolio Manager

July 31, 2015

Dear Fellow Stockholders:

We are pleased to present our Annual Report for the period ended June 30, 2015. On that date, the net asset value (“NAV”) of The Herzfeld Caribbean Basin Fund, Inc. (NASDAQ: CUBA), (the “Fund”) was $7.43 per share. For the fiscal year ended June 30, 2015, the total investment return of the Fund was 25.40%, based on market value per share, and -11.94% based on NAV per share.*

The Fund seeks long-term capital appreciation and through investment in companies that we believe are poised to benefit from economic, political, structural and technological developments in the Caribbean Basin. An important part of this investment strategy continues to be focused 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 further concentrated on investments which we believe can do well even if there is no political or economic change with respect to Cuba.

Continued Thaw of U.S. - Cuba Relations

Since President Obama’s historic announcement of his intention to restore diplomatic ties with Cuba in December 2014, there have been numerous advances. Notable developments include: (i) Cuba’s removal from the U.S. State Sponsor of Terrorism list; (ii) the granting of new OFAC licenses to U.S. businesses to do business in Cuba; and (iii) the reopening of U.S. and Cuban embassies in Havana and Washington, D.C. The removal from the State Sponsor of Terrorism list paves the way for banking relationships, especially with the IMF and World Bank, given that this removal ends the prohibition on U.S. economic aid. Cuba was placed on this list in 1982. The reopening of embassies allows for increased travel and passport services, as well as a mechanism for Cuban nationals to travel to the U.S.

*	The calculation of the total investment return assumes reinvestment of dividends and distributions at prices obtained by the dividend reinvestment plan.

 

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Erik M. Herzfeld

Portfolio Manager

The last time the U.S. had an embassy in Cuba was during President Eisenhower’s presidency. We await with great anticipation the Pope’s visit to Cuba in September 2015 and expect the Pope’s visit to further strengthen Cuba’s relationship with the global community.

Investment on the Island

Although the restoration of U.S. relations with Cuba is still in its infancy, foreign investment has seen the developments of rapprochement between the U.S. and Cuba as a signal to increase investment ahead of U.S. businesses. For instance, reportedly both the UK and Spain plan to invest $400 million each in Cuba this year, Italy is looking to invest $96 million and other foreign investments are expected from China and the Netherlands. Foreign companies have moved quickly with MSC (Italy) basing its cruise ship, “Opera,” which holds 1,700 passengers, in Havana Harbor. The Spanish ferry operator Balearia is ready for U.S. – Cuba services with its “Pinar del Rio” vessel. Additionally, Cuba’s government reportedly reached an agreement with the Paris Club to renegotiate its $15 billion debt with 16 countries. Cuba is said to be paying $5.6 billion of the debt this year.

During the first 6 months of 2015, the gross domestic product (“GDP”) of Cuba grew 4.7% and the non-governmental GDP increased by 7%. This marks the first time in 56 years that Cuba collected its total planned revenues. Specifically, it collected 102.3% of expected revenues and the fiscal debt was only 48% of what was planned. The tourism sector increased by 16% during the first half of the year, reaching 2 million visitors by July 10th. This is 39 days earlier than this mark was reached in 2014. The non-governmental sector of the economy now encompasses approximately 600,000 workers.

There is a new sense of fervor in Washington now and just in the first quarter alone, the number of organizations lobbying the federal government with regard to the Cuban embargo has doubled from the previous quarter. Suddenly, companies that never spoke about their plans for Cuba are becoming very vocal. A number of agricultural U.S. companies, including giants such as Archer Daniels Midland and ConAgra, appear ready to invest in Cuba when it is legal and practical. Other industries including telecommunications, construction materials, and air/maritime transportation are progressing towards operations on the Island. There is a substantial impact in the entire Caribbean Basin. New flights have started in the last three months connecting Cuba to the Dominican Republic, Puerto Rico, Martinique and other nations of the region.

 

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Investment Strategy

Over the past fiscal year, the bear market in commodities and in Latin America has hampered the NAV performance of The Herzfeld Caribbean Basin Fund, Inc. because the region depends heavily on commodities, agriculture and tourism. The Mexican Bolsa dropped by -11.6%, converted to U.S. dollars (“USD”) over the Fund’s fiscal year. Also, the continued strength of the USD has crimped tourism outside of the U.S. because most Caribbean nations accept or peg to the USD. The strong USD has also led to depressed prices for Latin American exports like energy, metals, and agricultural goods. At first glance, when compared to the performance of the S&P 500, the performance in those sectors looks worse. However, of the 7.42% return of the S&P 500 over our fiscal year, two sectors, information technology and healthcare, were responsible for more than 5 percentage points or nearly 70% of the S&P 500 return. These two sectors are minimally represented in the Caribbean Basin because there are few such companies which are located in or derive substantial revenues from the region.

Our newest and largest addition in 2015 has been NextEra Energy, Inc. (NEE). This Florida-based clean energy company generates electricity through solar, wind and natural gas along with nuclear power through its subsidiary, NextEra Energy Partners. The majority of the company’s revenues are generated through Florida Power & Light which generates, distributes, and transmits energy to nearly half the population of Florida. With clean energy usage increasing in the U.S. and the Caribbean, we feel this company is strategically positioned to take advantage of this trend. Cuba could be an enormous opportunity for NextEra’s integrated clean energy solutions because it already has been operating successfully in Southern Florida, a region that is similar in its geography, climate, and weather patterns.

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In Cruise Line News

Our large allocation to the cruise line industry, 16.8%, has been a bright spot over the Fund’s fiscal year. Norwegian Cruise Line Holdings Ltd. (NCLH), Royal Caribbean Cruises Ltd. (RCL), Carnival Corp. (CCL, or “Carnival”), and Steiner Leisure Ltd. (STNR) returned 76.8%, 43.8%, 34.3% and 24.2% respectively over the past fiscal year. CCL received approval from the U.S. government to begin trips to Cuba in July 2015. Although these trips are slated as “social impact travel” and not traditional cruises, Arnold Donald, CEO of CCL, has gotten out in front of its main competitors, NCLH and RCL. These trips will be made on the luxurious Adonia, a 710 passenger ship, currently under the P&O Brand, operating out of Southampton, England. Carnival’s “social impact travel” limits guests to cruise for developmental, educational and environmental initiatives. The revenue generated is likely to be quite small at this time, but it may offer Carnival a strong “first mover” advantage once the embargo is lifted. We do not expect RCL and NCLH to sit on their hands while CCL makes inroads into the island nation. NCLH President, Frank Del Rio, has been vocal about cruising to Cuba. At a cruise conference in Miami, he remarked, “once the embargo is lifted, which is the main restriction, yes, we’re ready.” RCL and NCLH derive nearly half of their revenues from the Caribbean while CCL’s is only a third. Therefore, changes in the region will impact RCL and NCLH more significantly. The cruise industry will continue to be a large allocation in our Fund as it is one of the largest businesses in the Caribbean Basin. It continues to show growth as customers have been flocking to the new ships that are taking the cruising experience to the next level, combining high-end entertainment, food from world-renowned chefs, and stately rooms. STNR is the largest provider of spa services to the cruise lines and growth in the cruising industry positively affects its bottom line as well.

Airline Capacity Surge Outweighs Drop in Jet Fuel

With flight capacity across the airline industry growing, margins have been deteriorating as supply is currently outweighing demand. Additionally, many airlines have hedges for the cost of jet fuel so the large drop in prices has not translated to increased revenues. Fuel expenses have recently accounted for one-third to one-half of operating expenses for airlines. However, when those futures contracts expire, airlines should be able to rehedge at lower prices. For instance, the Gulf Coast Jet Fuel 1 year future contract on June 30, 2014 was $2.87 and a 1 year contract on June 30, 2015 was $1.90, a drop of -33.8%.

Our holdings in Copa Holdings, S.A. (CPA) and Avianca Holdings S.A. (AVH) have been disappointing. The slump in commodity prices in Latin America has slowed growth in the region leading to sharp drops in the local currencies. Over our fiscal year, CPA and AVH have dropped -40.1% and -36.2% respectively. CPA and AVH still have the overhang of cash trapped in Venezuela, as currency controls remain strict. However, we believe CPA and AVH are trading at extremely undervalued levels and depressed jet fuel prices, and the reduction in flight capacity by North American Airlines to Latin America should help these Central American-based airlines in the future.

 

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Commodity Selloff Continues

Continued depressed commodity prices, while good for consumers, has not boded well for companies that make their living off of them. Specialty contractor MasTec, Inc. (MTZ) has seen a slowdown in projects for energy infrastructure as the drop in oil prices has curtailed new energy projects. Making matters worse, the company announced an internal investigation by the company’s Audit Committee, along with independent counsel in connection with certain costs that allegedly should have been recognized in the second quarter of 2014 but instead were recognized in the third quarter of 2014. Although this recognition timing is not expected to impact the company’s 2014 fiscal results, it has led to a number of shareholder lawsuits. After a -35.5% drop in the company’s fiscal year, MTZ looks like a textbook value play as analysts estimate revenues to grow around 10% in 2016 and 2017.

Outlook

We see a bifurcated market in the Caribbean Basin going forward. The strength of the USD has helped domestic consumers while the opposite can be said for Latin and Central American markets. Because most of the Latin American economies depend on exporting commodities, we expect those markets to underperform as long as commodities are depressed. The countries that are net importers of commodities, like the U.S., should continue to see growth. Since the Caribbean Basin combines the U.S. and Latin American markets, we expect to see commodity intensive businesses benefit from the drop in price while the commodity producers continue to lag.

We expect positive developments in U.S. - Cuban relations in the future to lead towards a lifting of the embargo. We continue to monitor developments closely as they can positively or negatively affect our holdings. Since President Obama has made restoring relations with Cuba a priority and with a year and a half left in his term, we believe that he will try to accelerate, and possibly complete, the normalization process before he leaves office.

 

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Largest Allocations

 

The following tables present our largest investment and geographic allocations as of June 30, 2015.

 

Daily net asset values and press releases by the Fund are available on the Internet at www.herzfeld.com.

We would like to thank the members of the Board of Directors for their hard work and guidance and also thank our fellow stockholders for their continued support and suggestions.

 

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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 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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Statement of Assets and Liabilities as of June 30, 2015

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*	Includes 243,200 shares issued through dividend reinvestment plan and 1,812,293 shares issued through a rights offering conducted in 2007 and 1,856,535 shares issued through a rights offering conducted in 2014. (Note 7)

 

See accompanying notes to the financial statements.

 

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Statement of Operations Year Ended June 30, 2015

 

See accompanying notes to the financial statements.

 

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Statements of Changes in Net Assets

Years Ended June 30, 2015 and 2014

 

See accompanying notes to the financial statements.

 

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Financial Highlights

Years Ended June 30, 2011 through 2015

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

 

See accompanying notes to the financial statements.

 

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Notes to Financial Statements

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.

The Fund’s custodian and transfer agent is State Street Bank and Trust Company (“SSBT”), 200 Clarendon Street, PO Box 9130, Boston, Massachusetts 02117.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

 

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Notes to Financial Statements

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 the most 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 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:

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.

 

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Notes to Financial Statements

Investments in securities traded on a national securities exchange (or reported on the NASDAQ National Market or Capital Market) are stated at the last reported sales price on the day of valuation (or at the NASDAQ official closing price); other securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are stated at the last quoted bid price. Restricted securities and other securities for which quotations are not readily available are valued at fair value as determined by the Board of Directors.

The following table summarizes the classification of the Fund’s investments by the above fair value hierarchy levels as of June 30, 2015:

 

 

Additional quantitative disclosures for assets in which Level 3 inputs are used in determining fair value are presented when there are significant Level 3 investments at the end of the period.

 

 

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Notes to Financial Statements

All transfers are recognized by the Fund at the end of each reporting period. Transfers from Level 2 to Level 1 were $12,227, transfers from Level 1 to Level 2 were $319,309, and transfers from Level 2 to Level 3 were $406,977. Transfers between Levels 1 and 2 related to the availability of trade information near the valuation date. Transfers between Levels 2 and 3 related to a change to fair valuation by the Board of Directors due to a limited amount of trading and lack of available information with respect to transactions in the primary market.

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

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. Pursuant to a custodian agreement, SSBT receives a fee reduced by credits which are determined based on the average daily cash balance the Fund maintains with SSBT. Credit balances used to reduce the Fund’s custodian fees for the year ended June 30, 2015 were approximately $0. 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.

 

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Notes to Financial Statements

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

The Fund may, during the course of its operations, maintain account balances with financial institutions in excess of federally insured limits.

In the normal course of business, substantially all of the Fund’s money balances and security positions are custodied with the Fund’s custodial broker, SSBT. The Fund 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.

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.

The Fund’s policy is to continue to comply with the provisions of the Internal Revenue Code that are applicable to regulated investment companies and to distribute all 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 tax provision is required.

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

 

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Notes to Financial Statements

Distributions to stockholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. For the year ended June 30, 2015, a distribution from long-term capital gains of $0.596 per share and from short-term capital gains of $0.039 per share was declared on December 18, 2014.

NOTE 3. RESTRICTED SECURITIES OWNED

Investments in securities include $165,000 principal, 4.5%, 1977 Republic of Cuba bonds purchased for $63,038 that are currently segregated and restricted from transfer. The bonds were listed on the New York Stock Exchange and had been trading in default since 1960. A “regulatory halt” on trading was imposed by the New York Stock Exchange in July 1995 and trading in the bonds was suspended as of December 28, 2006. The New York Stock Exchange has stated that following the suspension of trading, application will be made to the Securities and Exchange Commission to delist the issue. As of June 30, 2015, the position was valued at $0 by the Board of Directors.

Investments in securities also include 700 shares of Cuban Electric Company, purchased for $5,817, which are currently segregated and restricted from transfer. As of June 30, 2015, the position, was valued at $0 by the Board of Directors.

Investments in securities also include 500,000 shares of Fuego Enterprises, Inc. purchased for $125,000 that are Rule 144A securities which as of June 30, 2015 were restricted as to the resale to institutional investors. As of June 30, 2015, the restricted portion of the position was valued at $237,500 by the Board of Directors. This security has been deemed illiquid by the Advisor based on procedures approved by the Board of Directors.

NOTE 4. 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 year ended June 30, 2015 amounted to $558,086 of which $153,986 is payable as of June 30, 2015.

Mr. Thomas Herzfeld is the owner of the Advisor.

The Fund reimbursed the Advisor in the amount of $26,913 for the portion of the chief compliance officer’s (the “CCO”) salary determined to be attributable to the services provided as CCO of the Fund.

 

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Notes to Financial Statements

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NOTE 5. INVESTMENT TRANSACTIONS

During the year ended June 30, 2015, purchases and sales of investment securities were $14,395,577 and $5,160,942, respectively.

At June 30, 2015, the Fund’s investment portfolio had gross unrealized gains of $7,862,643 and gross unrealized losses of $5,179,122, resulting in a net unrealized gain on investments of $2,683,521 for financial statement purposes.

NOTE 6. INCOME TAX INFORMATION

As of June 30, 2015, for tax purposes the Fund’s accumulated net realized gain on investments was $873,316.

The cost basis of securities owned for financial statement purposes is lower than the cost basis for income tax purposes by $266,713 due to wash sale adjustments and book-to-tax adjustments to partnership investment. As of June 30, 2015, gross unrealized gains were $7,921,268 and gross unrealized losses were $5,504,460 for income tax purposes.

Permanent differences accounted for during the year ended June 30, 2015 result from differences between book and tax accounting for the characterization of foreign currency losses and the reclassification of the Fund’s net investment loss for tax purposes. Such amounts have been reclassified as follows:

 

	Accumulated Net Investment Loss	Realized Loss on Investments	Accumulated Net Additional Paid in Capital
Year ended June 30, 2015	$522,640	($105,044)	($417,596)

 

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, 2012. 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 year ended June 30, 2015.

 

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Notes to Financial Statements

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The tax character of distributions paid to shareholders during the fiscal year ended June 30, 2015 and June 30, 2014 were as follows: ordinary income, $71,408 and $0, and long-term capital gains, $3,465,295 and $4,232,900, respectively.

NOTE 7. CAPITAL SHARE TRANSACTIONS

2007 Rights Offering

On October 26, 2007, the Fund issued 1,812,293 common shares in connection with a rights offering. Stockholders of record September 26, 2007 were issued one non-transferable right for every share owned on that date. The rights entitled the stockholders to purchase one new common share for every right held. In addition, the Fund had the discretion to increase the number of shares of common stock subject to subscription by up to 100% of the shares offered, or up to an additional 1,678,556 shares of common stock.

The subscription price was equal to 85% of the average volume-weighted sales price per share of the Fund’s common stock on the NASDAQ Capital Market on October 26, 2007 and the four preceding trading days. The final subscription price was $10.04 per share. Net proceeds to the Fund were $18,075,138 after deducting rights offering costs of $120,284. The net asset value of the Fund’s common shares was increased by approximately $0.09 per share as a result of the share issuance.

2014 Rights Offering

On December 12, 2014, the Fund issued 1,856,535 common shares in connection with a rights offering. Stockholders of record October 9, 2014 were issued one non-transferable right for every share owned on that date. The rights entitled the stockholders to purchase one new common share for every three rights held. In addition, the Fund had the discretion to increase the number of shares of common stock subject to subscription by up to 50% of the shares offered, or up to an additional 618,845 shares of common stock.

The subscription price was equal to 95% of the average volume-weighted closing sales price per share of the Fund’s common stock on the NASDAQ Capital Market on December 4, 2014 and the four preceding trading days. The final subscription price was $6.77 per share. The Fund issued the entire 50% optional secondary oversubscription. Net proceeds to the Fund were $12,442,484, after deducting rights offering costs of $126,034. The net asset value of the Fund’s common shares was decreased by approximately $0.86 per share, as a result of the share issuance.

Year-End Distributions

No distribution was declared during the fiscal year ended June 30, 2011.

On January 9, 2012, the Fund paid a year-end distribution of $0.0634 per share in cash.

On December 26, 2012, the Fund paid a year-end distribution of $0.196 per share in cash.

Notes to Financial Statements

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On January 7, 2014, the Fund paid a year-end distribution of $1.140 per share in stock. Stockholder were also given the option of receiving the payment in cash. Shares were purchased in the open market to pay the distribution at a reinvestment price of $8.2657 per share including brokerage commissions.

On January 7, 2015 the Fund paid a year-end distribution of $0.635 per share in cash. Stockholders enrolled in the Fund’s dividend reinvestment plan received stock, issued by the Fund at $7.85 per share, equal to 95% of the closing market price of the stock on January 7, 2015, pursuant to the Fund’s Dividend Reinvestment Plan. The Fund issued a total of 29,978 common shares in connection with its year-end distribution.

NOTE 8. INVESTMENT RISKS

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.

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.

Notes to Financial Statements

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Securities and other instruments in which the Fund invests may be denominated or quoted in currencies other than the U.S. Dollar. Changes in foreign currency exchange rates may affect the value of the Fund’s portfolio. Because the Fund’s assets are primarily invested in securities of Caribbean Basin Companies, and because some portion of revenues and income may be received in foreign currencies while Fund distributions will be made in dollars, the dollar equivalent of the Fund’s net assets and distributions would be adversely affected by reductions in the value of the foreign currencies relative to the dollar. For this reason, changes in foreign currency exchange rates can affect the value of the Fund’s portfolio. Generally, when the U.S. Dollar rises in value against a foreign currency, a security denominated in that currency loses value because the currency is worth fewer U.S. Dollars. Conversely, when the U.S. Dollar decreases in value against a foreign currency, a security denominated in that currency gains value because the currency is worth more U.S. Dollars. This risk, generally known as “currency risk,” means that a strong U.S. Dollar may reduce returns for U.S. investors while a weak U.S. Dollar may increase those returns. The Fund is managed with the assumption that most of its stockholders hold their assets in U.S. Dollars. As a result, and because distributions are made in U.S. Dollars, other non-U.S. investors will be adversely affected by reductions in the value of the U.S. Dollar relative to their home currency.

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.

NOTE 9. SUBSEQUENT EVENTS

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 subsequent events that required disclosure in the financial statements.

 

KPMG LLP Suite 500 191 West Nationwide Blvd. Columbus, OH 43215-2568

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of The Herzfeld Caribbean Basin Fund, Inc.:

We have audited the accompanying statement of assets and liabilities of The Herzfeld Caribbean Basin Fund, Inc. (the Fund), including the schedule of investments, as of June 30, 2015, and the related statement of operations for the year then ended, and the statements of changes in net assets and financial highlights for each of the years in the two years then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The accompanying financial highlights for the years ended June 30, 2013 and prior were audited by prior auditors whose report thereon dated August 16, 2013, expressed an unqualified opinion on those financial statements and financial highlights.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of June 30, 2015, by correspondence with the custodian and brokers; or other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

 

Columbus, Ohio

August 21, 2015

Name Address and Age	Position(s) Held with Fund	Term of Office and Length of Time Served	Principal Occupation(s) During Past 5 Years	Number of Portfolios In Complex Overseen By Director	Other Directorships Held by Director
Interested Directors
Thomas J. Herzfeld* 119 Washington Avenue, Suite 504 Miami Beach, FL 33139 Age: 70	President, Portfolio Manager, Chairman, Director	three years; 1993 to present	Chairman and President of Thomas J. Herzfeld & Co., Inc., a broker dealer 1981-2010, and Thomas J. Herzfeld Advisors, Inc., 1984-present.	2	The Cuba Fund, Inc. (in registration)
Cecilia L. Gondor** c/o The Herzfeld Caribbean Basin Fund, Inc. 119 Washington Avenue, Suite 504 Miami Beach, FL 33139 Age: 53	Director	three years; 2014 to present	Managing Member of L&M Management, a real estate management business, 2014- present; Executive Vice President of Thomas J. Herzfeld & Co., Inc., a broker dealer, 1984-2010, and Thomas J. Herzfeld Advisors, Inc., 1984-2014.	1	None
Independent Directors
Ann S. Lieff c/o The Herzfeld Caribbean Basin Fund, Inc. 119 Washington Avenue, Suite 504 Miami Beach, FL 33139 Age: 63	Director	three years; 1998 to present	President of the Lieff Company, a management consulting firm that offers ongoing advisory services as a corporate director, 1998-present; former CEO Spec’s Music 1980- 1998, a retailer of recorded music.	1	None
Kay W. Tatum, Ph.D., CPA c/o The Herzfeld Caribbean Basin Fund, Inc. 119 Washington Avenue, Suite 504 Miami Beach, FL 33139 Age: 63	Director	three years; 2007 to present	Associate Professor of Accounting, University of Miami School of Business Administration, 1992-present; Chair, Department of Accounting, 2004-2008; Assistant Professor of Accounting, University of Miami, 1986-1992.	1	None
John A. Gelety c/o The Herzfeld Caribbean Basin Fund, Inc. 119 Washington Avenue, Suite 504 Miami Beach, FL 33139 Age: 47	Director	three years; 2011 to present	John A. Gelety, PA, attorney at law, a transactional law firm that specializes in business law, with a concentration on domestic and cross-border mergers & acquisitions, private equity and commercial transactions, 2005-present.	1	None

Name Address and Age	Position(s) Held with Fund	Term of Office and Length of Time Served	Principal Occupation(s) During Past 5 Years		Other Directorships Held by Officer
Officers
Erik M. Herzfeld 119 Washington Avenue, Suite 504 Miami Beach, FL 33139 Age: 41	Portfolio Manager	2008 to present	Co- President, Thomas J. Herzfeld Advisors, Inc., 2015-present; Portfolio Manager, Thomas J. Herzfeld Advisors, Inc. 2007-present; Managing Director, Thomas J. Herzfeld Adviors, Inc., 2007- 2015. Vice President JPMorgan Chase 2000-2007, foreign exchange option trading.		Strategic Investment Partners, Inc.
Reanna J. M. Lee 119 Washington Avenue, Suite 504 Miami Beach, FL 33139 Age: 29	Secretary, Treasurer	2014 to present	In-house counsel of Thomas J. Herzfeld Advisors, Inc., 2012-present; Chief Compliance Officer of Thomas J. Herzfeld Advisors, Inc., 2013-present; Reanna J M Lee, PA, a law firm with areas of practice including intellectual property and entertainment law, 2011-present.		N/A

 

Quarterly Portfolio Reports (Unaudited)

 

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