THE HERZFELD
CARIBBEAN BASIN
FUND, INC.
SEMI-ANNUAL REPORT
DECEMBER 31, 2002
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THE HERZFELD CARIBBEAN BASIN FUND, INC.
The Herzfeld Building
PO Box 161465
Miami, FL 33116
(305) 271-1900
INVESTMENT ADVISOR
HERZFELD/CUBA
a division of Thomas J. Herzfeld Advisors, Inc.
PO Box 161465
Miami, FL 33116
(305) 271-1900
TRANSFER AGENT & REGISTRAR
Investors Bank & Trust Company
200 Clarendon Street, 16th Floor
Boston, MA 02116
(617) 443-6870
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street, 5th Floor
Boston, MA 02116
COUNSEL
Pepper Hamilton LLP
3000 Two Logan Square
18th and Arch Streets
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Kaufman, Rossin & Co., P.A.
2699 South Bayshore Drive
Miami, FL 33133
Listed NASDAQ SmallCap Market
Symbol: CUBA
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The Herzfeld Caribbean Basin Fund's investment objective is long-term capital
appreciation. To achieve its objective, the Fund invests in issuers that are
likely, in the Advisor's view, to benefit from economic, political, structural
and technological developments in the countries in the Caribbean Basin, which
consists of Cuba, Jamaica, Trinidad and Tobago, the Bahamas, the Dominican
Republic, Barbados, Aruba, Haiti, the Netherlands Antilles, the Commonwealth of
Puerto Rico, Mexico, Honduras, Guatemala, Belize, Costa Rica, Panama, Colombia
and Venezuela. The fund invests at least 80% of its total assets in a broad
range of securities of issuers including U.S.-based companies, which engage in
substantial trade with and derive substantial revenue from operations in the
Caribbean Basin Countries.
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LETTER TO STOCKHOLDERS
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[PHOTO]
Thomas J. Herzfeld
Chairman and President
February 7, 2003
Dear Fellow Stockholders:
We are pleased to present our semi-annual report for the six months ended
December 31, 2002.
The Fund paid a long-term capital gains distribution of 7.746(cent) per share on
January 15, 2003, to stockholders of record on December 31, 2002; the
distribution is taxable to you for calendar year 2002. Adjusting for this
payment, the Fund's per share price increased 0.89% for the twelve months and
declined 2.30% for the six months ended December 31, 2002. The Fund's net asset
value fell 14.1% for the twelve month period, and 10.8% for six months, also
adjusted for the distribution.
Performance was boosted by our second largest position, PANAMERICAN BEVERAGE
INC. (PB), which is being acquired by COCA COLA FEMSA (KOF), our 9th largest
position. Shares of PB doubled from about $10 per share to $20 since the
announcement in late December. In typical fashion, the shares of its acquirer,
KOF, lost about 15% of their value over the same time period.
EMBARGO WITH CUBA
It is hard to believe that the U.S. embargo against Cuba is now in its 43rd
year. The only significant change in U.S. policy in regard to Cuba has been the
Trade Sanctions Reform and Export Enhancement Act of 2000. Under this new law,
food and agricultural products can be traded with Cuba as long as they are paid
for in cash. We expect to see further easing as time goes by, and that belief is
apparently held by others. According to the Miami Herald, "Representatives from
more than 100 companies, trade associations and government organizations are
preparing to attend the second annual U.S.-Cuba Business Conference in Cancun
and Havana, Feb. 17-19, to discuss business options." We will be watching to see
if the conference yields any new investment options for us. Because of current
U.S. laws, however, we are very limited in what we can invest directly in Cuba;
that is why our portfolio historically has been invested primarily in companies
domiciled elsewhere but could benefit from the lifting of the embargo. For
example, we hold significant positions in CARNIVAL CORP. (CCL) and ROYAL
CARIBBEAN CRUISES LTD. (RCL). CubaNews, a monthly publication which tracks
economic and political news surrounding Cuba, recently stated, "Once
restrictions disappear, an estimated 3.5 million U.S. cruise visitors could be
arriving annually on modern vessels operated by Carnival, Royal Caribbean Cruise
Lines and P&O Princess, which together control 85% of all cruise traffic to the
Caribbean."
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LETTER TO STOCKHOLDERS (continued)
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Pressure appears to be building for a lifting of the travel ban in 2003, says
Larry Luxner, editor and publisher of CubaNews. "Next month [March], as many as
10 to 12 U.S. representatives will travel to Cuba as part of the House Cuba
Working Group. That'll be the largest Congressional delegation to visit the
island since Fidel Castro came to power in 1959," says Luxner. "While the
embargo itself is extremely unlikely to be scrapped as long as President Bush is
in power, increasing numbers of ordinary Americans are circumventing the laws
and visiting Cuba anyway, and I believe it's only a matter of a year or two
before they'll be able to visit legally."
In addition, says Luxner, "U.S. companies may already export farm commodities to
Cuba on a cash-only basis--and that includes not only food staples like wheat,
corn and apples, but also consumer luxuries like Chardonnay wine and even
non-food items such as fertilizer, lumber and Kentucky burley tobacco. In 2002,
total U.S. farm sales to Cuba came to $155 million, with $230 million in
agricultural commodities expected to be sold to Cuba this year. That'll put Cuba
among the top 50 importers of U.S. food--meaning that the embargo is already
starting to unravel."
LARGEST ALLOCATIONS
The following tables present our largest investment and geographic allocations
as of December 31, 2002.
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GEOGRAPHIC % OF NET ASSETS LARGEST PORTFOLIO POSITIONS% OF NET ASSETS
ALLOCATION
USA 49.66% Florida East Coast Industries Inc. 23.11%
Mexico 15.16% PanAmerican Beverage Inc. Cl. A 8.61%
Cayman Islands 10.87% Consolidated Water Co. 8.37%
Panama 9.56% Florida Rock Industries 6.96%
Netherlands Antilles 3.92% Watsco Incorporated 4.81%
Latin American Regional 3.29% Carnival Corp. 4.39%
Puerto Rico 2.11% Royal Caribbean Cruises Ltd. 4.07%
Belize 2.00% Orthofix International N.V. 3.92%
Virgin Islands 1.19% Coca Cola Femsa 3.55%
Dominican Republic 1.11% Seaboard Corporation 3.34%
Costa Rica 0.81% ---------------------------------------------
Colombia 0.33%
Venezuela 0.12%
Cuba 0.00%
--------------------------------
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LETTER TO STOCKHOLDERS (continued)
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PREMIUM/DISCOUNT
As the graph below depicts, the Fund has traded at both premiums and discounts
every year except the year of inception in which it traded only at a premium. As
I have stated before, we believe that closed-end funds trading at discounts to
net asset value represent good value.
PREMIUM/DISCOUNT OF THE HERZFELD CARIBBEAN BASIN FUND FROM INCEPTION
[GRAPHIC OMITTED]
Daily net asset values and press releases on the Fund are available on the
Internet at WWW.HERZFELD.COM.
I would like to thank the members of the Board of Directors for their hard work
and guidance and also to thank my fellow stockholders for their continued
support and suggestions.
Sincerely,
/s/ Thomas J. Herzfeld
Thomas J. Herzfeld
Chairman of the Board and President
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SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2002
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Shares or Principal Amount Description Value
-------------------------- ----------- -----
Common stocks - 100.12% of net assets
Banking and finance - 1.92%
8,000 Bancolombia S.A. $ 18,720
12,000 Banco Latinoamericano de Exportaciones, S.A. 54,600
28,300 Grupo Financiero BBVA Bancomer,
S.A. de C.V. Series O* 21,392
3,600 Grupo Financiero Banorte, S.A. de C.V. Series O* 8,773
8,400 Grupo Financiero Inbursa, S.A. de C.V. Series O* 6,984
Communications - 7.63%
11,000 America Movil, S.A. de C.V. Series A 7,832
43,800 America Movil, S.A. de C.V. Series L 31,308
11,100 America Telecom, S.A. de C.V. Series A1* 6,471
72,000 AT&T Latin America Corp.* 15,120
4,400 Atlantic Tele-Network 68,200
11,100 Carso Global Telecom, S.A. de C.V., Series A1* 12,306
14,500 Grupo Iusacell, S.A. de C.V. Series V* 858
19,000 Grupo Radio Centro S.A. ADR 37,050
3,400 Grupo Televisa S.A. GDR* 94,962
12,100 Grupo Televisa, S.A., Series CPO* 16,767
11,000 Telefonos de Mexico, S.A. de C.V. Series A 17,503
39,300 Telefonos de Mexico, S.A. de C.V. Series L 62,534
21,000 Tricom S.A. ADR* 63,420
13,900 TV Azteca S.A. de C.V. Series CPO* 4,052
Conglomerates - 3.00%
4,900 Alfa S.A. de C.V. 7,834
42,024 Carlisle Holdings Inc.* 115,146
3,100 Corporacion Interamericana de Entretenimiento,
S.A. de C.V. Series B* 5,096
4,200 Desc, S.A. de C.V. Series B 1,646
3,300 Grupo Carso, S.A. de C.V. Series A1* 8,073
3,300 U.S. Commercial Corp. S.A. de C.V.* 1,356
2,600 Vitro, S.A. Series A 1,988
13,000 Vitro Sociedad Anonima ADR 31,070
------------------------
*Non-income producing
See accompanying notes.
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SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2002 (continued)
================================================================================
Shares or Principal Amount Description Value
-------------------------- ----------- -----
Construction and related - 8.88%
10,000 Cemex, S.A. de C.V. Series CPO $ 42,938
1,936 Ceramica Carabobo Cl. A ADR* 1,452
4,000 Consorcio ARA, S.A. de C.V. Series A1* 5,925
5,200 Empresas ICA, Sociedad Controladora, S.A. de C.V.* 875
10,500 Florida Rock Industries, Inc. 399,525
19,950 Mastec, Inc.* 58,853
Consumer products and related manufacturing - 10.35%
800,000 Atlas Electricas S.A. 46,488
1,918 Buenos Aires Embotelladora S.A.* 10
11,400 Coca Cola Femsa S.A. de C.V. ADR 204,060
6,400 Grupo Casa Saba S.A. ADR* 67,648
16,850 Watsco Incorporated 276,003
Food, beverages and tobacco - 9.48%
5,800 Fomento Economico Mexicano, S.A. de C.V. Series UBD 21,024
7,300 Grupo Bimbo, S.A. de C.V. Series A 10,737
7,300 Grupo Modelo, S.A. de C.V. Series C 17,783
23,800 PanAmerican Beverage Inc. Class A 494,564
Investment companies - 3.02%
11,745 The Latin America Equity Fund, Inc. 113,574
7,900 The Latin American Discovery Fund, Inc. 60,040
Leisure - 8.46%
10,100 Carnival Corp. 251,995
14,000 Royal Caribbean Cruises Ltd. 233,800
Medical - 3.92%
8,000 Orthofix International N.V.* 225,192
Pulp and paper - 0.23%
5,700 Kimberly-Clark de Mexico, S.A. de C.V. Series A 13,074
Railroad and landholdings - 23.11%
57,200 Florida East Coast Industries, Inc. 1,327,040
------------------------
*Non-income producing
See accompanying notes.
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SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2002 (continued)
================================================================================
Shares or Principal Amount Description Value
-------------------------- ----------- -----
Retail - 0.85%
3,700 Controladora Comercial Mexicana,
S.A. de C.V. Series UBC $ 1,910
1,380 Grupo Elektra, S.A. de C.V. Series CPO 3,389
7,900 Walmart de Mexico, S.A. de C.V. Series C 15,228
12,500 Walmart de Mexico, S.A. de C.V. Series V 28,431
Trucking and marine freight - 5.98%
800 Seaboard Corporation 192,000
46,600 Trailer Bridge, Inc.* 99,724
10,000 Grupo TMM S.A. ADR* 51,500
Utilities - 10.87%
12,000 Caribbean Utilities Ltd., Class A 143,640
32,600 Consolidated Water, Inc. 480,524
Other - 2.42%
2,414 Mantex S.A.I.C.A* 5,013
32,120 Margo Caribe Inc. 121,092
833 Siderurgica Venezolana Sivensa ADR* 183
20,000 Xcelera, Inc.* 12,600
------------
TOTAL COMMON STOCKS (COST $6,980,120) $ 5,748,895
Bonds - 0% of net assets
165,000 Republic of Cuba - 4.5%, 1977 - in default
(cost $63,038) (note 2)* --
OTHER ASSETS LESS LIABILITIES - (0.12%) OF NET ASSETS ($ 7,065)
------------
NET ASSETS - 100% (a) $ 5,741,830
============
(a) The cost for federal income tax purposes was $7,043,158. At December 31,
2002, net unrealized loss for all securities based on tax cost was $1,294,263.
This consisted of aggregate gross unrealized appreciation for all securities in
which there was an excess of value over tax cost of $976,310 and aggregate gross
unrealized depreciation for all securities in which there was an excess of tax
cost over value of $2,270,573.
------------------------
*Non-income producing
See accompanying notes.
-8-
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 2002
================================================================================
ASSETS
Investment in securities, at value (cost $7,043,158) (Note 2) $ 5,748,895
Cash 157,683
Dividends and interest receivable 9,587
Other assets 33,249
-----------
TOTAL ASSETS $ 5,949,414
LIABILITIES
Dividends payable $ 129,950
Accrued investment advisor fee (Note 3) 34,643
Other payables 42,991
-----------
TOTAL LIABILITIES 207,584
-----------
NET ASSETS (Equivalent to $3.42 per share
based on 1,677,636 shares outstanding) $ 5,741,830
===========
Net assets consist of the following:
Common stock, $.001 par value; 100,000,000
shares authorized; 1,677,636 shares issued
and outstanding $ 1,678
Additional paid-in capital 8,362,502
Undistributed net investment loss (1,054,335)
Undistributed net realized loss on investments (273,752)
Net unrealized loss on investments (1,294,263)
-----------
TOTAL $ 5,741,830
===========
See accompanying notes.
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STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2002
================================================================================
INVESTMENT INCOME
Dividends $ 36,984
---------
EXPENSES
Investment advisor fee (Note 3) $ 46,055
Custodian fees 27,519
Professional fees 18,345
Insurance 12,812
Transfer agent 8,919
Printing 6,485
Listing fees 4,077
Director fees 3,975
Postage 3,058
Proxy services 1,363
Miscellaneous 14,816
---------
Total expenses 147,424
---------
INVESTMENT LOSS - NET (110,440)
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized loss on investments (616,149)
Change in unrealized gain on investments 30,293
---------
NET LOSS ON INVESTMENTS (585,856)
---------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS ($696,296)
=========
See accompanying notes.
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STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
12/31/02 ENDED
(UNAUDITED) 6/30/02
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Investment loss - net ($ 110,440) ($ 176,134)
Net realized gain (loss) on investments (616,149) 129,946
Change in unrealized loss on investments 30,293 (1,768,169)
------------ ------------
Net increase (decrease) in net assets from
operations (696,296) (1,814,357)
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Investment income and short-term
realized gains -- (170,448)
Realized gains - long-term (129,950) (89,753)
------------ ------------
Total distributions (129,950) (260,201)
TOTAL DECREASE IN NET ASSETS ($ 826,246) ($ 2,074,558)
NET ASSETS:
Beginning of year $ 6,568,076 $ 8,642,634
------------ ------------
End of year $ 5,741,830 $ 6,568,076
============ ============
See accompanying notes.
RESULTS OF NOVEMBER 13, 2002 STOCKHOLDER MEETING
================================================================================
The annual meeting of stockholders of the Fund was held on November 13, 2002. At
the meeting two nominees for Director were elected as follows:
VOTES FOR VOTES WITHHELD
Thomas J. Herzfeld 1,386,245 31,123
Michael A. Rubin 1,340,444 76,924
The terms of office as directors of Cecilia Gondor, Ann S. Lieff and Albert L.
Weintraub continued after the meeting.
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FINANCIAL HIGHLIGHTS
========================================================================================================================
SIX MONTHS ENDED YEAR ENDED JUNE 30
12/31/02 ----------------------------------------------------------
(UNAUDITED) 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 3.92 $ 5.15 $ 5.02 $ 6.12 $ 6.43
Operations:
Net investment loss (0.07) (0.10) (0.07) (0.10) (0.11)
Net realized and unrealized gain (loss)
on investments (0.35) (0.98) 0.20 (1.00) 0.51
---------- ---------- ---------- ---------- ----------
Total from (to) operations (0.42) (1.08) 0.13 (1.10) 0.40
---------- ---------- ---------- ---------- ----------
Distributions:
From investment income net -- (0.10) -- -- --
----------
From net realized gains (0.08) (0.05) -- -- (0.71)
---------- ---------- ----------
Total distributions (0.08) (0.15) -- -- (0.71)
Net asset value, end of period $ 3.42 $ 3.92 $ 5.15 $ 5.02 $ 6.12
---------- ---------- ---------- ---------- ----------
Per share market value, end of period $ 3.32 $ 3.48 $ 4.20 $ 5.06 $ 6.00
---------- ---------- ---------- ---------- ----------
Total investment return (loss) based on
market value per share (4.61%)1 (13.45%) (17.04%) (15.63%) 11.83%
---------- ---------- ---------- ---------- ----------
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $ 5,742 $ 6,568 $ 8,643 $ 8,424 $ 10,272
---------- ---------- ---------- ---------- ----------
Ratio of expenses to average net assets 5.06%1 3.77% 3.11% 3.11% 3.30%
---------- ---------- ---------- ---------- ----------
Ratio of investment loss -
net to average net assets (3.79%)1 (2.45%) (1.33%) (1.76%) (1.95%)
---------- ---------- ---------- ---------- ----------
Portfolio turnover rate 0% 18% 27% 10% 59%
---------- ---------- ---------- ---------- ----------
1 This ratio has been annualized; however, the percentage shown is not
necessarily indicative of results for a full year.
See accompanying notes.
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NOTES TO FINANCIAL STATEMENTS
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND RELATED MATTERS
--------------------------------
The Herzfeld Caribbean Basin Fund, Inc. (the Fund) is a non-diversified,
closed-end management investment company incorporated under the laws of the
State of Maryland on March 10, 1992, and registered under the Investment Company
Act of 1940. The Fund commenced investing activities in January, 1994. The Fund
is listed on the NASDAQ SmallCap Market and trades under the symbol "CUBA".
The Fund's investment objective is to obtain long-term capital appreciation. The
Fund pursues its objective by investing primarily in equity and equity-linked
securities of public and private companies, including U.S.-based companies, (i)
whose securities are traded principally on a stock exchange in a Caribbean Basin
Country or (ii) that have at least 50% of the value of their assets in a
Caribbean Basin Country or (iii) that derive at least 50% of their total revenue
from operations in a Caribbean Basin Country. The Fund's investment objective is
fundamental and may not be changed without the approval of a majority of the
Fund's outstanding voting securities.
At December 31, 2002, the Fund had investments in companies operating
principally in Mexico, The Cayman Islands and Panama, representing approximately
15%, 11% and 10% of the Fund's net assets, respectively.
The Fund's custodian and transfer agent is Investors Bank & Trust Company, based
in Boston, Massachusetts.
SECURITY VALUATION
------------------
Investments in securities traded on a national securities exchange (or reported
on the NASDAQ national market) are stated at the last reported sales price on
the day of valuation; other securities traded in the over-the-counter market and
listed securities for which no sale was reported on that date are stated at the
last quoted bid price. Short-term notes are stated at amortized cost, which is
equivalent to value. Restricted securities and other securities for which
quotations are not readily available are valued at fair value as determined by
the Board of Directors.
INCOME RECOGNITION
------------------
Security transactions are recorded on the trade date. Gains and losses on
securities sold are determined on the basis of identified cost. Dividend income
is recognized on the ex-
-13-
NOTES TO FINANCIAL STATEMENTS
================================================================================
dividend date, and interest income is recognized on an accrual basis. Discounts
and premiums on securities purchased are amortized over the life of the
respective securities.
DEPOSITS WITH FINANCIAL INSTITUTIONS
------------------------------------
The Fund may, during the course of its operations, maintain account balances
with financial institutions in excess of federally insured limits.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
-----------------------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
INCOME TAXES
------------
The Fund qualifies as a "regulated investment company" and as such (and by
complying with the applicable provisions of the Internal Revenue Code of 1986,
as amended) is not subject to federal income tax on taxable income (including
realized capital gains) that is distributed to shareholders.
The Fund has adopted a June 30 year-end for federal income tax purposes.
DISTRIBUTIONS TO STOCKHOLDERS
-----------------------------
Distributions to stockholders are recorded on the ex-dividend date. Income and
capital gain distributions are determined in accordance with income tax
regulations which may differ from accounting principles generally accepted in
the United States.
NOTE 2. NON-MARKETABLE SECURITES OWNED
Investment in securities includes $165,000 principal, 4.5%, 1977 Republic of
Cuba bonds purchased for $63,038. The bonds are listed on the New York Stock
Exchange and had been trading in default since 1960. A "regulatory halt" on
trading was imposed by the New York Stock Exchange in July, 1995. As of December
31, 2002, the position was valued at $0 by the Board of Directors, which
approximates the bonds' fair value.
-14-
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 3. TRANSACTIONS WITH AFFILIATES
HERZFELD / CUBA (the Advisor), a division of Thomas J. Herzfeld Advisors, Inc.,
is the Fund's investment advisor and charges a monthly fee at the annual rate of
1.45% of the Fund's average daily net assets.
During the six months ended December 31, 2002, the Fund paid $180 of brokerage
commissions to Thomas J. Herzfeld & Co., Inc., an affiliate of the Advisor.
NOTE 4. INVESTMENT TRANSACTIONS
During the six months ended December 31, 2002, purchases and sales of investment
securities were $0 and $236,219, respectively.
At December 31, 2002, the Fund's investment portfolio had gross unrealized gains
of $976,310 and gross unrealized losses of $2,270,573, resulting in a net
unrealized loss of $1,294,263.
PRIVACY POLICY
================================================================================
INFORMATION WE COLLECT
We collect nonpublic information about you from applications or other account
forms you complete, from your transactions with us, our affiliates or others
through transactions and conversations over the telephone.
INFORMATION WE DISCLOSE
We do not disclose information about you, or our former customers, to our
affiliates or to service providers or other third parties except on the limited
basis permitted by law. For example, we may disclose nonpublic information about
you to third parties to assist us in servicing your account with us and to send
transaction confirmations, annual reports, prospectuses and tax forms to you. We
may also disclose nonpublic information about you to government entities in
response to subpoenas.
OUR SECURITY PROCEDURES
To ensure the highest level of confidentiality and security, we maintain
physical, electronic and procedural safeguards that comply with federal
standards to guard your personal information. We also restrict access to your
personal and account information to those employees who need to know that
information to provide services to you.
-15-
THE HERZFELD CARIBBEAN BASIN FUND, INC.
The Herzfeld Building
P.O. Box 161465
Miami, FL 33116