UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-02363
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CORNERSTONE TOTAL RETURN FUND, INC.
-----------------------------------
(Exact name of registrant as specified in charter)
383 MADISON AVENUE, NEW YORK, NY 10179
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(Address of principal executive offices) (Zip code)
Jodi B. Levine 383 MADISON AVE, NEW YORK, NY
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(Name and address of agent for service)
Registrant's telephone number, including area code: 212-272-3550
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Date of fiscal year end: DECEMBER 31, 2003
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Date of reporting period: JANUARY 1, 2003 THROUGH DECEMBER 31, 2003
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Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its regulatory,
disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form
N-CSR, and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
Include a copy of the report transmitted to stockholders pursuant to
Rule 30e-1 under the Act (17 CFR 270.30e-1).
CORNERSTONE TOTAL
RETURN FUND, INC.
DECEMBER 31, 2003
This update contains the following two documents:
o Letter from the Fund's Chairman
o Annual Report to Shareholders
LETTER FROM THE FUND'S CHAIRMAN
January 23, 2004
Dear Fellow Shareholders:
We present the following annual report for Cornerstone Total Return Fund, Inc.
(the "Fund"), covering the year ended December 31, 2003. At the end of the year,
the Fund's net assets were $65.6 million and the Net Asset Value ("NAV") per
share was $13.89. The share price closed at $17.95 and the Fund's price discount
to NAV improved from 11.9% at the beginning of the year to a premium of 29.2% at
the end. After reflecting the reinvestment of monthly distributions totaling
$1.99 per share, the Fund achieved a total investment return at market value of
82.96% for the year ended December 31, 2003.
CREATING VALUE
The Fund, under the direction of its Board, has made substantial progress in
creating value for its shareholders. A focus on reducing expenses, combined with
the voluntary waiver of a portion of management fees by the Fund's investment
manager, held the overall expense ratio to 1.2% for the year.
Since the beginning of 2002, the Fund has maintained an aggressive fixed,
monthly distribution policy designed to provide significant flexibility to all
of the Fund's shareholders. It is our belief that shareholders are well served
by this policy that provides regular distributions in both up and down markets.
We are proud of this innovative concept and believe it has contributed
significantly to the Fund's positive performance.
Over the long-run, a well-managed, diversified equity portfolio provides the
best risk/reward tradeoff for many investors. Long-term equity returns are
generally found to be higher than those with fixed-income or balanced programs
and favorable tax treatment on capital gains makes the net returns even better
for taxable investors. The Fund's distribution policy recognizes that many
investors are willing to accept the potentially higher asset volatility in this
approach, but would prefer that stable distributions were available to them each
year to either reinvest or utilize for other purposes of their choosing.
Shortly after the end of the year, it is determined what portion of these
distributions is attributable to income, capital gains, or return-of-capital.
This year, the Fund's asset base grew even though a large portion of the year's
distribution was classified as a tax favored return-of-capital. It is important
for shareholders to consult their tax advisor on proper recognition of the
return-of-capital distributions with regard to the cost basis of their shares.
Each shareholder has the option to receive their distributions in cash or new
shares of the Fund and may change this election whenever they wish. It is a goal
that long-term investment returns will exceed the level of distributions, but
there is no guarantee that this goal will be met. If the amount of distributions
taken in cash exceeds the total investment return of the Fund, the assets of the
Fund will decline. If the total investment return of the Fund exceeds the amount
of cash distributions, as it did in 2003, the assets of the
Fund will increase. The distributions of those who chose to reinvest in 2003
participated in the Fund's strong
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1
LETTER FROM THE FUND'S CHAIRMAN (CONTINUED)
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market performance. We encourage you to consider the reinvestment option for
your distributions from the Fund.
ECONOMIC AND MARKET SUMMARY
After wading through early concerns surrounding the war in Iraq, the global
economy performed much better than expected a year ago. The major market indices
also closed out 2003 strongly positive. In addition to good global news, stocks
responded to a fast-recovering economy, benign inflation, and rising profits. In
a reversal of the situation for 2002, almost every area of the U.S. equity
market was up at the end of 2003. Tax cuts, increased government spending, and
the Federal Reserve's accommodative policy toward low interest rates all
contributed to boost economic activity. The U.S. economy seemed to be running
wide-open as the GDP grew at an almost unheard of annualized rate of 8.2% in the
third quarter.
In spite of all the good news, both the U.S. economy and the markets face risk.
Stimulus may generate enough growth to reawaken inflation concerns and lead to
increased interest rates. Prices for many equities, which are high relative to
earnings, may be vulnerable to even small disappointments. Significantly, the
unemployment level remained surprisingly high, though it dropped near the end of
the year. In spite of this, consumer confidence continues to improve as many
continue to anticipate job growth.
PORTFOLIO PERFORMANCE
Following a broadly diversified approach, the Fund's portfolio performed well in
this year's market climb, turning in double digit performance and comparing well
with its benchmark S&P 500 Index return of 28.7%. We believe that this approach
has served well through both up and down markets of recent years and will
continue to benefit the Fund and its stockholders for the long-term.
The investment manager attempts to enhance portfolio performance by taking
advantage of temporary and occasional pricing inefficiencies in certain
securities. To that end, the percentage of the portfolio represented by
discounted closed-end funds increased. The availability and magnitude of such
opportunities are unpredictable, and therefore, their effect on possible
portfolio out-performance may vary considerably from year to year.
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2
LETTER FROM THE FUND'S CHAIRMAN (CONCLUDED)
The Fund's Board of Directors, its officers, and its investment manager are
mindful of the trust that the Fund's shareholders have placed in us. We know you
have a choice, we appreciate your support, and we look forward to continuing our
service to you in the future.
Sincerely,
/s/ Ralph W. Bradshaw
---------------------
Ralph W. Bradshaw
Chairman
IN ADDITION TO HISTORICAL INFORMATION, THIS REPORT CONTAINS FORWARD-LOOKING
STATEMENTS, WHICH MAY CONCERN, AMONG OTHER THINGS, DOMESTIC AND FOREIGN MARKETS,
INDUSTRY AND ECONOMIC TRENDS AND DEVELOPMENTS AND GOVERNMENT REGULATION AND
THEIR POTENTIAL IMPACT ON THE FUND'S INVESTMENT PORTFOLIO. THESE STATEMENTS ARE
SUBJECT TO RISKS AND UNCERTAINTIES AND ACTUAL TRENDS, DEVELOPMENTS AND
REGULATIONS IN THE FUTURE AND THEIR IMPACT ON THE FUND COULD BE MATERIALLY
DIFFERENT FROM THOSE PROJECTED, ANTICIPATED OR IMPLIED. THE FUND HAS NO
OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS.
--------------------------------------------------------------------------------
THIS LETTER FROM THE FUND'S CHAIRMAN IS NOT A PART OF THE ANNUAL REPORT TO
SHAREHOLDERS THAT FOLLOWS.
3
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CORNERSTONE TOTAL RETURN FUND, INC.
PORTFOLIO SUMMARY - AS OF DECEMBER 31, 2003 (UNAUDITED)
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CORNERSTONE TOTAL
RETURN FUND, INC.
ANNUAL REPORT
DECEMBER 31, 2003
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CONTENTS
Portfolio Summary ....................................................... 1
Schedule of Investments ................................................. 2
Statement of Assets and Liabilities ..................................... 7
Statement of Operations ................................................. 8
Statement of Changes in Net Assets ...................................... 9
Financial Highlights .................................................... 10
Notes to Financial Statements ........................................... 11
Report of Independent Accountants ....................................... 15
Tax Information ......................................................... 16
Additional Information Regarding the Fund's Directors and Officers ...... 17
Description of Dividend Reinvestment Plan ............................... 20
Summary of General Information .......................................... 22
Shareholder Information ................................................. 22
Privacy Policy Notice ................................................... 23
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CORNERSTONE TOTAL RETURN FUND, INC.
PORTFOLIO SUMMARY - AS OF DECEMBER 31, 2003 (UNAUDITED)
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TOP TEN, BY SECTOR
Percent of
Sector Net Assets
------ ------------------------------------------------------ -----------
1. Financials 20.1
------ ------------------------------------------------------ -----------
2. Information Technology 16.9
------ ------------------------------------------------------ -----------
3. Consumer Discretionary 13.0
------ ------------------------------------------------------ -----------
4. Healthcare 12.1
------ ------------------------------------------------------ -----------
5. Industrials 11.2
------ ------------------------------------------------------ -----------
6. Consumer Staples 8.3
------ ------------------------------------------------------ -----------
7. Energy 5.4
------ ------------------------------------------------------ -----------
8. Telecommunication Services 3.1
------ ------------------------------------------------------ -----------
9. Closed-End Domestic Funds 3.0
------ ------------------------------------------------------ -----------
10. Utilities 2.5
------ ------------------------------------------------------ -----------
TOP TEN HOLDINGS, BY ISSUER
Percent of
Holding Sector Net Assets
----- ------------------------------------------------------------- ---------
1. Microsoft Corp. Information Technology 3.3
----- ------------------------------------------------------------- ---------
2. General Electric Co. Industrials 3.3
----- ------------------------------------------------------------- ---------
3. Exxon Mobil Corp. Energy 2.9
----- ------------------------------------------------------------- ---------
4. Pfizer Inc. Healthcare 2.6
----- ------------------------------------------------------------- ---------
5. Citigroup Inc. Financials 2.4
----- ------------------------------------------------------------- ---------
6. Tri-Continental Corp. Closed-End Domestic Funds 2.4
----- ------------------------------------------------------------- ---------
7. Wal-Mart Stores, Inc. Consumer Discretionary 2.3
----- ------------------------------------------------------------- ---------
8. Intel Corp. Information Technology 2.2
----- ------------------------------------------------------------- ---------
9. American International Group, Inc. Financials 2.2
----- ------------------------------------------------------------- ---------
10. International Business Machines Corp. Information Technology 2.0
----- ------------------------------------------------------------- ---------
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1
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CORNERSTONE TOTAL RETURN FUND, INC.
SCHEDULE OF INVESTMENTS - December 31, 2003
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No. of Value
Description Shares (Note A)
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EQUITY SECURITIES - 99.07%
UNITED STATES - 97.99%
CLOSED-END DOMESTIC FUNDS - 2.95%
Gabelli Global Multimedia
Trust, Inc.+ 9,700 $ 87,979
Tri-Continental Corp. 96,000 1,574,400
Zweig Fund, Inc. 55,300 270,970
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1,933,349
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CONSUMER DISCRETIONARY - 13.02%
Bed Bath & Beyond Inc.+ 2,500 108,375
Best Buy Co., Inc. 2,500 130,600
Carnival Corp. 5,300 210,569
Clear Channel
Communications, Inc. 2,700 126,441
Comcast Corp., Class A+ 8,508 279,658
Comcast Corp.,
Special Class A + 7,500 234,600
Costco Wholesale Corp.+ 4,600 171,028
CVS Corp. 2,500 90,300
Dana Corp. 2,500 45,875
Delphi Corp. 5,100 52,071
Eastman Kodak Co. 2,500 64,175
Federated Department Stores, Inc. 2,500 117,825
Ford Motor Co. 15,200 243,200
Fortune Brands, Inc. 2,500 178,725
Gannett Co., Inc. 2,500 222,900
Gap, Inc. (The) 6,900 160,149
General Motors Corp. 5,000 267,000
Harley-Davidson, Inc. 2,500 118,825
Harrah's Entertainment, Inc. 2,500 124,425
Hilton Hotels Corp. 5,000 85,650
Home Depot, Inc. (The) 17,800 631,722
Kohl's Corp.+ 2,500 112,350
Limited Brands 4,500 81,135
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No. of Value
Description Shares (Note A)
--------------------------------------------------------------------------------
CONSUMER DISCRETIONARY (CONTINUED)
Lowe's Companies, Inc. 6,200 $ 343,418
Mattel, Inc. 4,500 86,715
May Department Stores Co. (The) 2,500 72,675
McDonald's Corp. 10,600 263,198
Monsanto Co. 1,773 51,027
Office Depot, Inc. + 2,500 41,775
Omnicom Group Inc. 1,500 130,995
Reebok International Ltd. 2,500 98,300
Sears, Roebuck & Co. 2,500 113,725
Staples, Inc.+ 4,600 125,580
Starbucks Corp.+ 2,500 82,650
Target Corp. 7,100 272,640
Time Warner Inc.+ 31,500 566,684
TJX Companies, Inc. (The) 4,000 88,200
Viacom Inc., non-voting Class B 9,000 399,420
Wal-Mart Stores, Inc. 28,900 1,533,145
Walt Disney Co. (The) 14,200 331,286
Yum! Brands, Inc.+ 2,500 86,000
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8,545,031
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CONSUMER STAPLES - 8.26%
Albertson's, Inc. 2,500 56,625
Altria Group, Inc. 13,200 718,344
Anheuser-Busch Companies, Inc. 6,200 326,616
Archer-Daniels-Midland Co. 5,650 85,993
Campbell Soup Co. 3,200 85,760
Coca-Cola Co. (The) 16,000 812,000
Coca-Cola Enterprises Inc. 2,500 54,675
Colgate-Palmolive Co. 5,100 255,255
ConAgra Foods, Inc. 2,500 65,975
General Mills, Inc. 2,500 113,250
Gillette Co. (The) 8,600 315,878
H.J. Heinz Co. 2,700 98,361
Kimberly-Clark Corp. 5,000 295,450
See accompanying notes to financial statements.
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2
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CORNERSTONE TOTAL RETURN FUND, INC.
SCHEDULE OF INVESTMENTS - December 31, 2003 (CONTINUED)
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No. of Value
Description Shares (Note A)
--------------------------------------------------------------------------------
CONSUMER STAPLES (CONTINUED)
Kroger Co. (The)+ 6,600 $ 122,166
PepsiCo, Inc. 12,600 587,412
Procter & Gamble Co. (The) 7,500 749,100
Safeway Inc.+ 4,900 107,359
Sara Lee Corp. 6,300 136,773
Walgreen Co. 8,100 294,678
Wm. Wrigley Jr. Co. 2,500 140,525
-----------
5,422,195
-----------
ENERGY - 5.41%
Anadarko Petroleum Corp. 2,500 127,525
CenterPoint Energy, Inc. 5,700 55,233
ChevronTexaco Corp. 8,302 717,210
ConocoPhillips 3,669 240,576
El Paso Corp. 2,500 20,475
Exxon Mobil Corp. 46,500 1,906,500
Marathon Oil Corp. 2,500 82,725
Reliant Resources, Inc.+ 4,494 33,076
Schlumberger Ltd. 5,100 279,072
Unocal Corp. 2,500 92,075
-----------
3,554,467
-----------
FINANCIALS - 20.11%
AFLAC Inc. 4,000 144,720
Allstate Corp. (The) 5,200 223,704
American Express Co. 8,600 414,778
American International Group, Inc. 21,331 1,413,819
Bank of America Corp. 10,900 876,687
Bank of New York Co., Inc. (The) 5,900 195,408
Bank One Corp. 9,300 423,987
BB&T Corp. 4,500 173,880
Capital One Financial Corp. 1,000 61,290
Charles Schwab Corp. (The) 10,700 126,688
Citigroup Inc. 32,600 1,582,404
Fannie Mae 5,700 427,842
--------------------------------------------------------------------------------
No. of Value
Description Shares (Note A)
--------------------------------------------------------------------------------
FINANCIALS (CONTINUED)
Fifth Third Bancorp 5,100 $ 301,410
Fiserv, Inc.+ 2,500 98,775
FleetBoston Financial Corp. 8,500 371,025
Freddie Mac 5,800 338,256
Goldman Sachs Group, Inc. (The) 3,000 296,190
Hartford Financial
Services Group, Inc. (The) 4,600 271,538
HSBC Holdings plc, ADR 2,514 198,153
John Hancock Financial Services, Inc . 3,500 131,250
J.P. Morgan Chase & Co. 14,700 539,931
Lehman Brothers Holdings Inc. 2,500 193,050
Marsh & McLennan
Companies, Inc. 4,600 220,294
MBNA Corp. 10,050 249,743
Mellon Financial Corp. 4,800 154,128
Merrill Lynch & Co., Inc. 6,600 387,090
MetLife, Inc. 6,000 202,020
Morgan Stanley 6,200 358,794
National City Corp. 5,300 179,882
Northern Trust Corp. 1,100 51,062
PNC Financial Services Group 1,400 76,622
Principal Financial Group, Inc. 2,500 82,675
Progressive Corp. (The) 2,500 208,975
Prudential Financial, Inc. 5,000 208,850
State Street Corp. 1,600 83,328
SunTrust Banks, Inc. 1,500 107,250
Travelers Property Casualty Corp.,
Class A 1,731 29,046
Travelers Property Casualty Corp.,
Class B 3,558 60,379
U.S. Bancorp 12,200 363,316
Wachovia Corp. 8,100 377,379
Washington Mutual, Inc. 7,250 290,870
Wells Fargo & Co. 12,000 706,680
-----------
13,203,168
-----------
See accompanying notes to financial statements.
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3
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CORNERSTONE TOTAL RETURN FUND, INC.
SCHEDULE OF INVESTMENTS - December 31, 2003 (CONTINUED)
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No. of Value
Description Shares (Note A)
--------------------------------------------------------------------------------
HEALTHCARE - 12.09%
Abbott Laboratories 10,700 $ 498,620
Amgen Inc.+ 8,300 512,940
Baxter International Inc. 5,100 155,652
Becton, Dickinson & Co. 2,500 102,850
Boston Scientific Corp.+ 3,000 110,280
Bristol-Myers Squibb Co. 12,100 346,060
Cardinal Health, Inc. 2,500 152,900
CIGNA Corp. 800 46,000
Eli Lilly & Co. 6,600 464,178
Genzyme Corp.+ 5,000 246,700
Guidant Corp. 2,500 150,500
HCA Inc. 2,600 111,696
Health Management
Associates, Inc. 2,500 60,000
HEALTHSOUTH Corp.+ 2,500 11,450
Johnson & Johnson 18,200 940,212
King Pharmaceuticals, Inc.+ 2,500 38,150
McKesson Corp. 2,500 80,400
Medco Health Solutions, Inc.+ 1,531 52,039
Medtronic, Inc. 10,100 490,961
Merck & Co. Inc. 12,700 586,740
Pfizer Inc. 47,460 1,676,762
Schering-Plough Corp. 11,400 198,246
Stryker Corp. 1,000 85,010
Tenet Healthcare Corp.+ 5,000 80,250
UnitedHealth Group Inc. 5,000 290,900
Wyeth 10,500 445,725
----------
7,935,221
----------
INDUSTRIALS - 11.20%
3M Co. 5,000 425,150
Automatic Data Processing, Inc. 4,500 178,245
Boeing Co. (The) 6,700 282,338
Burlington Northern Santa Fe Corp. 5,000 161,750
--------------------------------------------------------------------------------
No. of Value
Description Shares (Note A)
--------------------------------------------------------------------------------
INDUSTRIALS (CONTINUED)
Caterpillar Inc. 2,500 $ 207,550
Cendant Corp.+ 7,100 158,117
Concord EFS, Inc.+ 5,000 74,200
CSX Corp. 2,500 89,850
Dover Corp. 3,500 139,125
Emerson Electric Co. 2,000 129,500
FedEx Corp. 2,500 168,750
General Dynamics Corp. 2,500 225,975
General Electric Co. 70,500 2,184,090
Honeywell International Inc. 12,300 411,189
Illinois Tool Works Inc. 2,500 209,775
Lockheed Martin Corp. 5,000 257,000
Masco Corp. 4,600 126,086
Paychex, Inc. 5,000 186,000
Raytheon Co. 2,500 75,100
Southwest Airlines Co. 6,100 98,454
Transocean Inc.+ 2,500 60,025
Tyco International Ltd. 17,600 466,400
United Parcel Service, Inc., Class B 9,000 670,950
United Technologies Corp. 2,200 208,494
Waste Management, Inc. 5,300 156,880
----------
7,350,993
----------
INFORMATION TECHNOLOGY - 16.91%
Agere Systems Inc., Class A+ 75 229
Agere Systems Inc., Class B+ 1,851 5,368
Agilent Technologies, Inc.+ 5,000 146,200
Altera Corp.+ 1,200 27,240
Analog Devices, Inc. 5,000 228,250
Apple Computer, Inc.+ 2,500 53,425
Applied Materials, Inc.+ 19,400 435,530
CIENA Corp.+ 1,500 9,960
Cisco Systems, Inc.+ 52,000 1,263,080
See accompanying notes to financial statements.
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4
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CORNERSTONE TOTAL RETURN FUND, INC.
SCHEDULE OF INVESTMENTS - December 31, 2003 (CONTINUED)
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No. of Value
Description Shares (Note A)
--------------------------------------------------------------------------------
INFORMATION TECHNOLOGY (CONTINUED)
Computer Associates
International, Inc. 2,700 $ 73,818
Corning Inc.+ 7,500 78,225
Dell Inc.+ 20,200 685,992
eBAY Inc.+ 3,500 226,065
Electronic Data
Systems Corp. 7,500 184,050
EMC Corp.+ 8,000 103,360
First Data Corp. 5,000 205,450
Hewlett-Packard Co. 15,842 363,891
Intel Corp. 44,500 1,432,900
International Business
Machines Corp. 14,200 1,316,056
JDS Uniphase Corp.+ 9,700 35,405
Linear Technology Corp. 2,500 105,175
Lucent Technologies Inc.+ 7,000 19,880
Maxim Integrated
Products, Inc. 2,500 124,500
Micron Technology, Inc.+ 5,500 74,085
Microsoft Corp. 79,800 2,197,692
Motorola, Inc. 16,100 226,527
Oracle Corp.+ 37,600 496,320
PerkinElmer, Inc. 1,500 25,605
QUALCOMM Inc. 3,400 183,362
Sanmina-SCI Corp.+ 4,000 50,440
Siebel Systems, Inc.+ 5,000 69,350
Solectron Corp.+ 5,700 33,687
Sun Microsystems, Inc.+ 24,600 110,454
Texas Instruments Inc. 13,500 396,630
Yahoo! Inc.+ 2,500 112,925
-----------
11,101,126
-----------
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No. of Value
Description Shares (Note A)
--------------------------------------------------------------------------------
MATERIALS - 2.40%
Air Products & Chemicals, Inc. 2,500 $ 132,075
Alcan Inc. 1,500 70,425
Alcoa Inc. 6,800 258,400
Dow Chemical Co. (The) 7,200 299,304
E .I. du Pont de Nemours & Co. 5,800 266,162
Georgia-Pacific Corp. 2,500 76,675
International Paper Co. 4,800 206,928
Praxair, Inc. 2,500 95,500
Rohm & Haas Co. 2,500 106,775
Weyerhaeuser Co. 1,000 64,000
----------
1,576,244
----------
TELECOMMUNICATION SERVICES - 3.13%
ALLTEL Corp. 2,500 116,450
AT&T Corp. 5,260 106,778
AT&T Wireless Services Inc.+ 15,567 124,380
BellSouth Corp. 12,700 359,410
SBC Communications Inc. 25,600 667,392
Sprint Corp. (FON Group) 4,100 67,322
Verizon Communications Inc. 17,400 610,392
----------
2,052,124
----------
UTILITIES - 2.51%
American Electric Power Co., Inc. 5,500 167,805
Dominion Resources, Inc. 5,000 319,150
Duke Energy Corp. 6,600 134,970
Edison International+ 5,000 109,650
Exelon Corp. 2,500 165,900
FirstEnergy Corp. 5,000 176,000
Public Service Enterprise Group Inc. 2,500 109,500
Scottish Power plc, ADR 4,000 108,720
See accompanying notes to financial statements.
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5
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No. of Value
Shares (Note A)
--------------------------------------------------------------------------------
UTILITIES (CONTINUED)
Southern Co. (The) 5,000 $ 151,250
TXU Corp. 3,700 87,764
Williams Companies, Inc. (The) 2,500 24,550
Xcel Energy, Inc. 5,500 93,390
----------
1,648,649
----------
TOTAL UNITED STATES
(cost - $69,451,527) 64,322,567
----------
CZECH REPUBLIC - 1.08%
CONSUMER DISCRETIONARY - 1.08%
Bonton AS+# 68,590 118,498
Bonton Book AS+# 68,590 118,498
Bonton Disc AS+# 68,590 118,498
Bonton Film Entertainment AS+# 68,590 118,498
Bonton Music AS+# 68,590 118,498
Bonton Pictures AS+# 68,590 118,498
TOTAL CZECH REPUBLIC
(cost - $894,867) 710,988
----------
TOTAL EQUITY SECURITIES
(cost - $70,346,394) 65,033,555
----------
Principal
Amount
(000's)
---------
SHORT TERM INVESTMENTS - 2.46%
REPURCHASE AGREEMENTS - 2.46%
Bear, Stearns & Co. Inc.
(Agreement dated 12/31/03 to be
repurchased at $685,245),
0.85%, 01/02/04 (Note F) $ 685 685,213
--------------------------------------------------------------------------------
Principal
Amount Value
Description (000's) (Note A)
--------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (CONTINUED)
Bear, Stearns & Co. Inc.
(Agreement dated 12/31/03 to be
repurchased at $918,434),
1.06%*, 01/02/04 ** (Note E) $ 918 $ 918,380
Bear, Stearns & Co. Inc.
(Agreement dated 12/31/03 to be
repurchased at $6,729),
0.94%*, 01/02/04 ** (Note E) 7 6,729
------------
TOTAL SHORT-TERM INVESTMENTS
(cost - $1,610,322) 1,610,322
------------
TOTAL INVESTMENTS - 101.53%
(cost - $71,956,716) (Notes A, E, F, G) 66,643,877
------------
LIABILITIES IN EXCESS OF OTHER
ASSETS - (1.53)% (1,002,136)
------------
NET ASSETS - 100.00% $ 65,641,741
============
----------------------------------
+ Non-income producing security.
# Security fair valued in accordance with procedures established by the
Board of Directors.
* Stated interest rate, before rebate earned by borrower of securities on
loan.
** Represents investment purchased with cash collateral received for
securities on loan.
ADR American Depositary Receipts.
See accompanying notes to financial statements.
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6
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CORNERSTONE TOTAL RETURN FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 2003
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ASSETS
Investments, at value (Cost $71,956,716) (Notes A, E, F, G) $ 66,643,877
Receivables:
Dividends 83,355
Interest 886
Prepaid expenses 925
------------
Total Assets 66,729,043
------------
LIABILITIES
Payables:
Upon return of securities loaned (Note E) 925,109
Investment management fees (Note B) 56,678
Other accrued expenses 105,515
------------
Total Liabilities 1,087,302
------------
NET ASSETS (applicable to 4,726,629 shares of common stock outstanding) $ 65,641,741
============
NET ASSET VALUE PER SHARE ($65,641,741 / 4,726,629) $ 13.89
============
NET ASSETS CONSISTS OF
Capital stock, $0.01 par value; 4,726,629 shares issued and outstanding
(15,000,000 shares authorized) $ 47,266
Paid-in capital 85,550,471
Accumulated net realized loss on investments (14,643,157)
Net unrealized depreciation in value of investments (5,312,839)
------------
Net assets applicable to shares outstanding $ 65,641,741
============
See accompanying notes to financial statements.
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7
--------------------------------------------------------------------------------
CORNERSTONE TOTAL RETURN FUND, INC.
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2003
--------------------------------------------------------------------------------
INVESTMENT INCOME
Income (Note A):
Dividends $ 1,111,106
Interest 14,198
Foreign taxes withheld (152)
------------
Total Investment Income 1,125,152
------------
Expenses:
Investment management fees (Note B) 609,416
Administration fees 60,929
Transfer agent fees 44,409
Legal and audit fees (Note B) 35,147
Directors' fees 33,500
Accounting fees 32,570
Stock exchange listing fees 21,355
Printing 14,360
Custodian fees 11,937
Insurance 7,372
------------
Total Expenses 870,995
Less: Management fee waivers (Note B) (123,359)
Less: Fees paid indirectly (Note B) (16,716)
------------
Net Expenses 730,920
------------
Net Investment Income 394,232
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized loss from investments (403,402)
Net change in unrealized depreciation in value of investments 13,990,328
------------
Net realized and unrealized gain on investments 13,586,926
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 13,981,158
============
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
8
--------------------------------------------------------------------------------
CORNERSTONE TOTAL RETURN FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
For the Years Ended
December 31,
----------------------------
2003 2002
----------- ------------
INCREASE IN NET ASSETS
Operations:
Net investment income $ 394,232 $ 397,285
Net realized loss from investments (403,402) (10,666)
Net change in unrealized depreciation in value of
Investments 13,990,328 (8,144,534)
------------ ------------
Net increase/(decrease) in net assets resulting from operations
13,981,158 (7,757,915)
------------ ------------
Dividends and distributions to shareholders (Notes A, G):
Net investment income (394,232) (397,285)
Return-of-capital (8,947,881) (4,727,860)
------------ ------------
Total dividends and distributions to shareholders (9,342,113) (5,125,145)
------------ ------------
Capital stock transactions (Note D):
Net assets received in conjunction with Merger
Agreement (Note A) -- 33,396,970
Proceeds from 68,969 and 47,882 shares newly issued in
reinvestment of distributions, respectively 941,371 610,487
Cost of 7,500 and 43,900 shares repurchased, respectively (90,050) (520,502)
------------ ------------
Net increase in net assets resulting from capital stock 851,321 33,486,955
transactions
------------ ------------
Total increase in net assets 5,490,366 20,603,895
------------ ------------
NET ASSETS
Beginning of year 60,151,375 39,547,480
------------ ------------
End of year $ 65,641,741 $ 60,151,375
============ ============
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
9
--------------------------------------------------------------------------------
CORNERSTONE TOTAL RETURN FUND, INC.
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Contained below is per share operating performance data for a share of common
stock outstanding, total investment return, ratios to average net assets and
other supplemental data for each year indicated. This information has been
derived from information provided in the financial statements and market price
data for the Fund's shares.
-------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
---------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 12.89 $ 18.30 $ 18.28 $ 17.62 $ 18.78
--------- --------- --------- --------- ---------
Net investment income 0.08# 0.15# 0.52 1.07 1.03
Net realized and unrealized gain/(loss)
on investments 2.91 (3.57) 0.24 0.63 (1.20)
--------- --------- --------- --------- ---------
Net increase/(decrease) in net assets
resulting
from operations 2.99 (3.42) 0.76 1.70 (0.17)
--------- --------- --------- --------- ---------
Dividends and distributions to shareholders:
Net investment income (0.08) (0.18) (0.66) (1.05) (1.01)
Return-of-capital (1.91) (1.80) (0.09) - -
--------- --------- --------- --------- ---------
Total dividends and distributions to (1.99) (1.98) (0.75) (1.05) (1.01)
shareholders
--------- --------- --------- --------- ---------
Capital stock transactions:
Anti-dilutive effect due to capital stock
repurchased -- 0.02 0.01 0.01 0.02
Dilutive effect due to shares
ssued in reinvestment of dividends
iand distributions -- (0.03) -- -- --
--------- --------- --------- --------- ---------
Total capital stock transactions -- (0.01) 0.01 0.01 0.02
--------- --------- --------- --------- ---------
Net asset value, end of year $ 13.89 $ 12.89 $ 18.30 $ 18.28 $ 17.62
========= ========= ========= ========= =========
Market value, end of year $ 17.95 $ 11.35 $ 16.29 $ 15.875 $ 14.250
========= ========= ========= ========= =========
Total investment return (a) 82.96% (19.30)% 8.91% 19.02% (8.39)%
========= ========= ========= ========= =========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000 omitted) $ 65,642 $ 60,151 $ 39,547 $ 39,640 $ 38,283
Ratio of expenses to average net assets,
net of fee waivers, if any (b) 1.20% 1.50% 3.01% 1.06% 1.05%
Ratio of expenses to average net assets,
excluding fee waivers, if any (c) 1.43% 2.07% 3.01% 1.06% 1.05%
Ratio of expenses to average net assets,
net of fee waivers, if any (c) 1.23% 1.63% 3.01% 1.06% 1.05%
Ratio of net investment income to
average net assets 0.65% 1.01% 2.77% 5.97% 5.60%
Portfolio turnover 3.62% 86.60% - 15.87% 16.09%
--------------------------------------------------------------------------------------------------------------
# Based on average shares outstanding.
(a) Total investment return at market value is based on the changes in market
price of a share during the year and assumes reinvestment of dividends and
distributions, if any, at actual prices pursuant to the Fund's dividend
reinvestment plan. Total investment return does not reflect brokerage
commissions.
(b) Expenses are net of fees paid indirectly. (c) Expenses exclude the
reduction for fees paid indirectly.
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
10
--------------------------------------------------------------------------------
CORNERSTONE TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE A. SIGNIFICANT ACCOUNTING POLICIES
Cornerstone Total Return Fund, Inc. (the "Fund") was incorporated in New York on
March 16, 1973 and commenced investment operations on May 15, 1973. Its
investment objective is to seek total return consisting of capital appreciation
with current income as a secondary objective. The Fund is registered under the
Investment Company Act of 1940, as amended, as a closed-end, diversified
management investment company. On October 31, 2002, the Fund (then known as "EIS
Fund, Inc.") consummated a merger with The Cornerstone Strategic Return Fund,
Inc. (the "Predecessor Fund"). Pursuant to the terms of the agreement governing
the merger, each share of common stock of the Predecessor Fund was converted
into an equivalent dollar amount of full shares of common stock of the Fund,
based on the net asset value of the Fund and the Predecessor Fund as of October
30, 2002 ($13.35 and $7.33, respectively), resulting in a conversion ratio of
0.5490 shares of the Fund for each share of the Predecessor Fund resulting in
the issuance of 2,500,087 Fund shares. Cash was paid in lieu of fractional
shares. Net assets of the Fund and the Predecessor Fund as of the merger date
were $29,172,812 and $33,396,970, including unrealized depreciation of
$5,895,432 and $12,013,315, respectively. In addition, the Predecessor Fund's
net assets included undistributed capital losses of $14,137,957. Total net
assets after the merger were $62,569,782. Upon the consummation of the merger,
the Fund changed its name to Cornerstone Total Return Fund, Inc.
The following is a summary of significant accounting policies consistently
followed by the Fund:
MANAGEMENT ESTIMATES: The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
("GAAP") requires management to make certain estimates and assumptions that may
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION: Investments are stated at value in the accompanying
financial statements. All equity securities shall be valued at the closing price
on the exchange or market on which the security is primarily traded ("Primary
Market"). If the security did not trade on the Primary Market, it shall be
valued at the closing price on another exchange where it trades. If there are no
such sale prices, the value shall be the most recent bid, and if there is no
bid, the security shall be valued at the most recent asked. If no pricing
service is available and there are more than two dealers, the value shall be the
mean of the highest bid and lowest ask. If there is only one dealer, then the
value shall be the mean if bid and ask are available, otherwise the value shall
be the bid. All other securities and assets are valued as determined in good
faith by the Board of Directors. Short-term investments having a maturity of 60
days or less are valued on the basis of amortized cost. The Board of Directors
has established general guidelines for calculating fair value of not readily
marketable securities. At December 31, 2003, the Fund held 1.08% of its net
assets in securities valued in good faith by the Board of Directors with an
aggregate cost of $894,867 and a fair value of $710,988. The net asset value per
share of the Fund is calculated weekly and on the last business day of the month
with the exception of those days on which the American Stock Exchange, LLC is
closed.
REPURCHASE AGREEMENTS: The Fund has agreed to purchase securities from financial
institutions subject to the seller's agreement to repurchase them at an
agreed-upon time and price ("repurchase agreements"). The financial institutions
with whom the Fund enters into repurchase agreements are banks and
broker/dealers, which Cornerstone Advisors, Inc. (the Fund's "Manager" or
"Cornerstone") considers creditworthy. The seller under a repurchase agreement
will be required to maintain the value of
--------------------------------------------------------------------------------
11
--------------------------------------------------------------------------------
CORNERSTONE TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
the securities as collateral, subject to the agreement at not less than the
repurchase price plus accrued interest. Cornerstone monitors daily the
mark-to-market of the value of the collateral, and, if necessary, requires the
seller to maintain additional securities, so that the value of the collateral is
not less than the repurchase price. Default by or bankruptcy of the seller
would, however, expose the Fund to possible loss because of adverse market
action or delays in connection with the disposition of the underlying
securities.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: Investment transactions are
accounted for on the trade date. The cost of investments sold is determined by
use of the specific identification method for both financial reporting and
income tax purposes. Interest income is recorded on an accrual basis; dividend
income is recorded on the ex-dividend date.
TAXES: No provision is made for U.S. federal income or excise taxes as it is the
Fund's intention to continue to qualify as a regulated investment company and to
make the requisite distributions to its shareholders which will be sufficient to
relieve it from all or substantially all U.S. federal income and excise taxes.
DISTRIBUTIONS OF INCOME AND GAINS: Effective January 2002, the Fund initiated a
fixed, monthly distribution to shareholders. To the extent that these
distributions exceed the current earnings of the Fund, the balance will be
generated from sales of portfolio securities held by the Fund, which will either
be short-term or long-term capital gains or a tax-free return-of-capital. Prior
thereto, the Fund distributed at least annually to shareholders, substantially
all of its net investment income and net realized short-term capital gains, if
any. The Fund determines annually whether to distribute any net realized
long-term capital gains in excess of net realized short-term capital losses,
including capital loss carryovers, if any. An additional distribution may be
made to the extent necessary to avoid the payment of a 4% U.S. federal excise
tax. Dividends and distributions to shareholders are recorded by the Fund on the
ex-dividend date.
The character of dividends and distributions made during the year ended December
31, 2003 from net investment income or net realized gains may differ from their
ultimate characterization for U.S. income tax purposes due to U.S. generally
accepted accounting principles/tax differences in the character of income and
expense recognition.
NOTE B. AGREEMENTS
Cornerstone serves as the Fund's investment manager with respect to all
investments. As compensation for its management services, Cornerstone receives
from the Fund, an annual fee, calculated weekly and paid monthly, equal to 1.00%
of the Fund's average weekly net assets. Cornerstone has voluntarily agreed to
waive its management fees from the Fund to the extent that monthly operating
expenses exceed 0.10% of average net assets calculated monthly. For the year
ended December 31, 2003, Cornerstone earned $609,416 for investment management
services, of which it waived $123,359. Effective January 1, 2004, the Manager
has voluntarily undertaken to waive its investment management fees to the extent
such total operating expenses exceed an annualized rate of 0.125% in a month.
The Manager may discontinue such undertaking at any time during the fiscal year
without notice to fund shareholders.
Included in the Statement of Operations, under the caption FEES PAID INDIRECTLY,
are expense offsets of $16,716 arising from credits earned on portfolio
transactions executed with a broker, pursuant to directed brokerage arrangement.
The Fund paid or accrued approximately $1,328 and $18,429 for the year ended
December 31, 2003 for legal services to Blank Rome LLP ("Blank") and Spitzer &
Feldman P.C. ("Spitzer"), current and former counsel, respectively, to the Fund.
Thomas R. Westle, a current partner of Blank and former partner
--------------------------------------------------------------------------------
12
--------------------------------------------------------------------------------
CORNERSTONE TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
of Spitzer, serves as secretary of the Fund.
At December 31, 2003, pursuant to regulatory filings, affiliates owned
approximately 35% of the outstanding shares of the Fund based on a Schedule
13G/A filing with the Securities and Exchange Commission on January 8, 2004.
NOTE C. INVESTMENT IN SECURITIES
For the year ended December 31, 2003, purchases and sales of securities, other
than short-term investments, were $2,172,807 and $10,534,127, respectively.
NOTE D. SHARE REPURCHASE PROGRAM
Pursuant to Section 23 of the Investment Company Act of 1940, as amended the
Fund may in the future purchase shares of its common stock on the open market
from time to time, at such times, and in such amounts as may be deemed
advantageous to the Fund. Nothing herein shall be considered a commitment to
purchase such shares. For the year ended December 31, 2003, the Fund repurchased
7,500 of its shares for a total cost of $ 90,050 at a weighted average discount
of 12.01% from net asset value. The discount of the individual repurchases
ranged from 11.76% - 12.13%. For the year ended December 31, 2002, the Fund
purchased 43,900 shares for a total cost of $520,502 at a weighted average
discount of 13.56% from net asset value. The discount of the individual
repurchases ranged from 9.87% - 16.26%. No limit has been placed on the number
of shares to be purchased by the Fund other than those imposed by federal
securities laws.
All purchases are made in accordance with federal securities laws, with shares
repurchased held in treasury, effective January 1, 2002.
NOTE E. SECURITIES LENDING
To generate additional income, the Fund may lend up to 33 1/3% of its total
assets. The Fund receives payments from borrowers equivalent to the dividends
and interest that would have been earned on securities lent while simultaneously
seeking to earn interest on the investment of cash collateral. Loans are subject
to termination by the Fund or the borrower at any time, and are, therefore, not
considered to be illiquid investments. Loans of securities are required at all
times to be secured by collateral equal to at least 100% of the market value of
securities on loan. However, in the event of default or bankruptcy of the other
party to the agreement, realization and/or retention of the collateral may be
subject to legal proceedings. In the event that the borrower fails to return
securities, and collateral maintained by lender is insufficient to cover the
value of loaned securities, the borrower is obligated to pay the amount of the
shortfall (and interest thereon) to the Fund. However, there can be no assurance
the Fund can recover this amount. The value of securities on loan to brokers at
December 31, 2003 was $891,462. Any cash collateral received is reinvested into
repurchase agreements, which in turn are collateralized by various U.S.
Government and Agency securities. These repurchase agreements have been
segregated to satisfy the future commitment to return the cash collateral.
During the year ended December 31, 2003, the Fund earned $1,466 in securities
lending income that is included under the caption INTEREST in the Statement of
Operations.
NOTE F. COLLATERAL FOR REPURCHASE AGREEMENT
Listed below is the collateral associated with the repurchase agreement with
Bear, Stearns & Co. Inc. outstanding at December 31, 2003.
PRINCIPAL MARKET
ISSUER AMOUNT MATURITY VALUE
(000'S)
United
States
Treasury Bond,
(interest only) $1,260 11/15/15 $707,125
========
--------------------------------------------------------------------------------
13
--------------------------------------------------------------------------------
CORNERSTONE TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
--------------------------------------------------------------------------------
NOTE G. FEDERAL INCOME TAXES
Income and capital gains distributions are determined in accordance with federal
income tax regulations, which may differ from GAAP. These differences are
primarily due to differing treatments of losses deferred due to wash sales and
Post-October losses (as later defined), and excise tax regulations.
The tax characteristic of dividends and distributions paid during the year ended
December 31, 2003 were ordinary income and return-of-capital of $394,232 and
$8,947,881, respectively.
At December 31, 2003, the components of distributable earnings on a tax basis,
for the Fund were as follows:
Capital loss carryforward $(14,569,481)
Unrealized depreciation (5,386,515)
------------
Total loss $(19,955,996)
============
Under current tax law, certain capital losses realized after October 31 within a
taxable year may be deferred and treated as occurring on the first day of the
following tax year ("Post-October losses"). For the tax period ended
December 31, 2003, the Fund did not realize any of these losses.
At December 31, 2003, the Fund had a capital loss carryforward for U.S. federal
income tax purposes of $14,569,481 of which $91,132 expires in 2008, $14,052,643
expires in 2010 and $425,706 expires in 2011.
At December 31, 2003, the identified cost for federal income tax purposes, as
well as the gross unrealized appreciation from investments for those securities
having an excess of value over cost, gross unrealized depreciation from
investments for those securities having an excess of cost over value and the net
unrealized depreciation from investments were $72,030,392, $3,894,525,
$(9,281,040) and $(5,386,515), respectively.
At December 31, 2003, the Fund reclassified $8,947,881 from distributions in
excess of net investment income to paid-in capital, to adjust for current period
permanent book/tax differences. In addition, the Fund reissued 51,400 Treasury
shares with a cost of $610,552, such amount was reclassified to paid-in capital.
Net assets were not affected by these reclassifications.
--------------------------------------------------------------------------------
14
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Cornerstone Total Return Fund, Inc.
New York, New York
We have audited the accompanying statement of assets and liabilities of
Cornerstone Total Return Fund, Inc., including the schedule of investments, as
of December 31, 2003, and the related statement of operations for the year then
ended, and the statement of changes in net assets and the financial highlights
for each of the two years in the period 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 financial highlights for each of
the three years in the period ended December 31, 2001 have been audited by other
auditors, whose report dated February 8, 2002 expressed an unqualified opinion
on such financial highlights.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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. Our procedures included confirmation of
securities owned as of December 31, 2003 by correspondence with the custodian.
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.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Cornerstone Total Return Fund, Inc. as of December 31, 2003, the results of its
operations for the year then ended, and the changes in its net assets and the
financial highlights for each of the two years in the period then ended, in
conformity with accounting principles generally accepted in the United States of
America.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
February 13, 2004
--------------------------------------------------------------------------------
15
TAX INFORMATION (UNAUDITED)
Cornerstone Total Return Fund, Inc. (the "Fund") is required by Subchapter M of
the Internal Revenue Code of 1986, as amended, to advise its shareholders within
60 days of the Fund's year end (December 31, 2003) as to the U.S. federal tax
status of dividends and distributions received by the Fund's shareholders in
respect of such fiscal year. During the year ended December 31, 2003, the
following dividends and distributions per share were paid by the Fund:
PAYMENT DATE: 1/31/03 2/28/03 3/31/03 4/30/03 5/30/03 6/30/03
------- ------- ------- ------- ------- -------
Ordinary Income: $ 0.007 $ 0.007 $ 0.007 $ 0.007 $ 0.007 $ 0.007
Return-of-Capital: $ 0.158 $ 0.158 $ 0.158 $ 0.158 $ 0.158 $ 0.158
------- ------- ------- ------- ------- -------
Total: $ 0.165 $ 0.165 $ 0.165 $ 0.165 $ 0.165 $ 0.165
------- ------- ------- ------- ------- -------
PAYMENT DATE: 7/31/03 8/29/03 9/30/03 10/31/03 11/28/03 12/31/03
------- ------- ------- -------- -------- --------
Ordinary Income: $ 0.007 $ 0.007 $ 0.007 $ 0.007 $ 0.007 $ 0.007
Return-of-Capital: $ 0.158 $ 0.158 $ 0.158 $ 0.158 $ 0.158 $ 0.169
------- ------- ------- ------- ------- -------
Total: $ 0.165 $ 0.165 $ 0.165 $ 0.165 $ 0.165 $ 0.176
------- ------- ------- ------- ------- -------
Ordinary income dividends should be reported as dividend income on Form 1040. To
the extent that the distributions represent a return of your investment they are
not taxed as ordinary income dividends and are sometimes referred to as
nontaxable distributions. A return-of-capital distribution reduces the cost
basis of your shares in the Fund.
The Fund has met the requirements to pass through all ordinary income as
qualified dividends as noted on Box 1B on Form 1099-DIV. Please note that to
utilize the lower tax rate for qualifying dividend income shareholders must have
held their shares in the Fund for 60 days or more.
Foreign shareholders will generally be subject to U.S. withholding tax on the
amount of their distribution(s).
In general, distributions received by tax-exempt recipients (E.G., IRA's and
Keoghs) need not be reported as taxable income for U.S. federal income tax
purposes. However, some retirement trusts (E.G., corporate, Keogh and 403(b)(7)
plans) may need this information for their annual information reporting.
Shareholders are strongly advised to consult their own tax advisers with respect
to the tax consequences of their investment in the Fund.
--------------------------------------------------------------------------------
16
ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND OFFICERS (UNAUDITED)
POSITION(S) PRINCIPAL OCCUPATION POSITION WITH FUND
NAME AND ADDRESS (AGE)* HELD WITH FUND OVER LAST 5 YEARS SINCE
-------------------------------- ------------------- -------------------------------------------- --------------------
Ralph W. Bradshaw** (53) Chairman of the President, Cornerstone Advisors, Inc.; 2001
Board of Financial Consultant; Vice President, Deep
Directors and Discount Advisors, Inc. (1993-1999);
President Previous Director of The Austria Fund,
Inc.; Director of Investors First Fund,
Inc., Progressive Return Fund, Inc. and
Cornerstone Strategic Value Fund, Inc.
Thomas H. Lenagh (81) Director Chairman of the Board of Photonics 2002
Products Group; Independent Financial
Adviser; Director of Investors First Fund,
Inc., Cornerstone Strategic Value Fund,
Inc., Progressive Return Fund, Inc., The
Adams Express Company and Petroleum and
Resources Corporation.
Edwin Meese III (72) Director Distinguished Fellow, The Heritage 2002
Foundation, Washington D.C.; Distinguished
Visiting Fellow at the Hoover Institution,
Stanford University; Distinguished Senior
Fellow at the Institute of United States
Studies, University of London; Senior
Adviser, Revelation L.P.; Formerly U.S.
Attorney General under President Ronald
Reagan; Director of Investors First Fund,
Inc.; Progressive Return Fund, Inc. and
Cornerstone Strategic Value Fund, Inc.
--------------------------------------------------------------------------------
17
ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND
OFFICERS (UNAUDITED) (CONTINUED)
POSITION(S) PRINCIPAL OCCUPATION POSITION WITH FUND
NAME AND ADDRESS (AGE)* HELD WITH FUND OVER LAST 5 YEARS SINCE
-------------------------------- ------------------- -------------------------------------------- --------------------
Scott B. Rogers (48) Director Chief Executive Officer, Asheville 2001
Buncombe Community Christian Ministry;
President, ABCCM Doctor's Medical Clinic;
Director, Faith Partnerships Inc.;
Director, A-B Vision Board, Appointee, NC
Governor's Commission on Welfare to Work;
Chairman and Director, Recycling
Unlimited; Director, Interdenominational
Ministerial Alliance; Director of
Cornerstone Strategic Value Fund, Inc. and
Progressive Return Fund, Inc.
Andrew A. Strauss (50) Director Attorney and senior member of Strauss & 2001
Associates, P.A., Attorneys, Asheville and
Hendersonville, NC; previous President of
White Knight Healthcare, Inc. and LMV
Leasing, Inc., a wholly owned subsidiary
of Xerox Credit Corporation; Director of
Investors First Fund, Inc.; Cornerstone
Strategic Value Fund, Inc., Progressive
Return Fund, Inc., Investors First Fund,
Inc., Memorial Mission Hospital
Foundation, Deerfield Episcopal Retirement
Community and Asheville Symphony.
Glenn W. Wilcox, Sr. (72) Director Chairman of the Board and Chief Executive 2001
Officer of Wilcox Travel Agency, Inc.;
Director, Champion Industries, Inc.;
Chairman of Tower Associates, Inc. (a real
estate venture); Director and Chairman of
Audit Committee Investors First Fund,
Inc.; Director, Wachovia Corp.; Board
Trustee Appalachian State University;
Director and Chairman of Audit Committee
of Cornerstone Strategic Value Fund, Inc.
and Progressive Return Fund, Inc.
--------------------------------------------------------------------------------
18
ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND
OFFICERS (UNAUDITED) (CONCLUDED)
POSITION(S) PRINCIPAL OCCUPATION POSITION WITH FUND
NAME AND ADDRESS (AGE)* HELD WITH FUND OVER LAST 5 YEARS SINCE
-------------------------------- ------------------- -------------------------------------------- --------------------
Gary A. Bentz** (47) Director, Vice Chief Financial Officer, Chairman 2001
President and and Shareholder of Cornerstone Advisors,
Treasurer Inc.; Previous Director of The Austria
Fund, Inc.; Financial Consultant,
Certified Public Accountant; Chief
Financial Officer of Deep Discount
Advisors, Inc. (1993-2000); Director, Vice
President and Treasurer of Progressive
Return Fund, Inc. and Cornerstone
Strategic Value Fund, Inc.
Thomas R. Westle (50) Secretary Partner, Blank Rome LLP (October 31, 2001
405 Lexington Avenue 2003-Present), prior thereto Partner,
New York, NY 10174 Spitzer & Feldman P.C. (May, 1998-October
30, 2003).
--------------------------------------------------------------------------------
* The mailing address of each Director with respect to the Fund's
operation is 383 Madison Ave. 23rd Floor, New York, NY 10179.
** Designates a director who is an "interested person" of the Fund as
defined by the Investment Company Act of 1940, as amended. Messrs.
Bradshaw and Bentz are interested persons of the Fund by virtue of
their current positions with the Investment Manager of the Fund.
--------------------------------------------------------------------------------
19
DESCRIPTION OF DIVIDEND REINVESTMENT PLAN (UNAUDITED)
Shareholders who have Shares registered directly in their own names
automatically participate in the Fund's Dividend Reinvestment Plan (the "Plan"),
unless and until an election is made to withdraw from the Plan on behalf of such
participating shareholders. Shareholders who do not wish to have distributions
automatically reinvested should so notify American Stock Transfer & Trust Co.
(the "Agent") at P.O. Box 922, Wall Street Station, New York, NY 10269-0560 or
call (877) 248-6416. Under the Plan, all of the Fund's dividends and other
distributions to shareholders are reinvested in full and fractional Shares as
described below.
When the Fund declares an income dividend or a capital gain or other
distribution (each, a "Dividend" and collectively, "Dividends"), the Agent, on
the shareholders' behalf, will: (i) receive additional authorized shares from
the Fund either newly issued or repurchased from shareholders by the Fund and
held as treasury stock ("Newly Issued Shares") or, (ii) at the sole discretion
of the Board of Directors, be authorized to purchase outstanding shares on the
open market, on the American Stock Exchange, LLC or elsewhere, with cash
allocated to it by the Fund ("Open Market Purchases").
Shares acquired by the Agent in Open Market Purchases will be allocated to the
reinvesting shareholders based on the average cost of such Open Market
Purchases. Alternatively, the Agent will allocate Newly Issued Shares to the
reinvesting shareholders at a price equal to the average closing price of the
Fund over the five trading days preceding the payment date of such dividend.
Registered shareholders who acquire their shares through Open Market Purchases
and who do not wish to have their Dividends automatically reinvested should so
notify the Fund in writing. If a Shareholder has not elected to receive cash
Dividends and the Agent does not receive notice of an election to receive cash
Dividends prior to the record date of any dividend, the shareholder will
automatically receive such Dividends in additional Shares.
Participants in the Plan may withdraw from the Plan by providing written notice
to the Agent at least 30 days prior to the applicable Dividend payment date.
When a participant withdraws from the Plan, or upon termination of the Plan as
provided below, certificates for whole shares credited to his/her account under
the Plan will, upon request, be issued. Whether or not a participant requests
that certificates for whole shares be issued, a cash payment will be made for
any fraction of a Share credited to such account.
The Agent will maintain all shareholder accounts in the Plan and furnish written
confirmations of all transactions in the accounts, including information needed
by shareholders for personal and tax records. The Agent will hold shares in the
account of each Plan participant in non-certificated form in the name of the
participant, and each shareholder's proxy will include those shares purchased
pursuant to the Plan. Each participant, nevertheless, has the right to receive
certificates for whole shares owned. The Agent will distribute all proxy
solicitation materials to participating shareholders.
In the case of shareholders, such as banks, brokers or nominees, that hold
shares for others who are beneficial owners participating in the Plan, the Agent
will administer the Plan on the basis of the number of shares certified from
time to time by the record shareholder as representing the total amount of
shares registered in the Shareholder's name and held for the account of
beneficial owners participating in the Plan.
There will be no charge to participants for reinvesting Dividends other than
their share of brokerage commissions as discussed below. The Agent's fees for
administering the Plan and handling the reinvestment of Dividends will be paid
by the Fund. Each participant's account will be charged a pro-rata share of
brokerage commissions incurred with respect to the Agent's Open Market Purchases
in connection with the reinvestment of Dividends.
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20
DESCRIPTION OF DIVIDEND REINVESTMENT PLAN (UNAUDITED) (CONCLUDED)
Brokerage charges for purchasing small amounts of shares for individual accounts
through the Plan are expected to be less than the usual brokerage charges for
such transactions because the Agent will be purchasing shares for all the
participants in blocks and pro-rating the lower commission that may be
attainable.
The automatic reinvestment of Dividends will not relieve participants of any
income tax that may be payable on such Dividends. Participants who receive
shares pursuant to the Plan as described above will recognize taxable income in
the amount of the fair market value of those shares. In the case of non-U.S.
participants whose Dividends are subject to U.S. income tax withholding and in
the case of participants subject to 28% federal backup withholding, the Agent
will reinvest Dividends after deduction of the amount required to be withheld.
The Fund reserves the right to amend or terminate the Plan by written notice to
participants. All correspondence concerning the Plan should be directed to the
Agent at the address referred to in the first paragraph of this section.
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21
SUMMARY OF GENERAL INFORMATION
The Fund - Cornerstone Total Return Fund, Inc. is a closed-end, diversified
investment company whose shares trade on the American Stock Exchange, LLC. Its
investment objective is to seek total return, consisting of capital appreciation
and current income by investing primarily all of its assets in equity securities
of U.S. and non-U.S. issuers whose securities trade on a U.S. securities
exchange or over the counter or as American Depositary Receipts or other forms
of depositary receipts which trade in the United States. The Fund is managed by
Cornerstone Advisors, Inc.
SHAREHOLDER INFORMATION
Effective February 21, 2003, the Fund is listed on the American Stock Exchange,
LLC (symbol "CRF"). The share price is published in: THE NEW YORK TIMES (daily)
under the designation "Cnrstn TR" and THE WALL STREET JOURNAL (daily) and
BARRON'S (each Monday) under the designation "CornstnTtlRtn." The net asset
value per share is available weekly and may be obtained by contacting the Fund
at the general inquiry phone number.
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NOTICE IS HEREBY GIVEN IN ACCORDANCE WITH SECTION 23(C) OF THE INVESTMENT
COMPANY ACT OF 1940, AS AMENDED, THAT CORNERSTONE TOTAL RETURN FUND, INC. MAY
FROM TIME TO TIME PURCHASE SHARES OF ITS CAPITAL STOCK IN THE OPEN MARKET.
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This report, including the financial statements herein, is sent to the
shareholders of the Fund for their information. It is not a prospectus, circular
or representation intended for use in the purchase or sale of shares of the Fund
or of any securities mentioned in the report.
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22
PRIVACY POLICY NOTICE
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The following is a description of Cornerstone Total Return Fund, Inc.'s (the
"Fund") policies regarding disclosure of nonpublic personal information that you
provide to the Fund or that the Fund collects from other sources. In the event
that you hold shares of the Fund through a broker-dealer or other financial
intermediary, the privacy policy of the financial intermediary would govern how
your nonpublic personal information would be shared with unaffiliated third
parties.
CATEGORIES OF INFORMATION THE FUND COLLECTS. The Fund collects the following
nonpublic personal information about you:
1. Information from the Consumer: this category includes information the
Fund receives from you on or in applications or other forms,
correspondence, or conversations (such as your name, address, phone
number, social security number, assets, income and date of birth); and
2. Information about the Consumer's transactions: this category includes
information about your transactions with the Fund, its affiliates, or
others (such as your account number and balance, payment history,
parties to transactions, cost basis information, and other financial
information).
CATEGORIES OF INFORMATION THE FUND DISCLOSES. The Fund does not disclose any
nonpublic personal information about their current or former shareholders to
unaffiliated third parties, except as required or permitted by law. The Fund is
permitted by law to disclose all of the information it collects, as described
above, to its service providers (such as the Fund's custodian, administrator and
transfer agent) to process your transactions and otherwise provide services to
you.
CONFIDENTIALITY AND SECURITY. The Fund restricts access to your nonpublic
personal information to those persons who require such information to provide
products or services to you. The Fund maintains physical, electronic and
procedural safeguards that comply with federal standards to guard your nonpublic
personal information.
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23
CORNERSTONE TOTAL RETURN FUND, INC.
DIRECTORS AND CORPORATE OFFICERS
Ralph W. Bradshaw Chairman of the Board
of
Directors and
President
Gary A. Bentz Director, Vice
President
and Treasurer
Thomas H. Lenagh Director
Edwin Meese III Director
Scott B. Rogers Director
Andrew A. Strauss Director
Glenn W. Wilcox, Sr. Director
Thomas R. Westle Secretary
STOCK TRANSFER AGENT AND
INVESTMENT MANAGER REGISTRAR
Cornerstone Advisors, American Stock Transfer
Inc. & Trust
One West Pack Square Co.
Suite 1650 59 Maiden Lane
Asheville, NC 28801 New York, NY 10038
ADMINISTRATOR INDEPENDENT ACCOUNTANTS
Bear Stearns Funds Tait, Weller & Baker
Management Inc. 1818 Market Street
383 Madison Avenue Suite 2400
New York, NY 10179 Philadelphia, PA 19103
CUSTODIAN LEGAL COUNSEL
Custodial Trust Company Blank Rome LLP
101 Carnegie Center 405 Lexington Avenue
Princeton, NJ 08540 New York, NY 10174
EXECUTIVE OFFICES
383 Madison Avenue
New York, NY 10179
For shareholder inquiries, registered shareholders should call (800) 937-5449.
For general inquiries, please call (212) 272-3550.
ITEM 2. CODE OF ETHICS.
(a) Disclose whether, as of the end of the period covered by the report, the
registrant has adopted a code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or a
third party. If the registrant has not adopted such a code of ethics,
explain why it has not done so.
THE REGISTRANT HAS ADOPTED A CODE OF ETHICS APPLICABLE TO ITS APPLICABLE TO
ITS CHIEF EXECUTIVE OFFICER, PRESIDENT, CHIEF FINANCIAL OFFICER, OR PERSONS
PERFORMING SIMILAR FUNCTIONS. A COPY OF THE CODE IS FILED AS EXHIBIT
10(A)(1) TO THIS FORM. THERE WERE NO AMENDMENTS TO THE CODE DURING THE YEAR
ENDED DECEMBER 31, 2003. THERE WERE NO WAIVERS OR IMPLICIT WAIVERS FROM THE
CODE GRANTED BY THE REGISTRANT DURING THE YEAR ENDED DECEMBER 31, 2003.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a) (1) Disclose that the registrant's board of directors has
determined that the registrant either:
SEC 2569 (10-03)
(i) Has at least one audit committee financial expert serving
on its audit committee; or
(ii) Does not have an audit committee financial expert serving
on its audit committee.
(2) If the registrant provides the disclosure required by
paragraph (a)(1)(i) of this Item, it must disclose the name of the
audit committee financial expert and whether that person is
"independent." In order to be considered "independent" for
purposes of this Item, a member of an audit committee may not,
other than in his or her capacity as a member of the audit
committee, the board of directors, or any other board committee:
(i) Accept directly or indirectly any consulting, advisory, or
other compensatory fee from the issuer; or
(ii) Be an "interested person" of the investment company as
defined in Section 2(a)(19) of the Act (15 U.S.C. 80a-
2(a)(19)).
(3) If the registrant provides the disclosure required by
paragraph (a)(1)(ii) of this Item, it must explain why it does not
have an audit committee financial expert.
THE REGISTRANT'S BOARD OF DIRECTORS HAS DETERMINED THAT IT DOES NOT HAVE AN
AUDIT COMMITTEE FINANCIAL EXPERT SERVING ON ITS AUDIT COMMITTEE. AT THIS
TIME, THE REGISTRANT BELIEVES THAT THE EXPERIENCE PROVIDED BY EACH MEMBER
OF THE AUDIT COMMITTEE TOGETHER OFFER THE REGISTRANT ADEQUATE OVERSIGHT FOR
THE REGISTRANT'S LEVEL OF FINANCIAL COMPLEXITY.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Disclose, under the caption AUDIT FEES, the aggregate fees billed
for each of the last two fiscal years for professional services rendered by the
principal accountant for the audit of the registrant's annual financial
statements or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for those fiscal
years.
THE AGGREGATE FEES BILLED FOR PROFESSIONAL SERVICES RENDERED BY ITS INDEPENDENT
ACCOUNTANTS, TAIT WELLER & BAKER, FOR THE AUDITS OF THE REGISTRANT'S ANNUAL AND
SEMI-ANNUAL FINANCIAL STATEMENTS FOR 2003 AND 2002 WERE $11,000 FOR EACH OF THE
TWO YEARS.
(b) Disclose, under the caption AUDIT-RELATED FEES, the aggregate fees
billed in each of the last two fiscal years for assurance and related services
by the principal accountant that are reasonably related to the performance of
the audit of the registrant's financial statements and are not reported under
paragraph (a) of this Item. Registrants shall describe the nature of the
services comprising the fees disclosed under this category. THERE WERE NO
AUDIT-RELATED FEES IN 2003 AND 2002.
(c) Disclose, under the caption TAX FEES, the aggregate fees billed in
each of the last two fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and tax planning.
Registrants shall describe the nature of the services comprising the fees
disclosed under this category.
THE AGGREGATE FEES BILLED TO REGISTRANT FOR PROFESSIONAL SERVICES RENDERED BY
TAIT, WELLER & BAKER FOR THE REVIEW OF REGISTRANTS EXCISE TAX CALCULATIONS AND
PREPARATIONS OF FEDERAL, STATE AND EXCISE TAX RETURNS FOR 2003 AND 2002 WERE
$2,000 FOR EACH YEAR OF THE TWO YEARS.
(d) Disclose, under the caption ALL OTHER FEES, the aggregate fees
billed in each of the last two fiscal years for products and services provided
by the principal accountant, other than the services reported in paragraphs (a)
through (c) of this Item.
THE AGGREGATE FEES BILLED TO REGISTRANT BY TAIT, WELLER & BAKER LLP OTHER THAN
FOR THE SERVICES REFERENCED ABOVE FOR 2003 WAS $0 AND FOR 2002 WAS $2,500, WHICH
RELATED TO PROPOSED MERGER-RELATED WORK. IN ADDITION, PRICEWATERHOUSECOOPERS LLP
WAS PAID $3,850 FOR MERGER-RELATED WORK COMPLETED IN 2002.
(e) (1) Disclose the audit committee's pre-approval policies and
procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
PURSUANT TO ITS CHARTER, THE REGISTRANT'S AUDIT COMMITTEE PRE-APPROVES ALL AUDIT
SERVICES PROVIDED BY THE REGISTRANT'S PRINCIPAL ACCOUNTANT FOR THE REGISTRANT
AND ALL PERMISSIBLE NON-AUDIT SERVICES PROVIDED BY THE REGISTRANT'S PRINCIPAL
2
ACCOUNTANT FOR THE REGISTRANT, ITS INVESTMENT ADVISER AND ANY ENTITY
CONTROLLING, CONTROLLED BY, OR UNDER COMMON CONTROL WITH THE INVESTMENT ADVISER
("ADVISER AFFILIATE") THAT PROVIDES ONGOING SERVICES TO THE FUND, IF THE
ENGAGEMENT BY THE INVESTMENT ADVISER OR ADVISER AFFILIATE RELATES DIRECTLY TO
THE OPERATIONS AND FINANCIAL REPORTING OF THE REGISTRANT.
(2) Disclose the percentage of services described in each of paragraphs (b)
through (d) of this Item that were approved by the audit committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
NO SERVICES INCLUDED IN (B) - (D) ABOVE WERE APPROVED PURSUANT TO PARAGRAPH
(C)(7)(I)(C) OF RULE 2-01 OF REGULATION S-X.
(f) If greater than 50 percent, disclose the percentage of hours expended
on the principal accountant's engagement to audit the registrant's financial
statements for the most recent fiscal year that were attributed to work
performed by persons other than the principal accountant's full-time, permanent
employees.
NOT APPLICABLE.
(g) Disclose the aggregate non-audit fees billed by the registrant's
accountant for services rendered to the registrant, and rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the adviser that provides ongoing services to the registrant for
each of the last two fiscal years of the registrant.
THE AGGREGATE FEES BILLED FOR THE MOST RECENT FISCAL YEAR AND THE PRECEDING
FISCAL YEAR BY THE REGISTRANT'S PRINCIPAL ACCOUNTANT FOR NON-AUDIT SERVICES
RENDERED TO THE REGISTRANT, ITS INVESTMENT ADVISER, AND ADVISER AFFILIATE THAT
PROVIDES ONGOING SERVICES TO THE REGISTRANT WERE $2,000 AND $4,500,
RESPECTIVELY. IN ADDITION, PRICEWATERHOUSECOOPERS LLP WAS PAID $3,850 FOR
MERGER-RELATED WORK COMPLETED IN 2002. SUCH AMOUNTS RELATE SOLELY TO THE AMOUNTS
PREVIOUSLY DISCLOSED IN ITEM 4(C) -(D).
(h) Disclose whether the registrant's audit committee of the board of
directors has considered whether the provision of nonaudit services that were
rendered to the registrant's investment adviser (not including any subadviser
whose role is primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity controlling, controlled
by, or under common control with the investment adviser that provides ongoing
services to the registrant that were not pre-approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the
principal accountant's independence.
ALL NON-AUDIT SERVICES RENDERED IN (G) ABOVE WERE PRE-APPROVED BY THE
REGISTRANT'S AUDIT COMMITTEE. TAIT, WELLER & BAKER DID NOT PROVIDE ANY NON-AUDIT
RELATED SERVICES TO THE REGISTRANT'S INVESTMENT ADVISER, OR ANY ENTITY
CONTROLLING, CONTROLLED OR UNDER COMMON CONTROL WITH THE INVESTMENT ADVISER.
ITEMS 5. Audit Committee of Listed Registrants - If the registrant is a listed
issuer as defined in Rule 10A-3 under the Exchange Act (17CRF 240.10A-3) state
whether or not the registrant has a separately-designated standing audit
committee established in accordance with Section 3(a)(58)A of the Exchange Act
(15 U.S.C. 78c(a)(A)). If the registrant has such a committee, however
designated, identify each committee member. If the entire board of directors is
acting as the registrant's audit committee as specified in Section 3(a)(58)(B)
of the Exchange Act (15U.S.C. 78c(a)(58)(B), so state.
THE MEMBERS OF THE AUDIT COMMITTEE ARE GLENN W. WILCOX, SR., THOMAS H. LENAGH,
EDWIN MEESE III, SCOTT B. ROGERS AND ANDREW A. STRAUSS.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES. ISS Proxy Voting Guidelines Summary
The following is a condensed version of all proxy voting recommendations
contained in The ISS Proxy Voting Manual.
1. Operational Items
ADJOURN MEETING
Generally vote AGAINST proposals to provide management with the authority to
adjourn an annual or special meeting absent compelling reasons to support the
proposal.
AMEND QUORUM REQUIREMENTS Vote AGAINST proposals to reduce quorum requirements
3
for shareholder meetings below a majority of the shares outstanding unless
there are compelling reasons to support the proposal.
AMEND MINOR BYLAWS Vote FOR bylaw or charter changes that are of a
housekeeping nature (updates or corrections).
CHANGE COMPANY NAME Vote FOR proposals to change the corporate name.
CHANGE DATE, TIME, OR LOCATION OF ANNUAL MEETING
Vote FOR management proposals to change the date/time/location of the annual
meeting unless the proposed change is unreasonable. Vote AGAINST shareholder
proposals to change the date/time/location of the annual meeting unless the
current scheduling or location is unreasonable.
RATIFYING AUDITORS
Vote FOR proposals to ratify auditors, unless any of the following apply:
An auditor has a financial interest in or association with the company, and is
therefore not independent Fees for non-audit services are excessive, or There is
reason to believe that the independent auditor has rendered an opinion which is
neither accurate nor indicative of the company's financial position.
Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit
their auditors from engaging in non-audit services. Vote FOR shareholder
proposals asking for audit firm rotation, unless the rotation period is so short
(less than five years) that it would be unduly burdensome to the company.
Transact Other Business Vote AGAINST proposals to approve other business when it
appears as voting item.
2. Board of Directors
Voting on Director Nominees in Uncontested Elections
Votes on director nominees should be made on a CASE-BY-CASE basis, examining the
following factors: composition of the board and key board committees, attendance
at board meetings, corporate governance provisions and takeover activity,
long-term company performance relative to a market index, directors' investment
in the company, whether the chairman is also serving as CEO, and whether a
retired CEO sits on the board. However, there are some actions by directors that
should result in votes being withheld. These instances include directors who:
Attend less than 75 percent of the board and committee meetings without a valid
excuse Implement or renew a dead-hand or modified dead-hand poison pill Ignore a
shareholder proposal that is approved by a majority of the shares outstanding
Ignore a shareholder proposal that is approved by a majority of the votes cast
for two consecutive years Failed to act on takeover offers where the majority of
the shareholders tendered their shares Are inside directors or affiliated
outsiders and sit on the audit, compensation, or nominating committees Are
inside directors or affiliated outsiders and the full board serves as the audit,
compensation, or nominating committee or the company does not have one of these
committees Are audit committee members and the non-audit fees paid to the
auditor are excessive. In addition, directors who enacted egregious corporate
governance policies or failed to replace management as appropriate would be
subject to recommendations to withhold votes.
AGE LIMITS
Vote AGAINST shareholder proposals to impose a mandatory retirement age for
outside directors.
Board Size
Vote FOR proposals seeking to fix the board size or designate a range for the
board size. Vote AGAINST proposals that give management the ability to alter the
size of the board outside of a specified range without shareholder approval.
4
CLASSIFICATION/DECLASSIFICATION OF THE BOARD Vote AGAINST proposals to classify
the board.
Vote FOR proposals to repeal classified boards and to elect all directors
annually.
CUMULATIVE VOTING
Vote AGAINST proposals to eliminate cumulative voting.
Vote proposals to restore or permit cumulative voting on a CASE-BY-CASE basis
relative to the company's other governance provisions.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY PROTECTION
Proposals on director and officer indemnification and liability protection
should be evaluated on a CASE-BY-CASE basis, using Delaware law as the standard.
Vote AGAINST proposals to eliminate entirely directors' and officers' liability
for monetary damages for violating the duty of care.
Vote AGAINST indemnification proposals that would expand coverage beyond just
legal expenses to acts, such as negligence, that are more serious violations of
fiduciary obligation than mere carelessness.
Vote FOR only those proposals providing such expanded coverage in cases when a
director's or officer's legal defense was unsuccessful if both of the following
apply:
The director was found to have acted in good faith and in a manner that he
reasonably believed was in the best interests of the company, and Only if the
director's legal expenses would be covered.
ESTABLISH/AMEND NOMINEE QUALIFICATIONS
Vote CASE-BY-CASE on proposals that establish or amend director qualifications.
Votes should be based on how reasonable the criteria are and to what degree they
may preclude dissident nominees from joining the board.
Vote AGAINST shareholder proposals requiring two candidates per board seat.
FILLING VACANCIES/REMOVAL OF DIRECTORS Vote AGAINST proposals that provide that
directors may be removed only for cause. Vote FOR proposals to restore
shareholder ability to remove directors with or without cause.
Vote AGAINST proposals that provide that only continuing directors may elect
replacements to fill board vacancies. Vote FOR proposals that permit
shareholders to elect directors to fill board vacancies.
INDEPENDENT CHAIRMAN (SEPARATE CHAIRMAN/CEO)
Vote on a CASE-BY-CASE basis shareholder proposals requiring that the positions
of chairman and CEO be held separately. Because some companies have governance
structures in place that counterbalance a combined position, the following
factors should be taken into account in determining whether the proposal
warrants support:
Designated lead director appointed from the ranks of the independent board
members with clearly delineated duties
Majority of independent directors on board
All-independent key committees
Committee chairpersons nominated by the independent directors
CEO performance reviewed annually by a committee of outside directors
Established governance guidelines
Company performance.
MAJORITY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF COMMITTEES
Vote FOR shareholder proposals asking that a majority or more of directors be
independent unless the board composition already meets the proposed threshold by
ISS's definition of independence.
Vote FOR shareholder proposals asking that board audit, compensation, and/or
nominating committees be composed exclusively of independent directors if they
currently do not meet that standard.
5
STOCK OWNERSHIP REQUIREMENTS Generally vote AGAINST shareholder proposals that
mandate a minimum amount of stock that directors must own in order to qualify as
a director or to remain on the board. While ISS favors stock ownership on the
part of directors, the company should determine the appropriate ownership
requirement.
TERM LIMITS Vote AGAINST shareholder proposals to limit the tenure of outside
directors.
3. PROXY CONTESTS
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Votes in a contested election of directors must be evaluated on a CASE-BY-CASE
basis, considering the following factors: Long-term financial performance of the
target company relative to its industry; management's track record Background to
the proxy contest Qualifications of director nominees (both slates) Evaluation
of what each side is offering shareholders as well as the likelihood that the
proposed objectives and goals can be met; and stock ownership positions.
REIMBURSING PROXY SOLICITATION EXPENSES Voting to reimburse proxy solicitation
expenses should be analyzed on a CASE-BY-CASE basis. In cases where ISS
recommends in favor of the dissidents, we also recommend voting for reimbursing
proxy solicitation expenses.
CONFIDENTIAL VOTING
Vote FOR shareholder proposals requesting that corporations adopt confidential
voting, use independent vote tabulators and use independent inspectors of
election, as long as the proposal includes a provision for proxy contests as
follows: In the case of a contested election, management should be permitted to
request that the dissident group honor its confidential voting policy. If the
dissidents agree, the policy remains in place. If the dissidents will not agree,
the confidential voting policy is waived. Vote FOR management proposals to adopt
confidential voting.
4. ANTITAKEOVER DEFENSES AND VOTING RELATED ISSUES
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS/NOMINATIONS
Votes on advance notice proposals are determined on a CASE-BY-CASE basis, giving
support to those proposals which allow shareholders to submit proposals as close
to the meeting date as reasonably possible and within the broadest window
possible.
AMEND BYLAWS WITHOUT SHAREHOLDER CONSENT
Vote AGAINST proposals giving the board exclusive authority to amend the bylaws.
Vote FOR proposals giving the board the ability to amend the bylaws in addition
to shareholders.
POISON PILLS
Vote FOR shareholder proposals that ask a company to submit its poison pill for
shareholder ratification. Review on a CASE-BY-CASE basis shareholder proposals
to redeem a company's poison pill. Review on a CASE-BY-CASE basis management
proposals to ratify a poison pill.
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Vote AGAINST proposals to restrict or prohibit shareholder ability to take
action by written consent. Vote FOR proposals to allow or make easier
shareholder action by written consent.
SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS
Vote AGAINST proposals to restrict or prohibit shareholder ability to call
special meetings. Vote FOR proposals that remove restrictions on the right of
shareholders to act independently of management.
SUPERMAJORITY VOTE REQUIREMENTS
Vote AGAINST proposals to require a supermajority shareholder vote. Vote FOR
proposals to lower supermajority vote requirements.
6
5. MERGERS AND CORPORATE RESTRUCTURINGS
APPRAISAL RIGHTS
Vote FOR proposals to restore, or provide shareholders with, rights of
appraisal.
ASSET PURCHASES
Vote CASE-BY-CASE on asset purchase proposals,
considering the following factors:
Purchase price
Fairness opinion
Financial and strategic benefits
How the deal was negotiated
Conflicts of interest
Other alternatives for the business
Noncompletion risk.
ASSET SALES
Votes on asset sales should be determined on a CASE-BY-CASE basis, considering
the following factors:
Impact on the balance sheet/working capital
Potential elimination of diseconomies
Anticipated financial and operating benefits
Anticipated use of funds
Value received for the asset Fairness opinion
How the deal was negotiated Conflicts of interest.
BUNDLED PROPOSALS
Review on a CASE-BY-CASE basis bundled or "conditioned" proxy proposals. In the
case of items that are conditioned upon each other, examine the benefits and
costs of the packaged items. In instances when the joint effect of the
conditioned items is not in shareholders' best interests, vote against the
proposals. If the combined effect is positive, support such proposals.
CONVERSION OF SECURITIES
Votes on proposals regarding conversion of securities are determined on a
CASE-BY-CASE basis. When evaluating these proposals the investor should review
the dilution to existing shareholders, the conversion price relative to market
value, financial issues, control issues, termination penalties, and conflicts of
interest.
Vote FOR the conversion if it is expected that the company will be subject to
onerous penalties or will be forced to file for bankruptcy if the transaction is
not approved.
CORPORATE REORGANIZATION/DEBT RESTRUCTURING/PREPACKAGED BANKRUPTCY PLANS/REVERSE
LEVERAGED BUYOUTS/WRAP PLANS
Votes on proposals to increase common
and/or preferred shares and to issue shares as part of a debt restructuring plan
are determined on a CASE-BY-CASE basis, taking into consideration the following:
Dilution to existing shareholders' position
Terms of the offer
Financial issues
Management's efforts to pursue other alternatives
Control issues
Conflicts of interest.
Vote FOR the debt restructuring if it is expected that the company will file for
bankruptcy if the transaction is not approved.
FORMATION OF HOLDING COMPANY
Votes on proposals regarding the formation of a holding company should be
determined on a CASE-BY-CASE basis, taking into consideration the following:
The reasons for the change
Any financial or tax benefits
Regulatory benefits increases in capital structure
Changes to the articles of incorporation or bylaws of the company.
7
Absent compelling financial reasons to recommend the transaction, vote AGAINST
the formation of a holding company if the transaction would include either of
the following: Increases in common or preferred stock in excess of the allowable
maximum as calculated by the ISS Capital Structure model Adverse changes in
shareholder rights
GOING PRIVATE TRANSACTIONS (LBOS AND MINORITY SQUEEZEOUTS)
Vote going private transactions on a CASE-BY-CASE basis, taking into account the
following: offer price/premium, fairness opinion, how the deal was negotiated,
conflicts of interest, other alternatives/offers considered, and noncompletion
risk.
JOINT VENTURES
Votes CASE-BY-CASE on proposals to form joint ventures, taking into account the
following: percentage of assets/business contributed, percentage ownership,
financial and strategic benefits, governance structure, conflicts of interest,
other alternatives, and noncompletion risk.
LIQUIDATIONS
Votes on liquidations should be made on a CASE-BY-CASE basis after reviewing
management's efforts to pursue other alternatives, appraisal value of assets,
and the compensation plan for executives managing the liquidation. Vote FOR the
liquidation if the company will file for bankruptcy if the proposal is not
approved.
MERGERS AND ACQUISITIONS/ ISSUANCE OF SHARES TO FACILITATE MERGER OR
ACQUISITION
Votes on mergers and acquisitions should be considered on a CASE-BY-CASE basis,
determining whether the transaction enhances shareholder value by giving
consideration to the following:
Prospects of the combined company, anticipated financial and operating benefits
Offer price
Fairness opinion
How the deal was negotiated
Changes in corporate governance
Change in the capital structure
Conflicts of interest.
PRIVATE PLACEMENTS/WARRANTS/CONVERTIBLE DEBENTURES
Votes on proposals regarding private placements should be determined on a
CASE-BY-CASE basis. When evaluating these proposals the investor should review:
dilution to existing shareholders' position, terms of the offer, financial
issues, management's efforts to pursue other alternatives, control issues, and
conflicts of interest. Vote FOR the private placement if it is expected that the
company will file for bankruptcy if the transaction is not approved.
SPINOFFS
Votes on spinoffs should be considered on a CASE-BY-CASE basis depending on:
Tax and regulatory advantages
Planned use of the sale proceeds
Valuation of spinoff
Fairness opinion
Benefits to the parent company
Conflicts of interest
Managerial incentives
Corporate governance changes Changes in the capital structure.
VALUE MAXIMIZATION PROPOSALS
Vote CASE-BY-CASE on shareholder proposals seeking to maximize shareholder value
by hiring a financial advisor to explore strategic alternatives, selling the
company or liquidating the company and distributing the proceeds to
shareholders. These proposals should be evaluated based on the following
factors: prolonged poor performance with no turnaround in sight, signs of
entrenched board and management, strategic plan in place for improving value,
likelihood of receiving reasonable value in a sale or dissolution, and whether
company is actively exploring its strategic options, including retaining a
financial advisor.
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6. STATE OF INCORPORATION
CONTROL SHARE ACQUISITION PROVISIONS
Vote FOR proposals to opt out of control share acquisition statutes unless doing
so would enable the completion of a takeover that would be detrimental to
shareholders. Vote AGAINST proposals to amend the charter to include control
share acquisition provisions. Vote FOR proposals to restore voting rights to the
control shares.
CONTROL SHARE CASHOUT PROVISIONS Vote FOR proposals to opt out of control
share cashout statutes.
DISGORGEMENT PROVISIONS
Vote FOR proposals to opt out of state disgorgement provisions.
FAIR PRICE PROVISIONS
Vote proposals to adopt fair price provisions on a CASE-BY-CASE basis,
evaluating factors such as the vote required to approve the proposed
acquisition, the vote required to repeal the fair price provision, and the
mechanism for determining the fair price. Generally, vote AGAINST fair price
provisions with shareholder vote requirements greater than a majority of
disinterested shares.
FREEZEOUT PROVISIONS
Vote FOR proposals to opt out of state freezeout provisions.
GREENMAIL
Vote FOR proposals to adopt antigreenmail charter of bylaw amendments or
otherwise restrict a company's ability to make greenmail payments. Review on a
CASE-BY-CASE basis antigreenmail proposals when they are bundled with other
charter or bylaw amendments.
REINCORPORATION PROPOSALS
Proposals to change a company's state of incorporation should be evaluated on a
CASE-BY-CASE basis, giving consideration to both financial and corporate
governance concerns, including the reasons for reincorporating, a comparison of
the governance provisions, and a comparison of the jurisdictional laws. Vote FOR
reincorporation when the economic factors outweigh any neutral or negative
governance changes.
STAKEHOLDER PROVISIONS Vote AGAINST proposals that ask the
board to consider nonshareholder constituencies or other nonfinancial effects
when evaluating a merger or business combination.
STATE ANTITAKEOVER STATUTES
Review on a CASE-BY-CASE basis proposals to opt in or out of state takeover
statutes (including control share acquisition statutes, control share cash-out
statutes, freezeout provisions, fair price provisions, stakeholder laws, poison
pill endorsements, severance pay and labor contract provisions, antigreenmail
provisions, and disgorgement provisions).
7. CAPITAL STRUCTURE
ADJUSTMENTS TO PAR VALUE OF COMMON STOCK
Vote FOR management proposals to reduce the par value of common stock.
Common Stock Authorization Votes on proposals to increase the number of shares
of common stock authorized for issuance are determined on a CASE-BY-CASE basis
using a model developed by ISS. Vote AGAINST proposals at companies with
dual-class capital structures to increase the number of authorized shares of the
class of stock that has superior voting rights. Vote FOR proposals to approve
increases beyond the allowable increase when a company's shares are in danger of
being delisted or if a company's ability to continue to operate as a going
concern is uncertain.
DUAL-CLASS STOCK
Vote AGAINST proposals to create a new class of common stock with superior
voting rights. Vote FOR proposals to create a new class of nonvoting or
subvoting common stock if: It is intended for financing purposes with minimal or
no dilution to current shareholders It is not designed to preserve the voting
power of an insider or significant shareholder
ISSUE STOCK FOR USE WITH RIGHTS PLAN
Vote AGAINST proposals that increase authorized common stock for the
explicit purpose of implementing a shareholder rights plan (poison pill).
9
PREEMPTIVE RIGHTS
Review on a CASE-BY-CASE basis shareholder proposals that seek preemptive
rights. In evaluating proposals on preemptive rights, consider the size of a
company, the characteristics of its shareholder base, and the liquidity of the
stock.
PREFERRED STOCK
Vote AGAINST proposals authorizing the creation of new classes of preferred
stock with unspecified voting, conversion, dividend distribution, and other
rights ("blank check" preferred stock).
Vote FOR proposals to create "declawed" blank check preferred stock (stock that
cannot be used as a takeover defense). Vote FOR proposals to authorize preferred
stock in cases where the company specifies the voting, dividend, conversion, and
other rights of such stock and the terms of the preferred stock appear
reasonable.
Vote AGAINST proposals to increase the number of blank check preferred stock
authorized for issuance when no shares have been issued or reserved for a
specific purpose.
Vote CASE-BY-CASE on proposals to increase the number of blank check preferred
shares after analyzing the number of preferred shares available for issue given
a company's industry and performance in terms of shareholder returns.
RECAPITALIZATION
Votes CASE-BY-CASE on recapitalizations (reclassifications of securities),
taking into account the following: more simplified capital structure, enhanced
liquidity, fairness of conversion terms, impact on voting power and dividends,
reasons for the reclassification, conflicts of interest, and other alternatives
considered.
REVERSE STOCK SPLITS
Vote FOR management proposals to implement a reverse stock split when the number
of authorized shares will be proportionately reduced. Vote FOR management
proposals to implement a reverse stock split to avoid delisting. Votes on
proposals to implement a reverse stock split that do not proportionately reduce
the number of shares authorized for issue should be determined on a CASE-BY-CASE
basis using a model developed by ISS.
SHARE REPURCHASE PROGRAMS Vote FOR
management proposals to institute open-market share repurchase plans in which
all shareholders may participate on equal terms.
STOCK DISTRIBUTIONS: SPLITS AND DIVIDENDS
Vote FOR management proposals to increase the common share authorization for a
stock split or share dividend, provided that the increase in authorized shares
would not result in an excessive number of shares available for issuance as
determined using a model developed by ISS.
TRACKING STOCK
Votes on the creation of tracking stock are determined on a CASE-BY-CASE basis,
weighing the strategic value of the transaction against such factors as: adverse
governance changes, excessive increases in authorized capital stock, unfair
method of distribution, diminution of voting rights, adverse conversion
features, negative impact on stock option plans, and other alternatives such as
spinoff.
8. EXECUTIVE AND DIRECTOR COMPENSATION
Votes with respect to compensation plans should be determined on a CASE-BY-CASE
basis. Our methodology for reviewing compensation plans primarily focuses on the
transfer of shareholder wealth (the dollar cost of pay plans to shareholders
instead of simply focusing on voting power dilution). Using the expanded
compensation data disclosed under the SEC's rules, ISS will value every award
type. ISS will include in its analyses an estimated dollar cost for the proposed
plan and all continuing plans. This cost, dilution to shareholders' equity, will
also be expressed as a percentage figure for the transfer of shareholder wealth,
and will be considered long with dilution to voting power. Cash compensation,
and Categorization of the company as emerging, growth, or mature. These
adjustments are pegged to market capitalization. ISS will continue to examine
other features of proposed pay plans such as administration, payment terms, plan
duration, and whether the administering committee is permitted to reprice
underwater stock options without shareholder approval.
10
DIRECTOR COMPENSATION
Votes on compensation plans for directors are determined on a CASE-BY-CASE
basis, using a proprietary, quantitative model developed by ISS.
STOCK PLANS IN LIEU OF CASH
Votes for plans which provide participants with the option of taking all or a
portion of their cash compensation in the form of stock are determined on a
CASE-BY-CASE basis. Vote FOR plans which provide a dollar-for-dollar cash for
stock exchange. Votes for plans which do not provide a dollar-for-dollar cash
for stock exchange should be determined on a CASE-BY-CASE basis using a
proprietary, quantitative model developed by ISS.
DIRECTOR RETIREMENT PLANS
Vote AGAINST retirement plans for nonemployee directors.
Vote FOR shareholder proposals to eliminate retirement plans for nonemployee
directors.
MANAGEMENT PROPOSALS SEEKING APPROVAL TO REPRICE OPTIONS
Votes on management proposals seeking approval to reprice options are evaluated
on a CASE-BY-CASE basis giving consideration to the following:
Historic trading patterns
Rationale for the repricing
Value-for-value exchange
Option vesting
Term of the option
Exercise price
Participation
EMPLOYEE STOCK PURCHASE PLANS
Votes on employee stock purchase plans should be determined on a CASE-BY-CASE
basis. Vote FOR employee stock purchase plans where all of the following apply:
Purchase price is at least 85 percent of fair market value Offering period is 27
months or less, and Potential voting power dilution (VPD) is ten percent or
less. Vote AGAINST employee stock purchase plans where any of the following
apply: Purchase price is less than 85 percent of fair market value, or Offering
period is greater than 27 months, or VPD is greater than ten percent
INCENTIVE BONUS PLANS AND TAX DEDUCTIBILITY PROPOSALS (OBRA-RELATED COMPENSATION
PROPOSALS)
Vote FOR proposals that simply amend shareholder-approved compensation plans to
include administrative features or place a cap on the annual grants any one
participant may receive to comply with the provisions of Section 162(m).
Vote FOR proposals to add performance goals to existing compensation plans to
comply with the provisions of Section 162(m) unless they are clearly
inappropriate. Votes to amend existing plans to increase shares reserved and to
qualify for favorable tax treatment under the provisions of Section 162(m)
should be considered on a CASE-BY-CASE basis using a proprietary, quantitative
model developed by ISS.
Generally vote FOR cash or cash and stock bonus plans that are submitted to
shareholders for the purpose of exempting compensation from taxes under the
provisions of Section 162(m) if no increase in shares is requested.
EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS)
Vote FOR proposals to implement an ESOP or increase authorized shares for
existing ESOPs, unless the number of shares allocated to the ESOP is excessive
(more than five percent of outstanding shares.) is
401(K) EMPLOYEE BENEFIT PLANS
Vote FOR proposals to implement a 401(k) savings plan for employees.
11
SHAREHOLDER PROPOSALS REGARDING EXECUTIVE AND DIRECTOR PAY
Generally, vote FOR shareholder proposals seeking additional disclosure of
executive and director pay information, provided the information requested is
relevant to shareholders' needs, would not put the company at a competitive
disadvantage relative to its industry, and is not unduly burdensome to the
company.
Vote AGAINST shareholder proposals seeking to set absolute levels on
compensation or otherwise dictate the amount or form of compensation. Vote
AGAINST shareholder proposals requiring director fees be paid in stock only.
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
Vote on a CASE-BY-CASE basis for all other shareholder proposals regarding
executive and director pay, taking into account company performance, pay level
versus peers, pay level versus industry, and long term corporate outlook.
OPTION EXPENSING
Generally vote FOR shareholder proposals asking the company to expense stock
options, unless the company has already publicly committed to expensing options
by a specific date.
PERFORMANCE-BASED STOCK OPTIONS
Vote CASE-BY-CASE on shareholder proposals advocating the use of
performance-based stock options (indexed, premium-priced, and performance-vested
options), taking into account:
Whether the proposal mandates that all awards be performance-based
Whether the proposal extends beyond executive awards to those of lower-ranking
employees
Whether the company's stock-based compensation plans meet ISS's SVT
criteria and do not violate our repricing guidelines.
GOLDEN AND TIN PARACHUTES
Vote FOR shareholder proposals to require golden and tin parachutes (executive
severance agreements) to be submitted for shareholder ratification, unless the
proposal requires shareholder approval prior to entering into employment
contracts.
Vote on a CASE-BY-CASE basis on proposals to ratify or cancel golden or tin
parachutes. An acceptable parachute should include the following: The parachute
should be less attractive than an ongoing employment opportunity with the firm
The triggering mechanism should be beyond the control of management The amount
should not exceed three times base salary plus guaranteed benefits
9. SOCIAL AND ENVIRONMENTAL ISSUES CONSUMER ISSUES AND PUBLIC SAFETY ANIMAL
RIGHTS
Vote CASE-BY-CASE on proposals to phase out the use of animals in product
testing, taking into account: The nature of the product and the degree that
animal testing is necessary or federally mandated (such as medical products),
The availability and feasibility of alternatives to animal testing to ensure
product safety, and
The degree that competitors are using animal-free testing. Generally vote FOR
proposals seeking a report on the company's animal welfare standards unless:
The company has already published a set of animal welfare standards and monitors
compliance
The company's standards are comparable to or better than those of peer firms,
and
There are no serious controversies surrounding the company's treatment of
animals
DRUG PRICING
Vote CASE-BY-CASE on proposals asking the company to implement price restraints
on pharmaceutical products, taking into account:
Whether the proposal focuses on a specific drug and region
Whether the economic benefits of providing subsidized drugs (e.g., public
goodwill) outweigh the costs in terms of reduced profits, lower R&D spending,
and harm to competitiveness
The extent that reduced prices can be offset through the company's marketing
budget without affecting R&D spending
Whether the company already limits price increases of its products
Whether the company already contributes life-saving pharmaceuticals to the needy
and Third World countries The extent that peer companies implement price
restraints Genetically Modified Foods
Vote CASE-BY-CASE on proposals to label genetically modified (GMO) ingredients
voluntarily in the company's products, or alternatively to provide interim
labeling and eventually eliminate GMOs, taking into account:
The costs and feasibility of labeling and/or phasing out
The nature of the company's business and the proportion of it affected by the
proposal
The proportion of company sales in markets requiring labeling or
GMO-free products
The extent that peer companies label or have eliminated GMOs Competitive
benefits, such as expected increases in consumer demand for the
company's products
The risks of misleading consumers without federally mandated,
standardized labeling Alternatives to labeling employed by the company.
Vote FOR proposals asking for a report on the feasibility of labeling products
containing GMOs.
Vote AGAINST proposals to completely phase out GMOs from the company's
products. Such resolutions presuppose that there are proven health risks to
GMOs-an issue better left to federal regulators-which outweigh the economic
benefits derived from biotechnology.
Vote CASE-BY-CASE on reports outlining the steps necessary to eliminate GMOs
from the company's products, taking into account:
The relevance of the proposal in terms of the company's business and
the proportion of it affected by the resolution The extent that peer companies
have eliminated GMOs The extent that the report would clarify whether it is
viable for the company to eliminate GMOs from its products
Whether the proposal is limited to a feasibility study or additionally seeks
an action plan and timeframe actually to phase out GMOs
The percentage of revenue derived from international operations, particularly
in Europe, where GMOs are more regulated.
Vote AGAINST proposals seeking a report on the health and environmental effects
of GMOs and the company's strategy for phasing out GMOs in the event they become
illegal in the United States. Studies of this sort are better undertaken by
regulators and the scientific community.
If made illegal in the United States, genetically modified crops would
automatically be recalled and phased out.
Handguns
Generally vote AGAINST requests for reports on a company's policies
aimed at curtailing gun violence in the United States unless the report is
confined to product safety information. Criminal misuse of firearms is beyond
company control and instead falls within the purview of law enforcement
agencies.
Predatory Lending
Vote CASE-BY CASE on requests for reports on the company's procedures for
preventing predatory lending, including the establishment of a board committee
for oversight, taking into account:
Whether the company has adequately disclosed mechanisms in place to prevent
abusive lending practices
Whether the company has adequately disclosed the financial risks of its
subprime business
Whether the company has been subject to violations of lending laws or serious
lending controversies Peer companies' policies to prevent abusive lending
practices.
Tobacco
Most tobacco-related proposals should be evaluated on a CASE-BY-CASE basis,
taking into account the following factors:
Second-hand smoke:
Whether the company complies with all local ordinances and regulations
The degree that voluntary restrictions beyond those mandated by law might hurt
the company's competitiveness
The risk of any health-related liabilities. Advertising to youth:
Whether the company complies with federal, state, and local laws on the
marketing of tobacco or if it has been fined for violations
Whether the company has gone as far as peers in restricting advertising
13
Whether the company entered into the Master Settlement Agreement, which
restricts marketing of tobacco to youth
Whether restrictions on marketing to youth extend to foreign countries Cease
production of tobacco-related products or avoid selling products to tobacco
companies:
The percentage of the company's business affected
The economic loss of eliminating the business versus any potential
tobacco-related liabilities.
Spinoff tobacco-related businesses:
The percentage of the company's business affected
The feasibility of a spinoff
Potential future liabilities related to the company's tobacco business.
Stronger product warnings:
Vote AGAINST proposals seeking stronger product warnings. Such decisions are
better left to public health authorities.
Investment in tobacco stocks:
Vote AGAINST proposals prohibiting investment in tobacco equities. Such
decisions are better left to portfolio managers.
ENVIRONMENT AND ENERGY
Arctic National Wildlife Refuge
Vote CASE-BY-CASE on reports outlining potential environmental damage from
drilling in the Arctic National Wildlife Refuge (ANWR), taking into account:
Whether there are publicly available environmental impact reports;
Whether the company has a poor environmental track record, such as violations of
federal and state regulations or accidental spills; and
The current status of legislation regarding drilling in ANWR.
CERES Principles
Vote CASE-BY-CASE on proposals to adopt the CERES Principles, taking into
account:
The company's current environmental disclosure beyond legal requirements,
including environmental health and safety (EHS) audits and reports that may
duplicate CERES
The company's environmental performance record, including violations of federal
and state regulations, level of toxic emissions, and accidental spills
Environmentally conscious practices of peer companies, including endorsement of
CERES
Costs of membership and implementation.
Environmental Reports
Generally vote FOR requests for reports disclosing the company's environmental
policies unless it already has well-documented environmental management systems
that are available to the public. Global Warming Generally vote FOR reports on
the level of greenhouse gas emissions from the company's operations and
products, unless the report is duplicative of the company's current
environmental disclosure and reporting or is not integral to the company's line
of business. However, additional reporting may be warranted.
The company's level of disclosure lags that of its competitors, or
The company has a poor environmental track record, such as violations of federal
and state regulations.
Recycling
Vote CASE-BY-CASE on proposals to adopt a comprehensive recycling strategy,
taking into account:
The nature of the company's business and the percentage affected
The extent that peer companies are recycling
The timetable prescribed by the proposal
The costs and methods of implementation
Whether the company has a poor environmental track record, such as violations of
federal and state regulations.
Renewable Energy
Vote CASE-BY-CASE on proposals to invest in renewable energy sources, taking
into account:
The nature of the company's business and the percentage affected
The extent that peer companies are switching from fossil fuels to cleaner
sources
The timetable and specific action prescribed by the proposal The costs
of implementation
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The company's initiatives to address climate change
Generally vote FOR requests for reports on the feasibility of developing
renewable energy sources, unless the report is duplicative of the company's
current environmental disclosure and reporting or is not integral to the
company's line of business.
GENERAL CORPORATE ISSUES
Link Executive Compensation to Social Performance
Vote CASE-BY-CASE on proposals to review ways of linking executive compensation
to social factors, such as corporate downsizings, customer or employee
satisfaction, community involvement, human rights, environmental performance,
predatory lending, and executive/employee pay disparities.
Such resolutions should be evaluated in the context of:
The relevance of the issue to be linked to pay
The degree that social performance is already included in the company's pay
structure and disclosed
The degree that social performance is used by peer companies in setting pay
Violations or complaints filed against the company relating to the particular
social performance measure
Artificial limits sought by the proposal, such as freezing or capping executive
pay
Independence of the compensation committee Current company pay levels.
Charitable/Political Contributions Generally vote AGAINST proposals asking the
company to affirm political nonpartisanship in the workplace so long as:
The company is in compliance with laws governing corporate political activities,
and
The company has procedures in place to ensure that employee contributions to
company-sponsored political action committees (PACs) are strictly voluntary and
not coercive.
Vote AGAINST proposals to report or publish in newspapers the company's
political contributions. Federal and state laws restrict the amount of corporate
contributions and include reporting requirements.
Vote AGAINST proposals disallowing the company from making political
contributions. Businesses are affected by legislation at the federal, state, and
local level and barring contributions can put the company at a competitive
disadvantage.
Vote AGAINST proposals restricting the company from making charitable
contributions. Charitable contributions are generally useful for assisting
worthwhile causes and for creating goodwill in the community.
In the absence of bad faith, self-dealing, or gross negligence, management
should determine which contributions are in the best interests of the company.
Vote AGAINST proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
LABOR STANDARDS AND HUMAN RIGHTS
China Principles
Vote AGAINST proposals to implement the China Principles unless:
There are serious controversies surrounding the company's China operations, and
The company does not have a code of conduct with standards similar to those
promulgated by the International Labor Organization (ILO).
Country-specific human rights reports
Vote CASE-BY-CASE on requests for reports detailing the company's operations in
a particular country and steps to protect human rights, based on:
The nature and amount of company business in that country The company's
workplace code of conduct Proprietary and confidential information involved
Company compliance with U.S. regulations on investing in the country Level of
peer company involvement in the country.
International Codes of Conduct/Vendor Standards
Vote CASE-BY-CASE on proposals to implement certain human rights standards at
company facilities or those of its suppliers and to commit to outside,
independent monitoring. In evaluating these proposals, the following should be
considered:
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The company's current workplace code of conduct or adherence to other global
standards and the degree they meet the standards promulgated by the proponent
Agreements with foreign suppliers to meet certain workplace standards
Whether company and vendor facilities are monitored and how
Company participation in fair labor organizations
Type of business
Proportion of business conducted overseas
Countries of operation with known human rights abuses
Whether the company has been recently involved in significant labor and human
rights controversies or violations Peer company standards and practices
Union presence in company's international factories
Generally vote FOR reports outlining vendor standards compliance unless any of
the following apply:
The company does not operate in countries with significant human rights
violations
The company has no recent human rights controversies or violations, or
The company already publicly discloses information on its vendor standards
compliance.
MacBride Principles
Vote CASE-BY-CASE on proposals to endorse or increase activity on the MacBride
Principles, taking into account:
Company compliance with or violations of the Fair Employment Act of 1989
Company antidiscrimination policies that already exceed the legal requirements
The cost and feasibility of adopting all nine principles
The cost of duplicating efforts to follow two sets of standards (Fair
Employment and the MacBride Principles)
The potential for charges of reverse discrimination
The potential that any company sales or contracts in the rest of the United
Kingdom could be negatively impacted
The level of the company's investment in Northern Ireland The number of company
employees in Northern Ireland
The degree that industry peers have adopted the MacBride Principles
Applicable state and municipal laws that limit contracts with companies that
have not adopted the MacBride Principles.
MILITARY BUSINESS
Foreign Military Sales/Offsets
Vote AGAINST reports on foreign military sales or offsets.
Such disclosures may involve sensitive and confidential information. Moreover,
companies must comply with government controls and reporting on foreign military
sales.
Landmines and Cluster Bombs
Vote CASE-BY-CASE on proposals asking a company to renounce future involvement
in antipersonnel landmine production, taking into account:
Whether the company has in the past manufactured landmine components Whether the
company's peers have renounced future production
Vote CASE-BY-CASE on proposals asking a company to renounce future involvement
in cluster bomb production, taking into account:
What weapons classifications the proponent views as cluster bombs
Whether the company currently or in the past has manufactured cluster bombs or
their components
The percentage of revenue derived from cluster bomb manufacture
Whether the company's peers have renounced future production Nuclear Weapons
Vote AGAINST proposals asking a company to cease production of nuclear weapons
components and delivery systems, including disengaging from current and proposed
contracts. Components and delivery systems serve multiple military and
non-military uses, and withdrawal from these contracts could have a negative
impact on the company's business.
Spaced-Based Weaponization
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Generally vote FOR reports on a company's involvement in spaced-based
weaponization unless:
The information is already publicly available or The disclosures sought could
compromise proprietary information.
WORKPLACE DIVERSITY
Board Diversity
Generally vote FOR reports on the company's efforts to diversify the board,
unless:
The board composition is reasonably inclusive in relation to companies of
similar size and business or
The board already reports on its nominating procedures and diversity
initiatives.
Vote CASE-BY-CASE on proposals asking the company to increase the representation
of women and minorities on the board, taking into account:
The degree of board diversity
Comparison with peer companies Established process for improving board diversity
Existence of independent nominating committee
Use of outside search firm
History of EEO violations.
Equal Employment Opportunity (EEO)
Generally vote FOR reports outlining the company's affirmative action
initiatives unless all of the following apply: company.
Glass Ceiling
Generally vote FOR reports outlining the company's progress towards the
Glass Ceiling Commission's business recommendations, unless:
The composition of senior management and the board is fairly inclusive
The company has well-documented programs addressing diversity initiatives and
leadership development
The company already issues public reports on its company-wide affirmative
initiatives and provides data on its workforce diversity, and
The company has had no recent, significant EEO-related violations or litigation
Sexual Orientation
Vote CASE-BY-CASE on proposals to amend the company's EEO policy to include
sexual orientation, taking into account:
Whether the company's EEO policy is already in compliance with federal, state
and local laws
Whether the company has faced significant controversies or litigation regarding
unfair treatment of gay and lesbian employees
The industry norm for including sexual orientation in EEO statements
Existing policies in place to prevent workplace discrimination based on sexual
orientation
Vote AGAINST proposals to extend company benefits to or eliminate benefits from
domestic partners.
Benefit decisions should be left to the discretion of the company.
10. Mutual Fund Proxies Election of Directors Vote to elect directors on a
CASE-BY-CASE basis, considering the following factors:
Board structure Director independence and qualifications
Attendance at board and committee meetings. Votes should be withheld from
directors who:
Attend less than 75 percent of the board and committee meetings without a valid
excuse for the absences.
Valid reasons include illness or absence due to company business.
Participation via telephone is acceptable.
In addition, if the director missed only one meeting or one day's meetings,
votes should not be withheld even if such absence dropped the director's
attendance below 75 percent.
Ignore a shareholder proposal that is approved by a majority of shares
outstanding
Ignore a shareholder proposal that is approved by a majority of the votes cast
for two consecutive years Are interested directors and sit on the audit or
nominating committee, or
Are interested directors and the full board serves as the audit or nominating
committee or the company does not have one of these committees.
Convert Closed-end Fund to Open-end Fund
Vote conversion proposals on a CASE-BY-CASE basis, considering the following
factors:
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Past performance as a closed end fund
Market in which the fund invests
Measures taken by the board to address the discount
Past shareholder activism, board activity
Votes on related proposals.
Proxy Contests
Votes on proxy contests should be determined on a CASE-BY-CASE basis,
considering the following factors:
Past performance relative to its peers
Market in which fund invests Measures taken by the board to address the issues
Strategy of the incumbents versus the dissidents
Independence of directors
Experience and skills of director candidates
Governance profile of the company
Evidence of management entrenchment Investment
Advisory Agreements Votes on investment advisory agreements should be determined
on a CASE-BY-CASE basis, considering the following factors:
Proposed and current fee schedules
Fund category/investment objective
Performance benchmarks
Share price performance compared to peers
Resulting fees relative to peers
Assignments (where the advisor undergoes a change in control)
Approve New Classes or Series of Shares
Vote FOR the establishment of new classes or series of shares.
Preferred Stock Proposals
Votes on the authorization for or increase in preferred shares should be
determined on a CASE-BY-CASE basis, considering the following factors:
Stated specific financing purpose
Possible dilution for common shares
Whether the shares can be used for antitakeover purposes. 1940 Act Policies
Votes on 1940 Act policies should be determined on a CASE-BY-CASE basis,
considering the following factors:
Potential competitiveness
Regulatory developments
Current and potential returns
Current and potential risk.
Generally vote FOR these amendments as long as the proposed changes do not
fundamentally alter the investment focus of the fund and do comply with the
current SEC interpretation.
Change Fundamental Restriction to Nonfundamental Restriction
Proposals to change a fundamental restriction to a nonfundamental restriction
should be evaluated on a CASE-BY-CASE basis, considering the following factors:
The fund's target investments
The reasons given by the fund for the change
The projected impact of the change on the portfolio.
Change Fundamental Investment Objective to Nonfundamental
Vote AGAINST proposals to change a fund's fundamental investment objective to
nonfundamental.
Name Change Proposals
Votes on name change proposals should be determined on a CASE-BY-CASE basis,
considering the following factors:
Political/economic changes in the target market
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Consolidation in the target market
Current asset composition
Change in Fund's Subclassification
Votes on changes in a fund's subclassification should be determined on a
CASE-BY-CASE basis, considering the following factors:
Potential competitiveness
Current and potential returns
Risk of concentration
Consolidation in target industry
Disposition of Assets/Termination/Liquidation
Vote these proposals on a CASE-BY-CASE basis, considering the following factors:
Strategies employed to salvage the company
The fund's past performance
Terms of the liquidation.
Changes to the Charter Document
Votes on chances to the charter document should be determined on a CASE-BY-CASE
basis, considering the following factors:
The degree of change implied by the proposal
The efficiencies that could result
The state of incorporation
Regulatory standards and implications.
Vote AGAINST any of the following changes:
Removal of shareholder approval requirement to reorganize or terminate the trust
or any of its series
Removal of shareholder approval requirement for amendments to the new
declaration of trust
Removal of shareholder approval requirement to amend me fund's a management
contract, allowing the contract to be modified by the investment manager and the
trust management, as permitted by the 1940 Act
Allow the trustees to impose other fees in addition to sales charges on
investment in a fund, such as deferred sales charges and redemption fees that
may be imposed upon redemption of a fund's shares
Removal of shareholder approval requirement to engage in and terminate
subadvisory arrangements
Removal of shareholder approval requirement to change the domicile of the fund
Change the Fund's Domicile
Vote reincorporations on a CASE-BY-CASE basis, considering the following
factors:
Regulations of both states
Required fundamental policies of both states
Increased flexibility available
Authorize the Board to Hire and Terminate Subadvisors Without Shareholder
Approval
Vote AGAINST proposals authorizing the board to hire/terminate subadvisors
without shareholder approval.
Distribution Agreements
Vote these proposals on a CASE-BY-CASE basis, considering the following factors:
Fees charged to comparably sized funds with similar objectives
The proposed distributor's reputation and past performance
The competitiveness of the fund in the industry
Terms of the agreement
Master-Feeder Structure
Vote FOR the establishment of a master-feeder structure.
Mergers
Vote merger proposals on a CASE-BY-CASE basis, considering the following
factors:
Resulting fee structure
Performance of both funds
Continuity of management personnel
Changes in corporate governance and their impact on shareholder rights.
Shareholder Proposals to Establish Director Ownership Requirement
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Generally vote AGAINST shareholder proposals that mandate a specific minimum
amount of stock that directors must own in order to qualify as a director or to
remain on the board. While ISS favors stock ownership on the part of directors,
the company should determine the appropriate ownership requirement. Shareholder
Proposals to Reimburse Proxy Solicitation Expenses Voting to reimburse proxy
solicitation expenses should be analyzed on a CASE-BY-CASE basis. In cases where
ISS recommends in favor of the dissidents, we also recommend voting for
reimbursing proxy solicitation expenses.
Shareholder Proposals to Terminate Investment Advisor Vote to terminate the
investment advisor on a CASE-BY-CASE basis, considering the following factors:
Performance of the fund's NAV The fund's history of shareholder relations The
performance of other funds under the advisor's management.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(A) AS OF A DATE WITHIN 90 DAYS FROM THE FILING DATE OF THIS REPORT,
THE PRINCIPAL EXECUTIVE OFFICER AND THE PRINCIPAL FINANCIAL OFFICER
CONCLUDED THAT THE REGISTRANT'S DISCLOSURE CONTROLS AND PROCEDURES (AS
DEFINED IN RULE 30A-3(C) UNDER THE INVESTMENT COMPANY ACT OF 1940 (THE
"ACT")) WERE EFFECTIVE BASED ON THEIR EVALUATION OF THE DISCLOSURE
CONTROLS AND PROCEDURES REQUIRED BY RULE 30A-3(B) UNDER THE ACT AND
RULES 13A-15(B) OR 15D-15(B) UNDER THE SECURITIES AND EXCHANGE ACT OF
1934.
(B) THERE WERE NO CHANGES IN THE REGISTRANT'S INTERNAL CONTROL OVER
FINANCIAL REPORTING (AS DEFINED IN RULE 30A-3(D) UNDER THE ACT) THAT
OCCURRED DURING THE REGISTRANT'S SECOND FISCAL HALF-YEAR THAT HAVE
MATERIALLY AFFECTED, OR ARE REASONABLY LIKELY TO MATERIALLY AFFECT, THE
REGISTRANT'S INTERNAL CONTROL OVER FINANCIAL REPORTING.
ITEM 10. EXHIBITS.
File the exhibits listed below as part of this Form. Letter or number
the exhibits in the sequence indicated.
(a)(1) The registrant's code of ethics is an exhibit to this
report.
(a)(2) The certifications of the registrant as required by Rule
30a-2(a) under the Act are exhibits to this report.
(b)The certifications of the registrant as required by Rule
30a-2(b) under the Act are an exhibit to this report.
SIGNATURES
[See General Instruction F]
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.
(Registrant) CORNERSTONE TOTAL RETURN FUND, INC.
By (Signature and Title)* /S/ RALPH W. BRADSHAW
----------------------------
RALPH W. BRADSHAW,
CHAIRMAN AND PRESIDENT (PRINCIPAL EXECUTIVE OFFICER)
Date: March 8, 2004
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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 (Signature and Title)* /S/ RALPH W. BRADSHAW
-----------------------
RALPH W. BRADSHAW
CHAIRMAN AND PRESIDENT (PRINCIPAL EXECUTIVE OFFICER)
Date: March 8, 2004
By (Signature and Title)* /S/ GARY A. BENTZ
--------------------
GARY A. BENTZ
PRINCIPAL FINANCIAL OFFICER
Date: March 8, 2004
* Print the name and title of each signing officer under his or her signature.
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