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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
CORNERSTONE TOTAL RETURN FUND, INC.
(Exact name of registrant as specified in charter)
383 Madison Avenue, New York, New York 10179
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(Address of principal executive offices) (Zip code)
Jodi Levine
383 Madison Avenue, New York, New York 10179
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(Name and address of agent for service)
Registrant's telephone number, including area code: (212) 272-3550
Date of fiscal year end: December 31, 2006
Date of reporting period: December 31, 2006
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.
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ITEM 1. REPORTS TO STOCKHOLDERS.
The report of Cornerstone Total Return Fund, Inc. (the "Registrant") to
stockholders for the year ended December 31, 2006 follows.
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CORNERSTONE TOTAL
RETURN FUND, INC.
ANNUAL REPORT
DECEMBER 31, 2006
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CONTENTS
Portfolio Summary 1
Summary Schedule of Investments 2
Statement of Assets and Liabilities 4
Statement of Operations 5
Statement of Changes in Net Assets 6
Financial Highlights 7
Notes to Financial Statements 8
Report of Independent Registered Public Accounting Firm 12
Tax Information 13
Additional Information Regarding the Fund's Directors
and Corporate Officers 14
Description of Dividend Reinvestment Plan 17
Proxy Voting and Portfolio Holdings Information 19
Privacy Policy Notice 19
Summary of General Information 20
Shareholder Information 20
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CORNERSTONE TOTAL RETURN FUND, INC.
PORTFOLIO SUMMARY - AS OF DECEMBER 31, 2006 (UNAUDITED)
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SECTOR ALLOCATION
Percent of
Sector Net Assets
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Financials 19.6
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Information Technology 14.1
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Healthcare 10.4
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Industrials 9.8
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Energy 9.6
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Consumer Discretionary 9.6
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Consumer Staples 9.1
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Closed-End Funds 8.0
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Telecommunication Services 3.4
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Utilities 2.8
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Materials 2.3
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Other 1.3
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TOP TEN HOLDINGS, BY ISSUER
Percent of
Holding Sector Net Assets
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1. Exxon Mobil Corporation Energy 4.7
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2. General Electric Company Industrials 3.7
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3. Citigroup Inc. Financials 2.7
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4. Microsoft Corporation Information Technology 2.5
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5. Dreman/Claymore Dividend & Income Fund Closed-End Funds 2.2
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6. Johnson & Johnson Healthcare 2.0
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7. Adams Express Company Closed-End Funds 1.9
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8. Bank of America Corporation Financials 1.7
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9. Procter & Gamble Company (The) Consumer Staples 1.7
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10. American International Group, Inc. Financials 1.7
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1
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CORNERSTONE TOTAL RETURN FUND, INC.
SUMMARY SCHEDULE OF INVESTMENTS - DECEMBER 31, 2006
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No. of
Description Shares Value
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EQUITY SECURITIES - 99.14%
UNITED STATES - 98.82%
CLOSED-END FUNDS - 7.95%
Adams Express Company 70,400 $ 976,448
Boulder Total Return Fund, Inc. 13,900 310,526
Dreman/Claymore Dividend & Income Fund 49,500 1,137,510
Liberty All-Star Growth Fund, Inc. 140,800 756,096
Other Closed-End Funds (a) 984,167
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4,164,747
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CONSUMER DISCRETIONARY - 9.32%
Home Depot, Inc. (The) 9,000 361,440
McDonald's Corporation 8,100 359,073
Time Warner Inc. ^ 17,000 370,260
Walt Disney Company (The) 8,000 274,160
Other Consumer Discretionary (a) 3,518,426
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4,883,359
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CONSUMER STAPLES - 9.09%
Altria Group, Inc. 7,700 660,814
Coca-Cola Company (The) 13,500 651,375
PepsiCo, Inc. ^ 5,000 312,750
Procter & Gamble Company (The) 13,972 897,980
Wal-Mart Stores, Inc. 19,000 877,420
Other Consumer Staples (a) 1,362,843
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4,763,182
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ENERGY - 9.57%
Chevron Corporation 10,068 740,300
Exxon Mobil Corporation 32,000 2,452,163
Schlumberger Limited 5,000 315,800
Other Energy (a) 1,502,875
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5,011,138
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FINANCIALS - 19.62%
American International Group, Inc. 12,331 883,639
Bank of America Corporation ^ 17,021 908,751
Citigroup Inc. ^ 25,600 1,425,920
No. of
Description Shares Value
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FINANCIALS (CONTINUED)
Fannie Mae 6,200 $ 368,218
Franklin Resources, Inc. 2,500 275,425
Goldman Sachs Group, Inc. (The) 3,000 598,050
JPMorgan Chase & Co. 12,700 613,410
M&T Bank Corporation 2,500 305,400
Morgan Stanley 3,700 301,291
St. Paul Travelers Companies, Inc. (The) 5,092 273,389
Wachovia Corporation 5,600 318,920
Wells Fargo & Company 18,000 640,080
Other Financials (a) 3,360,577
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10,273,070
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HEALTHCARE - 10.36%
Amgen Inc. * 8,300 566,973
Johnson & Johnson 15,500 1,023,310
Merck & Co. Inc. 8,700 379,320
Pfizer Inc. 24,960 646,464
UnitedHealth Group Incorporated 10,000 537,300
Other Healthcare (a) 2,274,063
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5,427,430
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INDUSTRIALS - 9.83%
FedEx Corp. 2,500 271,550
General Electric Company 52,000 1,934,920
United Parcel Service, Inc., Class B 4,000 299,920
United Technologies Corporation ^ 4,400 275,088
Other Industrials (a) 2,369,846
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5,151,324
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INFORMATION TECHNOLOGY - 14.08%
Apple Computer, Inc. * 5,000 424,200
Cisco Systems, Inc. * 24,500 669,585
Google Inc. ^ * 1,000 460,480
Hewlett-Packard Company 10,000 411,900
Intel Corporation 19,500 394,875
International Business Machines Corporation 5,700 553,755
Microsoft Corporation 43,000 1,283,980
Oracle Corporation * 33,600 575,904
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See accompanying notes to financial statements
2
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CORNERSTONE TOTAL RETURN FUND, INC.
SUMMARY SCHEDULE OF INVESTMENTS - DECEMBER 31, 2006 (CONCLUDED)
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No. of
Description Shares Value
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INFORMATION TECHNOLOGY (CONTINUED)
Texas Instruments Incorporated 13,500 $ 388,800
Other Information Technology (a) 2,204,955
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7,368,434
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MATERIALS - 2.32%
E. I. du Pont de Nemours and Company 5,800 282,518
Other Materials (a) 934,671
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1,217,189
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REAL ESTATE INVESTMENT TRUST - 0.48%
Total Real Estate Investment Trust (a) 253,225
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TELECOMMUNICATION SERVICES - 3.39%
AT&T Inc. 24,699 882,989
Verizon Communications Inc. 10,000 372,400
Other Telecommunication Services (a) 519,957
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1,775,346
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UTILITIES - 2.81%
TXU Corp. 7,400 401,154
Other Utilities (a) 1,069,076
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1,470,230
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TOTAL UNITED STATES
(cost - $44,010,264) 51,758,674
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CZECH REPUBLIC - 0.32%
CONSUMER DISCRETIONARY - 0.32%
Total Consumer Discretionary # (a) 166,762
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TOTAL CZECH REPUBLIC
(cost - $894,864) 166,762
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TOTAL EQUITY SECURITIES
(cost - $44,905,128) 51,925,436
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Principal
Amount
Description (000's) Value
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SHORT-TERM INVESTMENTS - 2.73%
REPURCHASE AGREEMENTS - 2.73%
Bear, Stearns & Co. Inc. +
(Agreements dated 12/29/2006
to be repurchased at $1,433,098)(b) $ 1,432 $ 1,432,470
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TOTAL SHORT-TERM INVESTMENTS
(cost - $1,432,470) 1,432,470
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TOTAL INVESTMENTS - 101.87%
(cost - $46,337,598) 53,357,906
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LIABILITIES IN EXCESS OF
OTHER ASSETS - (1.87)% (978,676)
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NET ASSETS - 100.00% $52,379,230
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* Non-income producing security.
+ Includes investments purchased with cash collateral received for securities
on loan.
^ Security or a portion thereof is out on loan.
# Securities are fair valued in accordance with procedures established by the
Board of Directors. At December 31, 2006, the Fund held 0.32% of its net
assets in securities valued in good faith by the Board of Directors with an
aggregate cost of $894,864 and a fair value of $166,762.
(a) Represents issues not identified as a top 50 holding in terms of market
value and issues or issuers not exceeding 1% of net assets individually or
in the aggregate, respectively, as of December 31, 2006.
(b) At December 29, 2006, the maturity date for all repurchase agreements held
was January 2, 2007 with interest rates ranging from 2.6565% to 5.3130% and
collateralized by $1,476,042 in U.S. Treasury Bond Strips.
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See accompanying notes to financial statements.
3
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CORNERSTONE TOTAL RETURN FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 2006
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ASSETS
Investments, at value, including collateral for securities
on loan of $961,405 (Cost $46,337,598) (1) $ 53,357,906
Receivables:
Dividends 85,764
Interest 1,627
Prepaid expenses 1,509
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Total Assets 53,446,806
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LIABILITIES
Payables:
Upon return of securities loaned 961,405
Investment management fees 44,357
Directors' fees 14,500
Other accrued expenses 46,365
Due to custodian 949
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Total Liabilities 1,067,576
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NET ASSETS (applicable to 5,167,874 shares of
common stock outstanding) $ 52,379,230
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NET ASSET VALUE PER SHARE ($52,379,230 / 5,167,874) $ 10.14
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NET ASSETS CONSISTS OF
Capital stock, $0.01 par value; 5,167,874 shares
issued and outstanding (15,000,000 shares authorized) $ 51,679
Paid-in capital 60,678,188
Accumulated net realized loss on investments (15,370,945)
Net unrealized appreciation in value of investments 7,020,308
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Net assets applicable to shares outstanding $ 52,379,230
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(1) Includes securities out on loan to brokers with a market value of $954,730.
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See accompanying notes to financial statements.
4
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CORNERSTONE TOTAL RETURN FUND, INC.
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2006
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INVESTMENT INCOME
Income:
Dividends $ 1,145,598
Interest 20,639
Securities lending 14,335
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Total Investment Income 1,180,572
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Expenses:
Investment management fees 522,164
Directors' fees 55,498
Legal and audit fees 53,635
Administration fees 52,282
Accounting fees 32,837
Transfer agent fees 28,999
Custodian fees 12,872
Printing 10,551
Insurance 6,643
Stock exchange listing fees 6,282
Miscellaneous 1,176
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Total Expenses 782,939
Less: Fees paid indirectly (30,564)
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Net Expenses 752,375
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Net Investment Income 428,197
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NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized loss from investments (50,353)
Capital gain distributions from regulated investment companies 103,660
Net change in unrealized appreciation in value of investments 6,318,611
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Net realized and unrealized gain on investments 6,371,918
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 6,800,115
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See accompanying notes to financial statements.
5
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CORNERSTONE TOTAL RETURN FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
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For the Years Ended
December 31,
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2006 2005
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DECREASE IN NET ASSETS
Operations:
Net investment income $ 428,197 $ 299,210
Net realized loss from investments (50,353) (464,943)
Capital gain distributions from regulated
investment companies 103,660 --
Net change in unrealized appreciation/(depreciation)
in value of investments 6,318,611 1,364,595
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Net increase in net assets resulting from operations 6,800,115 1,198,862
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Dividends and distributions to shareholders:
Net investment income (428,197) (299,210)
Return-of-capital (10,248,116) (9,996,313)
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Total dividends and distributions to shareholders (10,676,313) (10,295,523)
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Capital stock transactions:
Proceeds from 200,573 and 167,470 shares newly issued
in reinvestment of dividends and distributions,
respectively 2,061,112 1,925,600
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Total decrease in net assets (1,815,086) (7,171,061)
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NET ASSETS
Beginning of year 54,194,316 61,365,377
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End of year $ 52,379,230 $ 54,194,316
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See accompanying notes to financial statements.
6
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CORNERSTONE TOTAL RETURN FUND, INC.
FINANCIAL HIGHLIGHTS
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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.
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For the Years Ended December 31,
------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of year $ 10.91 $ 12.78 $ 13.89 $ 12.89 $ 18.30
-------- -------- -------- -------- --------
Net investment income# 0.09 0.06 0.10 0.08 0.15
Net realized and unrealized gain/(loss)
on investments 1.25 0.18 0.87 2.91 (3.57)
-------- -------- -------- -------- --------
Net increase/(decrease) in net assets
resulting from operations 1.34 0.24 0.97 2.99 (3.42)
-------- -------- -------- -------- --------
Dividends and distributions to shareholders:
Net investment income (0.09) (0.06) (0.10) (0.08) (0.18)
Return-of-capital (2.02) (2.05) (2.01) (1.91) (1.80)
-------- -------- -------- -------- --------
Total dividends and distributions to
shareholders (2.11) (2.11) (2.11) (1.99) (1.98)
-------- -------- -------- -------- --------
Capital stock transactions:
Anti-dilutive effect due to
capital stock repurchased -- -- -- -- 0.02
Anti-dilutive/(dilutive) effect
due to shares issued in
reinvestment of dividends
and distributions -- -- 0.03 -- (0.03)
-------- -------- -------- -------- --------
Total capital stock transactions -- -- 0.03 -- (0.01)
-------- -------- -------- -------- --------
Net asset value, end of year $ 10.14 $ 10.91 $ 12.78 $ 13.89 $ 12.89
======== ======== ======== ======== ========
Market value, end of year $ 19.62 $ 14.65 $ 17.95 $ 17.95 $ 11.35
======== ======== ======== ======== ========
Total investment return (a) 64.15% (2.07)% 15.11% 82.96% (19.30)%
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000 omitted) $ 52,379 $ 54,194 $ 61,365 $ 65,642 $ 60,151
Ratio of expenses to average net assets,
net of fee waivers, if any (b) 1.44% 1.47% 1.41% 1.20% 1.50%
Ratio of expenses to average net assets,
excluding fee waivers, if any (c) 1.50% 1.52% 1.45% 1.43% 2.07%
Ratio of expenses to average net assets,
net of fee waivers, if any (c) 1.50% 1.50% 1.43% 1.23% 1.63%
Ratio of net investment income to
average net assets 0.82% 0.53% 0.75% 0.65% 1.01%
Portfolio turnover rate 11.29% 9.84% 12.15% 3.62% 86.60%
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# 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.
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See accompanying notes to financial statements.
7
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CORNERSTONE TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS
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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 capital appreciation with current income as a
secondary objective by investing primarily in U.S. and non-U.S. companies. The
Fund is registered under the Investment Company Act of 1940, as amended, as a
closed-end, diversified management investment company.
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. Securities and assets
for which market quotations are not readily available are valued at their fair
value as determined in good faith under procedures established by and under the
general supervision of the Board. Fair valuation methodologies and procedures
may include, but are not limited to: analysis and review of financial and
non-financial information abut the company; comparisons to the valuation and
changes in valuation of similar securities, including reference to special
reports prepared by analysts and or reports published in the financial press,
the financial conditions and prospects of the issuer available, including
considering any recent management or capital structure changes or other recent
events that may impact the price of the security; and evaluation of any other
information that could be indicative of the value of the security. At December
31, 2006, the Fund held 0.32% 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 $166,762. 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.
In September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 157, Fair Value Measurements, which
clarifies the definition of fair value and requires companies to expand their
disclosure about the use of fair value to measure assets and liabilities in
interim and annual periods subsequent to initial recognition. Adoption of SFAS
157 requires the use of the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. At this time, the Fund is in the
process of reviewing SFAS 157 against its current valuation policies to
determine future applicability.
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8
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CORNERSTONE TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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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 "Investment
Manager" or "Cornerstone") considers creditworthy. The seller under a repurchase
agreement will be required to maintain the value of 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.
In June 2006, the Financial Accounting Standards Board issued FASB
Interpretation No. ("FIN") 48, Accounting for Uncertainty in Income Taxes. FIN
48 is effective for financial statements issued for fiscal years beginning after
December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. The Fund does not expect the
FASB's issuance of FIN 48 to materially impact the Fund's financial condition or
results of operations.
DISTRIBUTIONS TO SHAREHOLDERS: Effective January 2002, the Fund initiated a
fixed, monthly distribution to shareholders. On November 29, 2006, this
distribution policy was updated to provide for the annual resetting of the
monthly distribution amount per share, beginning in 2007, based on the Fund's
net asset value on the last business day in each October. The terms of the
distribution policy will be reviewed and approved at least annually by the
Fund's Board of Directors and can be modified at their discretion. 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. To the extent these distributions are not represented by net
investment income and capital gains, they will not represent yield or investment
return on the Fund's investment portfolio. The Fund plans to maintain this
distribution policy even if regulatory requirements would make part of a
return-of-capital, necessary to maintain the distribution, taxable to
shareholders and to disclose that portion of the distribution that is classified
as ordinary income. Although it has no current intention to do so, the Board may
terminate this distribution policy at any time and such termination may have an
adverse effect on the market price for the Fund's common shares. 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. To the extent that the Fund's taxable income in any
calendar year exceeds the aggregate amount distributed pursuant to this
distribution policy, an additional distribution may be made to avoid the payment
of a 4% U.S. federal excise tax, and to the extent that the aggregate amount
================================================================================
9
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CORNERSTONE TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
distributed in any calendar year exceeds the Fund's taxable income, the amount
of that excess may constitute a return-of-capital for tax purposes. A
return-of-capital distribution reduces the cost basis of an investor's shares in
the Fund. Dividends and distributions to shareholders are recorded by the Fund
on the ex-dividend date.
NOTE B. AGREEMENTS
Cornerstone serves as the Fund's Investment Manager with respect to all
investments. As compensation for its investment 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. During the year ended December
31, 2006, Cornerstone voluntarily agreed to waive its management fees from the
Fund to the extent that the Fund's net monthly operating expenses (including
basic legal fees but excluding other legal expenses) exceed a rate of 0.125% of
average net assets. For the year ended December 31, 2006, Cornerstone earned
$522,164 for investment management services, of which no amounts were required
to be waived. The Investment 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 $30,564 arising from credits earned on portfolio
transactions executed with a broker, pursuant to a directed brokerage
arrangement.
The Fund paid or accrued approximately $39,035 for the year ended December 31,
2006 for legal services to Blank Rome LLP ("Blank"), counsel to the Fund. Thomas
R. Westle, partner of Blank, serves as Secretary of the Fund.
NOTE C. INVESTMENT IN SECURITIES
For the year ended December 31, 2006, purchases and sales of securities, other
than short-term investments, were $5,900,360 and $14,369,287 respectively.
NOTE D. 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 the 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, 2006, was $954,730. During the year ended December 31, 2006, the
Fund earned $14,335 in securities lending income which is included under the
caption SECURITIES LENDING in the Statement of Operations.
NOTE E. 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 character of dividends and distributions paid during the years ended
December 31, for the Fund were as follows:
ORDINARY INCOME RETURN-OF-CAPITAL
--------------- -----------------
2006 2005 2006 2005
---- ---- ---- ----
$428,197 $299,210 $10,248,116 $9,996,313
================================================================================
10
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CORNERSTONE TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
--------------------------------------------------------------------------------
At December 31, 2006 the components of distributable earnings on a tax basis,
for the Fund were as follows:
Accumulated net realized loss $(15,319,316)
Unrealized appreciation 6,968,679
------------
Total accumulated deficit $ (8,350,637)
============
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, 2006, the Fund did not incur Post-October losses.
At December 31, 2006, the Fund had a capital loss carryforward for U.S. federal
income tax purposes of $15,319,316, of which $12,887,270 expires in 2008,
$1,170,157 expires in 2009, $425,706 expires in 2011, $358,321 expires in 2012,
$420,772 expires in 2013 and $57,090 expires in 2014.
At December 31, 2006, 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 appreciation from investments were $46,389,227, $10,503,487,
$(3,534,808) and $6,968,679, respectively.
================================================================================
11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2006, the related statement of operations for the year then ended,
the statement of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five 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.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of the Fund's
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2006, by correspondence with the custodian
and brokers. 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, 2006, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
TAIT, WELLER & BAKER LLP
Philadelphia, Pennsylvania
February 7, 2007
================================================================================
12
2006 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, 2006) as to the U.S. federal tax
status of the dividends and distributions received by the Fund's shareholders in
respect of such fiscal year. As indicated in this notice, significant portions
of the Fund's distributions for 2006 were comprised of a return-of-capital;
accordingly these distributions do NOT represent yield or investment return on
the Fund's portfolio.
During the year ended December 31, 2006 the following dividends and
distributions per share were paid by the Fund:
SOURCES OF DIVIDENDS AND DISTRIBUTIONS
(PER SHARE AMOUNTS)
PAYMENT DATES: 1/31/06 2/28/06 3/31/06 4/28/06 5/31/06 6/30/06
Ordinary Income(1) $ 0.0076 $ 0.0076 $ 0.0076 $ 0.0076 $ 0.0076 $ 0.0076
Return-of-Capital(2) $ 0.1684 $ 0.1684 $ 0.1684 $ 0.1684 $ 0.1684 $ 0.1684
-------- -------- -------- -------- -------- --------
Total: $ 0.1760 $ 0.1760 $ 0.1760 $ 0.1760 $ 0.1760 $ 0.1760
======== ======== ======== ======== ======== ========
PAYMENT DATES: 7/31/06 8/31/06 9/29/06 10/31/06 11/30/06 12/29/06
Ordinary Income(1) $ 0.0076 $ 0.0076 $ 0.0076 $ 0.0076 $ 0.0076 $ 0.0076
Return-of-Capital(2) $ 0.1684 $ 0.1684 $ 0.1684 $ 0.1684 $ 0.1684 $ 0.1684
-------- -------- -------- -------- -------- --------
Total: $ 0.1760 $ 0.1760 $ 0.1760 $ 0.1760 $ 0.1760 $ 0.1760
======== ======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------
(1) ORDINARY INCOME DIVIDENDS - This is the total per share amount of
ordinary income dividends and short-term capital gain distributions
(if applicable) included in the amount reported in Box 1a on Form
1099-DIV.
(2) RETURN-OF-CAPITAL - This is the per share amount of return-of-capital,
or sometimes called nontaxable distributions reported in Box 3 - under
the title "Nondividend distributions" - on Form 1099-DIV. This amount
should NOT be reported as taxable income on your current return.
Rather, it should be treated as a reduction in the original cost basis
of your investment in the Fund.
The Fund has met the requirements to pass through all of its (100%) ordinary
income dividends as qualified dividends, which are subject to a maximum federal
tax rate of 15%. This is reported in Box 1b on Form 1099-DIV. Ordinary income
dividends should be reported as dividend income on Form 1040. Please note that
to utilize the lower tax rate for qualifying dividend income, shareholders
generally must have held their shares in the Fund for at least 61 days during
the 121 day period beginning 60 days before the ex-dividend date.
Foreign shareholders will generally be subject to U.S. withholding tax on the
amount of the actual ordinary income dividend paid by the Fund.
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.
================================================================================
13
ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS
AND CORPORATE OFFICERS (UNAUDITED)
NUMBER OF
PORTFOLIOS IN
NAME AND POSITION FUND COMPLEX
ADDRESS* POSITION(S) PRINCIPAL OCCUPATION WITH FUND OVERSEEN BY
(BIRTH DATE) HELD WITH FUND OVER LAST 5 YEARS SINCE DIRECTORS
--------------------------------------------------------------------------------------------------------------------
Ralph W. Chairman of the President, Cornerstone Advisors, Inc.; 2001 2
Bradshaw** Board of Financial Consultant; President and
(Dec. 1950) Directors and Director of Cornerstone Strategic
President Value Fund, Inc.
William A. Director and Vice Director and Stockholder of Cornerstone 2004 2
Clark** President Advisors, Inc.; Director and Vice President
(Oct. 1945) of Cornerstone Strategic Value Fund, Inc.;
former financial consultant of Deep
Discount Advisors, Inc.
Glenn W. Director; Audit Chairman of the Board and Chief 2001 2
Wilcox, Sr. Committee Executive Officer of Wilcox Travel
(Dec. 1931) Chairman, Agency, Inc.; Director of Cornerstone
Nominating and Strategic Value Fund, Inc.
Corporate
Governance
Committee
Member
Thomas H. Director; Audit, Independent Financial Adviser; Director 2002 2
Lenagh Nominating and of Photonics Products Group; Director of
(Nov. 1924) Corporate Cornerstone Total Return Fund, Inc.;
Governance Director of Adams Express and
Committee Petroleum and Resources; Retired
Member Treasurer and Investment Manager of
Ford Foundation.
Edwin Director; Audit, Distinguished Fellow, The Heritage 2001 2
Meese III Nominating and Distinguished Fellow, The Heritage
(Dec. 1931) Corporate Foundation Washington D.C.;
Governance Distinguished Visiting Fellow at the
Committee Hoover Institution, Stanford University;
Member Senior Adviser, Revelation L.P .; formerly
U.S. Attorney General under President
Ronald Reagan; Director of Cornerstone
Strategic Value Fund, Inc.
================================================================================
14
ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS
AND CORPORATE OFFICERS (UNAUDITED) (CONTINUED)
NUMBER OF
PORTFOLIOS IN
NAME AND POSITION FUND COMPLEX
ADDRESS* POSITION(S) PRINCIPAL OCCUPATION WITH FUND OVERSEEN BY
(BIRTH DATE) HELD WITH FUND OVER LAST 5 YEARS SINCE DIRECTORS
--------------------------------------------------------------------------------------------------------------------
Scott B. Rogers Director; Audit, Chairman, Board of Health Partners, 2001 2
(July 1955) Nominating and Inc.; Chief Executive Officer, Asheville
Corporate Buncombe Community Christian
Governance Ministry; and President, ABCCM
Committee Doctor's Medical Clinic; Appointee, NC
Member Governor's Commission on Welfare to
Work; Director of Cornerstone
Strategic Value Fund, Inc.
Andrew A. Director; Attorney and senior member of Strauss 2001 2
Strauss Chairman of & Associates, P.A., Attorneys, Asheville
(Nov. 1953) Nominating and and Hendersonville, NC; previous
Corporate President of White Knight Healthcare,
Governance Inc. and LMV Leasing, Inc., a wholly
Committees and owned subsidiary of Xerox Credit
Audit Committee Corporation; Director of Cornerstone
Member Strategic Value Fund, Inc.
================================================================================
15
ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS
AND CORPORATE OFFICERS (UNAUDITED) (CONCLUDED)
NAME AND POSITION
ADDRESS* POSITION(S) PRINCIPAL OCCUPATION WITH FUND
(BIRTH DATE) HELD WITH FUND OVER LAST 5 YEARS SINCE
--------------------------------------------------------------------------------------------------------------
Gary A. Bentz Chief Compliance Chairman and Chief Financial Officer of 2004
(June 1956) Officer Cornerstone Advisors, Inc.; previous
Director, Vice President and Treasurer of the
Fund and Cornerstone Strategic Value Fund,
Inc., Financial Consultant, C.P.A., Chief
Compliance Officer of Cornerstone Strategic
Value Fund, Inc.
Thomas R. Westle Secretary Partner, Blank Rome LLP, a law firm; 2001
405 Lexington Avenue previous partner, Spitzer & Feldman P.C.,
New York, NY 10174 a law firm; Secretary of Cornerstone Strategic
(Dec. 1953) Value Fund, Inc.
Jodi B. Levine Treasurer Associate Director, Bear, Stearns & Co. Inc.; 2004
(Aug. 1969) Treasurer of Cornerstone Strategic Value
Fund, Inc.
--------------------------------------------------------------------------------------------------------------
* The mailing address of each Director and/or Officer with respect to
the Fund's operation is 383 Madison Ave. -23rd Floor, New York, NY
10179 unless otherwise indicated.
** 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 Clark are interested persons of the Fund by virtue of
their current positions with the Investment Manager of the Fund.
================================================================================
16
DESCRIPTION OF DIVIDEND REINVESTMENT PLAN (UNAUDITED)
Cornerstone Total Return Fund, Inc. operates a Dividend Reinvestment Plan (the
"Plan"), sponsored and administered by American Stock Transfer & Trust Company
(the "Agent"), pursuant to which the Fund's income dividends or capital gains or
other distributions (each, a "Distribution" and collectively, "Distributions"),
net of any applicable U.S. withholding tax, are reinvested in shares of the
Fund. American Stock Transfer & Trust Company serves as the Agent that
administers the Plan for the shareholders in the Plan.
Shareholders automatically participate in the Fund's Plan, unless and until an
election is made to withdraw from the Plan on behalf of such participating
shareholder. Shareholders who do not wish to have Distributions automatically
reinvested should so notify the Agent at P.O. Box 922, Wall Street Station, New
York, New York 10269-0560. Under the Plan, the Fund's Distributions to
shareholders are reinvested in full and fractional shares as described below.
When the Fund declares a Distribution the Agent, on the shareholder's 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) 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").
The method for determining the number of shares to be received when
Distributions are reinvested will vary depending upon whether the net asset
value of the Fund's shares is higher or lower than its market price. If the net
asset value of the Fund's shares is lower than its market price, the number of
Newly Issued Shares received will be determined by dividing the amount of the
Distribution either by the Fund's net asset value per share or by 95% of its
market price, whichever is higher. If the net asset value of the Fund's shares
is higher than its market price, 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.
Whenever the Fund declares a Distribution and the net asset value of the Fund's
shares is higher than its market price, the Agent will apply the amount of such
Distribution payable to Plan participants of the Fund in Fund shares (less such
Plan participant's pro rata share of brokerage commissions incurred with respect
to Open Market Purchases in connection with the reinvestment of such
Distribution) to the purchase on the open market of Fund shares for such Plan
participant's account. Such purchases will be made on or after the payable date
for such Distribution, and in no event more than 30 days after such date except
where temporary curtailment or suspension of purchase is necessary to comply
with applicable provisions of federal securities laws. The Agent may aggregate a
Plan participant's purchases with the purchases of other Plan participants, and
the average price (including brokerage commissions) of all shares purchased by
the Agent shall be the price per share allocable to each Plan participant.
Registered shareholders who do not wish to have their Distributions
automatically reinvested should so notify the Fund in writing. If a shareholder
has not elected to receive cash Distributions and the Agent does not receive
notice of an election to receive cash Distributions prior to the record date of
any Distribution, the shareholder will automatically receive such Distributions
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 Distribution payment date.
When a Participant withdraws from the Plan, or upon suspension or termination of
the Plan at the sole discretion of the Fund's Board of Directors, certificates
for whole shares credited to his or 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 the Plan
================================================================================
17
DESCRIPTION OF DIVIDEND REINVESTMENT PLAN (UNAUDITED)(CONCLUDED)
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.
Neither the Agent nor the Fund shall have any responsibility or liability beyond
the exercise of ordinary care for any action taken or omitted pursuant to the
Plan, nor shall they have any duties, responsibilities or liabilities except
such as expressly set forth herein. Neither shall they be liable hereunder for
any act done in good faith or for any good faith omissions to act, including,
without limitation, failure to terminate a participants account prior to receipt
of written notice of his or her death or with respect to prices at which shares
are purchased or sold for the participants account and the terms on which such
purchases and sales are made, subject to applicable provisions of the federal
securities laws.
All correspondence concerning the Plan should be directed to the Agent at P.O.
Box 922, Wall Street Station, New York, New York 10269-0560. Certain
transactions can be performed online at www.amstock.com or by calling the toll
free number 888-556-0422.
================================================================================
18
PROXY VOTING AND PORTFOLIO HOLDINGS INFORMATION (UNAUDITED)
Information regarding how the Cornerstone Total Return Fund, Inc. (the "Fund")
voted proxies related to its portfolio securities during the 12-month period
ended June 30 of each year as well as the policies and procedures that the Fund
uses to determine how to vote proxies relating to its portfolio securities are
available by calling (212) 272-3550 or on the website of the Securities and
Exchange Commission, http://www.sec.gov.
This report incorporates a Summary Schedule of Investments for the Fund. A
complete Schedule of Investments for the Fund may be obtained free of charge by
contacting the Fund at (212) 272-3550.
The Fund files a complete schedule of its portfolio holdings for the first and
third quarters of its fiscal year with the SEC on Form N-Q. The Fund's Forms N-Q
are available on the SEC's website at http://www.sec.gov and may be reviewed and
copied at the SEC's Public Reference Room in Washington, DC. Information on the
operation of the SEC's Public Reference Room may be obtained by calling (202)
551-8090.
PRIVACY POLICY NOTICE (UNAUDITED)
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 trans- actions 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.
================================================================================
19
SUMMARY OF GENERAL INFORMATION (UNAUDITED)
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 capital appreciation with current income as a secondary
objective by investing primarily in U.S. and non-U.S. companies. The Fund is
managed by Cornerstone Advisors, Inc.
SHAREHOLDER INFORMATION (UNAUDITED)
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.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
================================================================================
20
CORNERSTONE TOTAL RETURN FUND, INC.
ITEM 2. CODE OF ETHICS.
(a) As of the end of the period covered by this report, the Registrant has
adopted a code of ethics that applies to the Registrant's principal executive
officer, principal accounting officer, and persons performing similar functions.
(c) and (d). During the period covered by this report, there was no amendment
to, and no waiver granted from, any provision of the code of ethics that applies
to the Registrant's principal executive officer, principal accounting officer,
and persons performing similar functions.
(f)(1) Pursuant to Item 12(a), the Registrant is attaching as an exhibit
(EX-99.CODE ETH) a copy of its code of ethics that applies to its principal
executive officer, principal financial officer, and persons performing similar
functions.
(f)(3) The Registrant undertakes to provide to any person without charge, upon
request, a copy of its code of ethics. This can be accomplished by calling the
Registrant at (212)272-3550.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The registrant's board of directors has determined that it does not have
an audit committee financial expert serving on its audit committee.
(a)(2) Not applicable
(a)(3) 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) through (d). The information in the table below is provided for services
rendered to the registrant by its independent registered public accounting firm,
Tait, Weller & Baker LLP, for the Registrant's fiscal years ended December 31,
2006 and December 31, 2005.
2006 2005
---- ----
Audit Fees $13,000 $12,300
Audit-related Fees -- --
Tax Fees (1) $ 2,500 $ 2,300
All Other Fees -- --
------- -------
Total $15,500 $14,600
======= =======
(1) Tax services in connection with the registrant's excise tax calculations and
review of the registrant's applicable tax returns.
(e)(1) Audit Committee Pre-Approval Policies and Procedures.
Before the auditor is (i) engaged by the Registrant to render audit, audit
related or permissible non-audit services to the Registrant or (ii) with respect
to non-audit services to be provided by the auditor to the Registrant's
investment adviser or any entity in the investment Registrant complex, if the
nature of the services provided relate directly to the operations or financial
reporting of the Registrant, either: (a) the Audit Committee shall pre-approve
such engagement; or (b) such engagement shall be entered into pursuant to
pre-approval policies and procedures established by the Audit Committee. Any
such policies and procedures must be detailed as to the particular service and
not involve any delegation of the Audit Committee's responsibilities to the
Registrant's investment adviser. The Audit Committee may delegate to one or more
of its members the authority to grant pre-approvals. The pre-approval policies
and procedures shall include the requirement that the decisions of any member to
whom authority is delegated under this provision shall be presented to the full
Audit Committee at its next scheduled meeting. Under certain limited
circumstances, pre-approvals are not required if certain de minimis thresholds
are not exceeded, as such thresholds are set forth by the Audit Committee and in
accordance with applicable SEC rules and regulations.
(e)(2) None of the services provided to the Registrant described in paragraphs
(b)-(d) of Item 4 were pre-approved by the Audit Committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) There were no non-audit fees billed by Tait, Weller & Baker LLP for services
rendered to the Registrant, the Registrant's investment advisor (not including
any sub-advisor whose role is primarily portfolio management and is
subcontracted with or overseen by another investment advisor) or any entity
controlling, controlled by, or under common control with the investment advisor
that provides ongoing services to the Registrant for the Registrant's last two
fiscal years (December 31, 2005 and December 31, 2006).
(h) No disclosures are required by this Item 4(h).
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately-designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Securities and
Exchange Act of 1934, as amended. Glenn Wilcox (Chair), Edwin Meese, Thomas
Lenagh, Andy Strauss and Scott Rogers are the members of the Registrant's audit
committee.
(b) Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
--------------------------------------------------------------------------------
CORNERSTONE TOTAL RETURN FUND, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006
--------------------------------------------------------------------------------
NO. OF
DESCRIPTION SHARES VALUE
--------------------------------------------------------------------------------
EQUITY SECURITIES - 99.14%
UNITED STATES - 98.82%
CLOSED-END FUNDS - 7.95%
Adams Express Company 70,400 $ 976,448
Boulder Total Return Fund, Inc. 13,900 310,526
Central Europe and Russia Fund, Inc. (The) 2,500 134,525
Cohen & Steers Select Utility Fund, Inc. 6,000 146,880
Dreman/Claymore Dividend & Income Fund 49,500 1,137,510
H&Q Healthcare Investors 5,100 83,997
H&Q Life Sciences Investors 6,000 80,880
Japan Equity Fund ^ 13,000 109,980
John Hancock Bank and Thrift Opportunity Fund 9,000 90,630
Liberty All-Star Growth Fund, Inc. 140,800 756,096
Neuberger Berman Real Estate Income Fund Inc. 8,500 236,895
Petroleum & Resources Corporation 3,000 100,380
-----------
4,164,747
-----------
CONSUMER DISCRETIONARY - 9.32%
Bed Bath & Beyond Inc. ^ * 2,500 95,250
Best Buy Co., Inc. ^ 3,750 184,462
CBS Corporation 2,000 62,360
Coach, Inc. * 2,500 107,400
Comcast Corporation, Special Class A * 4,500 188,460
Comcast Corporation, Class A * 6,008 254,319
Ford Motor Company 14,000 105,140
Fortune Brands, Inc. ^ 2,500 213,475
Goodyear Tire & Rubber Company (The) * 2,500 52,475
Harley-Davidson, Inc. 2,500 176,175
Hilton Hotels Corporation 2,500 87,250
Home Depot, Inc. (The) 9,000 361,440
J.C. Penney Company, Inc. 2,500 193,400
Kohl's Corporation * 2,500 171,075
Lowe's Companies, Inc. 4,900 152,635
Marriott International, Inc., Class A 5,000 238,600
Mattel, Inc. 4,500 101,970
McDonald's Corporation 8,100 359,073
McGraw-Hill Companies, Inc. (The) 2,500 170,050
Nordstrom, Inc. 2,500 123,350
Office Depot, Inc. * 2,500 95,425
Omnicom Group Inc. ^ 1,500 156,810
Staples, Inc. 3,150 84,105
Starbucks Corporation * 2,500 88,550
Target Corporation 4,600 262,430
Time Warner Inc. ^ 17,000 370,260
TJX Companies, Inc. (The) 2,500 71,200
Viacom Inc., Class B * 2,000 82,060
Walt Disney Company (The) 8,000 274,160
-----------
4,883,359
-----------
1
NO. OF
DESCRIPTION SHARES VALUE
--------------------------------------------------------------------------------
CONSUMER STAPLES - 9.09%
Altria Group, Inc. 7,700 660,814
Archer-Daniels-Midland Company 3,000 95,880
Campbell Soup Company 3,200 124,448
Coca-Cola Company (The) 13,500 651,375
Colgate-Palmolive Company 2,500 163,100
ConAgra Foods, Inc. 2,500 67,500
CVS Corporation 3,000 92,730
General Mills, Inc. 2,500 144,000
H.J. Heinz Company 2,700 121,527
Kroger Co. (The) 3,600 83,052
PepsiCo, Inc. ^ 5,000 312,750
Procter & Gamble Company (The) 13,972 897,980
Safeway Inc. ^ 4,900 169,344
Sara Lee Corporation 2,600 44,278
Walgreen Co. 5,600 256,984
Wal-Mart Stores, Inc. 19,000 877,420
-----------
4,763,182
-----------
ENERGY - 9.57%
Anadarko Petroleum Corp. 5,000 217,600
BJ Services Company 3,000 87,960
Chevron Corporation 10,068 740,300
ConocoPhillips ^ 2,500 179,875
Devon Energy Corporation 2,500 167,700
El Paso Corporation 3,000 45,840
Exxon Mobil Corporation 32,000 2,452,163
Halliburton Company 5,000 155,250
Marathon Oil Corp. 2,500 231,250
Norsk Hydro ADR 2,500 76,675
Occidental Petroleum Corporation 2,500 122,075
Peabody Energy Corporation ^ 2,500 101,025
Schlumberger Limited 5,000 315,800
XTO Energy, Inc. 2,500 117,625
-----------
5,011,138
-----------
FINANCIALS - 19.62%
AFLAC Incorporated 1,500 69,000
American Express Company 3,500 212,345
American International Group, Inc. 12,331 883,639
Ameriprise Financial, Inc. 1,220 66,490
Aon Corporation 2,500 88,350
Bank of America Corporation ^ 17,021 908,751
BB&T Corporation 4,500 197,685
Charles Schwab Corporation (The) 8,200 158,588
Chubb Corporation (The) 5,000 264,550
Cincinnati Financial Corporation 2,500 113,275
Citigroup Inc. ^ 25,600 1,425,920
Countrywide Financial Corporation ^ 3,500 148,575
Fannie Mae 6,200 368,218
Franklin Resources, Inc. 2,500 275,425
Freddie Mac 3,300 224,070
Goldman Sachs Group, Inc. (The) 3,000 598,050
Hartford Financial Services Group, Inc. (The) 1,600 149,296
JPMorgan Chase & Co. 12,700 613,410
KeyCorp 2,500 95,075
2
NO. OF
DESCRIPTION SHARES VALUE
--------------------------------------------------------------------------------
Lehman Brothers Holdings Inc. 2,500 195,300
M&T Bank Corporation 2,500 305,400
Mellon Financial Corporation 2,300 96,945
Merrill Lynch & Co., Inc. 1,100 102,410
Metlife, Inc. 3,000 177,030
Moody's Corporation 2,000 138,120
Morgan Stanley 3,700 301,291
Northern Trust Corporation 1,100 66,759
PNC Financial Services Group, Inc. 1,400 103,656
Prudential Financial, Inc. 2,500 214,650
Regions Financial Corporation 1,993 74,538
SLM Corporation 2,500 121,925
St. Paul Travelers Companies, Inc. (The) 5,092 273,389
State Street Corporation 1,600 107,904
Synovus Corporation 2,500 77,075
Wachovia Corporation 5,600 318,920
Wells Fargo & Company 18,000 640,080
Western Union Company ^ 4,325 96,966
-----------
10,273,070
-----------
HEALTHCARE - 10.36%
Aetna Inc. ^ 4,000 172,720
Amgen Inc. * 8,300 566,973
Biomet, Inc. 2,500 103,175
Caremark Rx, Inc. 2,500 142,775
Eli Lilly and Company 4,100 213,610
Gilead Sciences, Inc. * 2,500 162,325
Johnson & Johnson 15,500 1,023,310
Laboratory Corporation of America Holdings * 2,500 183,675
Medco Health Solutions, Inc. * 1,531 81,817
Medtronic, Inc. 4,500 240,795
Merck & Co. Inc. 8,700 379,320
Pfizer Inc. 24,960 646,464
Schering-Plough Corporation ^ 8,400 198,576
St. Jude Medical, Inc. * 2,500 91,400
Stryker Corporation ^ 2,000 110,220
UnitedHealth Group Incorporated 10,000 537,300
Waters Corporation * 2,500 122,425
Wyeth 5,000 254,600
Zimmer Holdings, Inc. * 2,500 195,950
-----------
5,427,430
-----------
INDUSTRIALS - 9.83%
3M Co. 2,500 194,825
Boeing Company (The) 1,400 124,376
Caterpillar Inc. 2,500 153,325
CSX Corporation 5,000 172,150
Danaher Corporation ^ 2,500 181,100
Dover Corporation ^ 1,000 49,020
FedEx Corp. 2,500 271,550
General Dynamics Corporation 2,500 185,875
General Electric Company 52,000 1,934,920
Honeywell International Inc. 3,300 149,292
Illinois Tool Works Inc. 5,000 230,950
Lockheed Martin Corporation 2,500 230,175
3
NO. OF
DESCRIPTION SHARES VALUE
--------------------------------------------------------------------------------
Norfolk Southern Corporation 2,500 125,725
Raytheon Company 2,500 132,000
Rockwell Automation, Inc. 2,500 152,700
Southwest Airlines Co. 6,100 93,452
United Parcel Service, Inc., Class B 4,000 299,920
United Technologies Corporation ^ 4,400 275,088
Waste Management, Inc. 5,300 194,881
-----------
5,151,324
-----------
INFORMATION TECHNOLOGY - 14.08%
Advanced Micro Devices * 2,500 50,875
Agilent Technologies Inc. * 5,000 174,250
Altera Corporation ^ * 2,500 49,200
Apple Computer, Inc. * 5,000 424,200
Applied Materials, Inc. ^ 8,000 147,600
Broadcom Corporation - Class A * 2,500 80,775
Cisco Systems, Inc. * 24,500 669,585
Corning Incorporated * 3,500 65,485
Dell Inc. * 5,700 143,013
eBay Inc. * 4,000 120,280
EMC Corporation * 8,000 105,600
First Data Corporation 4,325 110,374
Fiserv, Inc. * 2,500 131,050
Google Inc. ^ * 1,000 460,480
Hewlett-Packard Company 10,000 411,900
Intel Corporation 19,500 394,875
International Business Machines Corporation 5,700 553,755
Intuit Inc. * 2,500 76,275
Microsoft Corporation 43,000 1,283,980
Motorola, Inc. 11,100 228,216
Network Appliance, Inc. * 2,500 98,200
Oracle Corporation * 33,600 575,904
Paychex, Inc. 2,500 98,850
QUALCOMM Inc. 6,800 256,972
Texas Instruments Incorporated 13,500 388,800
Xerox Corporation * 3,000 50,850
Yahoo! Inc. * 8,500 217,090
-----------
7,368,434
-----------
MATERIALS - 2.32%
Air Products & Chemicals, Inc. 2,500 175,700
Alcoa Inc. 3,000 90,030
Dow Chemical Company (The) 3,500 139,790
E. I. du Pont de Nemours and Company 5,800 282,518
International Paper Company 2,300 78,430
Monsanto Company 3,546 186,271
Nucor Corporation ^ 2,500 136,650
Rohm and Hass Company 2,500 127,800
-----------
1,217,189
-----------
REAL ESTATE INVESTMENT TRUST - 0.48%
Simon Property Group, Inc. ^ 2,500 253,225
-----------
253,225
-----------
TELECOMMUNICATIONS SERVICES - 3.39%
AT&T Inc. 24,699 882,989
4
NO. OF
DESCRIPTION SHARES VALUE
--------------------------------------------------------------------------------
BellSouth Corporation 5,200 244,972
Nokia ADR 2,500 50,800
Qwest Communications International Inc. * 10,000 83,700
Sprint Nextel Corporation ^ 7,437 140,485
Verizon Communications Inc. 10,000 372,400
-----------
1,775,346
-----------
UTILITIES - 2.81%
AES Corporation (The) * 3,000 66,120
Alleghany Energy Inc. * 2,500 114,775
American Electric Power Company, Inc. 5,500 234,190
Duke Energy Corporation ^ 6,600 219,186
FirstEnergy Corp. 2,500 150,525
Southern Company (The) 2,500 92,150
TXU Corp. 7,400 401,154
Williams Companies, Inc. (The) 2,500 65,300
Xcel Energy, Inc. 5,500 126,830
-----------
1,470,230
-----------
TOTAL UNITED STATES
(cost - $44,010,264) 51,758,674
-----------
CZECH REPUBLIC - 0.32%
CONSUMER DISCRETIONARY - 0.32%
Bonton a.s. * # 137,180 3,861
Bonton Book a.s. * # 68,590 32,860
Bonton Film Entertainment a.s. * # 68,590 82,149
Bonton Music a.s. * # 68,590 45,428
Bonton Pictures a.s. * # 68,590 2,464
-----------
166,762
-----------
TOTAL CZECH REPUBLIC
(cost - $894,864) 166,762
-----------
TOTAL EQUITY SECURITIES
(cost - $44,905,128) 51,925,436
-----------
PRINCIPAL
AMOUNT
(000'S)
-------
SHORT-TERM INVESTMENTS - 2.73%
REPURCHASE AGREEMENTS - 2.73%
Bear, Stearns and Co., Inc. + ++
(Agreement dated 12/29/2006 to be
repurchased at $657,099), 2.6565%,
1/2/2007, collateralized by $676,013
in U.S. Treasury Bond Strips) $ 657 656,905
Bear, Stearns and Co., Inc.
(Agreement dated 12/29/2006 to
be repurchased at $471,319), 4.8500%,
1/2/2007, collateralized by $486,340
in U.S. Treasury Bond Strips) 471 471,065
Bear, Stearns and Co., Inc. + ++
(Agreement dated 12/29/2006 to be
repurchased at $304,680), 5.3130%,
1/2/2007, collateralized by $313,689 in
U.S. Treasury Bond Strips) 305 304,500
5
NO. OF
DESCRIPTION SHARES VALUE
--------------------------------------------------------------------------------
1,432,470
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost - $1,432,470) 1,432,470
-----------
TOTAL INVESTMENTS - 101.87% 53,357,906
-----------
(cost - $46,337,598) 53,357,906
-----------
LIABILITIES IN EXCESS OF OTHER ASSETS - (1.87)% (978,676)
-----------
NET ASSETS - 100.00% $52,379,230
===========
ADR American Depositary Receipt
* Non-income producing security.
+ Stated interest rate, before rebate earned by borrower of securities on
loan.
++ Represents investment purchased with collateral received for securities on
loan.
^ Security or a portion thereof is out on loan.
# Securities are fair valued in accordance with procedures established by the
Board of Directors.
At December 31, 2006, the Fund held 0.32% of its net assets in securities valued
in good faith by the Board of Directors with an aggregate cost of $894,864 and a
fair value of $166,762.
6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2006, the related statement of operations for the year then ended,
the statement of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five 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.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of the Fund's
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2006, by correspondence with the custodian
and brokers. 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, 2006, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of investments in securities
as of December 31, 2006 appearing in Item 6 of this Form N-CSR is presented for
the purpose of additional analysis and is not a required part of the basic
financial statements. This additional information is the responsibility of the
Fund's management. Such information has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
TAIT, WELLER & BAKER LLP
PHILADELPHIA, PENNSYLVANIA
FEBRUARY 7, 2007
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Registrant has delegated the voting of proxies relating to its voting
securities to its investment adviser, Cornerstone Advisors, Inc. (the
"Investment Manager"). The respective Proxy Voting Policies and Procedures of
the Registrant and the Investment Manager are attached as Exhibit 99.VOTEREG.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1) All information contained in this item and its subparts is as of the date
of this filing, unless otherwise noted. Ralph W. Bradshaw and William A. Clark
are employees of Cornerstone Advisors, Inc. (the Investment Manager) and
portfolio managers of the Fund. Mr. Bradshaw has acted as the portfolio manager
since 2001. Mr. Clark has acted as the portfolio manager since 2003. Ralph W.
Bradshaw occupation for the last five years is President of Cornerstone
Advisors, Inc. and a Financial Consultant. William A. Clark occupation for the
last five years is Director and Stockholder of Cornerstone Advisors, Inc. and a
former financial consultant of Deep Discount Advisors, Inc.
(a)(2)(i) Ralph W. Bradshaw and William A. Clark
(a)(2)(ii)(A) Registered Investment Companies - Ralph W. Bradshaw and William A.
Clark each manages one other registered closed-end fund (Cornerstone Strategic
Value Fund, Inc.) As of December 31, 2006, the total assets of Cornerstone
Strategic Value Fund, Inc. was $141.6 million.
(a)(2)(ii)(B) Not applicable
(a)(2)(ii)(C) Not applicable
(a)(2)(iii) None. Ralph W. Bradshaw and William A. Clark manage no accounts
where the Advisory Fee is based on the performance of the account.
(a)(2)(iv) None.
(a)(3) As of the most recent fiscal year end December 31, 2006, the compensation
paid to both Ralph W. Bradshaw and William A. Clark was fixed.
(a)(4) The dollar range of equity securities owned in the registrant
beneficially by each portfolio manager is as follows: for Ralph W. Bradshaw it
is in the range of $50,001-$100,000 and for William A. Clark it is also in the
range of $50,001-$100,000.
(b) None.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT COMPANY AND
AFFILIATED PURCHASERS.
None.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's principal executive officer and principal financial officer
have evaluated the Registrant's disclosure controls and procedures as of a date
within 90 days of this filing and have concluded that the Registrant's
disclosure controls and procedures are effective, as of such date, in ensuring
that information required to be disclosed by the registrant in this Form N-CSR
was recorded, processed, summarized, and reported timely.
(b) The Registrant's principal executive officer and principal financial officer
are aware of no changes in the Registrant's internal control over financial
reporting that occurred during the Registrant's last fiscal half-year that has
materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics attached as EX-99.CODE ETH.
(a)(2) Separate certifications of Principal Executive and Financial Officers
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 attached as
EX-99.CERT.
(b) Certification of Principal Executive and Financial Officers pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 furnished as EX-99.906 CERT.
(99) Proxy Voting Policies of the Registrant attached as EX-99.VOTEREG.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
By: /s/ Ralph W. Bradshaw
---------------------
Name: Ralph W. Bradshaw
Title: Principal Executive Officer
Date: March 9, 2007
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.
Cornerstone Total Return Fund, Inc.
By: /s/ Ralph W. Bradshaw
---------------------
Name: Ralph W. Bradshaw
Title: Principal Executive Officer
Date: March 9, 2007
By: /s/ Jodi B. Levine
------------------
Name: Jodi B. Levine
Title: Principal Financial Officer
Date: March 9, 2007