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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)
Kayadti A. Madison
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, 2007
Date of reporting period: December 31, 2007
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, 2007 follows.
CORNERSTONE TOTAL
RETURN FUND, INC.
ANNUAL REPORT
DECEMBER 31, 2007
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, 2007 (UNAUDITED)
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SECTOR ALLOCATION
Percent of
Sector Net Assets
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Information Technology 16.1
Financials 15.4
Energy 11.6
Healthcare 10.7
Industrials 10.7
Consumer Staples 9.8
Consumer Discretionary 7.5
Closed-End Funds 7.5
Telecommunication Services 3.7
Materials 3.2
Utilities 2.9
Other 0.9
TOP TEN HOLDINGS, BY ISSUER
Percent of
Holding Sector Net Assets
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1. Exxon Mobil Corporation Energy 6.6
2. General Electric Company Industrials 4.0
3. Microsoft Corporation Information Technology 2.9
4. AT&T Inc. Telecommunication Services 2.6
5. Johnson & Johnson Healthcare 2.3
6. Adams Express Company Closed-End Funds 2.2
7. Apple Computer, Inc. Information Technology 2.2
8. Chevron Corporation Energy 2.1
9. Wal-Mart Stores, Inc. Consumer Staples 1.9
10. Dreman/Claymore Dividend Closed-End Funds 1.9
& Income Fund
1
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CORNERSTONE TOTAL RETURN FUND, INC.
SUMMARY SCHEDULE OF INVESTMENTS - DECEMBER 31, 2007
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No. of
Description Shares Value
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EQUITY SECURITIES - 99.53%
CLOSED-END FUNDS - 7.48%
Adams Express Company (a) 70,400 $ 994,048
Dreman/Claymore Dividend & Income Fund 53,500 845,300
Liberty All-Star Growth Fund, Inc. 39,075 232,887
Other Closed-End Funds (a)(b) 1,326,682
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3,398,917
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CONSUMER DISCRETIONARY - 7.53%
Amazon.com, Inc. ^ * 2,500 231,600
Home Depot, Inc. (The) 13,500 363,690
McDonald's Corporation 5,100 300,441
Time Warner Inc. 17,000 280,670
Walt Disney Company (The) 8,000 258,240
Other Consumer Discretionary (b) 1,984,114
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3,418,755
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CONSUMER STAPLES - 9.77%
Altria Group, Inc. ^ 7,700 581,966
Coca-Cola Company (The) 11,000 675,070
PepsiCo, Inc. 5,000 379,500
Procter & Gamble Company (The) 11,472 842,274
Wal-Mart Stores, Inc. 18,500 879,305
Other Consumer Staples (b) 1,077,448
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4,435,563
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ENERGY - 11.61%
Chevron Corporation 10,068 939,646
Exxon Mobil Corporation 32,000 2,998,081
Schlumberger Limited 5,000 491,850
Other Energy (b) 844,800
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5,274,377
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FINANCIALS - 15.41%
American International Group, Inc. 12,331 718,897
Bank of America Corporation 14,521 599,136
Citigroup Inc. 25,600 753,664
Franklin Resources, Inc. 2,500 286,075
Goldman Sachs Group, Inc. (The) 3,000 645,150
JPMorgan Chase & Co. 10,200 445,230
Prudential Financial, Inc. 2,500 232,600
Travelers Companies, Inc. (The) 5,092 273,950
Wells Fargo & Company 18,000 543,420
Other Financials (b) 2,499,827
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6,997,949
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HEALTHCARE - 10.70%
Johnson & Johnson 15,500 1,033,850
Merck & Co. Inc. 13,700 796,107
UnitedHealth Group Incorporated ^ 7,500 436,500
Other Healthcare (b) 2,592,523
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4,858,980
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INDUSTRIALS - 10.67%
General Electric Company 49,000 1,816,431
Lockheed Martin Corporation 2,500 263,150
United Parcel Service, Inc., Class B 4,000 282,880
United Technologies Corporation 4,400 336,776
Other Industrials (b) 2,146,975
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4,846,212
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INFORMATION TECHNOLOGY - 16.08%
Apple Computer, Inc. * 5,000 990,400
Cisco Systems, Inc. * 22,000 595,540
Google Inc. * 1,000 691,480
Hewlett-Packard Company 10,000 504,800
Intel Corporation 13,000 346,580
International Business Machines Corporation 3,200 345,920
Microsoft Corporation 37,500 1,335,000
Oracle Corporation * 28,600 645,788
QUALCOMM Inc. 6,800 267,580
Texas Instruments Incorporated 11,000 367,400
Other Information Technology (b) 1,209,525
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7,300,013
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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, 2007 (CONCLUDED)
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No. of
Description Shares Value
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MATERIALS - 3.25%
Air Products & Chemicals, Inc. 2,500 $ 246,575
E. I. du Pont de Nemours and Company 5,800 255,722
Freeport-McMoRan Copper & Gold, Inc. 2,500 256,100
Monsanto Company 3,546 396,053
Other Materials (b) 322,094
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1,476,544
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REAL ESTATE INVESTMENT TRUST - 0.48%
Total Real Estate Investment Trust (b) 217,150
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TELECOMMUNICATION SERVICES - 3.66%
AT&T Inc. 28,589 1,188,159
Verizon Communications Inc. ^ 7,500 327,675
Other Telecommunication Services (b) 145,045
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1,660,879
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UTILITIES - 2.89%
American Electric Power Company, Inc. 5,500 256,080
Dominion Resources, Inc. ^ 5,000 237,250
Other Utilities (b) 819,157
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1,312,487
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TOTAL EQUITY SECURITIES
(cost - $36,665,722) 45,197,826
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Principal
Amount
Description (000's) Value
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SHORT-TERM INVESTMENTS - 4.00%
REPURCHASE AGREEMENTS - 4.00%
Bear, Stearns & Co. Inc. +
(Agreements dated 12/31/2007 to
be repurchased at $1,815,830) (c) $ 1,815 $ 1,815,457
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TOTAL SHORT-TERM INVESTMENTS
(cost - $1,815,457) 1,815,457
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TOTAL INVESTMENTS - 103.53%
(cost - $38,481,179) 47,013,283
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LIABILITIES IN EXCESS OF
OTHER ASSETS - (3.53)% (1,602,202)
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NET ASSETS - 100.00% $ 45,411,081
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* Non-income producing security.
^ Security or a portion thereof is out on loan.
+ Includes investments purchased with collateral received for securities on
loan.
(a) Affiliated investment. The fund holds 2.19% and 0.26% (based on net
assets) of Adams Express Company and Petroleum and Resources Corporation,
respectively. A director of the Fund also serves as a director to such
companies. During the fiscal year there were no purchases or sales of
these securities.
(b) 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, 2007.
(c) At December 31, 2007, the maturity date for all repurchase agreements held
was January 2, 2008, with interest rates ranging from 1.50% to 4.50% and
collateralized by $1,871,985 in U.S. Treasury Bond Strips maturing May 15,
2012.
See accompanying notes to financial statements.
3
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CORNERSTONE TOTAL RETURN FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 2007
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ASSETS
Investments, at value, including collateral for securities
on loan of $1,571,207:
Unaffiliated issuers (cost - $37,482,890)(1) $ 45,903,255
Affiliated issuers (cost - $998,289) 1,110,028
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Total investments (cost - $38,481,179) 47,013,283
Receivables:
Dividends 68,591
Foreign reclaims 19,141
Investments sold 9,552
Interest 1,377
Prepaid expenses 1,379
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Total Assets 47,113,323
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LIABILITIES
Payables:
Upon return of securities loaned 1,571,207
Investments purchased 40,787
Investment management fees 38,812
Directors' fees 13,293
Other accrued expenses 37,577
Due to custodian 566
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Total Liabilities 1,702,242
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NET ASSETS (applicable to 5,343,138 shares of
common stock outstanding) $ 45,411,081
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NET ASSET VALUE PER SHARE ($45,411,081 / 5,343,138) $ 8.50
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NET ASSETS CONSISTS OF
Capital stock, $0.01 par value; 5,343,138 shares issued and
outstanding (15,000,000 shares authorized) $ 53,431
Paid-in capital 52,043,713
Accumulated net realized loss on investments and foreign
currency related transactions (15,220,731)
Net unrealized appreciation in value of investments and
translation of foreign currency 8,534,668
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Net assets applicable to shares outstanding $ 45,411,081
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(1) Includes securities out on loan to brokers with a market value of
$1,540,013.
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, 2007
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INVESTMENT INCOME
Income:
Dividends (including $85,442 earned from affiliated issuers) $ 1,061,922
Interest 18,705
Securities lending 23,190
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Total Investment Income 1,103,817
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Expenses:
Investment management fees 496,035
Directors' fees 58,998
Administration fees 49,631
Legal and audit fees 39,574
Printing 32,248
Accounting fees 31,376
Transfer agent fees 27,102
Custodian fees 11,998
Insurance 6,269
Stock exchange listing fees 6,245
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Total Expenses 759,476
Less: Management fee waivers (5,723)
Less: Fees paid indirectly (15,218)
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Net Expenses 738,535
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Net Investment Income 365,282
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NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND
FOREIGN CURRENCY RELATED TRANSACTIONS
Net realized gain from investments and foreign currency
related transactions 31,417
Capital gain distributions from regulated investment companies 116,984
Net change in unrealized appreciation in value of investments
and translation of foreign currency 1,514,360
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Net realized and unrealized gain on investments and foreign
currency related transactions 1,662,761
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,028,043
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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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2007 2006
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DECREASE IN NET ASSETS
Operations:
Net investment income $ 365,282 $ 428,197
Net realized gain/(loss) from investments and
foreign currency related transactions 31,417 (50,353)
Capital gain distributions from regulated investment companies 116,984 103,660
Net change in unrealized appreciation in value of investments 1,514,360 6,318,611
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Net increase in net assets resulting from operations 2,028,043 6,800,115
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Dividends and distributions to shareholders:
Net investment income (363,469) (428,197)
Net realized capital gains (150,214) --
Return-of-capital (10,698,032) (10,248,116)
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Total dividends and distributions to shareholders (11,211,715) (10,676,313)
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Capital stock transactions:
Proceeds from 175,264 and 200,573 shares newly issued
in reinvestment of dividends and distributions, respectively 2,215,523 2,061,112
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Total decrease in net assets (6,968,149) (1,815,086)
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NET ASSETS
Beginning of year 52,379,230 54,194,316
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End of year $ 45,411,081 $ 52,379,230
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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.
For the Years Ended December 31,
------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 10.14 $ 10.91 $ 12.78 $ 13.89 $ 12.89
-------- -------- -------- -------- --------
Net investment income # 0.07 0.09 0.06 0.10 0.08
Net realized and unrealized gain on investments
and foreign currency related transactions 0.32 1.25 0.18 0.87 2.91
-------- -------- -------- -------- --------
Net increase in net assets resulting from operations 0.39 1.34 0.24 0.97 2.99
-------- -------- -------- -------- --------
Dividends and distributions to shareholders:
Net investment income (0.07) (0.09) (0.06) (0.10) (0.08)
Net realized capital gains (0.03) -- -- -- --
Return-of-capital (2.04) (2.02) (2.05) (2.01) (1.91)
-------- -------- -------- -------- --------
Total dividends and distributions to shareholders (2.14) (2.11) (2.11) (2.11) (1.99)
-------- -------- -------- -------- --------
Capital stock transactions:
Anti-dilutive effect due to shares issued in
reinvestment of dividends and distributions 0.11 -- -- 0.03 --
-------- -------- -------- -------- --------
Net asset value, end of year $ 8.50 $ 10.14 $ 10.91 $ 12.78 $ 13.89
======== ======== ======== ======== ========
Market value, end of year $ 9.80 $ 19.62 $ 14.65 $ 17.95 $ 17.95
======== ======== ======== ======== ========
Total investment return (a) (40.97)% 64.15% (2.07)% 15.11% 82.96%
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000 omitted) $ 45,411 $ 52,379 $ 54,194 $ 61,365 $ 65,642
Ratio of expenses to average net assets,
net of fee waivers, if any (b) 1.49% 1.44% 1.47% 1.41% 1.20%
Ratio of expenses to average net assets,
excluding fee waivers, if any (c) 1.53% 1.50% 1.52% 1.45% 1.43%
Ratio of expenses to average net assets,
net of fee waivers, if any (c) 1.52% 1.50% 1.50% 1.43% 1.23%
Ratio of net investment income to
average net assets 0.74% 0.82% 0.53% 0.75% 0.65%
Portfolio turnover rate 11.00% 11.29% 9.84% 12.15% 3.62%
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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.
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, 2007, the Fund held no securities valued in good faith by the Board of
Directors. 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.
On September 20, 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosure about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of January 1, 2008, the Fund adopted SFAS No. 157. The
Fund has performed an analysis of all existing investments to determine the
significance and character of all inputs to their fair value determination.
Based on this assessment the Fund does not believe any adjustments will be
required for the first quarter 2008.
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 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 July 2006, the Financial Accounting Standards Board ("FASB") released FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), an
interpretation of FASB Statement No. 109. FIN 48 provides guidance for how
uncertain tax positions should be recognized, measured, presented and disclosed
in the financial statements. FIN 48 requires the accounting and disclosure of
tax positions taken or expected to be taken in the course of preparing the
Fund's tax returns to determine whether the tax positions are "more likely than
not" of being sustained by the applicable tax authority. Tax positions not
deemed to meet the more likely than not threshold would be recorded as a tax
benefit or expense in the current year. Adoption of FIN 48 is effective during
the first required financial reporting period for fiscal years beginning after
December 15, 2006. Management adopted FIN 48 on June 29, 2007 and reviewed any
uncertain tax positions for open tax years 2004 through 2007. There was no
material impact to the financial statements or disclosures thereto as a result
of the adoption of this pronouncement.
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
9
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CORNERSTONE TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
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 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, 2007, 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, 2007, Cornerstone earned
$496,035 for investment management services, of which it waived $5,723. 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 $15,218 arising from credits earned on portfolio
transactions executed with a broker, pursuant to a directed brokerage
arrangement.
The Fund paid or accrued approximately $23,142 for the year ended December 31,
2007 for legal services to Blank Rome LLP ("Blank"), counsel to the Fund. Thomas
R. Westle, partner of Blank, served as Secretary of the Fund.
NOTE C. INVESTMENT IN SECURITIES
For the year ended December 31, 2007, purchases and sales of securities, other
than short-term investments, were $5,443,932 and $13,715,006 respectively.
NOTE D. SHARE REPURCHASE PROGRAM
As has been done in the past to enhance shareholder value, pursuant to Section
23 of the Investment Company Act of 1940, as amended, the Fund may again 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. The
Fund had no repurchases during the year ended December 31, 2007. No limit has
been placed on the number of shares to be repurchased by the Fund other than
those imposed by federal securities laws.
To the extent such purchases are made they will be in accordance with federal
securities laws, with shares repurchased held in treasury for future use by the
Fund.
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
10
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CORNERSTONE TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
--------------------------------------------------------------------------------
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, 2007, was $1,540,013.
During the year ended December 31, 2007, the Fund earned $23,190 in securities
lending income which is included under the caption SECURITIES LENDING in the
Statement of Operations.
NOTE F. 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
--------------- -----------------
2007 2006 2007 2006
---- ---- ---- ----
$513,683 $428,197 $10,698,032 $10,248,116
At December 31, 2007 the components of the accumulated deficit on a tax basis,
for the Fund were as follows:
Accumulated net realized loss $(14,881,286)
Other accumulated losses (287,816)
Unrealized appreciation 8,483,039
------------
Total accumulated deficit $ (6,686,063)
============
Accounting principles generally accepted in the United States of America require
that certain components of net assets relating to permanent differences be
reclassified between financial and tax reporting. These reclassifications have
no effect on net assets or net asset value per share. For the year ended
December 31, 2007, the Fund decreased net investment income by $1,813, decreased
net realized loss by $152,027 and decreased paid-in capital by $150,214. 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, 2007, the Fund incurred Post-October losses in the amount of $287,816.
At December 31, 2007, the Fund had a capital loss carryforward for U.S. federal
income tax purposes of $14,881,286, of which $12,449,240 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, 2007, 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 $38,532,808, $11,097,845,
($2,617,370), $8,480,475, respectively.
NOTE G. SUBSEQUENT EVENTS
Effective January 31, 2008, William A. Clark resigned from the Board of
Directors. Mr. Clark remains as Vice President of the Fund. Effective February
15, 2008, Thomas R. Westle was replaced by Gary A. Bentz as Secretary of the
Fund.
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, 2007, and the related statement of operations for the year then
ended, the statements 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 its
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, 2007, 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, 2007, 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 26, 2008
12
2007 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, 2007) 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. The $11,211,715 in dividend and distributions paid
to shareholders in respect of such year, is represented by $513,683 of ordinary
income, and $10,698,032 of return-of-capital.
As indicated in this notice, significant portions of the Fund's distributions
for 2007 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, 2007 the following dividends and
distributions per share were paid by the Fund:
SOURCES OF DIVIDENDS AND DISTRIBUTIONS
(PER SHARE AMOUNTS)
PAYMENT DATES: 1/31/07 2/28/07 3/30/07 4/30/07 5/31/07 6/29/07
------- ------- ------- ------- ------- -------
Ordinary Income(1) $0.0082 $0.0082 $0.0082 $0.0082 $0.0082 $0.0082
Return-of-Capital(2) $0.1698 $0.1698 $0.1698 $0.1698 $0.1698 $0.1698
Total: $0.1780 $0.1780 $0.1780 $0.1780 $0.1780 $0.1780
PAYMENT DATES: 7/31/07 8/31/07 9/28/07 10/31/07 11/30/07 12/31/07
------- ------- ------- -------- -------- --------
Ordinary Income(1) $0.0082 $0.0082 $0.0082 $0.0082 $0.0082 $0.0082
Return-of-Capital(2) $0.1698 $0.1698 $0.1698 $0.1698 $0.1698 $0.1698
Total: $0.1780 $0.1780 $0.178 $0.1780 $0.1780 $0.1780
----------
(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
NOTbe 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 (100%) of its ordinary
income dividends as qualified dividends, which are subject to a maximum 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. They will
generally not be entitled to foreign tax credit or deduction for the withholding
taxes 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 3
Bradshaw** Board of Financial Consultant; President and
(Dec. 1950) Directors and Director of Cornerstone Strategic
President Value Fund, Inc.; President and Trustee
of Cornerstone Progressive Return Fund.
Thomas H. Director; Audit, Independent Financial Adviser; Director 2002 3
Lenagh Nominating and of Photonics Products Group; Director of
(Nov. 1924) Corporate Cornerstone Strategic Value Fund, Inc.;
Governance Trustee of Cornerstone Progressive
Committee Return Fund; Director of Adams Express
Member Company and Petroleum and Resources
Corporation.
Edwin Director; Audit, Distinguished Fellow, The Heritage 2001 3
Meese III Nominating and Foundation Washington D.C.;
(Dec. 1931) Corporate Distinguished Visiting Fellow at the
Governance Hoover Institution, Stanford University;
Committee Senior Adviser, Revelation L.P.; Director
Member of Cornerstone Strategic Value Fund, Inc.;
Trustee of Cornerstone Progressive
Return Fund.
Scott B. Rogers Director; Audit, Chairman, Board of Health Partners, 2001 3
(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.; Trustee of
Cornerstone Progressive Return Fund.
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
----------------------------------------------------------------------------------------------------------------
Andrew A. Director; Attorney and senior member of Strauss 2001 3
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
Committee and owned subsidiary of Xerox Credit
Audit Committee Corporation; Director of Cornerstone
Member Strategic Value Fund, Inc.; Trustee of
Cornerstone Progressive Return Fund.
Glenn W. Director; Chairman of the Board, Tower 2001 3
Wilcox, Sr. Chairman of Associates, Inc.; Chairman of the Board
(Dec. 1931) Audit Committee, and Chief Executive Officer of Wilcox
Nominating and Travel Agency, Inc.; Director of
Corporate Cornerstone Strategic Value Fund, Inc.;
Governance Trustee of Cornerstone Progressive
Committee Return Fund.
Member
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, 2008
(June 1956) Officer and Cornerstone Advisors, Inc.; previous
Secretary Director, Vice President and Treasurer of the
Fund and Cornerstone Strategic Value Fund,
Inc., Financial Consultant, C.P.A., Chief
Compliance Officer and Secretary of
Cornerstone Strategic Value Fund, Inc. and
Cornerstone Progressive Return Fund.
William A. Clark Vice President Director and Stockholder of Cornerstone 2004
(Oct. 1945) Advisors, Inc.; Vice President and former
Director of Cornerstone Strategic Value Fund,
Inc.; Vice President and former Trustee of
Cornerstone Progressive Return Fund;
Financial Consultant; former Director of
Investors First Fund, Inc.
Kayadti A. Madison Treasurer Associate Director of Bear, Stearns & Co. Inc. 2007
(Feb. 1974) since 2007 and Vice President from 2005 to
2007. Senior fund administrator of Bear
Stearns Funds Management Inc. from 1999 to
2005. Treasurer of Cornerstone Strategic
Value Fund, Inc. and Cornerstone Progressive
Return Fund.
----------
* 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.
** Designates a director who is an "interested person" of the Fund as defined
by the Investment Company Act of 1940, as amended. Mr. Bradshaw is an
interested person of the Fund by virtue of his current position with the
Investment Advisor of the Fund.
16
DESCRIPTION OF DIVIDEND REINVESTMENT PLAN (UNAUDITED)
Cornerstone Total Return Fund, Inc. (the "Fund") 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.
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 their broker, or if a registered shareholder, the
Agent in writing at P.O. Box 922, Wall Street Station, New York, New York
10269-0560. Such written notice must be received by the Agent prior to the
record date of the Distribution or the share- holder will receive such
Distribution in shares through the Plan. 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 share- holders 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.
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 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.
17
DESCRIPTION OF DIVIDEND REINVESTMENT PLAN (UNAUDITED) (CONCLUDED)
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.
The automatic reinvestment of Distributions will not relieve participants of any
federal, state or local income tax that may be payable (or required to be
withheld) on such Distributions.
The Fund reserves the right to amend or terminate the Plan. There is no direct
service charge to participants with regard to purchases in the Plan.
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 877-864-4833.
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
previous week's net asset value per share, market price, and related premium or
discount are published each Monday in THE WALL STREET JOURNAL under the
designation "CornrstnTtRtn Fd" and BARRON'S under the designation "Cornerstone
Total Return". Such information 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.
DIRECTORS AND CORPORATE OFFICERS
Ralph W. Bradshaw Chairman of the Board of Directors
and President
Thomas H. Lenagh Director
Edwin Meese III Director
Scott B. Rogers Director
Andrew A. Strauss Director
Glenn W. Wilcox, Sr. Director
Gary A. Bentz Chief Compliance Officer and Secretary
William A. Clark Vice President
Kayadti A. Madison Treasurer
INVESTMENT MANAGER STOCK TRANSFER AGENT AND REGISTRAR
Cornerstone Advisors, Inc. American Stock Transfer & Trust Co.
One West Pack Square 59 Maiden Lane
Suite 1650 New York, NY 10038
Asheville, NC 28801
INDEPENDENT REGISTERED PUBLIC
ADMINISTRATOR ACCOUNTING FIRM
Bear Stearns Funds Management Inc. Tait, Weller & Baker LLP
383 Madison Avenue 1818 Market Street
New York, NY 10179 Suite 2400
Philadelphia, PA 19103
CUSTODIAN
Custodial Trust Company LEGAL COUNSEL
101 Carnegie Center Blank Rome LLP
Princeton, NJ 08540 405 Lexington Avenue
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.
[LOGO]
AMERICAN
STOCK EXCHANGE(R)
LISTED
CRF(TM)
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)(1), 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, 2007 and December 31, 2006.
2007 2006
------- -------
Audit Fees $13,600 $13,000
Audit-related Fees -- --
Tax Fees (1) $ 2,700 $ 2,500
All Other Fees -- --
------- -------
Total $16,300 $15,500
======= =======
(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, 2006 and December 31, 2007).
(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, 2007
================================================================================
NO. OF
DESCRIPTION SHARES VALUE
--------------------------------------------------------------------------------
EQUITY SECURITIES - 99.53%
CLOSED-END FUNDS - 7.48%
Adams Express Company (a) 70,400 $ 994,048
Alpine Global Premier Properties Fund 3,000 40,050
Boulder Total Return Fund, Inc. ^ 7,500 164,175
Central Europe and Russia Fund, Inc. (The) ^ 2,500 145,050
Denali Fund (The) 8,500 147,985
Dreman/Claymore Dividend & Income Fund 53,500 845,300
H&Q Healthcare Investors 11,400 188,442
H&Q Life Sciences Investors 6,000 79,500
Japan Equity Fund * 13,000 96,200
John Hancock Bank and Thrift Opportunity Fund 15,000 92,850
Liberty All-Star Growth Fund, Inc. 39,075 232,887
Petroleum & Resources Corporation (a) 3,000 115,980
Templeton Emerging Markets Fund ^ 3,000 69,600
Zweig Fund, Inc. ^ 37,000 186,850
----------
3,398,917
----------
CONSUMER DISCRETIONARY - 7.53%
Amazon.com, Inc. ^ * 2,500 231,600
Bed Bath & Beyond Inc. * 2,500 73,475
Best Buy Co., Inc. 2,500 131,625
Coach, Inc. * 2,500 76,450
Comcast Corporation, Class A * 9,012 164,559
Comcast Corporation, Special Class A * 4,250 77,010
DIRECTV Group, Inc. (The) * 4,000 92,480
Ford Motor Company * 14,000 94,220
Gap, Inc. (The) ^ 3,000 63,840
Goodyear Tire & Rubber Company (The) * 2,500 70,550
Home Depot, Inc. (The) 13,500 363,690
Johnson Controls, Inc. ^ 2,500 90,100
Marriott International, Inc., Class A ^ 5,000 170,900
Mattel, Inc. ^ 4,500 85,680
McDonald's Corporation 5,100 300,441
News Corporation, Class B ^ 7,500 159,375
NIKE, Inc., Class B 2,500 160,600
Omnicom Group Inc. 3,000 142,590
Staples, Inc. ^ 3,150 72,670
Starbucks Corporation * 2,500 51,175
Tata Motors Limited ^ ADR 2,500 47,150
Time Warner Inc. 17,000 280,670
TJX Companies, Inc. (The) 2,500 71,825
Viacom Inc., Class B * 2,000 87,840
Walt Disney Company (The) 8,000 258,240
----------
3,418,755
----------
CONSUMER STAPLES - 9.77%
Altria Group, Inc. ^ 7,700 581,966
Coca-Cola Company (The) 11,000 675,070
Colgate-Palmolive Company 2,500 194,900
ConAgra Foods, Inc. 2,500 59,475
CVS Corporation 4,175 165,956
H.J. Heinz Company 2,700 126,036
Kraft Foods Inc, Class A 5,328 173,853
Kroger Co. (The) ^ 3,600 96,156
PepsiCo, Inc. 5,000 379,500
Procter & Gamble Company (The) 11,472 842,274
Safeway Inc. 1,900 64,999
Sysco Corporation ^ 2,500 78,025
Walgreen Co. 3,100 118,048
Wal-Mart Stores, Inc. 18,500 879,305
----------
4,435,563
----------
ENERGY - 11.61%
Chevron Corporation 10,068 939,646
Exxon Mobil Corporation 32,000 2,998,081
Halliburton Company 2,500 94,775
Marathon Oil Corp. ^ 2,500 152,150
NiSource Inc. 2,500 47,225
Peabody Energy Corporation 2,500 154,100
Schlumberger Limited 5,000 491,850
Spectra Energy Corporation 2,500 64,550
Weatherford International Ltd. * 2,500 171,500
XTO Energy, Inc. ^ 3,125 160,500
----------
5,274,377
----------
FINANCIALS - 15.41%
AFLAC Incorporated 1,500 93,945
American Express Company 3,500 182,070
American International Group, Inc. 12,331 718,897
Ameriprise Financial, Inc. 1,220 67,234
Aon Corporation 2,500 119,225
Bank of America Corporation 14,521 599,136
Bank of New York Mellon Corporation ^ 2,300 112,148
BB&T Corporation ^ 2,000 61,340
Charles Schwab Corporation (The) 8,200 209,510
Chubb Corporation (The) 2,000 109,160
Citigroup Inc. 25,600 753,664
Discover Financial Services 1,850 27,898
Fannie Mae 3,200 127,936
Fifth Third Bancorp ^ 2,500 62,825
Franklin Resources, Inc. 2,500 286,075
Freddie Mac 3,300 112,431
Goldman Sachs Group, Inc. (The) 3,000 645,150
JPMorgan Chase & Co. 10,200 445,230
Lehman Brothers Holdings Inc. 2,500 163,600
Metlife, Inc. 3,000 184,860
Morgan Stanley 3,700 196,507
Prudential Financial, Inc. 2,500 232,600
SLM Corporation ^ 2,500 50,350
State Street Corporation ^ 1,600 129,920
SunTrust Banks, Inc. ^ 2,500 156,225
Synovus Corporation 2,500 60,200
Travelers Companies, Inc. (The) 5,092 273,950
UnumProvident Corporation ^ 2,500 59,475
Wachovia Corporation ^ 5,600 212,968
Wells Fargo & Company 18,000 543,420
----------
6,997,949
----------
HEALTHCARE - 10.70%
Aetna Inc. 4,000 230,920
Amgen Inc. * 2,500 116,100
NO. OF
DESCRIPTION SHARES VALUE
--------------------------------------------------------------------------------
Baxter International Inc. 2,500 145,125
Bristol-Myers Squibb Company ^ 4,000 106,080
Celgene Corporation ^ * 2,500 115,525
Eli Lilly and Company 4,100 218,899
Gilead Sciences, Inc. * 5,000 230,050
Johnson & Johnson 15,500 1,033,850
Laboratory Corporation of America Holdings * 2,500 188,825
McKesson Corporation 2,500 163,775
Medco Health Solutions, Inc. ^ * 1,531 155,243
Medtronic, Inc. ^ 4,500 226,215
Merck & Co. Inc. 13,700 796,107
Schering-Plough Corporation 8,400 223,776
St. Jude Medical, Inc. * 2,500 101,600
Stryker Corporation ^ 2,000 149,440
UnitedHealth Group Incorporated ^ 7,500 436,500
Wyeth 5,000 220,950
----------
4,858,980
----------
INDUSTRIALS - 10.67%
Allied Waste Industries, Inc. * 2,500 27,550
AMR Corporation * 2,500 35,075
Boeing Company (The) 1,400 122,444
Caterpillar Inc. 2,500 181,400
CSX Corporation 5,000 219,900
Danaher Corporation ^ 2,500 219,350
General Dynamics Corporation 2,500 222,475
General Electric Company 49,000 1,816,431
Honeywell International Inc. 3,300 203,181
Illinois Tool Works Inc. 2,500 133,850
Lockheed Martin Corporation 2,500 263,150
Raytheon Company ^ 2,500 151,750
Rockwell Automation, Inc. 2,500 172,400
Textron Inc. 2,500 178,250
United Parcel Service, Inc., Class B 4,000 282,880
United Technologies Corporation 4,400 336,776
Waste Management, Inc. 2,500 81,675
Waters Corporation * 2,500 197,675
----------
4,846,212
----------
INFORMATION TECHNOLOGY - 16.08%
Agilent Technologies Inc. * 2,500 91,850
Apple Computer, Inc. * 5,000 990,400
Automatic Data Processing, Inc. 2,500 111,325
Cisco Systems, Inc. * 22,000 595,540
Corning Incorporated 6,000 143,940
Dell Inc. ^ * 4,000 98,040
eBay Inc. * 6,500 215,735
EMC Corporation * 8,000 148,240
Google Inc. * 1,000 691,480
Hewlett-Packard Company 10,000 504,800
Intel Corporation 13,000 346,580
International Business Machines Corporation 3,200 345,920
Intuit Inc. * 2,500 79,025
Microsoft Corporation 37,500 1,335,000
NVIDIA Corporation * 3,750 127,575
Oracle Corporation * 28,600 645,788
Paychex, Inc. 2,500 90,550
QUALCOMM Inc. 6,800 267,580
NO. OF
DESCRIPTION SHARES VALUE
--------------------------------------------------------------------------------
Texas Instruments Incorporated 11,000 367,400
Xerox Corporation 3,000 48,570
Xilinx, Inc. 2,500 54,675
----------
7,300,013
----------
MATERIALS - 3.25%
Air Products & Chemicals, Inc. 2,500 246,575
Alcoa Inc. 3,000 109,650
Dow Chemical Company (The) ^ 3,500 137,970
E. I. du Pont de Nemours and Company 5,800 255,722
Freeport-McMoRan Copper & Gold, Inc. 2,500 256,100
International Paper Company 2,300 74,474
Monsanto Company 3,546 396,053
----------
1,476,544
----------
REAL ESTATE INVESTMENT TRUST - 0.48%
Simon Property Group, Inc. 2,500 217,150
----------
TELECOMMUNICATION SERVICES - 3.66%
AT&T Inc. 28,589 1,188,159
Nokia ADR 2,500 95,975
Qwest Communications International Inc. * 7,000 49,070
Verizon Communications Inc. ^ 7,500 327,675
----------
1,660,879
----------
UTILITIES - 2.89%
Alleghany Energy Inc. ^ 2,500 159,025
American Electric Power Company, Inc. 5,500 256,080
Dominion Resources, Inc. ^ 5,000 237,250
Duke Energy Corporation 6,600 133,122
Dynegy Inc. * 5,000 35,700
FirstEnergy Corp. ^ 2,500 180,850
Southern Company (The) 2,500 96,875
Williams Companies, Inc. (The) 2,500 89,450
Xcel Energy, Inc. 5,500 124,135
----------
1,312,487
----------
TOTAL EQUITY SECURITIES
(cost - $36,665,722) 45,197,826
----------
PRINCIPAL
AMOUNT
(000'S)
-----------
SHORT-TERM INVESTMENTS - 4.00%
REPURCHASE AGREEMENTS - 4.00%
Bear, Stearns & Co. Inc. + ++
(Agreements dated 12/31/2007 to
be repurchased at $1,249,342,
4.50%, 1/2/2008, collateralized
by $1,287,262 in U.S. Treasury Bond
Strips) $ 1,249 1,249,030
Bear, Stearns & Co. Inc. + ++
(Agreements dated 12/31/2007 to be
repurchased at $322,218, 2.25%,
1/2/2008, collateralized by $331,634
in U.S. Treasury Bond Strips) 322 322,177
Bear, Stearns & Co. Inc.
(Agreements dated 12/31/2007 to be
repurchased at $244,270, 1.50%,
1/2/2008, collateralized by $253,089
in U.S. Treasury Bond Strips) 244 244,250
----------
TOTAL SHORT-TERM INVESTMENTS
(cost - $1,815,457) 1,815,457
----------
NO. OF
DESCRIPTION SHARES VALUE
--------------------------------------------------------------------------------
TOTAL INVESTMENTS - 103.53%
(cost - $38,481,179) 47,013,283
------------
LIABILITIES IN EXCESS OF OTHER ASSETS - (3.53)% (1,602,202)
------------
NET ASSETS - 100.00% $ 45,411,081
============
--------
(a) Affiliated investment. The Fund holds 2.19% and 0.26% (based on net assets)
of Adams Express Company and Petroleum & Resources Corporation, respectively. A
director of the Fund also serves as a director to such companies.
During the fiscal year there were no purchases or sales of these securities.
ADR American Depositary Receipt
* Non-income producing security.
^ Security or a portion thereof is out on loan.
+ Stated interest rate, before rebate earned by borrower of securities on
loan.
++ Represents investment purchased with collateral received for securities on
loan.
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, 2007, the related statement of operations for the year then
ended, the statements 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, 2007, 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, 2007, 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, 2007 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 26, 2008
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Registrant and Cornerstone Advisors, Inc. share the same Proxy
Voting Policies and Procedures. The respective Proxy Voting Policies and
Procedures of the Registrant and Adviser are attached as EXHIBIT99.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's occupation for the last five years is President of Cornerstone
Advisors, Inc. and a Financial Consultant. William A. Clark's occupation for the
last five years is Director and Stockholder of Cornerstone Advisors, Inc. and
Vice President and former Director/Trustee of Cornerstone Strategic Value Fund,
Inc. and Cornerstone Progressive Return Fund.
(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 manage two other registered closed-end funds (Cornerstone
Strategic Value Fund, Inc. and Cornerstone Progressive Return Fund). As of
December 31, 2007, the total assets of Cornerstone Strategic Value Fund, Inc.
was $123.7 million. As of December 31, 2007, the total assets of Cornerstone
Progressive Return Fund, Inc. was $137.6 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, 2007, 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 in the range
of $10,001-$50,000.
(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 second fiscal quarter 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 and Adviser 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 10, 2008
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 10, 2008
By: /S/ KAYADTI A. MADISON
----------------------
Name: Kayadti A. Madison
Title: Principal Financial Officer
Date: March 10, 2008