N-CSRS 1 t300534.txt CORNERSTONE TOTAL RETURN FUND UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS 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 secified in charter) 383 MADISON AVENUE, NEW YORK, NY 10179 ---------------------------------------- ------------------- (Address of principal executive offices) (Zip code) FRANK J. MARESCA. 383 MADISON AVE, NEW YORK, NY ----------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: 212-272-3550 ------------ Date of fiscal year end: DECEMBER 31, 2003 Date of reporting period: JANUARY 1, 2003 THROUGH JUNE 30, 2003 ------------------------------------- Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. REPORTS TO STOCKHOLDERS. CORNERSTONE TOTAL RETURN FUND, INC. DIRECTORS AND CORPORATE OFFICERS Ralph W. Bradshaw Chairman of the Board of Directors and President Gary A. Bentz Director, Vice President and Treasurer Thomas H. Lenagh Director Edwin Meese III Director Scott B. Rogers Director Andrew A. Strauss Director Glenn W. Wilcox, Sr. Director Thomas R. Westle Secretary STOCK TRANSFER AGENT AND INVESTMENT MANAGER REGISTRAR Cornerstone Advisors, Inc. American Stock Transfer & One West Pack Square Trust Co. Suite 1650 59 Maiden Lane Asheville, NC 28801 New York, NY 10038 ADMINISTRATOR INDEPENDENT ACCOUNTANTS Bear Stearns Funds Tait, Weller & Baker Management Inc. 1818 Market Street 383 Madison Avenue Suite 2400 New York, NY 10179 Philadelphia, PA 19103 CUSTODIAN LEGAL COUNSEL Custodial Trust Company Spitzer & Feldman P.C. 101 Carnegie Center 405 Park Avenue Princeton, NJ 08540 New York, NY 10022 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. This report, including the financial statements herein, is sent to the shareholders of the Fund for their information. The financial information herein is taken from the records of the Fund without examination by independent accountants, who do not express an opinion thereon. 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 this report. ================================================================================ CORNERSTONE TOTAL RETURN FUND, INC. SEMI-ANNUAL REPORT JUNE 30, 2003 ================================================================================ CONTENTS Letter to Shareholders 1 Portfolio Summary 3 Schedule of Investments 4 Statement of Assets and Liabilities 9 Statement of Operations 10 Statement of Changes in Net Assets 11 Financial Highlights 12 Notes to Financial Statements 13 Results of Annual Meeting of Stockholders 17 Description of Dividend Reinvestment & Cash Purchase Plan 18 Summary of General Information 20 Shareholder Information 20 Privacy Policy Notice 21 LETTER TO SHAREHOLDERS July 25, 2003 Dear Fellow Shareholders: We are pleased to report the semi-annual results of Cornerstone Total Return Fund, Inc. (the "Fund"), covering the six months ended June 30, 2003. This Fund resulted from the merger in October 2002 of The Cornerstone Strategic Return Fund, Inc. with and into EIS Fund, Inc., and the subsequent name and stock ticker symbol change. At the end of the period, the Fund's net assets were $61.9 million and the Net Asset Value ("NAV") per share was $13.17. The share price closed at $13.99, representing a premium over NAV of 6.2%. Monthly distributions to shareholders during the period have totaled $0.99 per share, most of which is expected to be classified as non-taxable return-of-capital. Year-to-date 2003 total investment return at market value for shareholders who reinvested their distributions was 33.7%, significantly outperforming the Fund's benchmark, the S&P 500 Index, which returned 11.76% for the six-month period. We are gratified that our strategic vision for enhancing shareholder value has resulted in positive market performance. CREATING VALUE FOR OUR SHAREHOLDERS Since assuming portfolio management responsibilities for the Fund at the start of 2002, the main goal of the Fund's investment manager, Cornerstone Advisors, Inc., has been to add value for the owners of the Fund, our shareholders, by continuing to outperform the Fund's benchmark. We have accomplished this objective so far by focusing on portfolio performance, minimizing Fund expenses, and taking advantage of the Fund's discount to NAV for the benefit of its shareholders. The Fund and its investment manager remain firmly committed to this important goal, both now and over the long-term. The greatest contribution to Fund performance thus far in 2003 has resulted from actions designed to take advantage of the Fund's discount. After commencing the year with a price discount to NAV of 11.9%, the Fund's discount continued to close throughout the first half of the year, until the ending stock price on June 30th stood at a substantial 6.2% premium over the underlying portfolio NAV. We think that this vastly improving discount picture confirms the market's favorable view of our strategy and direction. We believe the Fund's monthly distribution policy with a fixed payout has been instrumental in contributing to this discount elimination and movement to a premium, while also providing maximum flexibility to shareholders. Shareholders can choose to receive substantial portions of their investment in cash via these large monthly distributions, or to continue their holdings in the Fund's stock by reinvesting in additional shares. As an added benefit to shareholders, losses in the portfolio are expected to allow most of the distributions to be classified as return-of-capital, which will defer the impact of capital gains taxes until significant Fund profits are realized in future periods. Repurchases of shares selling below NAV in the open market have enhanced NAV performance. Furthermore, these repurchases have served to reduce the supply of shares available for sale, thus changing the demand/supply balance and helping to reduce any existing discount. The investment manager also attempts to enhance portfolio performance by exploiting temporary and occasional pricing inefficiencies in certain securities, representing components of a fully diversified U.S. stock portfolio. The availability and magnitude of such opportunities are unpredictable and therefore, any potential portfolio out-performance will in all probability vary considerably from year to year. -------------------------------------------------------------------------------- 1 LETTER TO SHAREHOLDERS (CONCLUDED) On-going, diligent attention to Fund expenses has allowed continued substantial reductions in expense levels. In a demonstration of it's commitment, Cornerstone Advisors, Inc. has extended its voluntary agreement to waive a substantial portion of its management fees to the extent that monthly operating expenses exceed a monthly rate of 0.10%. The investment manager takes a serious view of the importance of controlling expenses, and fully intends for our Fund to continue to enjoy one of the lowest expense ratios among comparable closed-end funds. MARKET ENVIRONMENT AND OUTLOOK Following three consecutive years of dismal returns, U.S. investors welcomed the strong recovery in the equity markets exhibited thus far in 2003. The S&P 500 Index enjoyed its best quarter since 1998 in the second quarter, after experiencing meandering weakness in the first three months of the year. Most foreign equity markets also finished positive for the period. International political uncertainty, continuing concerns in Iraq and complications such as the SARS epidemic all combined to keep second quarter earnings expectations low. However, the market continues to anticipate stronger recovery in the second half of this year. Economic weakness continues to frustrate analysts and no consensus yet exists for when solid evidence of a sustained recovery should be expected. Unemployment remains stubbornly high and business investment remains unacceptably low. But consumer spending and confidence both remain high, and the housing market is still strong. The powerful combination of massive fiscal stimulus provided by tax cuts and tremendous monetary stimulus from continuing low interest rates should yet help put the economy back firmly on the right track. For most of first half of 2003, the Fund's portfolio remained essentially fully invested, with broad diversification across and within sectors, by utilizing closed-end fund and global equity positions. This approach has continued to serve us well and helped produce the sizable year-to-date Fund performance. We remain convinced the most compelling opportunities are still in the equity area, rather than in fixed-income investments. The Fund's portfolio will continue to consist primarily of stock holdings in the strongest, most stable U.S. companies and should provide solid returns for the long-term investor. The Fund's Board of Directors, officers and investment manager are all mindful of the trust that our shareholders have placed in us. We know you have a choice, we appreciate your support, and we look forward to continuing our service to you in the future. Sincerely, /s/ Ralph W. Bradshaw --------------------- Ralph W. Bradshaw Chairman IN ADDITION TO HISTORICAL INFORMATION, THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS, WHICH MAY CONCERN, AMONG OTHER THINGS, DOMESTIC AND FOREIGN MARKET, INDUSTRY AND ECONOMIC TRENDS AND DEVELOPMENTS AND GOVERNMENT REGULATION AND THEIR POTENTIAL IMPACT ON THE FUND'S INVESTMENT PORTFOLIO. THESE STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES AND ACTUAL TRENDS, DEVELOPMENTS AND REGULATIONS IN THE FUTURE AND THEIR IMPACT ON THE FUND COULD BE MATERIALLY DIFFERENT FROM THOSE PROJECTED, ANTICIPATED OR IMPLIED. THE FUND HAS NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS. -------------------------------------------------------------------------------- 2 CORNERSTONE TOTAL RETURN FUND, INC. PORTFOLIO SUMMARY - AS OF JUNE 30, 2003 (UNAUDITED) TOP TEN, BY SECTOR Percent of Sector Net Assets -------------------------------------------------------------------------------- 1. Financials 19.1 2. Information Technology 14.8 3. Consumer Discretionary 14.4 4. Healthcare 13.7 5. Industrials 11.4 6. Consumer Staples 9.2 7. Energy 5.0 8. Telecommunication Services 3.4 9. Utilities 2.6 10. Materials 1.8 TOP TEN HOLDINGS, BY ISSUER Holding Sector Net Assets -------------------------------------------------------------------------------- 1. General Electric Co. Industrials 3.6 2. Microsoft Corp. Information Technology 3.5 3. Pfizer Inc. Healthcare 3.1 4. Wal-Mart Stores, Inc. Consumer Discretionary 2.9 5. Exxon Mobil Corp. Energy 2.7 6. Citigroup Inc. Financials 2.4 7. American International Group, Inc. Financials 1.9 8. International Business Machines Corp. Information Technology 1.9 9. Johnson & Johnson Healthcare 1.9 10. Intel Corp. Information Technology 1.8 -------------------------------------------------------------------------------- 3 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) -------------------------------------------------------------------------------- EQUITY SECURITIES - 95.57% UNITED STATES - 94.16% CLOSED-END DOMESTIC FUND - 0.27% Gabelli Global Multimedia Trust, Inc. 21,700 $ 168,175 ----------- CONSUMER DISCRETIONARY - 12.94% AOL Time Warner Inc.+ 31,500 506,835 Bed Bath & Beyond Inc.+ 2,500 97,025 Best Buy Co., Inc.+ 5,000 219,600 Carnival Corp. 5,300 172,303 Clear Channel Communications, Inc.+ 2,700 114,453 Comcast Corp., Class A+ 8,508 256,771 Comcast Corp., Special Class A + 7,500 216,225 Costco Wholesale Corp.+ 4,600 168,360 CVS Corp. 2,500 70,075 Dana Corp. 2,500 28,900 Delphi Corp. 5,100 44,013 Eastman Kodak Co. 2,500 68,375 Federated Department Stores, Inc. 2,500 92,125 Ford Motor Co. 15,200 167,048 Fortune Brands, Inc. 2,500 130,500 Gannett Co., Inc. 2,500 192,025 Gap, Inc. (The) 6,900 129,444 General Motors Corp. 5,000 180,000 Harley-Davidson, Inc. 5,000 199,300 Harrah's Entertainment, Inc.+ 2,500 100,600 Hilton Hotels Corp. 5,000 63,950 Home Depot, Inc. (The) 17,800 589,536 Kohl's Corp.+ 2,500 128,450 Limited Brands 4,500 69,750 Lowe's Companies, Inc. 6,200 266,290 Mattel, Inc. 4,500 85,140 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) -------------------------------------------------------------------------------- CONSUMER DISCRETIONARY (CONTINUED) May Department Stores Co. (The) 2,500 $ 55,650 McDonald's Corp. 10,600 233,836 Monsanto Co. 1,773 38,368 Office Depot, Inc. + 2,500 36,275 Omnicom Group Inc. 1,500 107,550 Reebok International Ltd.+ 2,500 84,075 Sears, Roebuck & Co. 2,500 84,100 Staples, Inc.+ 4,600 84,410 Starbucks Corp.+ 2,500 61,300 Target Corp. 7,100 268,664 TJX Companies, Inc. (The) 4,000 75,360 Viacom Inc., non-voting Class B+ 9,000 392,940 Wal-Mart Stores, Inc. 32,900 1,765,743 Walt Disney Co. (The) 14,200 280,450 Yum! Brands, Inc.+ 2,500 73,900 ----------- 7,999,714 ----------- CONSUMER STAPLES - 9.21% Albertson's, Inc. 2,500 48,000 Altria Group, Inc. 19,200 872,448 Anheuser-Busch Companies, Inc. 6,200 316,510 Archer-Daniels-Midland Co. 5,650 72,716 Campbell Soup Co. 3,200 78,400 Coca-Cola Co. (The) 21,600 1,002,456 Coca-Cola Enterprises Inc. 2,500 45,375 Colgate-Palmolive Co. 5,100 295,545 ConAgra Foods, Inc. 2,500 59,000 General Mills, Inc. 2,500 118,525 Gillette Co. (The) 8,600 273,996 H.J. Heinz Co. 2,700 89,046 Kimberly-Clark Corp. 5,000 260,700 Kroger Co. (The)+ 6,600 110,088 PepsiCo, Inc. 12,600 560,700 Procter & Gamble Co. (The) 10,000 891,800 See accompanying notes to financial statements. -------------------------------------------------------------------------------- 4 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) -------------------------------------------------------------------------------- CONSUMER STAPLES (CONTINUED) Safeway Inc.+ 4,900 $ 100,254 Sara Lee Corp. 6,300 118,503 Walgreen Co. 8,100 243,810 Wm. Wrigley Jr. Co. 2,500 140,575 ----------- 5,698,447 ----------- ENERGY - 5.00% Anadarko Petroleum Corp. 2,500 111,175 Calpine Corp. + 3,000 19,800 CenterPoint Energy, Inc. 5,700 46,455 ChevronTexaco Corp. 8,302 599,404 ConocoPhillips 3,669 201,061 El Paso Corp. 4,800 38,784 Exxon Mobil Corp. 46,500 1,669,815 Marathon Oil Corp. 2,500 65,875 Reliant Resources, Inc.+ 4,494 27,548 Schlumberger Ltd. 5,100 242,607 Unocal Corp. 2,500 71,725 ----------- 3,094,249 ----------- FINANCIALS - 19.05% AFLAC Inc. 4,000 123,000 Allstate Corp. (The) 5,200 185,380 American Express Co. 8,600 359,566 American International Group, Inc. 21,331 1,177,045 Bank of America Corp. 10,900 861,427 Bank of New York Co., Inc. (The) 5,900 169,625 Bank One Corp. 9,300 345,774 BB&T Corp. 4,500 154,350 Capital One Financial Corp. 1,000 49,180 Charles Schwab Corp. (The) 10,700 107,963 Citigroup Inc. 35,100 1,502,280 -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) -------------------------------------------------------------------------------- FINANCIALS (CONTINUED) Fannie Mae 5,700 $ 384,408 Fifth Third Bancorp 5,100 292,434 Fiserv, Inc.+ 2,500 89,025 FleetBoston Financial Corp. 8,500 252,535 Freddie Mac 5,800 294,466 Goldman Sachs Group, Inc. (The) 3,000 251,250 Hartford Financial Services Group, Inc. (The) 4,600 231,656 HSBC Holdings plc ADR 2,514 148,602 J.P. Morgan Chase & Co. 14,700 502,446 John Hancock Financial Services, Inc. 3,500 107,555 Lehman Brothers Holdings Inc. 2,500 166,200 Marsh & McLennan Companies, Inc. 4,600 234,922 MBNA Corp. 10,050 209,442 Mellon Financial Corp. 4,800 133,200 Merrill Lynch & Co., Inc. 6,600 308,088 MetLife, Inc. 6,000 169,920 Morgan Stanley 6,200 265,050 National City Corp. 5,300 173,363 Northern Trust Corp. 1,100 45,969 PNC Financial Services Group 1,400 68,334 Principal Financial Group, Inc. 2,500 80,625 Progressive Corp. (The) 2,500 182,750 Prudential Financial, Inc. 5,000 168,250 State Street Corp. 1,600 63,040 SunTrust Banks, Inc. 1,500 89,010 Travelers Property Casualty Corp., Class A 1,731 27,523 Travelers Property Casualty Corp., Class B 3,558 56,110 U.S. Bancorp 15,700 384,650 See accompanying notes to financial statements. -------------------------------------------------------------------------------- 5 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) -------------------------------------------------------------------------------- FINANCIALS (CONTINUED) Wachovia Corp. 11,600 $ 463,536 Washington Mutual, Inc. 7,250 299,425 Wells Fargo & Co. 12,000 604,800 ----------- 11,784,174 ----------- HEALTHCARE - 13.69% Abbott Laboratories 10,700 468,232 Amgen Inc.+ 8,300 555,934 Baxter International Inc. 5,100 132,600 Becton, Dickinson & Co. 2,500 97,125 Boston Scientific Corp.+ 3,000 183,300 Bristol-Myers Squibb Co. 12,100 328,515 Cardinal Health, Inc. 2,500 160,750 CIGNA Corp. 800 37,552 Eli Lilly & Co. 9,100 627,627 Genzyme Corp.+ 5,000 209,000 Guidant Corp. 2,500 110,975 HCA Inc. 2,600 83,304 HEALTHSOUTH Corp.+ 2,500 1,275 Johnson & Johnson 22,600 1,168,420 King Pharmaceuticals, Inc.+ 2,500 36,900 McKesson Corp. 2,500 89,350 Medtronic, Inc. 10,100 484,497 Merck & Co. Inc. 12,700 768,985 Pfizer Inc. 56,360 1,924,694 Schering-Plough Corp. 11,400 212,040 Tenet Healthcare Corp.+ 5,000 58,250 UnitedHealth Group Inc. 5,000 251,250 Wyeth 10,500 478,275 ----------- 8,468,850 ----------- INDUSTRIALS - 11.38% 3M Co. 2,500 322,450 Automatic Data Processing, Inc. 7,500 253,950 -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) -------------------------------------------------------------------------------- INDUSTRIALS (CONTINUED) Boeing Co. (The) 6,700 $ 229,944 Burlington North Santa Fe Corp. 5,000 142,200 Caterpillar Inc. 2,500 139,150 Cendant Corp.+ 7,100 130,072 Concord EFS, Inc.+ 5,000 73,600 CSX Corp. 2,500 75,225 Dover Corp. 3,500 104,860 Emerson Electric Co. 4,500 229,950 FedEx Corp. 2,500 155,075 First Data Corp. 5,000 207,200 General Dynamics Corp. 2,500 181,250 General Electric Co. 76,500 2,194,020 Honeywell International Inc. 12,300 330,255 Illinois Tool Works Inc. 2,500 164,625 Lockheed Martin Corp. 5,000 237,850 Masco Corp. 4,600 109,710 Paychex, Inc. 5,000 146,550 Raytheon Co. 2,500 82,100 Southwest Airlines Co. 6,100 104,920 Transocean Inc.+ 2,500 54,925 Tyco International Ltd. 17,600 334,048 United Parcel Service, Inc., Class B 9,000 573,300 United Technologies Corp. 4,700 332,901 Waste Management, Inc. 5,300 127,677 ----------- 7,037,807 ----------- INFORMATION TECHNOLOGY - 14.77% Adobe Systems Inc. 2,500 80,175 Agere Systems Inc., Class A+ 75 175 Agere Systems Inc., Class B+ 1,851 4,257 Agilent Technologies, Inc.+ 5,000 97,750 Altera Corp.+ 1,200 19,680 Analog Devices, Inc.+ 5,000 174,100 Apple Computer, Inc.+ 2,500 47,800 See accompanying notes to financial statements. -------------------------------------------------------------------------------- 6 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) -------------------------------------------------------------------------------- INFORMATION TECHNOLOGY (CONTINUED) Applied Materials, Inc.+ 19,400 $ 307,684 CIENA Corp.+ 1,500 7,785 Cisco Systems, Inc.+ 52,000 862,680 Computer Associates International, Inc. 5,200 115,856 Corning Inc.+ 7,500 55,425 Dell Computer Corp.+ 20,200 645,592 Electronic Data Systems Corp. 7,500 160,875 EMC Corp.+ 8,000 83,760 Hewlett-Packard Co. 15,842 337,435 Intel Corp. 52,500 1,091,160 International Business Machines Corp. 14,200 1,171,500 JDS Uniphase Corp.+ 9,700 34,047 Linear Technology Corp. 2,500 80,525 Lucent Technologies Inc.+ 7,000 14,210 Maxim Integrated Products, Inc. 2,500 85,475 Micron Technology, Inc. 5,500 63,965 Microsoft Corp. 84,800 2,171,728 Motorola, Inc. 16,100 151,823 Oracle Corp.+ 43,100 518,062 PerkinElmer, Inc. 1,500 20,715 QUALCOMM Inc. 3,400 121,550 Sanmina-SCI Corp.+ 4,000 25,240 Siebel Systems, Inc.+ 5,000 47,700 Solectron Corp.+ 5,700 21,318 Sun Microsystems, Inc.+ 24,600 113,160 Texas Instruments Inc. 13,500 237,600 Yahoo! Inc.+ 5,000 163,800 ----------- 9,134,607 ----------- -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) -------------------------------------------------------------------------------- MATERIALS - 1.84% Air Products & Chemicals, Inc. 2,500 $ 104,000 Alcan Inc. 1,500 46,935 Alcoa Inc. 6,800 173,400 Dow Chemical Co. (The) 7,200 222,912 E .I. du Pont de Nemours & Co. 5,800 241,512 Georgia-Pacific Corp. 2,500 47,375 International Paper Co. 4,800 171,504 Rohm & Haas Co. 2,500 77,575 Weyerhaeuser Co. 1,000 54,000 ----------- 1,139,213 ----------- TELECOMMUNICATION SERVICES - 3.42% ALLTEL Corp. 2,500 120,550 AT&T Corp. 5,260 101,255 AT&T Wireless Services Inc.+ 15,567 127,805 BellSouth Corp. 12,700 338,201 SBC Communications Inc. 25,600 654,080 Sprint Corp. (FON Group) 4,100 59,040 Sprint Corp. (PCS Group)+ 4,300 24,725 Verizon Communications Inc. 17,400 686,430 ----------- 2,112,086 ----------- UTILITIES - 2.59% American Electric Power Co., Inc. 5,500 164,065 Dominion Resources, Inc. 5,000 321,350 Duke Energy Corp. 6,600 131,670 Edison International+ 5,000 82,150 Exelon Corp. 2,500 149,525 FirstEnergy Corp. 5,000 192,250 Public Service Enterprise Group Inc. 2,500 105,625 Scottish Power plc ADR 4,000 97,240 Southern Co. (The) 5,000 155,800 See accompanying notes to financial statements. -------------------------------------------------------------------------------- 7 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) -------------------------------------------------------------------------------- UTILITIES (CONTINUED) TXU Corp. 3,700 $ 83,065 Williams Companies, Inc. (The) 4,800 37,920 Xcel Energy, Inc. 5,500 82,720 1,603,380 TOTAL UNITED STATES (cost - $71,122,828) 58,240,702 ----------- CZECH REPUBLIC - 1.41% CONSUMER DISCRETIONARY - 1.41% Bonton AS 68,590 145,461 Bonton Book AS 68,590 145,461 Bonton Disc AS 68,590 145,486 Bonton Film Entertainment AS 68,590 145,461 Bonton Music AS 68,590 145,485 Bonton Pictures AS 68,590 145,485 ----------- TOTAL CZECH REPUBLIC (cost - $894,867) 872,839 ----------- TOTAL EQUITY SECURITIES - 95.57% (cost - $72,017,695) 59,113,541 ----------- Amount Value Description (000's) (Note A) SHORT-TERM INVESTMENT - 4.58% REPURCHASE AGREEMENT - 4.58% Bear, Stearns & Co. Inc. (Agreement dated 06/30/03 to be repurchased at $2,829,242), 1.10%, 07/01/03 (cost - $2,829,156) (Note F) $ 2,829 $ 2,829,156 ----------- TOTAL INVESTMENTS - 100.15% (cost - $74,846,851) (Notes A, G) 61,942,697 ----------- SECURITIES LENDING COLLATERAL (Note E) - 1.34% 830,584 LIABILITIES IN EXCESS OF OTHER ASSETS - (1.49)% (920,356) ----------- NET ASSETS - 100.00% $61,852,925 =========== + Non-income producing security. ADR American Depositary Receipts. See accompanying notes to financial statements. -------------------------------------------------------------------------------- 8 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. STATEMENT OF ASSETS AND LIABILITIES - JUNE 30, 2003 (UNAUDITED) --------------------------------------------------------------------------------
ASSETS Investments, at value (Cost $74,846,851) (Notes A, G) $ 61,942,697 Cash collateral received for securities loaned (Note E) 830,584 Receivables: Dividends 75,558 Interest 1,395 Prepaid expenses 16,711 ------------ Total Assets 62,866,945 ------------ LIABILITIES Payables: Upon return of securities loaned (Note E) 830,584 Investment management fees (Note B) 9,382 Other accrued expenses 174,054 Total Liabilities 1,014,020 ------------ NET ASSETS (applicable to 4,694,778 shares of common stock outstanding) $ 61,852,925 ------------ NET ASSET VALUE PER SHARE ($61,852,925 / 4,694,778) $ 13.17 ============ NET ASSETS CONSISTS OF Capital stock, $0.01 par value; 4,694,778 shares issued and outstanding (15,000,000 shares authorized) $ 46,948 Paid-in capital 94,167,851 Cost of 14,282 shares repurchased (159,454) Distributions in excess of net investment income (4,438,607) Accumulated net realized loss on investments (14,859,659) Net unrealized depreciation in value of investments (12,904,154) ------------ Net assets applicable to shares outstanding $ 61,852,925 ============
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 9 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. STATEMENT OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED) --------------------------------------------------------------------------------
INVESTMENT INCOME Income (Note A): Dividends $ 536,633 Interest 7,903 ------------ Total Investment Income 544,536 ------------ Expenses: Investment management fees (Note B) 293,022 Administration fees 29,292 Transfer agent fees 21,017 Legal and audit fees (Note B) 17,921 Directors' fees 16,612 Accounting fees 16,181 Printing 12,523 Stock exchange listing fees 7,623 Custodian fees 6,558 Japanese filings 5,740 Insurance 5,316 Other 544 ------------ Total Expenses 432,349 Less: Management fee waivers (Note B) (66,680) Less: Fees paid indirectly (Note B) (11,335) ------------ Net Expenses 354,334 ------------ Net Investment Income 190,202 ------------ NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized loss from investments (619,904) Net change in unrealized depreciation in value of investments 6,399,013 ------------ Net realized and unrealized gain on investments 5,779,109 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 5,969,311 ============
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 10 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. STATEMENT OF CHANGES IN NET ASSETS --------------------------------------------------------------------------------
For the Six Months Ended For the Year June 30, 2003 Ended (unaudited) December 31, 2002 ------------ ------------ INCREASE IN NET ASSETS Operations: Net investment income $ 190,202 $ 397,285 Net realized loss on investments (619,904) (10,666) Net change in unrealized appreciation/(depreciation) in value of investments 6,399,013 (8,144,534) ------------ ------------ Net increase/(decrease) in net assets resulting from operations 5,969,311 (7,757,915) ------------ ------------ Dividends and distributions to shareholders (Notes A, G): Net investment income (190,202) (397,285) Return-of-capital (4,438,607) (4,727,860) ------------ ------------ Total dividends and distributions to shareholders (4,628,809) (5,125,145) ------------ ------------ Capital stock transactions (Note D): Net assets received in conjunction with Merger Agreement (Note A) -- 33,396,970 Proceeds from 37,118 and 47,882 shares newly issued in reinvestment of distributions, respectively 451,098 610,487 Cost of 7,500 and 43,900 shares repurchased, respectively (90,050) (520,502) ------------ ------------ Net increase in net assets resulting from capital stock transactions 361,048 33,486,955 ------------ ------------ Total increase in net assets 1,701,550 20,603,895 ------------ ------------ NET ASSETS Beginning of period 60,151,375 39,547,480 ------------ ------------ End of period $ 61,852,925 $ 60,151,375 ============ ============
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 11 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data for each period 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, For the Six ----------------------------------------------------------------------- Months Ended June 30, 2003 (unaudited) 2002 2001 2000 1999 1998 ----------- ----------- ----------- ----------- ----------- ----------- PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 12.89 $ 18.30 $ 18.28 $ 17.62 $ 18.78 $ 18.52 ----------- ----------- ----------- ----------- ----------- ----------- Net investment income 0.04# 0.15# 0.52 1.07 1.03 1.06 Net realized and unrealized gain/(loss) on investments 1.23 (3.57) 0.24 0.63 (1.20) 0.23 ----------- ----------- ----------- ----------- ----------- ----------- Net increase/(decrease) in net assets resulting from operations 1.27 (3.42) 0.76 1.70 (0.17) 1.29 ----------- ----------- ----------- ----------- ----------- ----------- Dividends and distributions to shareholders: Net investment income (0.04) (0.18) (0.66) (1.05) (1.01) (1.03) Return-of-capital (0.95) (1.80) (0.09) -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Total dividends and distributions to shareholders (0.99) (1.98) (0.75) (1.05) (1.01) (1.03) ----------- ----------- ----------- ----------- ----------- ----------- Capital stock transactions: Anti-dilutive effect due to capital stock repurchased -- 0.02 0.01 0.01 0.02 -- Dilutive effect due to shares issued in reinvestment of dividends and distributions -- (0.03) -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Total capital stock transactions -- (0.01) 0.01 0.01 0.02 -- ----------- ----------- ----------- ----------- ----------- ----------- Net asset value, end of period $ 13.17 $ 12.89 $ 18.30 $ 18.28 $ 17.62 $ 18.78 Market value, end of period $ 13.99 $ 11.350 $ 16.290 $ 15.875 $ 14.250 $ 16.560 Total investment return (a) 33.65% (19.30)% 8.91% 19.02% (8.39)% 5.55% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000 omitted) $ 61,853 $ 60,151 $ 39,547 $ 39,640 $ 38,283 $ 41,069 Ratio of expenses to average net assets, net of fee waivers, if any (b) 1.21%(d) 1.50% -- -- -- -- Ratio of expenses to average net assets, excluding fee waivers, if any (c) 1.48%(d) 2.07% 3.01% -- -- -- Ratio of expenses to average net assets, net of fee waivers but excluding fees paid indirectly, if any 1.25%(d) 1.63% -- 1.06% 1.05% 0.97% Ratio of net investment income to average net assets 0.65%(d) 1.01% 2.77% 5.97% 5.60% 5.62% Portfolio turnover -- 86.60% -- 15.87% 16.09% 15.88% ------------------------------------------------------------------------------------------------------------------------------------ # 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 period 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 fees paid indirectly. (d) Annualized. See accompanying notes to financial statements. -------------------------------------------------------------------------------- 12
-------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- NOTE A. SIGNIFICANT ACCOUNTING POLICIES Cornerstone Total Return Fund, Inc. (the "Fund") was incorporated in New York on March 16, 1973 and commenced investment operations on May 15, 1973. Its investment objective is to seek total return consisting of capital appreciation with current income as a secondary objective. The Fund is registered under the Investment Company Act of 1940, as amended, as a closed-end, diversified management investment company. On October 31, 2002, the Fund (then known as "EIS Fund, Inc.") consummated a merger with The Cornerstone Strategic Return Fund, Inc. (the "Predecessor Fund"). Pursuant to the terms of the agreement governing the merger, each share of common stock of the Predecessor Fund was converted into an equivalent dollar amount of full shares of common stock of the Fund, based on the net asset value of the Fund and the Predecessor Fund as of October 30, 2002 ($13.35 and $7.33, respectively), resulting in a conversion ratio of 0.5490 shares of the Fund for each share of the Predecessor Fund resulting in the issuance of 2,500,087 Fund shares. Cash was paid in lieu of fractional shares. Net assets of the Fund and the Predecessor Fund as of the merger date were $29,172,812 and $33,396,970, including unrealized depreciation of $5,895,432 and $12,013,315, respectively. In addition, the Predecessor Fund's net assets included undistributed capital losses of $14,137,957. Total net assets after the merger were $62,569,782. Upon the consummation of the merger, the Fund changed its name to Cornerstone Total Return Fund, Inc. The following is a summary of significant accounting policies consistently followed by the Fund: MANAGEMENT ESTIMATES: The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") requires management to make certain estimates and assumptions that may affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION: Investments are stated at value in the accompanying financial statements. All equity securities shall be valued at the closing price on the exchange or market on which the security is primarily traded ("Primary Market"). If the security did not trade on the Primary Market, it shall be valued at the closing price on another exchange where it trades. If there are no such sale prices, the value shall be the most recent bid, and if there is no bid, the security shall be valued at the most recent asked. If no pricing service is available and there are more than two dealers, the value shall be the mean of the highest bid and lowest ask. If there is only one dealer, then the value shall be the mean if bid and ask are available, otherwise the value shall be the bid. All other securities and assets are valued as determined in good faith by the Board of Directors. Short-term investments having a maturity of 60 days or less are valued on the basis of amortized cost. The Board of Directors has established general guidelines for calculating fair value of not readily marketable securities. At June 30, 2003, the Fund held 1.41% 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 $872,839. The net asset value per share of the Fund is calculated weekly and on the last business day of the month with the exception of those days on which the American Stock Exchange, LLC is closed. REPURCHASE AGREEMENTS: The Fund has agreed to purchase securities from financial institutions subject to the seller's agreement to repurchase them at an agreed-upon time and price -------------------------------------------------------------------------------- 13 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- ("repurchase agreements"). The financial institutions with whom the Fund enters into repurchase agreements are banks and broker/dealers, which Cornerstone Advisors, Inc. (the Fund's "Manager" or "Cornerstone") considers creditworthy. The seller under a repurchase agreement will be required to maintain the value of the securities as collateral, subject to the agreement at not less than the repurchase price plus accrued interest. Cornerstone monitors daily the mark-to-market of the value of the collateral, and, if necessary, requires the seller to maintain additional securities, so that the value of the collateral is not less than the repurchase price. Default by or bankruptcy of the seller would, however, expose the Fund to possible loss because of adverse market action or delays in connection with the disposition of the underlying securities. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: Investment transactions are accounted for on the trade date. The cost of investments sold is determined by use of the specific identification method for both financial reporting and income tax purposes. Interest income is recorded on an accrual basis; dividend income is recorded on the ex-dividend date. TAXES: No provision is made for U.S. federal income or excise taxes as it is the Fund's intention to continue to qualify as a regulated investment company and to make the requisite distributions to its shareholders which will be sufficient to relieve it from all or substantially all U.S. federal income and excise taxes. DISTRIBUTIONS OF INCOME AND GAINS: Effective January 2002, the Fund initiated a fixed, monthly distribution to shareholders. To the extent that these distributions exceed the current earnings of the Fund, the balance will be generated from sales of portfolio securities held by the Fund, which will either be short-term or long-term capital gains or a tax-free return-of-capital. Prior thereto, the Fund distributed at least annually to shareholders, substantially all of its net investment income and net realized short-term capital gains, if any. The Fund determines annually whether to distribute any net realized long-term capital gains in excess of net realized short-term capital losses, including capital loss carryovers, if any. An additional distribution may be made to the extent necessary to avoid the payment of a 4% U.S. federal excise tax. Dividends and distributions to shareholders are recorded by the Fund on the ex-dividend date. The character of dividends and distributions made during the six months ended June 30, 2003 from net investment income or net realized gains may differ from their ultimate characterization for U.S. income tax purposes due to U.S. generally accepted accounting principles/tax differences in the character of income and expense recognition. NOTE B. AGREEMENTS Cornerstone serves as the Fund's investment manager with respect to all investments. As compensation for its management services, Cornerstone receives from the Fund, an annual fee, calculated weekly and paid monthly, equal to 1.00% of the Fund's average weekly net assets. Cornerstone has voluntarily agreed to waive its management fees from the Fund to the extent that monthly operating expenses exceed 0.10% of average net assets calculated monthly. Cornerstone voluntarily agreed to continue the undertaking through December 31, 2003. For the six months ended June 30, 2003, Cornerstone earned $293,022 for investment management services, of which it waived $66,680. Included in the Statement of Operations, under the caption FEES PAID INDIRECTLY, are expense offsets of $11,335 arising from credits earned on portfolio transactions executed with a broker, pursuant to directed brokerage arrangement. -------------------------------------------------------------------------------- 14 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- The Fund paid or accrued approximately $12,899 for the six months ended June 30, 2003 for legal services to Spitzer & Feldman P.C., counsel to the Fund. Thomas R. Westle, a partner of the firm, serves as secretary of the Fund. At June 30, 2003, pursuant to regulatory filings, a single shareholder and his affiliates owned approximately 43% and 6% of the outstanding shares of the Fund based on a Schedule 13G/A filing with the Securities and Exchange Commission on February 7, 2003 and February 13, 2003, respectively. NOTE C. INVESTMENT IN SECURITIES For the six months ended June 30, 2003, purchases and sales of securities, other than short-term investments, were $2,807 and $6,476,324, respectively. NOTE D. SHARE REPURCHASE PROGRAM Pursuant to Section 23 of the Investment Company Act of 1940, as amended the Fund may in the future purchase shares of its common stock on the open market from time to time, at such times, and in such amounts as may be deemed advantageous to the Fund. Nothing herein shall be considered a commitment to purchase such shares. For the six months ended June 30, 2003, the Fund repurchased 7,500 of its shares for a total cost of $ 90,050 at a weighted average discount of 12.01% from net asset value. The discount of the individual repurchases ranged from 11.76% - 12.13%. For the year ended December 31, 2002, the Fund purchased 43,900 shares for a total cost of $540,395 at a weighted average discount of 13.56% from net asset value. The discount of the individual repurchases ranged from 9.87% - 16.26%. No limit has been placed on the number of shares to be purchased by the Fund other than those imposed by federal securities laws. All purchases are made in accordance with federal securities laws, with shares repurchased held in treasury, effective January 1, 2002. NOTE E. SECURITIES LENDING To generate additional income, the Fund may lend up to 33 1/3% of its total assets. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn interest on the investment of cash collateral. Loans are subject to termination by the Fund or the borrower at any time, and are, therefore, not considered to be illiquid investments. Loans of securities are required at all times to be secured by collateral equal to at least 100% of the market value of securities on loan. However, in the event of default or bankruptcy of the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. In the event that the borrower fails to return securities, and collateral maintained by lender is insufficient to cover the value of loaned securities, the borrower is obligated to pay the amount of the shortfall (and interest thereon) to the Fund. However, there can be no assurance the Fund can recover this amount. The value of securities on loan to brokers and the related collateral received at June 30, 2003 were $813,743 and $830,584, respectively. Any cash collateral received is reinvested into repurchase agreements, which in turn are collateralized by various U.S. Government and Agency securities. During the six months ended June 30, 2003, the Fund earned $596 in securities lending income that is included under the caption INTEREST in the Statement of Operations. -------------------------------------------------------------------------------- 15 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED) -------------------------------------------------------------------------------- NOTE F. COLLATERAL FOR REPURCHASE AGREEMENT Listed below is the collateral associated with the repurchase agreement with Bear, Stearns & Co. Inc. outstanding at June 30, 2003. PRINCIPAL AMOUNT MARKET ISSUER (000'S) MATURITY VALUE ------ --------- -------- ---------- United States Treasury Bond, (interest only) $6,380 2/15/20 $2,911,513 ========== NOTE G. FEDERAL INCOME TAXES Income and capital gains distributions are determined in accordance with federal income tax regulations, which may differ from GAAP. These differences are primarily due to differing treatments of losses deferred due to wash sales and Post-October losses (as later defined), and excise tax regulations. The tax characteristic of distributions paid during the year ended December 31, 2002 for return-of-capital and net investment income were $4,727,860 and $397,285, respectively. 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"). At December 31, 2002, the Fund had a capital loss carryforward for U.S. federal income tax purposes of $14,143,775 of which $91,132 expires in 2008 and $14,052,643 expires in 2010. At June 30, 2003, the identified cost for federal income tax purposes, as well as the gross unrealized appreciation from investments for those securities having an excess of value over cost, gross unrealized depreciation from investments for those securities having an excess of cost over value and the net unrealized depreciation from investments were $74,942,831, $1,354,941, $(14,355,075) and $(13,000,134), respectively. -------------------------------------------------------------------------------- 16 RESULTS OF ANNUAL MEETING OF STOCKHOLDERS (UNAUDITED) On April 11, 2003, the Annual Meeting of Stockholders of Cornerstone Total Return Fund, Inc. was held and the following matter was voted upon: (1) To elect seven Directors until the year 2004 Annual Meeting. NAME OF DIRECTORS FOR WITHHOLD ----------------- --------- -------- Gary A. Bentz 4,319,742 14,739 Ralph W. Bradshaw 4,319,042 15,439 Thomas H. Lenagh 4,327,366 7,115 Edwin Meese III 4,317,797 16,684 Scott B. Rogers 4,328,287 6,194 Andrew A. Strauss 4,328,193 6,288 Glenn W. Wilcox, Sr. 4,319,228 15,253 -------------------------------------------------------------------------------- 17 DESCRIPTION OF DIVIDEND REINVESTMENT & CASH PURCHASE PLAN (UNAUDITED) Shareholders who have Shares registered directly in their own names automatically participate in the Fund's Dividend Reinvestment & Cash Purchase Plan (the "Plan"), unless and until an election is made to withdraw from the Plan on behalf of such participating shareholders. Shareholders who do not wish to have distributions automatically reinvested should so notify American Stock Transfer & Trust Co. (the "Agent") at P.O. Box 922, Wall Street Station, New York, NY 10269-0560 or call (877)248-6416. Under the Plan, all of the Fund's dividends and other distributions to shareholders are reinvested in full and fractional Shares as described below. When the Fund declares an income dividend or a capital gain or other distribution (each, a "Dividend" and collectively, "Dividends"), the Agent, on the shareholders' behalf, will: (i) receive additional authorized shares from the Fund either newly issued or repurchased from shareholders by the Fund and held as treasury stock ("Newly Issued Shares") or, (ii) at the sole discretion of the Board of Directors, be authorized to purchase outstanding shares on the open market, on the American Stock Exchange, LLC or elsewhere, with cash allocated to it by the Fund ("Open Market Purchases"). Shares acquired by the Agent in Open Market Purchases will be allocated to the reinvesting shareholders based on the average cost of such Open Market Purchases. Alternatively, the Agent will allocate Newly Issued Shares to the reinvesting shareholders at a price equal to the average closing price of the Fund over the five trading days preceding the payment date of such dividend. Registered shareholders who acquire their shares through Open Market Purchases and who do not wish to have their Dividends automatically reinvested should so notify the Fund in writing. If a Shareholder has not elected to receive cash Dividends and the Agent does not receive notice of an election to receive cash Dividends prior to the record date of any dividend, the shareholder will automatically receive such Dividends in additional Shares. Participants in the Plan may withdraw from the Plan by providing written notice to the Agent at least 30 days prior to the applicable Dividend payment date. When a participant withdraws from the Plan, or upon termination of the Plan as provided below, certificates for whole shares credited to his/her account under the Plan will, upon request, be issued. Whether or not a participant requests that certificates for whole shares be issued, a cash payment will be made for any fraction of a Share credited to such account. The Agent will maintain all shareholder accounts in the Plan and furnish written confirmations of all transactions in the accounts, including information needed by shareholders for personal and tax records. The Agent will hold shares in the account of each Plan participant in non-certificated form in the name of the participant, and each shareholder's proxy will include those shares purchased pursuant to the Plan. Each participant, nevertheless, has the right to receive certificates for whole shares owned. The Agent will distribute all proxy solicitation materials to participating shareholders. In the case of shareholders, such as banks, brokers or nominees, that hold shares for others who are beneficial owners participating in the Plan, the Agent will administer the Plan on the basis of the number of shares certified from time to time by the record shareholder as representing the total amount of shares registered in the Shareholder's name and held for the account of beneficial owners participating in the Plan. -------------------------------------------------------------------------------- 18 DESCRIPTION OF DIVIDEND REINVESTMENT & CASH PURCHASE PLAN (UNAUDITED) (CONCLUDED) There will be no charge to participants for reinvesting Dividends other than their share of brokerage commissions as discussed below. The Agent's fees for administering the Plan and handling the reinvestment of Dividends will be paid by the Fund. Each participant's account will be charged a pro-rata share of brokerage commissions incurred with respect to the Agent's Open Market Purchases in connection with the reinvestment of Dividends. Brokerage charges for purchasing small amounts of shares for individual accounts through the Plan are expected to be less than the usual brokerage charges for such transactions because the Agent will be purchasing shares for all the participants in blocks and pro-rating the lower commission that may be attainable. The automatic reinvestment of Dividends will not relieve participants of any income tax that may be payable on such Dividends. Participants who receive shares pursuant to the Plan as described above will recognize taxable income in the amount of the fair market value of those shares. In the case of non-U.S. participants whose Dividends are subject to U.S. income tax withholding and in the case of participants subject to 28% federal backup withholding, the Agent will reinvest Dividends after deduction of the amount required to be withheld. The Fund reserves the right to amend or terminate the Plan by written notice to participants. All correspondence concerning the Plan should be directed to the Agent at the address referred to in the first paragraph of this section. -------------------------------------------------------------------------------- 19 SUMMARY OF GENERAL INFORMATION The Fund - Cornerstone Total Return Fund, Inc. is a closed-end, diversified investment company whose shares trade on the American Stock Exchange, LLC. Its investment objective is to seek total return, consisting of capital appreciation and current income by investing primarily all of its assets in equity securities of U.S. and non-U.S. issuers whose securities trade on a U.S. securities exchange or over the counter or as American Depositary Receipts or other forms of depositary receipts which trade in the United States. The Fund is managed by Cornerstone Advisors, Inc. SHAREHOLDER INFORMATION Effective February 21, 2003, the Fund is listed on the American Stock Exchange, LLC (symbol "CRF"). The share price is published in: THE NEW YORK TIMES (daily) under the designation "Cnrstn TR" and THE WALL STREET JOURNAL (daily) and BARRON'S (each Monday) under the designation "CornstnTtlRtn." The net asset value per share is published under "Closed-End Funds" each Sunday in THE NEW YORK TIMES UNDER THE DESIGNATION "CNRSTN TR" and each Monday in THE WALL STREET JOURNAL and BARRON'S under the designation "CornrstnTtlRtn Fd". -------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 20 PRIVACY POLICY NOTICE The following is a description of Cornerstone Total Return Fund, Inc.'s (the "Fund") policies regarding disclosure of nonpublic personal information that you provide to the Fund or that the Fund collects from other sources. In the event that you hold shares of the Fund through a broker-dealer or other financial intermediary, the privacy policy of the financial intermediary would govern how your nonpublic personal information would be shared with unaffiliated third parties. CATEGORIES OF INFORMATION THE FUND COLLECTS. The Fund collects the following nonpublic personal information about you: 1. Information from the Consumer: this category includes information the Fund receives from you on or in applications or other forms, correspondence, or conversations (such as your name, address, phone number, social security number, assets, income and date of birth); and 2. Information about the Consumer's transactions: this category includes information about your transactions with the Fund, its affiliates, or others (such as your account number and balance, payment history, parties to transactions, cost basis information, and other financial information). CATEGORIES OF INFORMATION THE FUND DISCLOSES. The Fund does not disclose any nonpublic personal information about their current or former shareholders to unaffiliated third parties, except as required or permitted by law. The Fund is permitted by law to disclose all of the information it collects, as described above, to its service providers (such as the Fund's custodian, administrator and transfer agent) to process your transactions and otherwise provide services to you. CONFIDENTIALITY AND SECURITY. The Fund restricts access to your nonpublic personal information to those persons who require such information to provide products or services to you. The Fund maintains physical, electronic and procedural safeguards that comply with federal standards to guard your nonpublic personal information. -------------------------------------------------------------------------------- 21 ITEM 2. CODE OF ETHICS. (a) Disclose whether, as of the end of the period covered by the report, the registrant has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, explain why it has not done so. NOT APPLICABLE - ONLY EFFECTIVE FOR ANNUAL REPORTS WITH PERIODS ENDING ON OR AFTER JULY 15, 2003. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a) (1) Disclose that the registrant's board of directors has determined that the registrant either: (i) Has at least one audit committee financial expert serving on its audit committee; or (ii) Does not have an audit committee financial expert serving on its audit committee. (2) If the registrant provides the disclosure required by paragraph (a)(1)(i) of this Item, it must disclose the name of the audit committee financial expert and whether that person is "independent." In order to be considered "independent" for purposes of this Item, a member of an audit committee may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (i) Accept directly or indirectly any consulting, advisory, or other compensatory fee from the issuer; or (ii) Be an "interested person" of the investment company as defined in Section 2(a)(19) of the Act (15 U.S.C. 80a- 2(a)(19)). (3) If the registrant provides the disclosure required by paragraph (a)(1)(ii) of this Item, it must explain why it does not have an audit committee financial expert. NOT APPLICABLE - ONLY EFFECTIVE FOR ANNUAL REPORTS WITH PERIODS ENDING ON OR AFTER JULY 15, 2003. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Disclose, under the caption AUDIT FEES, the aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. (b) Disclose, under the caption AUDIT-RELATED FEES, the aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item. Registrants shall describe the nature of the services comprising the fees disclosed under this category. (c) Disclose, under the caption TAX FEES, the aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. Registrants shall describe the nature of the services comprising the fees disclosed under this category. (d) Disclose, under the caption ALL OTHER FEES, the aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item. Registrants shall describe the nature of the services comprising the fees disclosed under this category. (e) (1) Disclose the audit committee's pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. (2) Disclose the percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. (f) If greater than 50 percent, disclose the percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees. (g) Disclose the aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant. (h) Disclose whether the registrant's audit committee of the board of directors has considered whether the provision of nonaudit services that were rendered to the registrant's investment adviser (not including any subadviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. NOT APPLICABLE - ONLY EFFECTIVE FOR ANNUAL REPORTS WITH PERIODS ENDING ON OR AFTER DECEMBER 15, 2003. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Form N-CSR disclosure requirement not yet effective with respect to the Registrant. ITEM 6. [Reserved] ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. A closed-end management investment company that is filing an annual report on this Form N-CSR must, unless it invests exclusively in non-voting securities, describe the policies and procedures that it uses to determine how to vote proxies relating to portfolio securities, including the procedures that the company uses when a vote presents a conflict between the interests of its shareholders, on the one hand, and those of the company's investment adviser; principal underwriter; or any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(3)) and the rules thereunder) of the company, its investment adviser, or its principal underwriter, on the other. Include any policies and procedures of the company's investment adviser, or any other third party, that the company uses, or that are used on the company's behalf, to determine how to vote proxies relating to portfolio securities. NOT APPLICABLE - ONLY EFFECTIVE FOR ANNUAL REPORTS WITH PERIODS ENDING ON OR AFTER JULY 1, 2003. ITEM 8. [RESERVED] ITEM 9. CONTROLS AND PROCEDURES. (a) The Principal Executive Officer and Principal Financial Officer concluded that the Registrant's Disclosure Controls and Procedures are effective based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report. (b) There were no significant changes in registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 10. EXHIBITS. File the exhibits listed below as part of this Form. Letter or number the exhibits in the sequence indicated. (a) Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit. NOT APPLICABLE. (b) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2 under the Act (17 CFR 270.30a-2) SIGNATURES [See General Instruction F] Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) CORNERSTONE TOTAL RETURN FUND, INC. By (Signature and Title)* /S/ RALPH W. BRADSHAW ----------------------- RALPH W. BRADSHAW, Chairman and President (Principal Executive Officer) Date: September 4, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /S/ RALPH W. BRADSHAW ----------------------- RALPH W. BRADSHAW, Chairman and President (Principal Executive Officer) Date: September 4, 2003 By (Signature and Title)* /S/ GARY A. BENTZ ----------------------- GARY A. BENTZ, Vice President and Treasurer (Principal Financial Officer) Date: September 4, 2003 * Print the name and title of each signing officer under his or her signature. ALL CERTIFICATIONS (UNDER THE ACT'S SECTION 302 AND 906) SHOULD BE INCLUDED IN ONE EDGAR EX-99.CERT EXHIBIT DOCUMENT TO FORM N-CSR)