-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JrseYgJVhnhitI7+9oJjHWZh0noAMic1lb7OukgKtEKIDyFiIz/kgdU0U/DhUcJl Mc+KaohMuzwL24DcdDNT1w== 0000909012-04-000168.txt : 20040308 0000909012-04-000168.hdr.sgml : 20040308 20040308120708 ACCESSION NUMBER: 0000909012-04-000168 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040308 EFFECTIVENESS DATE: 20040308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNERSTONE TOTAL RETURN FUND INC CENTRAL INDEX KEY: 0000033934 IRS NUMBER: 132727013 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-02363 FILM NUMBER: 04654012 BUSINESS ADDRESS: STREET 1: BEAR STEARNS FUNDS MGMT INC. STREET 2: 383 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10179 BUSINESS PHONE: 2122722093 MAIL ADDRESS: STREET 1: BEAR STEARNS FUNDS MGMT INC. STREET 2: 383 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10179 FORMER COMPANY: FORMER CONFORMED NAME: EIS FUND INC DATE OF NAME CHANGE: 20020109 FORMER COMPANY: FORMER CONFORMED NAME: EXCELSIOR INCOME SHARES INC DATE OF NAME CHANGE: 19920703 N-CSR 1 t300864.txt CORNERSTONE TOTAL RETURN FUND, INC. 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, NY 10179 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Jodi B. Levine 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 DECEMBER 31, 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. Include a copy of the report transmitted to stockholders pursuant to Rule 30e-1 under the Act (17 CFR 270.30e-1). CORNERSTONE TOTAL RETURN FUND, INC. DECEMBER 31, 2003 This update contains the following two documents: o Letter from the Fund's Chairman o Annual Report to Shareholders LETTER FROM THE FUND'S CHAIRMAN January 23, 2004 Dear Fellow Shareholders: We present the following annual report for Cornerstone Total Return Fund, Inc. (the "Fund"), covering the year ended December 31, 2003. At the end of the year, the Fund's net assets were $65.6 million and the Net Asset Value ("NAV") per share was $13.89. The share price closed at $17.95 and the Fund's price discount to NAV improved from 11.9% at the beginning of the year to a premium of 29.2% at the end. After reflecting the reinvestment of monthly distributions totaling $1.99 per share, the Fund achieved a total investment return at market value of 82.96% for the year ended December 31, 2003. CREATING VALUE The Fund, under the direction of its Board, has made substantial progress in creating value for its shareholders. A focus on reducing expenses, combined with the voluntary waiver of a portion of management fees by the Fund's investment manager, held the overall expense ratio to 1.2% for the year. Since the beginning of 2002, the Fund has maintained an aggressive fixed, monthly distribution policy designed to provide significant flexibility to all of the Fund's shareholders. It is our belief that shareholders are well served by this policy that provides regular distributions in both up and down markets. We are proud of this innovative concept and believe it has contributed significantly to the Fund's positive performance. Over the long-run, a well-managed, diversified equity portfolio provides the best risk/reward tradeoff for many investors. Long-term equity returns are generally found to be higher than those with fixed-income or balanced programs and favorable tax treatment on capital gains makes the net returns even better for taxable investors. The Fund's distribution policy recognizes that many investors are willing to accept the potentially higher asset volatility in this approach, but would prefer that stable distributions were available to them each year to either reinvest or utilize for other purposes of their choosing. Shortly after the end of the year, it is determined what portion of these distributions is attributable to income, capital gains, or return-of-capital. This year, the Fund's asset base grew even though a large portion of the year's distribution was classified as a tax favored return-of-capital. It is important for shareholders to consult their tax advisor on proper recognition of the return-of-capital distributions with regard to the cost basis of their shares. Each shareholder has the option to receive their distributions in cash or new shares of the Fund and may change this election whenever they wish. It is a goal that long-term investment returns will exceed the level of distributions, but there is no guarantee that this goal will be met. If the amount of distributions taken in cash exceeds the total investment return of the Fund, the assets of the Fund will decline. If the total investment return of the Fund exceeds the amount of cash distributions, as it did in 2003, the assets of the Fund will increase. The distributions of those who chose to reinvest in 2003 participated in the Fund's strong - -------------------------------------------------------------------------------- 1 LETTER FROM THE FUND'S CHAIRMAN (CONTINUED) - -------------------------------------------------------------------------------- market performance. We encourage you to consider the reinvestment option for your distributions from the Fund. ECONOMIC AND MARKET SUMMARY After wading through early concerns surrounding the war in Iraq, the global economy performed much better than expected a year ago. The major market indices also closed out 2003 strongly positive. In addition to good global news, stocks responded to a fast-recovering economy, benign inflation, and rising profits. In a reversal of the situation for 2002, almost every area of the U.S. equity market was up at the end of 2003. Tax cuts, increased government spending, and the Federal Reserve's accommodative policy toward low interest rates all contributed to boost economic activity. The U.S. economy seemed to be running wide-open as the GDP grew at an almost unheard of annualized rate of 8.2% in the third quarter. In spite of all the good news, both the U.S. economy and the markets face risk. Stimulus may generate enough growth to reawaken inflation concerns and lead to increased interest rates. Prices for many equities, which are high relative to earnings, may be vulnerable to even small disappointments. Significantly, the unemployment level remained surprisingly high, though it dropped near the end of the year. In spite of this, consumer confidence continues to improve as many continue to anticipate job growth. PORTFOLIO PERFORMANCE Following a broadly diversified approach, the Fund's portfolio performed well in this year's market climb, turning in double digit performance and comparing well with its benchmark S&P 500 Index return of 28.7%. We believe that this approach has served well through both up and down markets of recent years and will continue to benefit the Fund and its stockholders for the long-term. The investment manager attempts to enhance portfolio performance by taking advantage of temporary and occasional pricing inefficiencies in certain securities. To that end, the percentage of the portfolio represented by discounted closed-end funds increased. The availability and magnitude of such opportunities are unpredictable, and therefore, their effect on possible portfolio out-performance may vary considerably from year to year. - -------------------------------------------------------------------------------- 2 LETTER FROM THE FUND'S CHAIRMAN (CONCLUDED) The Fund's Board of Directors, its officers, and its investment manager are mindful of the trust that the Fund's shareholders have placed in us. We know you have a choice, we appreciate your support, and we look forward to continuing our service to you in the future. Sincerely, /s/ Ralph W. Bradshaw - --------------------- Ralph W. Bradshaw Chairman IN ADDITION TO HISTORICAL INFORMATION, THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS, WHICH MAY CONCERN, AMONG OTHER THINGS, DOMESTIC AND FOREIGN MARKETS, INDUSTRY AND ECONOMIC TRENDS AND DEVELOPMENTS AND GOVERNMENT REGULATION AND THEIR POTENTIAL IMPACT ON THE FUND'S INVESTMENT PORTFOLIO. THESE STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES AND ACTUAL TRENDS, DEVELOPMENTS AND REGULATIONS IN THE FUTURE AND THEIR IMPACT ON THE FUND COULD BE MATERIALLY DIFFERENT FROM THOSE PROJECTED, ANTICIPATED OR IMPLIED. THE FUND HAS NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS. - -------------------------------------------------------------------------------- THIS LETTER FROM THE FUND'S CHAIRMAN IS NOT A PART OF THE ANNUAL REPORT TO SHAREHOLDERS THAT FOLLOWS. 3 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. PORTFOLIO SUMMARY - AS OF DECEMBER 31, 2003 (UNAUDITED) - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. ANNUAL REPORT DECEMBER 31, 2003 - -------------------------------------------------------------------------------- CONTENTS Portfolio Summary ....................................................... 1 Schedule of Investments ................................................. 2 Statement of Assets and Liabilities ..................................... 7 Statement of Operations ................................................. 8 Statement of Changes in Net Assets ...................................... 9 Financial Highlights .................................................... 10 Notes to Financial Statements ........................................... 11 Report of Independent Accountants ....................................... 15 Tax Information ......................................................... 16 Additional Information Regarding the Fund's Directors and Officers ...... 17 Description of Dividend Reinvestment Plan ............................... 20 Summary of General Information .......................................... 22 Shareholder Information ................................................. 22 Privacy Policy Notice ................................................... 23 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. PORTFOLIO SUMMARY - AS OF DECEMBER 31, 2003 (UNAUDITED) - -------------------------------------------------------------------------------- TOP TEN, BY SECTOR Percent of Sector Net Assets - ------ ------------------------------------------------------ ----------- 1. Financials 20.1 - ------ ------------------------------------------------------ ----------- 2. Information Technology 16.9 - ------ ------------------------------------------------------ ----------- 3. Consumer Discretionary 13.0 - ------ ------------------------------------------------------ ----------- 4. Healthcare 12.1 - ------ ------------------------------------------------------ ----------- 5. Industrials 11.2 - ------ ------------------------------------------------------ ----------- 6. Consumer Staples 8.3 - ------ ------------------------------------------------------ ----------- 7. Energy 5.4 - ------ ------------------------------------------------------ ----------- 8. Telecommunication Services 3.1 - ------ ------------------------------------------------------ ----------- 9. Closed-End Domestic Funds 3.0 - ------ ------------------------------------------------------ ----------- 10. Utilities 2.5 - ------ ------------------------------------------------------ ----------- TOP TEN HOLDINGS, BY ISSUER Percent of Holding Sector Net Assets - ----- ------------------------------------------------------------- --------- 1. Microsoft Corp. Information Technology 3.3 - ----- ------------------------------------------------------------- --------- 2. General Electric Co. Industrials 3.3 - ----- ------------------------------------------------------------- --------- 3. Exxon Mobil Corp. Energy 2.9 - ----- ------------------------------------------------------------- --------- 4. Pfizer Inc. Healthcare 2.6 - ----- ------------------------------------------------------------- --------- 5. Citigroup Inc. Financials 2.4 - ----- ------------------------------------------------------------- --------- 6. Tri-Continental Corp. Closed-End Domestic Funds 2.4 - ----- ------------------------------------------------------------- --------- 7. Wal-Mart Stores, Inc. Consumer Discretionary 2.3 - ----- ------------------------------------------------------------- --------- 8. Intel Corp. Information Technology 2.2 - ----- ------------------------------------------------------------- --------- 9. American International Group, Inc. Financials 2.2 - ----- ------------------------------------------------------------- --------- 10. International Business Machines Corp. Information Technology 2.0 - ----- ------------------------------------------------------------- --------- - -------------------------------------------------------------------------------- 1 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS - December 31, 2003 - -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) - -------------------------------------------------------------------------------- EQUITY SECURITIES - 99.07% UNITED STATES - 97.99% CLOSED-END DOMESTIC FUNDS - 2.95% Gabelli Global Multimedia Trust, Inc.+ 9,700 $ 87,979 Tri-Continental Corp. 96,000 1,574,400 Zweig Fund, Inc. 55,300 270,970 ----------- 1,933,349 ----------- CONSUMER DISCRETIONARY - 13.02% Bed Bath & Beyond Inc.+ 2,500 108,375 Best Buy Co., Inc. 2,500 130,600 Carnival Corp. 5,300 210,569 Clear Channel Communications, Inc. 2,700 126,441 Comcast Corp., Class A+ 8,508 279,658 Comcast Corp., Special Class A + 7,500 234,600 Costco Wholesale Corp.+ 4,600 171,028 CVS Corp. 2,500 90,300 Dana Corp. 2,500 45,875 Delphi Corp. 5,100 52,071 Eastman Kodak Co. 2,500 64,175 Federated Department Stores, Inc. 2,500 117,825 Ford Motor Co. 15,200 243,200 Fortune Brands, Inc. 2,500 178,725 Gannett Co., Inc. 2,500 222,900 Gap, Inc. (The) 6,900 160,149 General Motors Corp. 5,000 267,000 Harley-Davidson, Inc. 2,500 118,825 Harrah's Entertainment, Inc. 2,500 124,425 Hilton Hotels Corp. 5,000 85,650 Home Depot, Inc. (The) 17,800 631,722 Kohl's Corp.+ 2,500 112,350 Limited Brands 4,500 81,135 - -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) - -------------------------------------------------------------------------------- CONSUMER DISCRETIONARY (CONTINUED) Lowe's Companies, Inc. 6,200 $ 343,418 Mattel, Inc. 4,500 86,715 May Department Stores Co. (The) 2,500 72,675 McDonald's Corp. 10,600 263,198 Monsanto Co. 1,773 51,027 Office Depot, Inc. + 2,500 41,775 Omnicom Group Inc. 1,500 130,995 Reebok International Ltd. 2,500 98,300 Sears, Roebuck & Co. 2,500 113,725 Staples, Inc.+ 4,600 125,580 Starbucks Corp.+ 2,500 82,650 Target Corp. 7,100 272,640 Time Warner Inc.+ 31,500 566,684 TJX Companies, Inc. (The) 4,000 88,200 Viacom Inc., non-voting Class B 9,000 399,420 Wal-Mart Stores, Inc. 28,900 1,533,145 Walt Disney Co. (The) 14,200 331,286 Yum! Brands, Inc.+ 2,500 86,000 ----------- 8,545,031 ----------- CONSUMER STAPLES - 8.26% Albertson's, Inc. 2,500 56,625 Altria Group, Inc. 13,200 718,344 Anheuser-Busch Companies, Inc. 6,200 326,616 Archer-Daniels-Midland Co. 5,650 85,993 Campbell Soup Co. 3,200 85,760 Coca-Cola Co. (The) 16,000 812,000 Coca-Cola Enterprises Inc. 2,500 54,675 Colgate-Palmolive Co. 5,100 255,255 ConAgra Foods, Inc. 2,500 65,975 General Mills, Inc. 2,500 113,250 Gillette Co. (The) 8,600 315,878 H.J. Heinz Co. 2,700 98,361 Kimberly-Clark Corp. 5,000 295,450 See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 2 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS - December 31, 2003 (CONTINUED) - -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) - -------------------------------------------------------------------------------- CONSUMER STAPLES (CONTINUED) Kroger Co. (The)+ 6,600 $ 122,166 PepsiCo, Inc. 12,600 587,412 Procter & Gamble Co. (The) 7,500 749,100 Safeway Inc.+ 4,900 107,359 Sara Lee Corp. 6,300 136,773 Walgreen Co. 8,100 294,678 Wm. Wrigley Jr. Co. 2,500 140,525 ----------- 5,422,195 ----------- ENERGY - 5.41% Anadarko Petroleum Corp. 2,500 127,525 CenterPoint Energy, Inc. 5,700 55,233 ChevronTexaco Corp. 8,302 717,210 ConocoPhillips 3,669 240,576 El Paso Corp. 2,500 20,475 Exxon Mobil Corp. 46,500 1,906,500 Marathon Oil Corp. 2,500 82,725 Reliant Resources, Inc.+ 4,494 33,076 Schlumberger Ltd. 5,100 279,072 Unocal Corp. 2,500 92,075 ----------- 3,554,467 ----------- FINANCIALS - 20.11% AFLAC Inc. 4,000 144,720 Allstate Corp. (The) 5,200 223,704 American Express Co. 8,600 414,778 American International Group, Inc. 21,331 1,413,819 Bank of America Corp. 10,900 876,687 Bank of New York Co., Inc. (The) 5,900 195,408 Bank One Corp. 9,300 423,987 BB&T Corp. 4,500 173,880 Capital One Financial Corp. 1,000 61,290 Charles Schwab Corp. (The) 10,700 126,688 Citigroup Inc. 32,600 1,582,404 Fannie Mae 5,700 427,842 - -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) - -------------------------------------------------------------------------------- FINANCIALS (CONTINUED) Fifth Third Bancorp 5,100 $ 301,410 Fiserv, Inc.+ 2,500 98,775 FleetBoston Financial Corp. 8,500 371,025 Freddie Mac 5,800 338,256 Goldman Sachs Group, Inc. (The) 3,000 296,190 Hartford Financial Services Group, Inc. (The) 4,600 271,538 HSBC Holdings plc, ADR 2,514 198,153 John Hancock Financial Services, Inc . 3,500 131,250 J.P. Morgan Chase & Co. 14,700 539,931 Lehman Brothers Holdings Inc. 2,500 193,050 Marsh & McLennan Companies, Inc. 4,600 220,294 MBNA Corp. 10,050 249,743 Mellon Financial Corp. 4,800 154,128 Merrill Lynch & Co., Inc. 6,600 387,090 MetLife, Inc. 6,000 202,020 Morgan Stanley 6,200 358,794 National City Corp. 5,300 179,882 Northern Trust Corp. 1,100 51,062 PNC Financial Services Group 1,400 76,622 Principal Financial Group, Inc. 2,500 82,675 Progressive Corp. (The) 2,500 208,975 Prudential Financial, Inc. 5,000 208,850 State Street Corp. 1,600 83,328 SunTrust Banks, Inc. 1,500 107,250 Travelers Property Casualty Corp., Class A 1,731 29,046 Travelers Property Casualty Corp., Class B 3,558 60,379 U.S. Bancorp 12,200 363,316 Wachovia Corp. 8,100 377,379 Washington Mutual, Inc. 7,250 290,870 Wells Fargo & Co. 12,000 706,680 ----------- 13,203,168 ----------- See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS - December 31, 2003 (CONTINUED) - -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) - -------------------------------------------------------------------------------- HEALTHCARE - 12.09% Abbott Laboratories 10,700 $ 498,620 Amgen Inc.+ 8,300 512,940 Baxter International Inc. 5,100 155,652 Becton, Dickinson & Co. 2,500 102,850 Boston Scientific Corp.+ 3,000 110,280 Bristol-Myers Squibb Co. 12,100 346,060 Cardinal Health, Inc. 2,500 152,900 CIGNA Corp. 800 46,000 Eli Lilly & Co. 6,600 464,178 Genzyme Corp.+ 5,000 246,700 Guidant Corp. 2,500 150,500 HCA Inc. 2,600 111,696 Health Management Associates, Inc. 2,500 60,000 HEALTHSOUTH Corp.+ 2,500 11,450 Johnson & Johnson 18,200 940,212 King Pharmaceuticals, Inc.+ 2,500 38,150 McKesson Corp. 2,500 80,400 Medco Health Solutions, Inc.+ 1,531 52,039 Medtronic, Inc. 10,100 490,961 Merck & Co. Inc. 12,700 586,740 Pfizer Inc. 47,460 1,676,762 Schering-Plough Corp. 11,400 198,246 Stryker Corp. 1,000 85,010 Tenet Healthcare Corp.+ 5,000 80,250 UnitedHealth Group Inc. 5,000 290,900 Wyeth 10,500 445,725 ---------- 7,935,221 ---------- INDUSTRIALS - 11.20% 3M Co. 5,000 425,150 Automatic Data Processing, Inc. 4,500 178,245 Boeing Co. (The) 6,700 282,338 Burlington Northern Santa Fe Corp. 5,000 161,750 - -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) - -------------------------------------------------------------------------------- INDUSTRIALS (CONTINUED) Caterpillar Inc. 2,500 $ 207,550 Cendant Corp.+ 7,100 158,117 Concord EFS, Inc.+ 5,000 74,200 CSX Corp. 2,500 89,850 Dover Corp. 3,500 139,125 Emerson Electric Co. 2,000 129,500 FedEx Corp. 2,500 168,750 General Dynamics Corp. 2,500 225,975 General Electric Co. 70,500 2,184,090 Honeywell International Inc. 12,300 411,189 Illinois Tool Works Inc. 2,500 209,775 Lockheed Martin Corp. 5,000 257,000 Masco Corp. 4,600 126,086 Paychex, Inc. 5,000 186,000 Raytheon Co. 2,500 75,100 Southwest Airlines Co. 6,100 98,454 Transocean Inc.+ 2,500 60,025 Tyco International Ltd. 17,600 466,400 United Parcel Service, Inc., Class B 9,000 670,950 United Technologies Corp. 2,200 208,494 Waste Management, Inc. 5,300 156,880 ---------- 7,350,993 ---------- INFORMATION TECHNOLOGY - 16.91% Agere Systems Inc., Class A+ 75 229 Agere Systems Inc., Class B+ 1,851 5,368 Agilent Technologies, Inc.+ 5,000 146,200 Altera Corp.+ 1,200 27,240 Analog Devices, Inc. 5,000 228,250 Apple Computer, Inc.+ 2,500 53,425 Applied Materials, Inc.+ 19,400 435,530 CIENA Corp.+ 1,500 9,960 Cisco Systems, Inc.+ 52,000 1,263,080 See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS - December 31, 2003 (CONTINUED) - -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) - -------------------------------------------------------------------------------- INFORMATION TECHNOLOGY (CONTINUED) Computer Associates International, Inc. 2,700 $ 73,818 Corning Inc.+ 7,500 78,225 Dell Inc.+ 20,200 685,992 eBAY Inc.+ 3,500 226,065 Electronic Data Systems Corp. 7,500 184,050 EMC Corp.+ 8,000 103,360 First Data Corp. 5,000 205,450 Hewlett-Packard Co. 15,842 363,891 Intel Corp. 44,500 1,432,900 International Business Machines Corp. 14,200 1,316,056 JDS Uniphase Corp.+ 9,700 35,405 Linear Technology Corp. 2,500 105,175 Lucent Technologies Inc.+ 7,000 19,880 Maxim Integrated Products, Inc. 2,500 124,500 Micron Technology, Inc.+ 5,500 74,085 Microsoft Corp. 79,800 2,197,692 Motorola, Inc. 16,100 226,527 Oracle Corp.+ 37,600 496,320 PerkinElmer, Inc. 1,500 25,605 QUALCOMM Inc. 3,400 183,362 Sanmina-SCI Corp.+ 4,000 50,440 Siebel Systems, Inc.+ 5,000 69,350 Solectron Corp.+ 5,700 33,687 Sun Microsystems, Inc.+ 24,600 110,454 Texas Instruments Inc. 13,500 396,630 Yahoo! Inc.+ 2,500 112,925 ----------- 11,101,126 ----------- - -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) - -------------------------------------------------------------------------------- MATERIALS - 2.40% Air Products & Chemicals, Inc. 2,500 $ 132,075 Alcan Inc. 1,500 70,425 Alcoa Inc. 6,800 258,400 Dow Chemical Co. (The) 7,200 299,304 E .I. du Pont de Nemours & Co. 5,800 266,162 Georgia-Pacific Corp. 2,500 76,675 International Paper Co. 4,800 206,928 Praxair, Inc. 2,500 95,500 Rohm & Haas Co. 2,500 106,775 Weyerhaeuser Co. 1,000 64,000 ---------- 1,576,244 ---------- TELECOMMUNICATION SERVICES - 3.13% ALLTEL Corp. 2,500 116,450 AT&T Corp. 5,260 106,778 AT&T Wireless Services Inc.+ 15,567 124,380 BellSouth Corp. 12,700 359,410 SBC Communications Inc. 25,600 667,392 Sprint Corp. (FON Group) 4,100 67,322 Verizon Communications Inc. 17,400 610,392 ---------- 2,052,124 ---------- UTILITIES - 2.51% American Electric Power Co., Inc. 5,500 167,805 Dominion Resources, Inc. 5,000 319,150 Duke Energy Corp. 6,600 134,970 Edison International+ 5,000 109,650 Exelon Corp. 2,500 165,900 FirstEnergy Corp. 5,000 176,000 Public Service Enterprise Group Inc. 2,500 109,500 Scottish Power plc, ADR 4,000 108,720 See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 5 - -------------------------------------------------------------------------------- No. of Value Shares (Note A) - -------------------------------------------------------------------------------- UTILITIES (CONTINUED) Southern Co. (The) 5,000 $ 151,250 TXU Corp. 3,700 87,764 Williams Companies, Inc. (The) 2,500 24,550 Xcel Energy, Inc. 5,500 93,390 ---------- 1,648,649 ---------- TOTAL UNITED STATES (cost - $69,451,527) 64,322,567 ---------- CZECH REPUBLIC - 1.08% CONSUMER DISCRETIONARY - 1.08% Bonton AS+# 68,590 118,498 Bonton Book AS+# 68,590 118,498 Bonton Disc AS+# 68,590 118,498 Bonton Film Entertainment AS+# 68,590 118,498 Bonton Music AS+# 68,590 118,498 Bonton Pictures AS+# 68,590 118,498 TOTAL CZECH REPUBLIC (cost - $894,867) 710,988 ---------- TOTAL EQUITY SECURITIES (cost - $70,346,394) 65,033,555 ---------- Principal Amount (000's) --------- SHORT TERM INVESTMENTS - 2.46% REPURCHASE AGREEMENTS - 2.46% Bear, Stearns & Co. Inc. (Agreement dated 12/31/03 to be repurchased at $685,245), 0.85%, 01/02/04 (Note F) $ 685 685,213 - -------------------------------------------------------------------------------- Principal Amount Value Description (000's) (Note A) - -------------------------------------------------------------------------------- REPURCHASE AGREEMENTS (CONTINUED) Bear, Stearns & Co. Inc. (Agreement dated 12/31/03 to be repurchased at $918,434), 1.06%*, 01/02/04 ** (Note E) $ 918 $ 918,380 Bear, Stearns & Co. Inc. (Agreement dated 12/31/03 to be repurchased at $6,729), 0.94%*, 01/02/04 ** (Note E) 7 6,729 ------------ TOTAL SHORT-TERM INVESTMENTS (cost - $1,610,322) 1,610,322 ------------ TOTAL INVESTMENTS - 101.53% (cost - $71,956,716) (Notes A, E, F, G) 66,643,877 ------------ LIABILITIES IN EXCESS OF OTHER ASSETS - (1.53)% (1,002,136) ------------ NET ASSETS - 100.00% $ 65,641,741 ============ - ---------------------------------- + Non-income producing security. # Security fair valued in accordance with procedures established by the Board of Directors. * Stated interest rate, before rebate earned by borrower of securities on loan. ** Represents investment purchased with cash collateral received for securities on loan. ADR American Depositary Receipts. See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 6
- -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 2003 - -------------------------------------------------------------------------------- ASSETS Investments, at value (Cost $71,956,716) (Notes A, E, F, G) $ 66,643,877 Receivables: Dividends 83,355 Interest 886 Prepaid expenses 925 ------------ Total Assets 66,729,043 ------------ LIABILITIES Payables: Upon return of securities loaned (Note E) 925,109 Investment management fees (Note B) 56,678 Other accrued expenses 105,515 ------------ Total Liabilities 1,087,302 ------------ NET ASSETS (applicable to 4,726,629 shares of common stock outstanding) $ 65,641,741 ============ NET ASSET VALUE PER SHARE ($65,641,741 / 4,726,629) $ 13.89 ============ NET ASSETS CONSISTS OF Capital stock, $0.01 par value; 4,726,629 shares issued and outstanding (15,000,000 shares authorized) $ 47,266 Paid-in capital 85,550,471 Accumulated net realized loss on investments (14,643,157) Net unrealized depreciation in value of investments (5,312,839) ------------ Net assets applicable to shares outstanding $ 65,641,741 ============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 7 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2003 - --------------------------------------------------------------------------------
INVESTMENT INCOME Income (Note A): Dividends $ 1,111,106 Interest 14,198 Foreign taxes withheld (152) ------------ Total Investment Income 1,125,152 ------------ Expenses: Investment management fees (Note B) 609,416 Administration fees 60,929 Transfer agent fees 44,409 Legal and audit fees (Note B) 35,147 Directors' fees 33,500 Accounting fees 32,570 Stock exchange listing fees 21,355 Printing 14,360 Custodian fees 11,937 Insurance 7,372 ------------ Total Expenses 870,995 Less: Management fee waivers (Note B) (123,359) Less: Fees paid indirectly (Note B) (16,716) ------------ Net Expenses 730,920 ------------ Net Investment Income 394,232 ------------ NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized loss from investments (403,402) Net change in unrealized depreciation in value of investments 13,990,328 ------------ Net realized and unrealized gain on investments 13,586,926 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 13,981,158 ============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 8 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
For the Years Ended December 31, ---------------------------- 2003 2002 ----------- ------------ INCREASE IN NET ASSETS Operations: Net investment income $ 394,232 $ 397,285 Net realized loss from investments (403,402) (10,666) Net change in unrealized depreciation in value of Investments 13,990,328 (8,144,534) ------------ ------------ Net increase/(decrease) in net assets resulting from operations 13,981,158 (7,757,915) ------------ ------------ Dividends and distributions to shareholders (Notes A, G): Net investment income (394,232) (397,285) Return-of-capital (8,947,881) (4,727,860) ------------ ------------ Total dividends and distributions to shareholders (9,342,113) (5,125,145) ------------ ------------ Capital stock transactions (Note D): Net assets received in conjunction with Merger Agreement (Note A) -- 33,396,970 Proceeds from 68,969 and 47,882 shares newly issued in reinvestment of distributions, respectively 941,371 610,487 Cost of 7,500 and 43,900 shares repurchased, respectively (90,050) (520,502) ------------ ------------ Net increase in net assets resulting from capital stock 851,321 33,486,955 transactions ------------ ------------ Total increase in net assets 5,490,366 20,603,895 ------------ ------------ NET ASSETS Beginning of year 60,151,375 39,547,480 ------------ ------------ End of year $ 65,641,741 $ 60,151,375 ============ ============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 9 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data for each year indicated. This information has been derived from information provided in the financial statements and market price data for the Fund's shares.
- ------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, --------------------------------------------------------- 2003 2002 2001 2000 1999 --------- --------- --------- --------- --------- PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 12.89 $ 18.30 $ 18.28 $ 17.62 $ 18.78 --------- --------- --------- --------- --------- Net investment income 0.08# 0.15# 0.52 1.07 1.03 Net realized and unrealized gain/(loss) on investments 2.91 (3.57) 0.24 0.63 (1.20) --------- --------- --------- --------- --------- Net increase/(decrease) in net assets resulting from operations 2.99 (3.42) 0.76 1.70 (0.17) --------- --------- --------- --------- --------- Dividends and distributions to shareholders: Net investment income (0.08) (0.18) (0.66) (1.05) (1.01) Return-of-capital (1.91) (1.80) (0.09) - - --------- --------- --------- --------- --------- Total dividends and distributions to (1.99) (1.98) (0.75) (1.05) (1.01) shareholders --------- --------- --------- --------- --------- Capital stock transactions: Anti-dilutive effect due to capital stock repurchased -- 0.02 0.01 0.01 0.02 Dilutive effect due to shares ssued in reinvestment of dividends iand distributions -- (0.03) -- -- -- --------- --------- --------- --------- --------- Total capital stock transactions -- (0.01) 0.01 0.01 0.02 --------- --------- --------- --------- --------- Net asset value, end of year $ 13.89 $ 12.89 $ 18.30 $ 18.28 $ 17.62 ========= ========= ========= ========= ========= Market value, end of year $ 17.95 $ 11.35 $ 16.29 $ 15.875 $ 14.250 ========= ========= ========= ========= ========= Total investment return (a) 82.96% (19.30)% 8.91% 19.02% (8.39)% ========= ========= ========= ========= ========= RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000 omitted) $ 65,642 $ 60,151 $ 39,547 $ 39,640 $ 38,283 Ratio of expenses to average net assets, net of fee waivers, if any (b) 1.20% 1.50% 3.01% 1.06% 1.05% Ratio of expenses to average net assets, excluding fee waivers, if any (c) 1.43% 2.07% 3.01% 1.06% 1.05% Ratio of expenses to average net assets, net of fee waivers, if any (c) 1.23% 1.63% 3.01% 1.06% 1.05% Ratio of net investment income to average net assets 0.65% 1.01% 2.77% 5.97% 5.60% Portfolio turnover 3.62% 86.60% - 15.87% 16.09% - -------------------------------------------------------------------------------------------------------------- # Based on average shares outstanding. (a) Total investment return at market value is based on the changes in market price of a share during the year and assumes reinvestment of dividends and distributions, if any, at actual prices pursuant to the Fund's dividend reinvestment plan. Total investment return does not reflect brokerage commissions. (b) Expenses are net of fees paid indirectly. (c) Expenses exclude the reduction for fees paid indirectly.
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 10 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE A. SIGNIFICANT ACCOUNTING POLICIES Cornerstone Total Return Fund, Inc. (the "Fund") was incorporated in New York on March 16, 1973 and commenced investment operations on May 15, 1973. Its investment objective is to seek total return consisting of capital appreciation with current income as a secondary objective. The Fund is registered under the Investment Company Act of 1940, as amended, as a closed-end, diversified management investment company. On October 31, 2002, the Fund (then known as "EIS Fund, Inc.") consummated a merger with The Cornerstone Strategic Return Fund, Inc. (the "Predecessor Fund"). Pursuant to the terms of the agreement governing the merger, each share of common stock of the Predecessor Fund was converted into an equivalent dollar amount of full shares of common stock of the Fund, based on the net asset value of the Fund and the Predecessor Fund as of October 30, 2002 ($13.35 and $7.33, respectively), resulting in a conversion ratio of 0.5490 shares of the Fund for each share of the Predecessor Fund resulting in the issuance of 2,500,087 Fund shares. Cash was paid in lieu of fractional shares. Net assets of the Fund and the Predecessor Fund as of the merger date were $29,172,812 and $33,396,970, including unrealized depreciation of $5,895,432 and $12,013,315, respectively. In addition, the Predecessor Fund's net assets included undistributed capital losses of $14,137,957. Total net assets after the merger were $62,569,782. Upon the consummation of the merger, the Fund changed its name to Cornerstone Total Return Fund, Inc. The following is a summary of significant accounting policies consistently followed by the Fund: MANAGEMENT ESTIMATES: The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") requires management to make certain estimates and assumptions that may affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION: Investments are stated at value in the accompanying financial statements. All equity securities shall be valued at the closing price on the exchange or market on which the security is primarily traded ("Primary Market"). If the security did not trade on the Primary Market, it shall be valued at the closing price on another exchange where it trades. If there are no such sale prices, the value shall be the most recent bid, and if there is no bid, the security shall be valued at the most recent asked. If no pricing service is available and there are more than two dealers, the value shall be the mean of the highest bid and lowest ask. If there is only one dealer, then the value shall be the mean if bid and ask are available, otherwise the value shall be the bid. All other securities and assets are valued as determined in good faith by the Board of Directors. Short-term investments having a maturity of 60 days or less are valued on the basis of amortized cost. The Board of Directors has established general guidelines for calculating fair value of not readily marketable securities. At December 31, 2003, the Fund held 1.08% of its net assets in securities valued in good faith by the Board of Directors with an aggregate cost of $894,867 and a fair value of $710,988. The net asset value per share of the Fund is calculated weekly and on the last business day of the month with the exception of those days on which the American Stock Exchange, LLC is closed. REPURCHASE AGREEMENTS: The Fund has agreed to purchase securities from financial institutions subject to the seller's agreement to repurchase them at an agreed-upon time and price ("repurchase agreements"). The financial institutions with whom the Fund enters into repurchase agreements are banks and broker/dealers, which Cornerstone Advisors, Inc. (the Fund's "Manager" or "Cornerstone") considers creditworthy. The seller under a repurchase agreement will be required to maintain the value of - -------------------------------------------------------------------------------- 11 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- the securities as collateral, subject to the agreement at not less than the repurchase price plus accrued interest. Cornerstone monitors daily the mark-to-market of the value of the collateral, and, if necessary, requires the seller to maintain additional securities, so that the value of the collateral is not less than the repurchase price. Default by or bankruptcy of the seller would, however, expose the Fund to possible loss because of adverse market action or delays in connection with the disposition of the underlying securities. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: Investment transactions are accounted for on the trade date. The cost of investments sold is determined by use of the specific identification method for both financial reporting and income tax purposes. Interest income is recorded on an accrual basis; dividend income is recorded on the ex-dividend date. TAXES: No provision is made for U.S. federal income or excise taxes as it is the Fund's intention to continue to qualify as a regulated investment company and to make the requisite distributions to its shareholders which will be sufficient to relieve it from all or substantially all U.S. federal income and excise taxes. DISTRIBUTIONS OF INCOME AND GAINS: Effective January 2002, the Fund initiated a fixed, monthly distribution to shareholders. To the extent that these distributions exceed the current earnings of the Fund, the balance will be generated from sales of portfolio securities held by the Fund, which will either be short-term or long-term capital gains or a tax-free return-of-capital. Prior thereto, the Fund distributed at least annually to shareholders, substantially all of its net investment income and net realized short-term capital gains, if any. The Fund determines annually whether to distribute any net realized long-term capital gains in excess of net realized short-term capital losses, including capital loss carryovers, if any. An additional distribution may be made to the extent necessary to avoid the payment of a 4% U.S. federal excise tax. Dividends and distributions to shareholders are recorded by the Fund on the ex-dividend date. The character of dividends and distributions made during the year ended December 31, 2003 from net investment income or net realized gains may differ from their ultimate characterization for U.S. income tax purposes due to U.S. generally accepted accounting principles/tax differences in the character of income and expense recognition. NOTE B. AGREEMENTS Cornerstone serves as the Fund's investment manager with respect to all investments. As compensation for its management services, Cornerstone receives from the Fund, an annual fee, calculated weekly and paid monthly, equal to 1.00% of the Fund's average weekly net assets. Cornerstone has voluntarily agreed to waive its management fees from the Fund to the extent that monthly operating expenses exceed 0.10% of average net assets calculated monthly. For the year ended December 31, 2003, Cornerstone earned $609,416 for investment management services, of which it waived $123,359. Effective January 1, 2004, the Manager has voluntarily undertaken to waive its investment management fees to the extent such total operating expenses exceed an annualized rate of 0.125% in a month. The Manager may discontinue such undertaking at any time during the fiscal year without notice to fund shareholders. Included in the Statement of Operations, under the caption FEES PAID INDIRECTLY, are expense offsets of $16,716 arising from credits earned on portfolio transactions executed with a broker, pursuant to directed brokerage arrangement. The Fund paid or accrued approximately $1,328 and $18,429 for the year ended December 31, 2003 for legal services to Blank Rome LLP ("Blank") and Spitzer & Feldman P.C. ("Spitzer"), current and former counsel, respectively, to the Fund. Thomas R. Westle, a current partner of Blank and former partner - -------------------------------------------------------------------------------- 12 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- of Spitzer, serves as secretary of the Fund. At December 31, 2003, pursuant to regulatory filings, affiliates owned approximately 35% of the outstanding shares of the Fund based on a Schedule 13G/A filing with the Securities and Exchange Commission on January 8, 2004. NOTE C. INVESTMENT IN SECURITIES For the year ended December 31, 2003, purchases and sales of securities, other than short-term investments, were $2,172,807 and $10,534,127, respectively. NOTE D. SHARE REPURCHASE PROGRAM Pursuant to Section 23 of the Investment Company Act of 1940, as amended the Fund may in the future purchase shares of its common stock on the open market from time to time, at such times, and in such amounts as may be deemed advantageous to the Fund. Nothing herein shall be considered a commitment to purchase such shares. For the year ended December 31, 2003, the Fund repurchased 7,500 of its shares for a total cost of $ 90,050 at a weighted average discount of 12.01% from net asset value. The discount of the individual repurchases ranged from 11.76% - 12.13%. For the year ended December 31, 2002, the Fund purchased 43,900 shares for a total cost of $520,502 at a weighted average discount of 13.56% from net asset value. The discount of the individual repurchases ranged from 9.87% - 16.26%. No limit has been placed on the number of shares to be purchased by the Fund other than those imposed by federal securities laws. All purchases are made in accordance with federal securities laws, with shares repurchased held in treasury, effective January 1, 2002. NOTE E. SECURITIES LENDING To generate additional income, the Fund may lend up to 33 1/3% of its total assets. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn interest on the investment of cash collateral. Loans are subject to termination by the Fund or the borrower at any time, and are, therefore, not considered to be illiquid investments. Loans of securities are required at all times to be secured by collateral equal to at least 100% of the market value of securities on loan. However, in the event of default or bankruptcy of the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. In the event that the borrower fails to return securities, and collateral maintained by lender is insufficient to cover the value of loaned securities, the borrower is obligated to pay the amount of the shortfall (and interest thereon) to the Fund. However, there can be no assurance the Fund can recover this amount. The value of securities on loan to brokers at December 31, 2003 was $891,462. Any cash collateral received is reinvested into repurchase agreements, which in turn are collateralized by various U.S. Government and Agency securities. These repurchase agreements have been segregated to satisfy the future commitment to return the cash collateral. During the year ended December 31, 2003, the Fund earned $1,466 in securities lending income that is included under the caption INTEREST in the Statement of Operations. NOTE F. COLLATERAL FOR REPURCHASE AGREEMENT Listed below is the collateral associated with the repurchase agreement with Bear, Stearns & Co. Inc. outstanding at December 31, 2003. PRINCIPAL MARKET ISSUER AMOUNT MATURITY VALUE (000'S) United States Treasury Bond, (interest only) $1,260 11/15/15 $707,125 ======== - -------------------------------------------------------------------------------- 13 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONCLUDED) - -------------------------------------------------------------------------------- NOTE G. FEDERAL INCOME TAXES Income and capital gains distributions are determined in accordance with federal income tax regulations, which may differ from GAAP. These differences are primarily due to differing treatments of losses deferred due to wash sales and Post-October losses (as later defined), and excise tax regulations. The tax characteristic of dividends and distributions paid during the year ended December 31, 2003 were ordinary income and return-of-capital of $394,232 and $8,947,881, respectively. At December 31, 2003, the components of distributable earnings on a tax basis, for the Fund were as follows: Capital loss carryforward $(14,569,481) Unrealized depreciation (5,386,515) ------------ Total loss $(19,955,996) ============ Under current tax law, certain capital losses realized after October 31 within a taxable year may be deferred and treated as occurring on the first day of the following tax year ("Post-October losses"). For the tax period ended December 31, 2003, the Fund did not realize any of these losses. At December 31, 2003, the Fund had a capital loss carryforward for U.S. federal income tax purposes of $14,569,481 of which $91,132 expires in 2008, $14,052,643 expires in 2010 and $425,706 expires in 2011. At December 31, 2003, the identified cost for federal income tax purposes, as well as the gross unrealized appreciation from investments for those securities having an excess of value over cost, gross unrealized depreciation from investments for those securities having an excess of cost over value and the net unrealized depreciation from investments were $72,030,392, $3,894,525, $(9,281,040) and $(5,386,515), respectively. At December 31, 2003, the Fund reclassified $8,947,881 from distributions in excess of net investment income to paid-in capital, to adjust for current period permanent book/tax differences. In addition, the Fund reissued 51,400 Treasury shares with a cost of $610,552, such amount was reclassified to paid-in capital. Net assets were not affected by these reclassifications. - -------------------------------------------------------------------------------- 14 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors Cornerstone Total Return Fund, Inc. New York, New York We have audited the accompanying statement of assets and liabilities of Cornerstone Total Return Fund, Inc., including the schedule of investments, as of December 31, 2003, and the related statement of operations for the year then ended, and the statement of changes in net assets and the financial highlights for each of the two years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for each of the three years in the period ended December 31, 2001 have been audited by other auditors, whose report dated February 8, 2002 expressed an unqualified opinion on such financial highlights. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2003 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Cornerstone Total Return Fund, Inc. as of December 31, 2003, the results of its operations for the year then ended, and the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. TAIT, WELLER & BAKER Philadelphia, Pennsylvania February 13, 2004 - -------------------------------------------------------------------------------- 15 TAX INFORMATION (UNAUDITED) Cornerstone Total Return Fund, Inc. (the "Fund") is required by Subchapter M of the Internal Revenue Code of 1986, as amended, to advise its shareholders within 60 days of the Fund's year end (December 31, 2003) as to the U.S. federal tax status of dividends and distributions received by the Fund's shareholders in respect of such fiscal year. During the year ended December 31, 2003, the following dividends and distributions per share were paid by the Fund: PAYMENT DATE: 1/31/03 2/28/03 3/31/03 4/30/03 5/30/03 6/30/03 ------- ------- ------- ------- ------- ------- Ordinary Income: $ 0.007 $ 0.007 $ 0.007 $ 0.007 $ 0.007 $ 0.007 Return-of-Capital: $ 0.158 $ 0.158 $ 0.158 $ 0.158 $ 0.158 $ 0.158 ------- ------- ------- ------- ------- ------- Total: $ 0.165 $ 0.165 $ 0.165 $ 0.165 $ 0.165 $ 0.165 ------- ------- ------- ------- ------- ------- PAYMENT DATE: 7/31/03 8/29/03 9/30/03 10/31/03 11/28/03 12/31/03 ------- ------- ------- -------- -------- -------- Ordinary Income: $ 0.007 $ 0.007 $ 0.007 $ 0.007 $ 0.007 $ 0.007 Return-of-Capital: $ 0.158 $ 0.158 $ 0.158 $ 0.158 $ 0.158 $ 0.169 ------- ------- ------- ------- ------- ------- Total: $ 0.165 $ 0.165 $ 0.165 $ 0.165 $ 0.165 $ 0.176 ------- ------- ------- ------- ------- ------- Ordinary income dividends should be reported as dividend income on Form 1040. To the extent that the distributions represent a return of your investment they are not taxed as ordinary income dividends and are sometimes referred to as nontaxable distributions. A return-of-capital distribution reduces the cost basis of your shares in the Fund. The Fund has met the requirements to pass through all ordinary income as qualified dividends as noted on Box 1B on Form 1099-DIV. Please note that to utilize the lower tax rate for qualifying dividend income shareholders must have held their shares in the Fund for 60 days or more. Foreign shareholders will generally be subject to U.S. withholding tax on the amount of their distribution(s). In general, distributions received by tax-exempt recipients (E.G., IRA's and Keoghs) need not be reported as taxable income for U.S. federal income tax purposes. However, some retirement trusts (E.G., corporate, Keogh and 403(b)(7) plans) may need this information for their annual information reporting. Shareholders are strongly advised to consult their own tax advisers with respect to the tax consequences of their investment in the Fund. - -------------------------------------------------------------------------------- 16 ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND OFFICERS (UNAUDITED)
POSITION(S) PRINCIPAL OCCUPATION POSITION WITH FUND NAME AND ADDRESS (AGE)* HELD WITH FUND OVER LAST 5 YEARS SINCE - -------------------------------- ------------------- -------------------------------------------- -------------------- Ralph W. Bradshaw** (53) Chairman of the President, Cornerstone Advisors, Inc.; 2001 Board of Financial Consultant; Vice President, Deep Directors and Discount Advisors, Inc. (1993-1999); President Previous Director of The Austria Fund, Inc.; Director of Investors First Fund, Inc., Progressive Return Fund, Inc. and Cornerstone Strategic Value Fund, Inc. Thomas H. Lenagh (81) Director Chairman of the Board of Photonics 2002 Products Group; Independent Financial Adviser; Director of Investors First Fund, Inc., Cornerstone Strategic Value Fund, Inc., Progressive Return Fund, Inc., The Adams Express Company and Petroleum and Resources Corporation. Edwin Meese III (72) Director Distinguished Fellow, The Heritage 2002 Foundation, Washington D.C.; Distinguished Visiting Fellow at the Hoover Institution, Stanford University; Distinguished Senior Fellow at the Institute of United States Studies, University of London; Senior Adviser, Revelation L.P.; Formerly U.S. Attorney General under President Ronald Reagan; Director of Investors First Fund, Inc.; Progressive Return Fund, Inc. and Cornerstone Strategic Value Fund, Inc.
- -------------------------------------------------------------------------------- 17 ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND OFFICERS (UNAUDITED) (CONTINUED)
POSITION(S) PRINCIPAL OCCUPATION POSITION WITH FUND NAME AND ADDRESS (AGE)* HELD WITH FUND OVER LAST 5 YEARS SINCE - -------------------------------- ------------------- -------------------------------------------- -------------------- Scott B. Rogers (48) Director Chief Executive Officer, Asheville 2001 Buncombe Community Christian Ministry; President, ABCCM Doctor's Medical Clinic; Director, Faith Partnerships Inc.; Director, A-B Vision Board, Appointee, NC Governor's Commission on Welfare to Work; Chairman and Director, Recycling Unlimited; Director, Interdenominational Ministerial Alliance; Director of Cornerstone Strategic Value Fund, Inc. and Progressive Return Fund, Inc. Andrew A. Strauss (50) Director Attorney and senior member of Strauss & 2001 Associates, P.A., Attorneys, Asheville and Hendersonville, NC; previous President of White Knight Healthcare, Inc. and LMV Leasing, Inc., a wholly owned subsidiary of Xerox Credit Corporation; Director of Investors First Fund, Inc.; Cornerstone Strategic Value Fund, Inc., Progressive Return Fund, Inc., Investors First Fund, Inc., Memorial Mission Hospital Foundation, Deerfield Episcopal Retirement Community and Asheville Symphony. Glenn W. Wilcox, Sr. (72) Director Chairman of the Board and Chief Executive 2001 Officer of Wilcox Travel Agency, Inc.; Director, Champion Industries, Inc.; Chairman of Tower Associates, Inc. (a real estate venture); Director and Chairman of Audit Committee Investors First Fund, Inc.; Director, Wachovia Corp.; Board Trustee Appalachian State University; Director and Chairman of Audit Committee of Cornerstone Strategic Value Fund, Inc. and Progressive Return Fund, Inc.
- -------------------------------------------------------------------------------- 18 ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND OFFICERS (UNAUDITED) (CONCLUDED)
POSITION(S) PRINCIPAL OCCUPATION POSITION WITH FUND NAME AND ADDRESS (AGE)* HELD WITH FUND OVER LAST 5 YEARS SINCE - -------------------------------- ------------------- -------------------------------------------- -------------------- Gary A. Bentz** (47) Director, Vice Chief Financial Officer, Chairman 2001 President and and Shareholder of Cornerstone Advisors, Treasurer Inc.; Previous Director of The Austria Fund, Inc.; Financial Consultant, Certified Public Accountant; Chief Financial Officer of Deep Discount Advisors, Inc. (1993-2000); Director, Vice President and Treasurer of Progressive Return Fund, Inc. and Cornerstone Strategic Value Fund, Inc. Thomas R. Westle (50) Secretary Partner, Blank Rome LLP (October 31, 2001 405 Lexington Avenue 2003-Present), prior thereto Partner, New York, NY 10174 Spitzer & Feldman P.C. (May, 1998-October 30, 2003). - -------------------------------------------------------------------------------- * The mailing address of each Director with respect to the Fund's operation is 383 Madison Ave. 23rd Floor, New York, NY 10179. ** Designates a director who is an "interested person" of the Fund as defined by the Investment Company Act of 1940, as amended. Messrs. Bradshaw and Bentz are interested persons of the Fund by virtue of their current positions with the Investment Manager of the Fund.
- -------------------------------------------------------------------------------- 19 DESCRIPTION OF DIVIDEND REINVESTMENT PLAN (UNAUDITED) Shareholders who have Shares registered directly in their own names automatically participate in the Fund's Dividend Reinvestment Plan (the "Plan"), unless and until an election is made to withdraw from the Plan on behalf of such participating shareholders. Shareholders who do not wish to have distributions automatically reinvested should so notify American Stock Transfer & Trust Co. (the "Agent") at P.O. Box 922, Wall Street Station, New York, NY 10269-0560 or call (877) 248-6416. Under the Plan, all of the Fund's dividends and other distributions to shareholders are reinvested in full and fractional Shares as described below. When the Fund declares an income dividend or a capital gain or other distribution (each, a "Dividend" and collectively, "Dividends"), the Agent, on the shareholders' behalf, will: (i) receive additional authorized shares from the Fund either newly issued or repurchased from shareholders by the Fund and held as treasury stock ("Newly Issued Shares") or, (ii) at the sole discretion of the Board of Directors, be authorized to purchase outstanding shares on the open market, on the American Stock Exchange, LLC or elsewhere, with cash allocated to it by the Fund ("Open Market Purchases"). Shares acquired by the Agent in Open Market Purchases will be allocated to the reinvesting shareholders based on the average cost of such Open Market Purchases. Alternatively, the Agent will allocate Newly Issued Shares to the reinvesting shareholders at a price equal to the average closing price of the Fund over the five trading days preceding the payment date of such dividend. Registered shareholders who acquire their shares through Open Market Purchases and who do not wish to have their Dividends automatically reinvested should so notify the Fund in writing. If a Shareholder has not elected to receive cash Dividends and the Agent does not receive notice of an election to receive cash Dividends prior to the record date of any dividend, the shareholder will automatically receive such Dividends in additional Shares. Participants in the Plan may withdraw from the Plan by providing written notice to the Agent at least 30 days prior to the applicable Dividend payment date. When a participant withdraws from the Plan, or upon termination of the Plan as provided below, certificates for whole shares credited to his/her account under the Plan will, upon request, be issued. Whether or not a participant requests that certificates for whole shares be issued, a cash payment will be made for any fraction of a Share credited to such account. The Agent will maintain all shareholder accounts in the Plan and furnish written confirmations of all transactions in the accounts, including information needed by shareholders for personal and tax records. The Agent will hold shares in the account of each Plan participant in non-certificated form in the name of the participant, and each shareholder's proxy will include those shares purchased pursuant to the Plan. Each participant, nevertheless, has the right to receive certificates for whole shares owned. The Agent will distribute all proxy solicitation materials to participating shareholders. In the case of shareholders, such as banks, brokers or nominees, that hold shares for others who are beneficial owners participating in the Plan, the Agent will administer the Plan on the basis of the number of shares certified from time to time by the record shareholder as representing the total amount of shares registered in the Shareholder's name and held for the account of beneficial owners participating in the Plan. There will be no charge to participants for reinvesting Dividends other than their share of brokerage commissions as discussed below. The Agent's fees for administering the Plan and handling the reinvestment of Dividends will be paid by the Fund. Each participant's account will be charged a pro-rata share of brokerage commissions incurred with respect to the Agent's Open Market Purchases in connection with the reinvestment of Dividends. - -------------------------------------------------------------------------------- 20 DESCRIPTION OF DIVIDEND REINVESTMENT PLAN (UNAUDITED) (CONCLUDED) Brokerage charges for purchasing small amounts of shares for individual accounts through the Plan are expected to be less than the usual brokerage charges for such transactions because the Agent will be purchasing shares for all the participants in blocks and pro-rating the lower commission that may be attainable. The automatic reinvestment of Dividends will not relieve participants of any income tax that may be payable on such Dividends. Participants who receive shares pursuant to the Plan as described above will recognize taxable income in the amount of the fair market value of those shares. In the case of non-U.S. participants whose Dividends are subject to U.S. income tax withholding and in the case of participants subject to 28% federal backup withholding, the Agent will reinvest Dividends after deduction of the amount required to be withheld. The Fund reserves the right to amend or terminate the Plan by written notice to participants. All correspondence concerning the Plan should be directed to the Agent at the address referred to in the first paragraph of this section. - -------------------------------------------------------------------------------- 21 SUMMARY OF GENERAL INFORMATION The Fund - Cornerstone Total Return Fund, Inc. is a closed-end, diversified investment company whose shares trade on the American Stock Exchange, LLC. Its investment objective is to seek total return, consisting of capital appreciation and current income by investing primarily all of its assets in equity securities of U.S. and non-U.S. issuers whose securities trade on a U.S. securities exchange or over the counter or as American Depositary Receipts or other forms of depositary receipts which trade in the United States. The Fund is managed by Cornerstone Advisors, Inc. SHAREHOLDER INFORMATION Effective February 21, 2003, the Fund is listed on the American Stock Exchange, LLC (symbol "CRF"). The share price is published in: THE NEW YORK TIMES (daily) under the designation "Cnrstn TR" and THE WALL STREET JOURNAL (daily) and BARRON'S (each Monday) under the designation "CornstnTtlRtn." The net asset value per share is available weekly and may be obtained by contacting the Fund at the general inquiry phone number. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 22 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. - -------------------------------------------------------------------------------- 23 CORNERSTONE TOTAL RETURN FUND, INC. DIRECTORS AND CORPORATE OFFICERS Ralph W. Bradshaw Chairman of the Board of Directors and President Gary A. Bentz Director, Vice President and Treasurer Thomas H. Lenagh Director Edwin Meese III Director Scott B. Rogers Director Andrew A. Strauss Director Glenn W. Wilcox, Sr. Director Thomas R. Westle Secretary STOCK TRANSFER AGENT AND INVESTMENT MANAGER REGISTRAR Cornerstone Advisors, American Stock Transfer Inc. & Trust One West Pack Square Co. Suite 1650 59 Maiden Lane Asheville, NC 28801 New York, NY 10038 ADMINISTRATOR INDEPENDENT ACCOUNTANTS Bear Stearns Funds Tait, Weller & Baker Management Inc. 1818 Market Street 383 Madison Avenue Suite 2400 New York, NY 10179 Philadelphia, PA 19103 CUSTODIAN LEGAL COUNSEL Custodial Trust Company Blank Rome LLP 101 Carnegie Center 405 Lexington Avenue Princeton, NJ 08540 New York, NY 10174 EXECUTIVE OFFICES 383 Madison Avenue New York, NY 10179 For shareholder inquiries, registered shareholders should call (800) 937-5449. For general inquiries, please call (212) 272-3550. ITEM 2. CODE OF ETHICS. (a) Disclose whether, as of the end of the period covered by the report, the registrant has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, explain why it has not done so. THE REGISTRANT HAS ADOPTED A CODE OF ETHICS APPLICABLE TO ITS APPLICABLE TO ITS CHIEF EXECUTIVE OFFICER, PRESIDENT, CHIEF FINANCIAL OFFICER, OR PERSONS PERFORMING SIMILAR FUNCTIONS. A COPY OF THE CODE IS FILED AS EXHIBIT 10(A)(1) TO THIS FORM. THERE WERE NO AMENDMENTS TO THE CODE DURING THE YEAR ENDED DECEMBER 31, 2003. THERE WERE NO WAIVERS OR IMPLICIT WAIVERS FROM THE CODE GRANTED BY THE REGISTRANT DURING THE YEAR ENDED DECEMBER 31, 2003. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a) (1) Disclose that the registrant's board of directors has determined that the registrant either: SEC 2569 (10-03) (i) Has at least one audit committee financial expert serving on its audit committee; or (ii) Does not have an audit committee financial expert serving on its audit committee. (2) If the registrant provides the disclosure required by paragraph (a)(1)(i) of this Item, it must disclose the name of the audit committee financial expert and whether that person is "independent." In order to be considered "independent" for purposes of this Item, a member of an audit committee may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (i) Accept directly or indirectly any consulting, advisory, or other compensatory fee from the issuer; or (ii) Be an "interested person" of the investment company as defined in Section 2(a)(19) of the Act (15 U.S.C. 80a- 2(a)(19)). (3) If the registrant provides the disclosure required by paragraph (a)(1)(ii) of this Item, it must explain why it does not have an audit committee financial expert. THE REGISTRANT'S BOARD OF DIRECTORS HAS DETERMINED THAT IT DOES NOT HAVE AN AUDIT COMMITTEE FINANCIAL EXPERT SERVING ON ITS AUDIT COMMITTEE. AT THIS TIME, THE REGISTRANT BELIEVES THAT THE EXPERIENCE PROVIDED BY EACH MEMBER OF THE AUDIT COMMITTEE TOGETHER OFFER THE REGISTRANT ADEQUATE OVERSIGHT FOR THE REGISTRANT'S LEVEL OF FINANCIAL COMPLEXITY. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Disclose, under the caption AUDIT FEES, the aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. THE AGGREGATE FEES BILLED FOR PROFESSIONAL SERVICES RENDERED BY ITS INDEPENDENT ACCOUNTANTS, TAIT WELLER & BAKER, FOR THE AUDITS OF THE REGISTRANT'S ANNUAL AND SEMI-ANNUAL FINANCIAL STATEMENTS FOR 2003 AND 2002 WERE $11,000 FOR EACH OF THE TWO YEARS. (b) Disclose, under the caption AUDIT-RELATED FEES, the aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item. Registrants shall describe the nature of the services comprising the fees disclosed under this category. THERE WERE NO AUDIT-RELATED FEES IN 2003 AND 2002. (c) Disclose, under the caption TAX FEES, the aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. Registrants shall describe the nature of the services comprising the fees disclosed under this category. THE AGGREGATE FEES BILLED TO REGISTRANT FOR PROFESSIONAL SERVICES RENDERED BY TAIT, WELLER & BAKER FOR THE REVIEW OF REGISTRANTS EXCISE TAX CALCULATIONS AND PREPARATIONS OF FEDERAL, STATE AND EXCISE TAX RETURNS FOR 2003 AND 2002 WERE $2,000 FOR EACH YEAR OF THE TWO YEARS. (d) Disclose, under the caption ALL OTHER FEES, the aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item. THE AGGREGATE FEES BILLED TO REGISTRANT BY TAIT, WELLER & BAKER LLP OTHER THAN FOR THE SERVICES REFERENCED ABOVE FOR 2003 WAS $0 AND FOR 2002 WAS $2,500, WHICH RELATED TO PROPOSED MERGER-RELATED WORK. IN ADDITION, PRICEWATERHOUSECOOPERS LLP WAS PAID $3,850 FOR MERGER-RELATED WORK COMPLETED IN 2002. (e) (1) Disclose the audit committee's pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. PURSUANT TO ITS CHARTER, THE REGISTRANT'S AUDIT COMMITTEE PRE-APPROVES ALL AUDIT SERVICES PROVIDED BY THE REGISTRANT'S PRINCIPAL ACCOUNTANT FOR THE REGISTRANT AND ALL PERMISSIBLE NON-AUDIT SERVICES PROVIDED BY THE REGISTRANT'S PRINCIPAL 2 ACCOUNTANT FOR THE REGISTRANT, ITS INVESTMENT ADVISER AND ANY ENTITY CONTROLLING, CONTROLLED BY, OR UNDER COMMON CONTROL WITH THE INVESTMENT ADVISER ("ADVISER AFFILIATE") THAT PROVIDES ONGOING SERVICES TO THE FUND, IF THE ENGAGEMENT BY THE INVESTMENT ADVISER OR ADVISER AFFILIATE RELATES DIRECTLY TO THE OPERATIONS AND FINANCIAL REPORTING OF THE REGISTRANT. (2) Disclose the percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. NO SERVICES INCLUDED IN (B) - (D) ABOVE WERE APPROVED PURSUANT TO PARAGRAPH (C)(7)(I)(C) OF RULE 2-01 OF REGULATION S-X. (f) If greater than 50 percent, disclose the percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees. NOT APPLICABLE. (g) Disclose the aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant. THE AGGREGATE FEES BILLED FOR THE MOST RECENT FISCAL YEAR AND THE PRECEDING FISCAL YEAR BY THE REGISTRANT'S PRINCIPAL ACCOUNTANT FOR NON-AUDIT SERVICES RENDERED TO THE REGISTRANT, ITS INVESTMENT ADVISER, AND ADVISER AFFILIATE THAT PROVIDES ONGOING SERVICES TO THE REGISTRANT WERE $2,000 AND $4,500, RESPECTIVELY. IN ADDITION, PRICEWATERHOUSECOOPERS LLP WAS PAID $3,850 FOR MERGER-RELATED WORK COMPLETED IN 2002. SUCH AMOUNTS RELATE SOLELY TO THE AMOUNTS PREVIOUSLY DISCLOSED IN ITEM 4(C) -(D). (h) Disclose whether the registrant's audit committee of the board of directors has considered whether the provision of nonaudit services that were rendered to the registrant's investment adviser (not including any subadviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. ALL NON-AUDIT SERVICES RENDERED IN (G) ABOVE WERE PRE-APPROVED BY THE REGISTRANT'S AUDIT COMMITTEE. TAIT, WELLER & BAKER DID NOT PROVIDE ANY NON-AUDIT RELATED SERVICES TO THE REGISTRANT'S INVESTMENT ADVISER, OR ANY ENTITY CONTROLLING, CONTROLLED OR UNDER COMMON CONTROL WITH THE INVESTMENT ADVISER. ITEMS 5. Audit Committee of Listed Registrants - If the registrant is a listed issuer as defined in Rule 10A-3 under the Exchange Act (17CRF 240.10A-3) state whether or not the registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)A of the Exchange Act (15 U.S.C. 78c(a)(A)). If the registrant has such a committee, however designated, identify each committee member. If the entire board of directors is acting as the registrant's audit committee as specified in Section 3(a)(58)(B) of the Exchange Act (15U.S.C. 78c(a)(58)(B), so state. THE MEMBERS OF THE AUDIT COMMITTEE ARE GLENN W. WILCOX, SR., THOMAS H. LENAGH, EDWIN MEESE III, SCOTT B. ROGERS AND ANDREW A. STRAUSS. ITEM 6. [RESERVED] ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. ISS Proxy Voting Guidelines Summary The following is a condensed version of all proxy voting recommendations contained in The ISS Proxy Voting Manual. 1. Operational Items ADJOURN MEETING Generally vote AGAINST proposals to provide management with the authority to adjourn an annual or special meeting absent compelling reasons to support the proposal. AMEND QUORUM REQUIREMENTS Vote AGAINST proposals to reduce quorum requirements 3 for shareholder meetings below a majority of the shares outstanding unless there are compelling reasons to support the proposal. AMEND MINOR BYLAWS Vote FOR bylaw or charter changes that are of a housekeeping nature (updates or corrections). CHANGE COMPANY NAME Vote FOR proposals to change the corporate name. CHANGE DATE, TIME, OR LOCATION OF ANNUAL MEETING Vote FOR management proposals to change the date/time/location of the annual meeting unless the proposed change is unreasonable. Vote AGAINST shareholder proposals to change the date/time/location of the annual meeting unless the current scheduling or location is unreasonable. RATIFYING AUDITORS Vote FOR proposals to ratify auditors, unless any of the following apply: An auditor has a financial interest in or association with the company, and is therefore not independent Fees for non-audit services are excessive, or There is reason to believe that the independent auditor has rendered an opinion which is neither accurate nor indicative of the company's financial position. Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services. Vote FOR shareholder proposals asking for audit firm rotation, unless the rotation period is so short (less than five years) that it would be unduly burdensome to the company. Transact Other Business Vote AGAINST proposals to approve other business when it appears as voting item. 2. Board of Directors Voting on Director Nominees in Uncontested Elections Votes on director nominees should be made on a CASE-BY-CASE basis, examining the following factors: composition of the board and key board committees, attendance at board meetings, corporate governance provisions and takeover activity, long-term company performance relative to a market index, directors' investment in the company, whether the chairman is also serving as CEO, and whether a retired CEO sits on the board. However, there are some actions by directors that should result in votes being withheld. These instances include directors who: Attend less than 75 percent of the board and committee meetings without a valid excuse Implement or renew a dead-hand or modified dead-hand poison pill Ignore a shareholder proposal that is approved by a majority of the shares outstanding Ignore a shareholder proposal that is approved by a majority of the votes cast for two consecutive years Failed to act on takeover offers where the majority of the shareholders tendered their shares Are inside directors or affiliated outsiders and sit on the audit, compensation, or nominating committees Are inside directors or affiliated outsiders and the full board serves as the audit, compensation, or nominating committee or the company does not have one of these committees Are audit committee members and the non-audit fees paid to the auditor are excessive. In addition, directors who enacted egregious corporate governance policies or failed to replace management as appropriate would be subject to recommendations to withhold votes. AGE LIMITS Vote AGAINST shareholder proposals to impose a mandatory retirement age for outside directors. Board Size Vote FOR proposals seeking to fix the board size or designate a range for the board size. Vote AGAINST proposals that give management the ability to alter the size of the board outside of a specified range without shareholder approval. 4 CLASSIFICATION/DECLASSIFICATION OF THE BOARD Vote AGAINST proposals to classify the board. Vote FOR proposals to repeal classified boards and to elect all directors annually. CUMULATIVE VOTING Vote AGAINST proposals to eliminate cumulative voting. Vote proposals to restore or permit cumulative voting on a CASE-BY-CASE basis relative to the company's other governance provisions. DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY PROTECTION Proposals on director and officer indemnification and liability protection should be evaluated on a CASE-BY-CASE basis, using Delaware law as the standard. Vote AGAINST proposals to eliminate entirely directors' and officers' liability for monetary damages for violating the duty of care. Vote AGAINST indemnification proposals that would expand coverage beyond just legal expenses to acts, such as negligence, that are more serious violations of fiduciary obligation than mere carelessness. Vote FOR only those proposals providing such expanded coverage in cases when a director's or officer's legal defense was unsuccessful if both of the following apply: The director was found to have acted in good faith and in a manner that he reasonably believed was in the best interests of the company, and Only if the director's legal expenses would be covered. ESTABLISH/AMEND NOMINEE QUALIFICATIONS Vote CASE-BY-CASE on proposals that establish or amend director qualifications. Votes should be based on how reasonable the criteria are and to what degree they may preclude dissident nominees from joining the board. Vote AGAINST shareholder proposals requiring two candidates per board seat. FILLING VACANCIES/REMOVAL OF DIRECTORS Vote AGAINST proposals that provide that directors may be removed only for cause. Vote FOR proposals to restore shareholder ability to remove directors with or without cause. Vote AGAINST proposals that provide that only continuing directors may elect replacements to fill board vacancies. Vote FOR proposals that permit shareholders to elect directors to fill board vacancies. INDEPENDENT CHAIRMAN (SEPARATE CHAIRMAN/CEO) Vote on a CASE-BY-CASE basis shareholder proposals requiring that the positions of chairman and CEO be held separately. Because some companies have governance structures in place that counterbalance a combined position, the following factors should be taken into account in determining whether the proposal warrants support: Designated lead director appointed from the ranks of the independent board members with clearly delineated duties Majority of independent directors on board All-independent key committees Committee chairpersons nominated by the independent directors CEO performance reviewed annually by a committee of outside directors Established governance guidelines Company performance. MAJORITY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF COMMITTEES Vote FOR shareholder proposals asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by ISS's definition of independence. Vote FOR shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors if they currently do not meet that standard. 5 STOCK OWNERSHIP REQUIREMENTS Generally vote AGAINST shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to remain on the board. While ISS favors stock ownership on the part of directors, the company should determine the appropriate ownership requirement. TERM LIMITS Vote AGAINST shareholder proposals to limit the tenure of outside directors. 3. PROXY CONTESTS VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS Votes in a contested election of directors must be evaluated on a CASE-BY-CASE basis, considering the following factors: Long-term financial performance of the target company relative to its industry; management's track record Background to the proxy contest Qualifications of director nominees (both slates) Evaluation of what each side is offering shareholders as well as the likelihood that the proposed objectives and goals can be met; and stock ownership positions. REIMBURSING PROXY SOLICITATION EXPENSES Voting to reimburse proxy solicitation expenses should be analyzed on a CASE-BY-CASE basis. In cases where ISS recommends in favor of the dissidents, we also recommend voting for reimbursing proxy solicitation expenses. CONFIDENTIAL VOTING Vote FOR shareholder proposals requesting that corporations adopt confidential voting, use independent vote tabulators and use independent inspectors of election, as long as the proposal includes a provision for proxy contests as follows: In the case of a contested election, management should be permitted to request that the dissident group honor its confidential voting policy. If the dissidents agree, the policy remains in place. If the dissidents will not agree, the confidential voting policy is waived. Vote FOR management proposals to adopt confidential voting. 4. ANTITAKEOVER DEFENSES AND VOTING RELATED ISSUES ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS/NOMINATIONS Votes on advance notice proposals are determined on a CASE-BY-CASE basis, giving support to those proposals which allow shareholders to submit proposals as close to the meeting date as reasonably possible and within the broadest window possible. AMEND BYLAWS WITHOUT SHAREHOLDER CONSENT Vote AGAINST proposals giving the board exclusive authority to amend the bylaws. Vote FOR proposals giving the board the ability to amend the bylaws in addition to shareholders. POISON PILLS Vote FOR shareholder proposals that ask a company to submit its poison pill for shareholder ratification. Review on a CASE-BY-CASE basis shareholder proposals to redeem a company's poison pill. Review on a CASE-BY-CASE basis management proposals to ratify a poison pill. SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT Vote AGAINST proposals to restrict or prohibit shareholder ability to take action by written consent. Vote FOR proposals to allow or make easier shareholder action by written consent. SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS Vote AGAINST proposals to restrict or prohibit shareholder ability to call special meetings. Vote FOR proposals that remove restrictions on the right of shareholders to act independently of management. SUPERMAJORITY VOTE REQUIREMENTS Vote AGAINST proposals to require a supermajority shareholder vote. Vote FOR proposals to lower supermajority vote requirements. 6 5. MERGERS AND CORPORATE RESTRUCTURINGS APPRAISAL RIGHTS Vote FOR proposals to restore, or provide shareholders with, rights of appraisal. ASSET PURCHASES Vote CASE-BY-CASE on asset purchase proposals, considering the following factors: Purchase price Fairness opinion Financial and strategic benefits How the deal was negotiated Conflicts of interest Other alternatives for the business Noncompletion risk. ASSET SALES Votes on asset sales should be determined on a CASE-BY-CASE basis, considering the following factors: Impact on the balance sheet/working capital Potential elimination of diseconomies Anticipated financial and operating benefits Anticipated use of funds Value received for the asset Fairness opinion How the deal was negotiated Conflicts of interest. BUNDLED PROPOSALS Review on a CASE-BY-CASE basis bundled or "conditioned" proxy proposals. In the case of items that are conditioned upon each other, examine the benefits and costs of the packaged items. In instances when the joint effect of the conditioned items is not in shareholders' best interests, vote against the proposals. If the combined effect is positive, support such proposals. CONVERSION OF SECURITIES Votes on proposals regarding conversion of securities are determined on a CASE-BY-CASE basis. When evaluating these proposals the investor should review the dilution to existing shareholders, the conversion price relative to market value, financial issues, control issues, termination penalties, and conflicts of interest. Vote FOR the conversion if it is expected that the company will be subject to onerous penalties or will be forced to file for bankruptcy if the transaction is not approved. CORPORATE REORGANIZATION/DEBT RESTRUCTURING/PREPACKAGED BANKRUPTCY PLANS/REVERSE LEVERAGED BUYOUTS/WRAP PLANS Votes on proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan are determined on a CASE-BY-CASE basis, taking into consideration the following: Dilution to existing shareholders' position Terms of the offer Financial issues Management's efforts to pursue other alternatives Control issues Conflicts of interest. Vote FOR the debt restructuring if it is expected that the company will file for bankruptcy if the transaction is not approved. FORMATION OF HOLDING COMPANY Votes on proposals regarding the formation of a holding company should be determined on a CASE-BY-CASE basis, taking into consideration the following: The reasons for the change Any financial or tax benefits Regulatory benefits increases in capital structure Changes to the articles of incorporation or bylaws of the company. 7 Absent compelling financial reasons to recommend the transaction, vote AGAINST the formation of a holding company if the transaction would include either of the following: Increases in common or preferred stock in excess of the allowable maximum as calculated by the ISS Capital Structure model Adverse changes in shareholder rights GOING PRIVATE TRANSACTIONS (LBOS AND MINORITY SQUEEZEOUTS) Vote going private transactions on a CASE-BY-CASE basis, taking into account the following: offer price/premium, fairness opinion, how the deal was negotiated, conflicts of interest, other alternatives/offers considered, and noncompletion risk. JOINT VENTURES Votes CASE-BY-CASE on proposals to form joint ventures, taking into account the following: percentage of assets/business contributed, percentage ownership, financial and strategic benefits, governance structure, conflicts of interest, other alternatives, and noncompletion risk. LIQUIDATIONS Votes on liquidations should be made on a CASE-BY-CASE basis after reviewing management's efforts to pursue other alternatives, appraisal value of assets, and the compensation plan for executives managing the liquidation. Vote FOR the liquidation if the company will file for bankruptcy if the proposal is not approved. MERGERS AND ACQUISITIONS/ ISSUANCE OF SHARES TO FACILITATE MERGER OR ACQUISITION Votes on mergers and acquisitions should be considered on a CASE-BY-CASE basis, determining whether the transaction enhances shareholder value by giving consideration to the following: Prospects of the combined company, anticipated financial and operating benefits Offer price Fairness opinion How the deal was negotiated Changes in corporate governance Change in the capital structure Conflicts of interest. PRIVATE PLACEMENTS/WARRANTS/CONVERTIBLE DEBENTURES Votes on proposals regarding private placements should be determined on a CASE-BY-CASE basis. When evaluating these proposals the investor should review: dilution to existing shareholders' position, terms of the offer, financial issues, management's efforts to pursue other alternatives, control issues, and conflicts of interest. Vote FOR the private placement if it is expected that the company will file for bankruptcy if the transaction is not approved. SPINOFFS Votes on spinoffs should be considered on a CASE-BY-CASE basis depending on: Tax and regulatory advantages Planned use of the sale proceeds Valuation of spinoff Fairness opinion Benefits to the parent company Conflicts of interest Managerial incentives Corporate governance changes Changes in the capital structure. VALUE MAXIMIZATION PROPOSALS Vote CASE-BY-CASE on shareholder proposals seeking to maximize shareholder value by hiring a financial advisor to explore strategic alternatives, selling the company or liquidating the company and distributing the proceeds to shareholders. These proposals should be evaluated based on the following factors: prolonged poor performance with no turnaround in sight, signs of entrenched board and management, strategic plan in place for improving value, likelihood of receiving reasonable value in a sale or dissolution, and whether company is actively exploring its strategic options, including retaining a financial advisor. 8 6. STATE OF INCORPORATION CONTROL SHARE ACQUISITION PROVISIONS Vote FOR proposals to opt out of control share acquisition statutes unless doing so would enable the completion of a takeover that would be detrimental to shareholders. Vote AGAINST proposals to amend the charter to include control share acquisition provisions. Vote FOR proposals to restore voting rights to the control shares. CONTROL SHARE CASHOUT PROVISIONS Vote FOR proposals to opt out of control share cashout statutes. DISGORGEMENT PROVISIONS Vote FOR proposals to opt out of state disgorgement provisions. FAIR PRICE PROVISIONS Vote proposals to adopt fair price provisions on a CASE-BY-CASE basis, evaluating factors such as the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and the mechanism for determining the fair price. Generally, vote AGAINST fair price provisions with shareholder vote requirements greater than a majority of disinterested shares. FREEZEOUT PROVISIONS Vote FOR proposals to opt out of state freezeout provisions. GREENMAIL Vote FOR proposals to adopt antigreenmail charter of bylaw amendments or otherwise restrict a company's ability to make greenmail payments. Review on a CASE-BY-CASE basis antigreenmail proposals when they are bundled with other charter or bylaw amendments. REINCORPORATION PROPOSALS Proposals to change a company's state of incorporation should be evaluated on a CASE-BY-CASE basis, giving consideration to both financial and corporate governance concerns, including the reasons for reincorporating, a comparison of the governance provisions, and a comparison of the jurisdictional laws. Vote FOR reincorporation when the economic factors outweigh any neutral or negative governance changes. STAKEHOLDER PROVISIONS Vote AGAINST proposals that ask the board to consider nonshareholder constituencies or other nonfinancial effects when evaluating a merger or business combination. STATE ANTITAKEOVER STATUTES Review on a CASE-BY-CASE basis proposals to opt in or out of state takeover statutes (including control share acquisition statutes, control share cash-out statutes, freezeout provisions, fair price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, antigreenmail provisions, and disgorgement provisions). 7. CAPITAL STRUCTURE ADJUSTMENTS TO PAR VALUE OF COMMON STOCK Vote FOR management proposals to reduce the par value of common stock. Common Stock Authorization Votes on proposals to increase the number of shares of common stock authorized for issuance are determined on a CASE-BY-CASE basis using a model developed by ISS. Vote AGAINST proposals at companies with dual-class capital structures to increase the number of authorized shares of the class of stock that has superior voting rights. Vote FOR proposals to approve increases beyond the allowable increase when a company's shares are in danger of being delisted or if a company's ability to continue to operate as a going concern is uncertain. DUAL-CLASS STOCK Vote AGAINST proposals to create a new class of common stock with superior voting rights. Vote FOR proposals to create a new class of nonvoting or subvoting common stock if: It is intended for financing purposes with minimal or no dilution to current shareholders It is not designed to preserve the voting power of an insider or significant shareholder ISSUE STOCK FOR USE WITH RIGHTS PLAN Vote AGAINST proposals that increase authorized common stock for the explicit purpose of implementing a shareholder rights plan (poison pill). 9 PREEMPTIVE RIGHTS Review on a CASE-BY-CASE basis shareholder proposals that seek preemptive rights. In evaluating proposals on preemptive rights, consider the size of a company, the characteristics of its shareholder base, and the liquidity of the stock. PREFERRED STOCK Vote AGAINST proposals authorizing the creation of new classes of preferred stock with unspecified voting, conversion, dividend distribution, and other rights ("blank check" preferred stock). Vote FOR proposals to create "declawed" blank check preferred stock (stock that cannot be used as a takeover defense). Vote FOR proposals to authorize preferred stock in cases where the company specifies the voting, dividend, conversion, and other rights of such stock and the terms of the preferred stock appear reasonable. Vote AGAINST proposals to increase the number of blank check preferred stock authorized for issuance when no shares have been issued or reserved for a specific purpose. Vote CASE-BY-CASE on proposals to increase the number of blank check preferred shares after analyzing the number of preferred shares available for issue given a company's industry and performance in terms of shareholder returns. RECAPITALIZATION Votes CASE-BY-CASE on recapitalizations (reclassifications of securities), taking into account the following: more simplified capital structure, enhanced liquidity, fairness of conversion terms, impact on voting power and dividends, reasons for the reclassification, conflicts of interest, and other alternatives considered. REVERSE STOCK SPLITS Vote FOR management proposals to implement a reverse stock split when the number of authorized shares will be proportionately reduced. Vote FOR management proposals to implement a reverse stock split to avoid delisting. Votes on proposals to implement a reverse stock split that do not proportionately reduce the number of shares authorized for issue should be determined on a CASE-BY-CASE basis using a model developed by ISS. SHARE REPURCHASE PROGRAMS Vote FOR management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms. STOCK DISTRIBUTIONS: SPLITS AND DIVIDENDS Vote FOR management proposals to increase the common share authorization for a stock split or share dividend, provided that the increase in authorized shares would not result in an excessive number of shares available for issuance as determined using a model developed by ISS. TRACKING STOCK Votes on the creation of tracking stock are determined on a CASE-BY-CASE basis, weighing the strategic value of the transaction against such factors as: adverse governance changes, excessive increases in authorized capital stock, unfair method of distribution, diminution of voting rights, adverse conversion features, negative impact on stock option plans, and other alternatives such as spinoff. 8. EXECUTIVE AND DIRECTOR COMPENSATION Votes with respect to compensation plans should be determined on a CASE-BY-CASE basis. Our methodology for reviewing compensation plans primarily focuses on the transfer of shareholder wealth (the dollar cost of pay plans to shareholders instead of simply focusing on voting power dilution). Using the expanded compensation data disclosed under the SEC's rules, ISS will value every award type. ISS will include in its analyses an estimated dollar cost for the proposed plan and all continuing plans. This cost, dilution to shareholders' equity, will also be expressed as a percentage figure for the transfer of shareholder wealth, and will be considered long with dilution to voting power. Cash compensation, and Categorization of the company as emerging, growth, or mature. These adjustments are pegged to market capitalization. ISS will continue to examine other features of proposed pay plans such as administration, payment terms, plan duration, and whether the administering committee is permitted to reprice underwater stock options without shareholder approval. 10 DIRECTOR COMPENSATION Votes on compensation plans for directors are determined on a CASE-BY-CASE basis, using a proprietary, quantitative model developed by ISS. STOCK PLANS IN LIEU OF CASH Votes for plans which provide participants with the option of taking all or a portion of their cash compensation in the form of stock are determined on a CASE-BY-CASE basis. Vote FOR plans which provide a dollar-for-dollar cash for stock exchange. Votes for plans which do not provide a dollar-for-dollar cash for stock exchange should be determined on a CASE-BY-CASE basis using a proprietary, quantitative model developed by ISS. DIRECTOR RETIREMENT PLANS Vote AGAINST retirement plans for nonemployee directors. Vote FOR shareholder proposals to eliminate retirement plans for nonemployee directors. MANAGEMENT PROPOSALS SEEKING APPROVAL TO REPRICE OPTIONS Votes on management proposals seeking approval to reprice options are evaluated on a CASE-BY-CASE basis giving consideration to the following: Historic trading patterns Rationale for the repricing Value-for-value exchange Option vesting Term of the option Exercise price Participation EMPLOYEE STOCK PURCHASE PLANS Votes on employee stock purchase plans should be determined on a CASE-BY-CASE basis. Vote FOR employee stock purchase plans where all of the following apply: Purchase price is at least 85 percent of fair market value Offering period is 27 months or less, and Potential voting power dilution (VPD) is ten percent or less. Vote AGAINST employee stock purchase plans where any of the following apply: Purchase price is less than 85 percent of fair market value, or Offering period is greater than 27 months, or VPD is greater than ten percent INCENTIVE BONUS PLANS AND TAX DEDUCTIBILITY PROPOSALS (OBRA-RELATED COMPENSATION PROPOSALS) Vote FOR proposals that simply amend shareholder-approved compensation plans to include administrative features or place a cap on the annual grants any one participant may receive to comply with the provisions of Section 162(m). Vote FOR proposals to add performance goals to existing compensation plans to comply with the provisions of Section 162(m) unless they are clearly inappropriate. Votes to amend existing plans to increase shares reserved and to qualify for favorable tax treatment under the provisions of Section 162(m) should be considered on a CASE-BY-CASE basis using a proprietary, quantitative model developed by ISS. Generally vote FOR cash or cash and stock bonus plans that are submitted to shareholders for the purpose of exempting compensation from taxes under the provisions of Section 162(m) if no increase in shares is requested. EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS) Vote FOR proposals to implement an ESOP or increase authorized shares for existing ESOPs, unless the number of shares allocated to the ESOP is excessive (more than five percent of outstanding shares.) is 401(K) EMPLOYEE BENEFIT PLANS Vote FOR proposals to implement a 401(k) savings plan for employees. 11 SHAREHOLDER PROPOSALS REGARDING EXECUTIVE AND DIRECTOR PAY Generally, vote FOR shareholder proposals seeking additional disclosure of executive and director pay information, provided the information requested is relevant to shareholders' needs, would not put the company at a competitive disadvantage relative to its industry, and is not unduly burdensome to the company. Vote AGAINST shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form of compensation. Vote AGAINST shareholder proposals requiring director fees be paid in stock only. Vote FOR shareholder proposals to put option repricings to a shareholder vote. Vote on a CASE-BY-CASE basis for all other shareholder proposals regarding executive and director pay, taking into account company performance, pay level versus peers, pay level versus industry, and long term corporate outlook. OPTION EXPENSING Generally vote FOR shareholder proposals asking the company to expense stock options, unless the company has already publicly committed to expensing options by a specific date. PERFORMANCE-BASED STOCK OPTIONS Vote CASE-BY-CASE on shareholder proposals advocating the use of performance-based stock options (indexed, premium-priced, and performance-vested options), taking into account: Whether the proposal mandates that all awards be performance-based Whether the proposal extends beyond executive awards to those of lower-ranking employees Whether the company's stock-based compensation plans meet ISS's SVT criteria and do not violate our repricing guidelines. GOLDEN AND TIN PARACHUTES Vote FOR shareholder proposals to require golden and tin parachutes (executive severance agreements) to be submitted for shareholder ratification, unless the proposal requires shareholder approval prior to entering into employment contracts. Vote on a CASE-BY-CASE basis on proposals to ratify or cancel golden or tin parachutes. An acceptable parachute should include the following: The parachute should be less attractive than an ongoing employment opportunity with the firm The triggering mechanism should be beyond the control of management The amount should not exceed three times base salary plus guaranteed benefits 9. SOCIAL AND ENVIRONMENTAL ISSUES CONSUMER ISSUES AND PUBLIC SAFETY ANIMAL RIGHTS Vote CASE-BY-CASE on proposals to phase out the use of animals in product testing, taking into account: The nature of the product and the degree that animal testing is necessary or federally mandated (such as medical products), The availability and feasibility of alternatives to animal testing to ensure product safety, and The degree that competitors are using animal-free testing. Generally vote FOR proposals seeking a report on the company's animal welfare standards unless: The company has already published a set of animal welfare standards and monitors compliance The company's standards are comparable to or better than those of peer firms, and There are no serious controversies surrounding the company's treatment of animals DRUG PRICING Vote CASE-BY-CASE on proposals asking the company to implement price restraints on pharmaceutical products, taking into account: Whether the proposal focuses on a specific drug and region Whether the economic benefits of providing subsidized drugs (e.g., public goodwill) outweigh the costs in terms of reduced profits, lower R&D spending, and harm to competitiveness The extent that reduced prices can be offset through the company's marketing budget without affecting R&D spending Whether the company already limits price increases of its products Whether the company already contributes life-saving pharmaceuticals to the needy and Third World countries The extent that peer companies implement price restraints Genetically Modified Foods Vote CASE-BY-CASE on proposals to label genetically modified (GMO) ingredients voluntarily in the company's products, or alternatively to provide interim labeling and eventually eliminate GMOs, taking into account: The costs and feasibility of labeling and/or phasing out The nature of the company's business and the proportion of it affected by the proposal The proportion of company sales in markets requiring labeling or GMO-free products The extent that peer companies label or have eliminated GMOs Competitive benefits, such as expected increases in consumer demand for the company's products The risks of misleading consumers without federally mandated, standardized labeling Alternatives to labeling employed by the company. Vote FOR proposals asking for a report on the feasibility of labeling products containing GMOs. Vote AGAINST proposals to completely phase out GMOs from the company's products. Such resolutions presuppose that there are proven health risks to GMOs-an issue better left to federal regulators-which outweigh the economic benefits derived from biotechnology. Vote CASE-BY-CASE on reports outlining the steps necessary to eliminate GMOs from the company's products, taking into account: The relevance of the proposal in terms of the company's business and the proportion of it affected by the resolution The extent that peer companies have eliminated GMOs The extent that the report would clarify whether it is viable for the company to eliminate GMOs from its products Whether the proposal is limited to a feasibility study or additionally seeks an action plan and timeframe actually to phase out GMOs The percentage of revenue derived from international operations, particularly in Europe, where GMOs are more regulated. Vote AGAINST proposals seeking a report on the health and environmental effects of GMOs and the company's strategy for phasing out GMOs in the event they become illegal in the United States. Studies of this sort are better undertaken by regulators and the scientific community. If made illegal in the United States, genetically modified crops would automatically be recalled and phased out. Handguns Generally vote AGAINST requests for reports on a company's policies aimed at curtailing gun violence in the United States unless the report is confined to product safety information. Criminal misuse of firearms is beyond company control and instead falls within the purview of law enforcement agencies. Predatory Lending Vote CASE-BY CASE on requests for reports on the company's procedures for preventing predatory lending, including the establishment of a board committee for oversight, taking into account: Whether the company has adequately disclosed mechanisms in place to prevent abusive lending practices Whether the company has adequately disclosed the financial risks of its subprime business Whether the company has been subject to violations of lending laws or serious lending controversies Peer companies' policies to prevent abusive lending practices. Tobacco Most tobacco-related proposals should be evaluated on a CASE-BY-CASE basis, taking into account the following factors: Second-hand smoke: Whether the company complies with all local ordinances and regulations The degree that voluntary restrictions beyond those mandated by law might hurt the company's competitiveness The risk of any health-related liabilities. Advertising to youth: Whether the company complies with federal, state, and local laws on the marketing of tobacco or if it has been fined for violations Whether the company has gone as far as peers in restricting advertising 13 Whether the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth Whether restrictions on marketing to youth extend to foreign countries Cease production of tobacco-related products or avoid selling products to tobacco companies: The percentage of the company's business affected The economic loss of eliminating the business versus any potential tobacco-related liabilities. Spinoff tobacco-related businesses: The percentage of the company's business affected The feasibility of a spinoff Potential future liabilities related to the company's tobacco business. Stronger product warnings: Vote AGAINST proposals seeking stronger product warnings. Such decisions are better left to public health authorities. Investment in tobacco stocks: Vote AGAINST proposals prohibiting investment in tobacco equities. Such decisions are better left to portfolio managers. ENVIRONMENT AND ENERGY Arctic National Wildlife Refuge Vote CASE-BY-CASE on reports outlining potential environmental damage from drilling in the Arctic National Wildlife Refuge (ANWR), taking into account: Whether there are publicly available environmental impact reports; Whether the company has a poor environmental track record, such as violations of federal and state regulations or accidental spills; and The current status of legislation regarding drilling in ANWR. CERES Principles Vote CASE-BY-CASE on proposals to adopt the CERES Principles, taking into account: The company's current environmental disclosure beyond legal requirements, including environmental health and safety (EHS) audits and reports that may duplicate CERES The company's environmental performance record, including violations of federal and state regulations, level of toxic emissions, and accidental spills Environmentally conscious practices of peer companies, including endorsement of CERES Costs of membership and implementation. Environmental Reports Generally vote FOR requests for reports disclosing the company's environmental policies unless it already has well-documented environmental management systems that are available to the public. Global Warming Generally vote FOR reports on the level of greenhouse gas emissions from the company's operations and products, unless the report is duplicative of the company's current environmental disclosure and reporting or is not integral to the company's line of business. However, additional reporting may be warranted. The company's level of disclosure lags that of its competitors, or The company has a poor environmental track record, such as violations of federal and state regulations. Recycling Vote CASE-BY-CASE on proposals to adopt a comprehensive recycling strategy, taking into account: The nature of the company's business and the percentage affected The extent that peer companies are recycling The timetable prescribed by the proposal The costs and methods of implementation Whether the company has a poor environmental track record, such as violations of federal and state regulations. Renewable Energy Vote CASE-BY-CASE on proposals to invest in renewable energy sources, taking into account: The nature of the company's business and the percentage affected The extent that peer companies are switching from fossil fuels to cleaner sources The timetable and specific action prescribed by the proposal The costs of implementation -14- The company's initiatives to address climate change Generally vote FOR requests for reports on the feasibility of developing renewable energy sources, unless the report is duplicative of the company's current environmental disclosure and reporting or is not integral to the company's line of business. GENERAL CORPORATE ISSUES Link Executive Compensation to Social Performance Vote CASE-BY-CASE on proposals to review ways of linking executive compensation to social factors, such as corporate downsizings, customer or employee satisfaction, community involvement, human rights, environmental performance, predatory lending, and executive/employee pay disparities. Such resolutions should be evaluated in the context of: The relevance of the issue to be linked to pay The degree that social performance is already included in the company's pay structure and disclosed The degree that social performance is used by peer companies in setting pay Violations or complaints filed against the company relating to the particular social performance measure Artificial limits sought by the proposal, such as freezing or capping executive pay Independence of the compensation committee Current company pay levels. Charitable/Political Contributions Generally vote AGAINST proposals asking the company to affirm political nonpartisanship in the workplace so long as: The company is in compliance with laws governing corporate political activities, and The company has procedures in place to ensure that employee contributions to company-sponsored political action committees (PACs) are strictly voluntary and not coercive. Vote AGAINST proposals to report or publish in newspapers the company's political contributions. Federal and state laws restrict the amount of corporate contributions and include reporting requirements. Vote AGAINST proposals disallowing the company from making political contributions. Businesses are affected by legislation at the federal, state, and local level and barring contributions can put the company at a competitive disadvantage. Vote AGAINST proposals restricting the company from making charitable contributions. Charitable contributions are generally useful for assisting worthwhile causes and for creating goodwill in the community. In the absence of bad faith, self-dealing, or gross negligence, management should determine which contributions are in the best interests of the company. Vote AGAINST proposals asking for a list of company executives, directors, consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful information to shareholders. LABOR STANDARDS AND HUMAN RIGHTS China Principles Vote AGAINST proposals to implement the China Principles unless: There are serious controversies surrounding the company's China operations, and The company does not have a code of conduct with standards similar to those promulgated by the International Labor Organization (ILO). Country-specific human rights reports Vote CASE-BY-CASE on requests for reports detailing the company's operations in a particular country and steps to protect human rights, based on: The nature and amount of company business in that country The company's workplace code of conduct Proprietary and confidential information involved Company compliance with U.S. regulations on investing in the country Level of peer company involvement in the country. International Codes of Conduct/Vendor Standards Vote CASE-BY-CASE on proposals to implement certain human rights standards at company facilities or those of its suppliers and to commit to outside, independent monitoring. In evaluating these proposals, the following should be considered: -15- The company's current workplace code of conduct or adherence to other global standards and the degree they meet the standards promulgated by the proponent Agreements with foreign suppliers to meet certain workplace standards Whether company and vendor facilities are monitored and how Company participation in fair labor organizations Type of business Proportion of business conducted overseas Countries of operation with known human rights abuses Whether the company has been recently involved in significant labor and human rights controversies or violations Peer company standards and practices Union presence in company's international factories Generally vote FOR reports outlining vendor standards compliance unless any of the following apply: The company does not operate in countries with significant human rights violations The company has no recent human rights controversies or violations, or The company already publicly discloses information on its vendor standards compliance. MacBride Principles Vote CASE-BY-CASE on proposals to endorse or increase activity on the MacBride Principles, taking into account: Company compliance with or violations of the Fair Employment Act of 1989 Company antidiscrimination policies that already exceed the legal requirements The cost and feasibility of adopting all nine principles The cost of duplicating efforts to follow two sets of standards (Fair Employment and the MacBride Principles) The potential for charges of reverse discrimination The potential that any company sales or contracts in the rest of the United Kingdom could be negatively impacted The level of the company's investment in Northern Ireland The number of company employees in Northern Ireland The degree that industry peers have adopted the MacBride Principles Applicable state and municipal laws that limit contracts with companies that have not adopted the MacBride Principles. MILITARY BUSINESS Foreign Military Sales/Offsets Vote AGAINST reports on foreign military sales or offsets. Such disclosures may involve sensitive and confidential information. Moreover, companies must comply with government controls and reporting on foreign military sales. Landmines and Cluster Bombs Vote CASE-BY-CASE on proposals asking a company to renounce future involvement in antipersonnel landmine production, taking into account: Whether the company has in the past manufactured landmine components Whether the company's peers have renounced future production Vote CASE-BY-CASE on proposals asking a company to renounce future involvement in cluster bomb production, taking into account: What weapons classifications the proponent views as cluster bombs Whether the company currently or in the past has manufactured cluster bombs or their components The percentage of revenue derived from cluster bomb manufacture Whether the company's peers have renounced future production Nuclear Weapons Vote AGAINST proposals asking a company to cease production of nuclear weapons components and delivery systems, including disengaging from current and proposed contracts. Components and delivery systems serve multiple military and non-military uses, and withdrawal from these contracts could have a negative impact on the company's business. Spaced-Based Weaponization -16- Generally vote FOR reports on a company's involvement in spaced-based weaponization unless: The information is already publicly available or The disclosures sought could compromise proprietary information. WORKPLACE DIVERSITY Board Diversity Generally vote FOR reports on the company's efforts to diversify the board, unless: The board composition is reasonably inclusive in relation to companies of similar size and business or The board already reports on its nominating procedures and diversity initiatives. Vote CASE-BY-CASE on proposals asking the company to increase the representation of women and minorities on the board, taking into account: The degree of board diversity Comparison with peer companies Established process for improving board diversity Existence of independent nominating committee Use of outside search firm History of EEO violations. Equal Employment Opportunity (EEO) Generally vote FOR reports outlining the company's affirmative action initiatives unless all of the following apply: company. Glass Ceiling Generally vote FOR reports outlining the company's progress towards the Glass Ceiling Commission's business recommendations, unless: The composition of senior management and the board is fairly inclusive The company has well-documented programs addressing diversity initiatives and leadership development The company already issues public reports on its company-wide affirmative initiatives and provides data on its workforce diversity, and The company has had no recent, significant EEO-related violations or litigation Sexual Orientation Vote CASE-BY-CASE on proposals to amend the company's EEO policy to include sexual orientation, taking into account: Whether the company's EEO policy is already in compliance with federal, state and local laws Whether the company has faced significant controversies or litigation regarding unfair treatment of gay and lesbian employees The industry norm for including sexual orientation in EEO statements Existing policies in place to prevent workplace discrimination based on sexual orientation Vote AGAINST proposals to extend company benefits to or eliminate benefits from domestic partners. Benefit decisions should be left to the discretion of the company. 10. Mutual Fund Proxies Election of Directors Vote to elect directors on a CASE-BY-CASE basis, considering the following factors: Board structure Director independence and qualifications Attendance at board and committee meetings. Votes should be withheld from directors who: Attend less than 75 percent of the board and committee meetings without a valid excuse for the absences. Valid reasons include illness or absence due to company business. Participation via telephone is acceptable. In addition, if the director missed only one meeting or one day's meetings, votes should not be withheld even if such absence dropped the director's attendance below 75 percent. Ignore a shareholder proposal that is approved by a majority of shares outstanding Ignore a shareholder proposal that is approved by a majority of the votes cast for two consecutive years Are interested directors and sit on the audit or nominating committee, or Are interested directors and the full board serves as the audit or nominating committee or the company does not have one of these committees. Convert Closed-end Fund to Open-end Fund Vote conversion proposals on a CASE-BY-CASE basis, considering the following factors: -17- Past performance as a closed end fund Market in which the fund invests Measures taken by the board to address the discount Past shareholder activism, board activity Votes on related proposals. Proxy Contests Votes on proxy contests should be determined on a CASE-BY-CASE basis, considering the following factors: Past performance relative to its peers Market in which fund invests Measures taken by the board to address the issues Strategy of the incumbents versus the dissidents Independence of directors Experience and skills of director candidates Governance profile of the company Evidence of management entrenchment Investment Advisory Agreements Votes on investment advisory agreements should be determined on a CASE-BY-CASE basis, considering the following factors: Proposed and current fee schedules Fund category/investment objective Performance benchmarks Share price performance compared to peers Resulting fees relative to peers Assignments (where the advisor undergoes a change in control) Approve New Classes or Series of Shares Vote FOR the establishment of new classes or series of shares. Preferred Stock Proposals Votes on the authorization for or increase in preferred shares should be determined on a CASE-BY-CASE basis, considering the following factors: Stated specific financing purpose Possible dilution for common shares Whether the shares can be used for antitakeover purposes. 1940 Act Policies Votes on 1940 Act policies should be determined on a CASE-BY-CASE basis, considering the following factors: Potential competitiveness Regulatory developments Current and potential returns Current and potential risk. Generally vote FOR these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with the current SEC interpretation. Change Fundamental Restriction to Nonfundamental Restriction Proposals to change a fundamental restriction to a nonfundamental restriction should be evaluated on a CASE-BY-CASE basis, considering the following factors: The fund's target investments The reasons given by the fund for the change The projected impact of the change on the portfolio. Change Fundamental Investment Objective to Nonfundamental Vote AGAINST proposals to change a fund's fundamental investment objective to nonfundamental. Name Change Proposals Votes on name change proposals should be determined on a CASE-BY-CASE basis, considering the following factors: Political/economic changes in the target market -18- Consolidation in the target market Current asset composition Change in Fund's Subclassification Votes on changes in a fund's subclassification should be determined on a CASE-BY-CASE basis, considering the following factors: Potential competitiveness Current and potential returns Risk of concentration Consolidation in target industry Disposition of Assets/Termination/Liquidation Vote these proposals on a CASE-BY-CASE basis, considering the following factors: Strategies employed to salvage the company The fund's past performance Terms of the liquidation. Changes to the Charter Document Votes on chances to the charter document should be determined on a CASE-BY-CASE basis, considering the following factors: The degree of change implied by the proposal The efficiencies that could result The state of incorporation Regulatory standards and implications. Vote AGAINST any of the following changes: Removal of shareholder approval requirement to reorganize or terminate the trust or any of its series Removal of shareholder approval requirement for amendments to the new declaration of trust Removal of shareholder approval requirement to amend me fund's a management contract, allowing the contract to be modified by the investment manager and the trust management, as permitted by the 1940 Act Allow the trustees to impose other fees in addition to sales charges on investment in a fund, such as deferred sales charges and redemption fees that may be imposed upon redemption of a fund's shares Removal of shareholder approval requirement to engage in and terminate subadvisory arrangements Removal of shareholder approval requirement to change the domicile of the fund Change the Fund's Domicile Vote reincorporations on a CASE-BY-CASE basis, considering the following factors: Regulations of both states Required fundamental policies of both states Increased flexibility available Authorize the Board to Hire and Terminate Subadvisors Without Shareholder Approval Vote AGAINST proposals authorizing the board to hire/terminate subadvisors without shareholder approval. Distribution Agreements Vote these proposals on a CASE-BY-CASE basis, considering the following factors: Fees charged to comparably sized funds with similar objectives The proposed distributor's reputation and past performance The competitiveness of the fund in the industry Terms of the agreement Master-Feeder Structure Vote FOR the establishment of a master-feeder structure. Mergers Vote merger proposals on a CASE-BY-CASE basis, considering the following factors: Resulting fee structure Performance of both funds Continuity of management personnel Changes in corporate governance and their impact on shareholder rights. Shareholder Proposals to Establish Director Ownership Requirement -19- Generally vote AGAINST shareholder proposals that mandate a specific minimum amount of stock that directors must own in order to qualify as a director or to remain on the board. While ISS favors stock ownership on the part of directors, the company should determine the appropriate ownership requirement. Shareholder Proposals to Reimburse Proxy Solicitation Expenses Voting to reimburse proxy solicitation expenses should be analyzed on a CASE-BY-CASE basis. In cases where ISS recommends in favor of the dissidents, we also recommend voting for reimbursing proxy solicitation expenses. Shareholder Proposals to Terminate Investment Advisor Vote to terminate the investment advisor on a CASE-BY-CASE basis, considering the following factors: Performance of the fund's NAV The fund's history of shareholder relations The performance of other funds under the advisor's management. ITEM 8. [RESERVED] ITEM 9. CONTROLS AND PROCEDURES. (A) AS OF A DATE WITHIN 90 DAYS FROM THE FILING DATE OF THIS REPORT, THE PRINCIPAL EXECUTIVE OFFICER AND THE PRINCIPAL FINANCIAL OFFICER CONCLUDED THAT THE REGISTRANT'S DISCLOSURE CONTROLS AND PROCEDURES (AS DEFINED IN RULE 30A-3(C) UNDER THE INVESTMENT COMPANY ACT OF 1940 (THE "ACT")) WERE EFFECTIVE BASED ON THEIR EVALUATION OF THE DISCLOSURE CONTROLS AND PROCEDURES REQUIRED BY RULE 30A-3(B) UNDER THE ACT AND RULES 13A-15(B) OR 15D-15(B) UNDER THE SECURITIES AND EXCHANGE ACT OF 1934. (B) THERE WERE NO CHANGES IN THE REGISTRANT'S INTERNAL CONTROL OVER FINANCIAL REPORTING (AS DEFINED IN RULE 30A-3(D) UNDER THE ACT) THAT OCCURRED DURING THE REGISTRANT'S SECOND FISCAL HALF-YEAR THAT HAVE MATERIALLY AFFECTED, OR ARE REASONABLY LIKELY TO MATERIALLY AFFECT, THE REGISTRANT'S INTERNAL CONTROL OVER FINANCIAL REPORTING. ITEM 10. EXHIBITS. File the exhibits listed below as part of this Form. Letter or number the exhibits in the sequence indicated. (a)(1) The registrant's code of ethics is an exhibit to this report. (a)(2) The certifications of the registrant as required by Rule 30a-2(a) under the Act are exhibits to this report. (b)The certifications of the registrant as required by Rule 30a-2(b) under the Act are an exhibit to this report. SIGNATURES [See General Instruction F] Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) CORNERSTONE TOTAL RETURN FUND, INC. By (Signature and Title)* /S/ RALPH W. BRADSHAW ---------------------------- RALPH W. BRADSHAW, CHAIRMAN AND PRESIDENT (PRINCIPAL EXECUTIVE OFFICER) Date: March 8, 2004 -20- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /S/ RALPH W. BRADSHAW ----------------------- RALPH W. BRADSHAW CHAIRMAN AND PRESIDENT (PRINCIPAL EXECUTIVE OFFICER) Date: March 8, 2004 By (Signature and Title)* /S/ GARY A. BENTZ -------------------- GARY A. BENTZ PRINCIPAL FINANCIAL OFFICER Date: March 8, 2004 * Print the name and title of each signing officer under his or her signature. -21- EX-99.CODE ETH 3 ex10a1.txt CODE OF ETHICS FOR SENIOR OFFICERS EXHIBIT 10(A)(1) CORNERSTONE STRATEGIC VALUE FUND, INC. PROGRESSIVE RETURN FUND, INC. CORNERSTONE TOTAL RETURN FUND, INC. CODE OF ETHICS FOR SENIOR OFFICERS PREAMBLE Section 406 of the Sarbanes-Oxley Act of 2002 directs that rules be adopted disclosing whether a company has a code of ethics for senior financial officers. The U.S. Securities and Exchange Commission (the "SEC") has adopted rules requiring annual disclosure of an investment company's code of ethics applicable to the company's principal executive as well as principal financial officers, if such a code has been adopted. In response, the Cornerstone Strategic Value Fund, Inc., Cornerstone Total Return Fund, Inc. and the Progressive Return Fund, Inc. (the "Funds") have each adopted this Code of Ethics. STATEMENT OF POLICY It is the obligation of the senior officers of each Fund to provide full, fair, timely and comprehensible disclosure--financial and otherwise--to the Fund's shareholders, regulatory authorities and the general public. In fulfilling that obligation, senior officers must act ethically, honestly and diligently. This Code is intended to enunciate guidelines to be followed by persons who serve each Fund in senior officer positions. No Code of Ethics can address every situation that a senior officer might face; however, as a guiding principle, senior officers should strive to implement the spirit as well as the letter of applicable laws, rules and regulations, and to provide the type of clear and complete disclosure and information each Fund's shareholders have a right to expect. The purpose of this Code of Ethics (the "Code") is to promote high standards of ethical conduct by Covered Persons (as defined below) in their capacities as officers of the Funds, to instruct them as to what is considered to be inappropriate and unacceptable conduct or activities for officers and to prohibit such conduct or activities. This Code supplements other policies that the Funds and its adviser have adopted or may adopt in the future with which Fund officers are also required to comply (e.g., code of ethics relating to personal trading and conduct). COVERED PERSONS This Code applies to those persons appointed by the each Fund's Board of Directors as Chief Executive Officer, President, Chief Financial Officer and Chief Accounting Officer, or persons performing similar functions. - 1 - PROMOTION OF HONEST AND ETHICAL CONDUCT In serving as an officer of a Fund, each Covered Person must maintain high standards of honesty and ethical conduct and must encourage his colleagues who provide services to a Fund, whether directly or indirectly, to do the same. Each Covered Person understands that as an officer of a Fund, he has a duty to act in the best interests of the Fund and its shareholders. The interests of the Covered Person's personal interests should not be allowed to compromise the Covered Person from fulfilling his duties as an officer of the Fund. If a Covered Person believes that his personal interests are likely to materially compromise his objectivity or his ability to perform the duties of his role as an officer of a Fund, he should consult with the Fund's chief legal officer or outside counsel. Under appropriate circumstances, a Covered Person should also consider whether to present the matter to the Directors of a Fund or a committee thereof. No Covered Person shall suggest that any person providing, or soliciting to be retained to provide, services to a Fund give a gift or an economic benefit of any kind to him in connection with the person's retention or the provision of services. PROMOTION OF FULL, FAIR, ACCURATE, TIMELY AND UNDERSTANDABLE DISCLOSURE No Covered Person shall create or further the creation of false or misleading information in any SEC filing or report to Fund shareholders. No Covered Person shall conceal or fail to disclose information within the Covered Person's possession legally required to be disclosed or necessary to make the disclosure made not misleading. If a Covered Person shall become aware that information filed with the SEC or made available to the public contains any false or misleading information or omits to disclose necessary information, he shall promptly report it to Fund counsel, who shall advise such Covered Person whether corrective action is necessary or appropriate. Each Covered Person, consistent with his responsibilities, shall exercise appropriate supervision over, and shall assist, Fund service providers in developing financial information and other disclosure that complies with relevant law and presents information in a clear, comprehensible and complete manner. Each Covered Person shall use his best efforts within his area of expertise to assure that Fund reports reveal, rather than conceal, each Fund's financial condition. Each Covered Person shall seek to obtain additional resources if he believes that available resources are inadequate to enable the Fund to provide full, fair and accurate financial information and other disclosure to regulators and Fund shareholders. - 2 - Each Covered Person shall inquire of other Fund officers and service providers, as appropriate, to assure that information provided is accurate and complete and presented in an understandable format using comprehensible language. Each Covered Person shall diligently perform his services to the Fund, so that information can be gathered and assessed early enough to facilitate timely filings and issuance of reports and required certifications. PROMOTION OF COMPLIANCE WITH APPLICABLE GOVERNMENT LAWS, RULES AND REGULATIONS Each Covered Person shall become and remain knowledgeable concerning the laws and regulations relating to each Fund and their operations and shall act with competence and due care in serving as an officer of a Fund. Each Covered Person with specific responsibility for financial statement disclosure will become and remain knowledgeable concerning relevant auditing standards, generally accepted accounting principles, FASB pronouncements and other accounting and tax literature and developments. Each Covered Person shall devote sufficient time to fulfilling his responsibilities to the Funds. Each Covered Person shall cooperate with each Fund's independent auditors, regulatory agencies and internal auditors in their review or inspection of the Fund and its operations. No Covered Person shall knowingly violate any law or regulation relating to a Fund or their operations or seek to illegally circumvent any such law or regulation. No Covered Person shall engage in any conduct involving dishonesty, fraud, deceit or misrepresentation involving a Fund or its operations. PROMOTING PROMPT INTERNAL REPORTING OF VIOLATIONS Each Covered Person shall promptly report his own violations of this Code and violations by other Covered Persons of which he is aware to the Chairman of the Fund's Audit Committee. Any requests for a waiver from or an amendment to this Code shall be made to the Chairman of the Fund's Audit Committee. All waivers and amendments shall be disclosed as required by law. SANCTIONS Failure to comply with this Code will subject the violator to appropriate sanctions, which will vary based on the nature and severity of the violation. Such sanctions may include censure, suspension or termination of position as an officer of the Fund. Sanctions shall be imposed by the Fund's Audit Committee, subject to review by the entire Board of Directors of the Fund. Each Covered Person shall be required to certify annually whether he has complied with this Code. NO RIGHTS CREATED - 3- This Code of Ethics is a statement of certain fundamental principles, policies and procedures that govern the Fund's senior officers in the conduct of the Fund's business. It is not intended to and does not create any rights in any employee, investor, supplier, competitor, shareholder or any other person or entity. RECORDKEEPING Each Fund will maintain and preserve for a period of not less than six (6) years from the date such action is taken, the first two (2) years in an easily accessible place, a copy of the information or materials supplied to the Board (1) that provided the basis for any amendment or waiver to this Code and (2) relating to any violation of the Code and sanctions imposed for such violation, together with a written record of the approval or action taken by the Board. AMENDMENTS The Directors will make and approve such changes to this Code of Ethics as they deem necessary or appropriate to effectuate the purposes of this Code. Dated: August 15, 2003 - 4 - CODE OF ETHICS FOR SENIOR OFFICERS I HEREBY CERTIFY THAT: (1) I have read and I understand the Code of Ethics for Senior Officers adopted by the Cornerstone Strategic Value Fund, Inc., the Cornerstone Total Return Fund, Inc. and the Progressive Return Fund, Inc. (the "Code of Ethics"); (2) I recognize that I am subject to the Code of Ethics; (3) I have complied with the requirements of the Code of Ethics during the calendar year ending December 31, _______; and (4) I have reported all violations of the Code of Ethics required to be reported pursuant to the requirements of the Code during the calendar year ending December 31, _____. Set forth below exceptions to items (3) and (4), if any: --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- Name: ----------------- Date: ----------------- - 5 - EX-99.CERT 4 ex99-cert.txt PRINCIPAL EXEC.OFFICER & PRINCIPAL FIN. OFFICER Exhibit 10(a)(2) EX-99.CERT CERTIFICATIONS I, Ralph A. Bradshaw, certify that: 1. I have reviewed this report on Form N-CSR of Cornerstone Total Return Fund, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures or caused such disclosures and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the liability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosures and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's second half-fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Date: March 8, 2004 /s/ Ralph W. Bradshaw - ------------------------ Ralph W. Bradshaw Chairman and President (Principal Executive Officer) EX-99.CERT CERTIFICATIONS I, Gary A. Bentz, certify that: 1. I have reviewed this report on Form N-CSR of Cornerstone Total Return Fund, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures or caused such disclosures and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the liability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosures and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's second half-fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Date: March 8, 2004 /s/ Gary A. Bentz - ------------------------ Gary A. Bentz Principal Financial Officer EX-99.906 5 ex99-906.txt PRINCIPAL EXEC.OFFICER & PRINCIPAL FIN. OFFICER EXHIBIT 10(B) SECTION 906 CERTIFICATIONS SECTION 906 CERTIFICATIONS Ralph W. Bradshaw, Principal Executive Officer, and Gary A. Bentz, Principal Financial Officer, of the Cornerstone Total Return Fund, Inc. (the "Fund"), each certify to his knowledge that: (1) The Fund's periodic report on Form N-CSR for the period ended December 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Fund. /S/ RALPH W. BRADSHAW /S/ GARY A. BENTZ - --------------------- ----------------- Ralph W. Bradshaw Gary A. Bentz Chairman and President Principal Financial Officer (Principal Executive Officer) A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Fund and will be retained by the Fund and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----