N-CSR 1 t301674.txt ANNUAL REPORT, 12/31/2004 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 Avenue, New York, NY 10179 -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (212) 272-3550 --------------------- Date of fiscal year end: December 31, 2004 ------------------------------ Date of reporting period: December 31, 2004 ---------------------------- Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. REPORTS TO STOCKHOLDERS. ================================================================================ CORNERSTONE TOTAL RETURN FUND, INC. ANNUAL REPORT DECEMBER 31, 2004 ================================================================================ CONTENTS Portfolio Summary 1 Summary Schedule of Investments 2 Statement of Assets and Liabilities 4 Statement of Operations 5 Statement of Changes in Net Assets 6 Financial Highlights 7 Notes to Financial Statements 8 Report of Independent Registered Public Accounting Firm 12 Tax Information 13 Additional Information Regarding the Fund's Directors and Corporate Officers 14 Description of Dividend Reinvestment Plan 16 Proxy Voting and Portfolio Holdings Information 18 Privacy Policy Notice 18 Summary of General Information 19 Shareholder Information 19 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. PORTFOLIO SUMMARY - AS OF DECEMBER 31, 2004 (UNAUDITED) -------------------------------------------------------------------------------- SECTOR ALLOCATION Percent of Sector Net Assets -------------------------------------------------------------------------------- Financials 18.5 Information Technology 15.5 Consumer Discretionary 14.1 Healthcare 11.1 Industrials 11.1 Consumer Staples 7.6 Closed-End Domestic Funds 7.0 Energy 6.6 Telecommunication Services 2.8 Materials 2.8 Utilities 2.2 Other 0.7 TOP TEN HOLDINGS, BY ISSUER Percent of Holding Sector Net Assets -------------------------------------------------------------------------------- 1. General Electric Co. Industrials 3.4 2. Tri-Continental Corp. Closed-End Domestic Funds 3.2 3. Exxon Mobil Corp. Energy 3.0 4. Microsoft Corp. Information Technology 2.9 5. Citigroup Inc. Financials 2.5 6. Wal-Mart Stores, Inc. Consumer Discretionary 2.1 7. American International Group, Inc. Financials 2.0 8. Johnson & Johnson Healthcare 1.9 9. Pfizer Inc. Healthcare 1.9 10. Bank of America Corp. Financials 1.6 -------------------------------------------------------------------------------- 1 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SUMMARY SCHEDULE OF INVESTMENTS - DECEMBER 31, 2004 -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) -------------------------------------------------------------------------------- EQUITY SECURITIES - 99.60% UNITED STATES - 98.27% CLOSED-END DOMESTIC FUNDS - 6.97% Adams Express Co. 38,800 $ 509,056 Boulder Total Return Fund, Inc. 21,100 395,625 Tri-Continental Corp. 109,000 1,992,520 Zweig Fund, Inc. 165,900 920,745 Other Closed-End Domestic Funds (a) 457,950 ------------ 4,275,896 ------------ CONSUMER DISCRETIONARY - 12.73% Home Depot, Inc. (The) 14,800 632,552 Time Warner Inc. + 25,500 495,720 Viacom Inc., non-voting Class B 9,000 327,510 Wal-Mart Stores, Inc. 24,900 1,315,218 Walt Disney Co. (The) 11,700 325,260 Other Consumer Discretionary (a) 4,716,685 ------------ 7,812,945 ------------ CONSUMER STAPLES - 7.62% Altria Group, Inc. 10,700 653,770 Coca-Cola Co. (The) 13,500 562,005 PepsiCo, Inc. 10,000 522,000 Procter & Gamble Co. (The) 15,000 826,200 Other Consumer Staples (a) 2,110,168 ------------ 4,674,143 ------------ ENERGY - 6.56% ChevronTexaco Corp. 16,604 871,876 Exxon Mobil Corp. 36,000 1,845,360 Schlumberger Ltd. 5,100 341,445 Other Energy (a) 969,107 ------------ 4,027,788 ------------ FINANCIALS - 18.49% American Express Co. 6,100 $ 343,857 American International Group, Inc. 18,331 1,203,797 Bank of America Corp. 20,740 974,573 Citigroup Inc. 32,600 1,570,668 Fannie Mae 5,700 405,897 Goldman Sachs Group, Inc. (The) 6,000 624,240 JPMorgan Chase & Co. 12,700 495,427 Morgan Stanley 6,200 344,224 Wachovia Corp. 8,100 426,060 Wells Fargo & Co. 9,000 559,350 Other Financials (a) 4,397,388 ------------ 11,345,481 ------------ HEALTHCARE - 11.15% Amgen Inc.+ 8,300 532,445 Eli Lilly & Co. 6,600 374,550 Johnson & Johnson 18,200 1,154,244 Medtronic, Inc. 7,100 352,657 Merck & Co. Inc. 12,700 408,178 Pfizer Inc. 42,460 1,141,749 UnitedHealth Group Inc. 5,000 440,150 Other Healthcare (a) 2,440,074 ------------ 6,844,047 ------------ INDUSTRIALS - 11.14% 3M Co. 5,000 410,350 General Electric Co. 58,000 2,117,000 Tyco International Ltd. 11,600 414,584 United Parcel Service, Inc., Class B 6,500 555,490 Other Industrials (a) 3,335,672 ------------ 6,833,096 ------------ -------------------------------------------------------------------------------- See accompanying notes to financial statements. 2 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SUMMARY SCHEDULE OF INVESTMENTS - DECEMBER 31, 2004 (CONCLUDED) -------------------------------------------------------------------------------- No. of Value Description Shares (Note A) -------------------------------------------------------------------------------- INFORMATION TECHNOLOGY - 15.53% Cisco Systems, Inc. + 35,000 $ 675,500 Dell Inc.+ 16,200 682,668 eBay Inc. + 3,500 406,980 Hewlett-Packard Co. 15,842 332,207 Intel Corp. 38,500 900,515 International Business Machines Corp. 8,200 808,356 Microsoft Corp. 66,800 1,784,228 Oracle Corp. + 33,600 460,992 QUALCOMM Inc. 9,300 394,320 Texas Instruments Inc. 13,500 332,370 Yahoo! Inc. + 8,500 320,280 Other Information Technology (a) 2,433,639 ------------ 9,532,055 ------------ MATERIALS - 2.77% Total Materials (a) 1,696,123 ------------ REAL ESTATE INVESTMENT TRUSTS - 0.26% Total Real Estate Investment Trusts (a) 161,675 ------------ TELECOMMUNICATION SERVICES - 2.85% SBC Communications Inc. 25,600 659,712 Verizon Communications Inc. 14,900 603,599 Other Telecommunication Services (a) 485,598 ------------ 1,748,909 ------------ UTILITIES - 2.20% Total Utilities (a) 1,350,215 ------------ TOTAL UNITED STATES (cost - $60,887,946) 60,302,373 ------------ CZECH REPUBLIC - 1.33% CONSUMER DISCRETIONARY - 1.33% Total Consumer Discretionary # (a) 817,542 ------------ TOTAL CZECH REPUBLIC (cost - $894,867) 817,542 ------------ TOTAL EQUITY SECURITIES (cost - $61,782,813) 61,119,915 ------------ Principal Amount Description (000's) Value -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS - 0.98% REPURCHASE AGREEMENTS - 0.98% Bear, Stearns & Co. Inc. (Agreement dated 12/31/04 to be repurchased at $343,127), 1.50%, 01/03/05 (Note F) $ 343 $ 343,084 Bear, Stearns & Co. Inc. (Agreement dated 12/31/04 to be repurchased at $259,384), 1.16%*, 01/03/05** (Note E) 259 259,359 ------------ TOTAL SHORT-TERM INVESTMENTS (cost - $602,443) 602,443 ------------ TOTAL INVESTMENTS - 100.58% (cost - $62,385,256) (Notes A, E, F, G) 61,722,358 ------------ LIABILITIES IN EXCESS OF OTHER ASSETS - (0.58)% (356,981) ------------ NET ASSETS - 100.00% $ 61,365,377 ============ ---------- + Non-income producing security. # Securities are fair valued in accordance with procedures estab- lished 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. (a) Represents issues not identified as a top 50 holding in terms of market value and issues or issuers not exceeding 1% of net assets individually or in the aggregate, respectively, as of December 31, 2004. -------------------------------------------------------------------------------- See accompanying notes to financial statements. 3 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 2004 -------------------------------------------------------------------------------- ASSETS Investments, at value (Cost $62,385,256) (Notes A, E, F, G) $ 61,722,358 Receivables: Dividends 69,963 Interest 1,352 Prepaid expenses 1,211 ------------ Total Assets 61,794,884 ------------ LIABILITIES Payables: Upon return of securities loaned (Note E) 259,359 Investment management fees (Note B) 51,581 Directors' fees 13,722 Other accrued expenses 104,845 ------------ Total Liabilities 429,507 ------------ NET ASSETS (applicable to 4,799,831 shares of common stock outstanding) $ 61,365,377 ============ NET ASSET VALUE PER SHARE ($61,365,377 / 4,799,831) $ 12.78 ============ NET ASSETS CONSISTS OF Capital stock, $0.01 par value; 4,799,831 shares issued and outstanding (15,000,000 shares authorized) $ 47,998 Paid-in capital 76,965,259 Accumulated net realized loss on investments (14,984,982) Net unrealized depreciation in value of investments (662,898) ------------ Net assets applicable to shares outstanding $ 61,365,377 ============ -------------------------------------------------------------------------------- See accompanying notes to financial statements. 4 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2004 -------------------------------------------------------------------------------- INVESTMENT INCOME Income (Note A): Dividends (net of foreign taxes withheld of $188) $ 1,327,991 Interest 8,014 ------------ Total Investment Income 1,336,005 ------------ Expenses: Investment management fees (Note B) 618,101 Administration fees 61,864 Directors' fees 47,598 Legal and audit fees (Note B) 46,751 Accounting fees 33,923 Transfer agent fees 31,422 Printing 28,699 Custodian fees 10,501 Stock exchange listing fees 9,715 Insurance 5,182 Miscellaneous 1,901 ------------ Total Expenses 895,657 Less: Management fee waivers (Note B) (11,305) Less: Fees paid indirectly (Note B) (10,501) ------------ Net Expenses 873,851 ------------ Net Investment Income 462,154 ------------ NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized loss from investments (428,172) Net change in unrealized depreciation in value of investments 4,649,941 ------------ Net realized and unrealized gain on investments 4,221,769 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,683,923 ============ -------------------------------------------------------------------------------- See accompanying notes to financial statements. 5 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. STATEMENT OF CHANGES IN NET ASSETS --------------------------------------------------------------------------------
For the Years Ended December 31, ------------------------------ 2004 2003 ------------ ------------ INCREASE/(DECREASE) IN NET ASSETS Operations: Net investment income $ 462,154 $ 394,232 Net realized loss from investments (428,172) (403,402) Net change in unrealized depreciation in value of investments 4,649,941 13,990,328 ------------ ------------ Net increase in net assets resulting from operations 4,683,923 13,981,158 ------------ ------------ Dividends and distributions to shareholders (Notes A, G): Net investment income (462,154) (394,232) Return-of-capital (9,584,964) (8,947,881) ------------ ------------ Total dividends and distributions to shareholders (10,047,118) (9,342,113) ------------ ------------ Capital stock transactions (Note D): Proceeds from 73,202 and 68,969 newly shares issued in reinvestment of dividends and distributions, respectively 1,086,831 941,371 Cost of 7,500 shares repurchased -- (90,050) ------------ ------------ Net increase in net assets resulting from capital stock transactions 1,086,831 851,321 ------------ ------------ Total increase/(decrease) in net assets (4,276,364) 5,490,366 ------------ ------------ NET ASSETS Beginning of year 65,641,741 60,151,375 ------------ ------------ End of year $ 61,365,377 $ 65,641,741 ============ ============
-------------------------------------------------------------------------------- See accompanying notes to financial statements. 6 -------------------------------------------------------------------------------- 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, ---------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 13.89 $ 12.89 $ 18.30 $ 18.28 $ 17.62 ---------- ---------- ---------- ---------- ---------- Net investment income 0.10# 0.08# 0.15# 0.52 1.07 Net realized and unrealized gain/(loss) on investments 0.87 2.91 (3.57) 0.24 0.63 ---------- ---------- ---------- ---------- ---------- Net increase/(decrease) in net assets resulting from operations 0.97 2.99 (3.42) 0.76 1.70 ---------- ---------- ---------- ---------- ---------- Dividends and distributions to shareholders: Net investment income (0.10) (0.08) (0.18) (0.66) (1.05) Return-of-capital (2.01) (1.91) (1.80) (0.09) -- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions to shareholders (2.11) (1.99) (1.98) (0.75) (1.05) ---------- ---------- ---------- ---------- ---------- Capital stock transactions: Anti-dilutive effect due to capital stock repurchased -- -- 0.02 0.01 0.01 Anti-dilutive/(dilutive) effect due to shares issued in reinvestment of dividends and distributions 0.03 -- (0.03) -- -- ---------- ---------- ---------- ---------- ---------- Total capital stock transactions 0.03 -- (0.01) 0.01 0.01 ---------- ---------- ---------- ---------- ---------- Net asset value, end of year $ 12.78 $ 13.89 $ 12.89 $ 18.30 $ 18.28 ========== ========== ========== ========== ========== Market value, end of year $ 17.95 $ 17.95 $ 11.35 $ 16.29 $ 15.875 ========== ========== ========== ========== ========== Total investment return (a) 15.11% 82.96% (19.30)% 8.91% 19.02% ========== ========== ========== ========== ========== RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000 omitted) $ 61,365 $ 65,642 $ 60,151 $ 39,547 $ 39,640 Ratio of expenses to average net assets, net of fee waivers, if any (b) 1.41% 1.20% 1.50% 3.01% 1.06% Ratio of expenses to average net assets, excluding fee waivers, if any (c) 1.45% 1.43% 2.07% 3.01% 1.06% Ratio of expenses to average net assets, net of fee waivers, if any (c) 1.43% 1.23% 1.63% 3.01% 1.06% Ratio of net investment income to average net assets 0.75% 0.65% 1.01% 2.77% 5.97% Portfolio turnover rate 12.15% 3.62% 86.60% -- 15.87%
# Based on average shares outstanding. (a) Total investment return at market value is based on the changes in market price of a share during the year and assumes reinvestment of dividends and distributions, if any, at actual prices pursuant to the Fund's dividend reinvestment plan. Total investment return does not reflect brokerage commissions. (b) Expenses are net of fees paid indirectly. (c) Expenses exclude the reduction for fees paid indirectly. -------------------------------------------------------------------------------- See accompanying notes to financial statements. 7 -------------------------------------------------------------------------------- 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. 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, 2004, the Fund held 1.33% 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 $817,542. 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 "Investment Manager" or "Cornerstone") considers creditworthy. The seller under a repurchase agreement will be required to maintain the value of the securities as collateral, subject to the agreement at not less than the repurchase price plus accrued interest. Cornerstone monitors daily the mark-to-market of the value of the collateral, and, if necessary, requires the seller to maintain additional securities, so that the value of the collateral is not less than the repurchase price. Default by or bankruptcy of the seller could, 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. -------------------------------------------------------------------------------- 8 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- 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. To the extent these distributions are not represented by net investment income and capital gains, they will not represent yield or investment return on the Fund's investment portfolio. The Fund plans to maintain this distribution policy even if regulatory requirements would make part of a return-of-capital, necessary to maintain the distribution, taxable to shareholders and to disclose that portion of the distribution that is classified as ordinary income. Although it has no current intention to do so, the Board may terminate this distribution policy at any time and such termination my have an adverse effect on the market price for the Fund's common shares. The Fund determines annually whether to distribute any net realized long-term capital gains in excess of net realized short-term capital losses, including capital loss carryovers, if any. To the extent that the Fund's taxable income in any calendar year exceeds the aggregate amount distributed pursuant to this distribution policy, an additional distribution may be made to avoid the payment of a 4% U.S. federal excise tax, and to the extent that the aggregate amount distributed in any calendar year exceeds the Fund's taxable income, the amount of that excess may constitute a return-of-capital for tax purposes. A return-of-capital distribution reduces the cost basis of an investor's shares in the Fund. Dividends and distributions to shareholders are recorded by the Fund on the ex-dividend date. The character of dividends and distributions made during the year ended December 31, 2004 from net investment income or net realized gains, if any, 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 investment management services, Cornerstone receives from the Fund, an annual fee, calculated weekly and paid monthly, equal to 1.00% of the Fund's average weekly net assets. Cornerstone has voluntarily agreed to continue to waive its management fees from the Fund to the extent that monthly operating expenses exceed 0.125% of average net assets calculated monthly. For the year ended December 31, 2004, Cornerstone earned $618,101 for investment management services, of which it waived $11,305. The Investment Manager may discontinue such undertaking at any time during the fiscal year without notice to fund shareholders. Included in the Statement of Operations, under the caption FEES PAID indirectly, are expense offsets of $10,501 arising from credits earned on portfolio transactions executed with a broker, pursuant to a directed brokerage arrangement. The Fund paid approximately $28,800 for the year ended December 31, 2004 for legal services to Blank Rome LLP ("Blank"), counsel to the Fund. Thomas R. Westle, partner of Blank, serves as secretary of the Fund. At December 31, 2004, pursuant to a regulatory filing, an affiliate owned approximately 15% of the outstanding shares of the Fund based on a Schedule 13G/A filing with the Securities and Exchange Commission on February 3, 2005. NOTE C. INVESTMENT IN SECURITIES For the year ended December 31, 2004, purchases and sales of securities, other than short-term investments, were $7,505,642 and $15,641,050, respectively. -------------------------------------------------------------------------------- 9 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- NOTE D. SHARE REPURCHASE PROGRAM As had been done in the past to enhance shareholder value, pursuant to Section 23 of the Investment Company Act of 1940, as amended the Fund may again in the future purchase shares of its common stock on the open market from time to time, at such times, and in such amounts as may be deemed advantageous to the Fund. Nothing herein shall be considered a commitment to purchase such shares. For the year ended December 31, 2004, the Fund had no repurchases. 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%. 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 10 amount. The value of securities on loan to brokers at December 31, 2004 was $259,359. Collateral for repurchased agreements in connection with securities lending at December 31, 2004 are listed below: PRINCIPAL AMOUNT MARKET ISSUER (000'S) MATURITY VALUE ------ ------- -------- ----- United States Treasury Bond, (interest only) $730 11/15/24 $267,377 ======== During the year ended December 31, 2004, the Fund earned $3,378 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, 2004. PRINCIPAL AMOUNT MARKET ISSUER (000'S) MATURITY VALUE ------ ------- -------- ----- United States Treasury Bond, (interest only) $965 11/15/24 $353,451 ======== 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 character of dividends and distributions paid during the year ended December 31, for the Fund were as follows: ORDINARY INCOME RETURN-OF-CAPITAL --------------- ----------------- 2004 2003 2004 2003 ---- ---- ---- ---- $462,154 $394,232 $9,584,964 $8,947,881 -------------------------------------------------------------------------------- 10 -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONCLUDED) -------------------------------------------------------------------------------- At December 31, 2004, the components of distributable earnings on a tax basis, for the Fund were as follows: Accumulated net realized loss $(14,933,353) Unrealized depreciation (714,527) ------------ Total accumulated deficit $(15,647,880) ============ 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, 2004, the Fund incurred and elected to defer net realized loses from investments of $91,899. At December 31, 2004, the Fund had a capital loss carryforward for U.S. federal income tax purposes of $14,841,454 of which $12,887,270 expires in 2008, $1,170,157 expires in 2009, $425,706 expires in 2011 and $358,321 expires in 2012. At December 31, 2004, 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 $62,436,885, $7,299,117, $(8,013,644) and $(714,527), respectively. At December 31, 2004, the Fund reclassified $9,584,964 from distributions in excess of net investment income and $86,347 from accumulated net realized loss on investments to paid-in capital, to adjust for current period permanent book/tax differences. Net assets were not affected by this reclassification. -------------------------------------------------------------------------------- 11 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors Cornerstone Total Return Fund, Inc. New York, New York We have audited the accompanying statement of assets and liabilities of Cornerstone Total Return Fund, Inc., including the summary schedule of investments, as of December 31, 2004, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the three 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 two 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. 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, 2004 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, 2004, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the three 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 15, 2005 -------------------------------------------------------------------------------- 12 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, 2004) as to the U.S. federal tax status of the dividends and distributions received by the Fund's shareholders in respect of such fiscal year. During the year ended December 31, 2004, the following dividends and distributions per share were paid by the Fund:
PAYMENT DATE: 1/30/04 2/27/04 3/31/04 4/30/04 5/21/04 6/30/04 ------- ------- ------- ------- ------- ------- Ordinary Income: $ 0.008 $ 0.008 $ 0.008 $ 0.008 $ 0.008 $ 0.008 Return-of-Capital: $ 0.168 $ 0.168 $ 0.168 $ 0.168 $ 0.168 $ 0.168 ------- ------- ------- ------- ------- ------- Total: $ 0.176 $ 0.176 $ 0.176 $ 0.176 $ 0.176 $ 0.176 ======= ======= ======= ======= ======= ======= PAYMENT DATE: 7/30/04 8/31/04 9/30/04 10/29/04 11/30/04 12/31/04 ------- ------- ------- -------- -------- -------- Ordinary Income: $ 0.008 $ 0.008 $ 0.008 $ 0.008 $ 0.008 $ 0.008 Return-of-Capital: $ 0.168 $ 0.168 $ 0.168 $ 0.168 $ 0.168 $ 0.168 ------- ------- ------- ------- ------- ------- Total: $ 0.176 $ 0.176 $ 0.176 $ 0.176 $ 0.176 $ 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. Please note that to utilize the lower tax rate for qualifying dividend income, shareholders must have held their shares in the Fund for at least 61 days during the 121 day period beginning 60 days before the ex-dividend date. Foreign shareholders will generally be subject to U.S. withholding tax on the amount of 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. -------------------------------------------------------------------------------- 13 ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND CORPORATE OFFICERS (UNAUDITED)
NAME AND POSITION(S) PRINCIPAL OCCUPATION POSITION WITH ADDRESS (AGE)* HELD WITH FUND OVER LAST 5 YEARS FUND SINCE ---------------------------------------------------------------------------------------------------------------------- Ralph W. Bradshaw** (54) Chairman of the President, Cornerstone Advisors, Inc.; 2001 Board of Directors Financial Consultant; Vice President, Deep and President Discount Advisors, Inc. (1993-1999); previous Director of The Austria Fund, Inc.; Director of Cornerstone Strategic Value Fund, Inc. William A. Clark ** (59) Director and Director and Stockholder of Cornerstone 2004 Vice President Advisors, Inc.; former Financial Consultant of Deep Discount Advisors, Inc.; previous Director of The Austria Fund, Inc.; Director of Cornerstone Strategic Value Fund, Inc. Thomas H. Lenagh (82) Director; Audit, Chairman of the Board of Photonics Products 2002 Nominating and Group; Independent Financial Adviser; Director Corporate of Cornerstone Strategic Value Fund, Inc., The Governance Adams Express Company and Petroleum and Committee Resources Corporation. Member Edwin Meese III (73) Director; Audit, Distinguished Fellow, The Heritage 2001 Nominating and Foundation, Washington D.C.; Distinguished Corporate Visiting Fellow at the Hoover Institution, Governance Stanford University; Senior Adviser, Revelation Committee L.P.; formerly U.S. Attorney General under Member President Ronald Reagan; Director of Carrington Laboratories Inc.; Director of Cornerstone Strategic Value Fund, Inc. Scott B. Rogers (49) Director; Audit, Chief Executive Officer, Asheville Buncombe 2001 Nominating and Community Christian Ministry; President of Corporate ABCCM Doctor's Medical Clinic; Director Governance of Faith Partnerships Inc.; Director of A-B Committee Vision Board; Appointee, NC Governor's Member Commission on Welfare to Work; Chairman and Director of Recycling Unlimited; Director of Interdenominational Ministerial Alliance; Director of Cornerstone Strategic Value Fund, Inc.
-------------------------------------------------------------------------------- 14 ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND CORPORATE OFFICERS (UNAUDITED) (CONCLUDED)
NAME AND POSITION(S) PRINCIPAL OCCUPATION POSITION WITH ADDRESS (AGE)* HELD WITH FUND OVER LAST 5 YEARS FUND SINCE ---------------------------------------------------------------------------------------------------------------------- Andrew A. Strauss (51) Director; Audit, Attorney and senior member of Strauss & 2001 Nominating and Associates, P.A., Attorneys, Asheville and Corporate Hendersonville, NC; previous President of Governance White Knight Healthcare, Inc. and LMV Committee Leasing, Inc., a wholly owned subsidiary of Member Xerox Credit Corporation; Director of Cornerstone Strategic Value Fund, Inc., Memorial Mission Hospital Foundation, Deerfield Episcopal Retirement Community and Asheville Symphony. Glenn W. Wilcox, Sr. (73) Director; Audit, Chairman of the Board of Wilcox Travel Agency, 2001 Nominating and Inc.; Director of Champion Industries, Inc.; Corporate Chairman of Tower Associates, Inc. (a real Governance estate venture); Director of Wachovia Corp.; Committee Board Trustee of Appalachian State University; Member Director and Chairman of Audit Committee of Cornerstone Strategic Value Fund, Inc. Gary A. Bentz (48) Chief Compliance Chief Financial Officer, Chairman and 2004 Officer Shareholder of Cornerstone Advisors, Inc.; previous Director of The Austria Fund, Inc.; previous Director, Vice President and Treasurer of the Fund and Cornerstone Strategic Value Fund, Inc.; Financial Consultant, Certified Public Accountant; Chief Financial Officer of Deep Discount Advisors, Inc. (1993-2000); Chief Compliance Officer of Cornerstone Strategic Value Fund, Inc. Thomas R. Westle (51) Secretary Partner, Blank Rome LLP (October 31, 2003 - 2001 405 Lexington Avenue Present); prior thereto Partner, Spitzer & New York, NY 10174 Feldman P.C. (May, 1998-October 30, 2003). Jodi B. Levine (35) Treasurer Associate Director, Bear Stearns Funds 2004 Management Inc.
* The mailing address of each Director and/or Officer with respect to the Fund's operations 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 Clark are interested persons of the Fund by virtue of their current positions with the Investment Manager of the Fund. -------------------------------------------------------------------------------- 15 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 "Distribution" and collectively, "Distributions"), 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 the lower of (i) a price equal to the average closing price of the Fund over the five trading days preceding the payment date of such distribution or (ii) the net asset value of the Fund as last determined prior to such payment date. Registered shareholders who acquire their shares through Open Market Purchases and who do not wish to have their Distributions automatically reinvested should so notify the Fund in writing. If a Shareholder has not elected to receive cash Distributions and the Agent does not receive notice of an election to receive cash Distributions prior to the record date of any distribution, the shareholder will automatically receive such Distributions in additional Shares. Participants in the Plan may withdraw from the Plan by providing written notice to the Agent at least 30 days prior to the applicable Distributions 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 Distributions other than their share of brokerage commissions as discussed below. The Agent's fees for administering the Plan and handling the reinvestment of Distributions 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 Distributions. -------------------------------------------------------------------------------- 16 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 Distributions will not relieve participants of any income tax that may be payable on such Distributions. 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 Distributions are subject to U.S. income tax withholding and in the case of participants subject to 28% federal backup withholding, the Agent will reinvest Distributions 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. -------------------------------------------------------------------------------- 17 PROXY VOTING AND PORTFOLIO HOLDINGS INFORMATION (UNAUDITED) Information regarding how the Cornerstone Total Return Fund, Inc. (the "Fund") voted proxies related to its portfolio securities during the 12-month period ended June 30, 2004 as well as the policies and procedures that the Fund uses to determine how to vote proxies relating to its portfolio securities are available: o by calling (212) 272-3550; o on the website of the Securities and Exchange Commission, http://www.sec.gov. This report incorporates a Summary Schedule of Investments for the Fund. A complete Schedule of Investments for the Fund may be obtained free of charge by contacting the Fund at (212) 272-3550. The Fund files a complete schedule of its portfolio holdings for the first and third quarters of its fiscal year with the SEC on Form N-Q. The Fund's Forms N-Q are available on the SEC's website at http://www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330. PRIVACY POLICY NOTICE (UNAUDITED) The following is a description of Cornerstone Total Return Fund, Inc.'s (the "Fund") policies regarding disclosure of nonpublic personal information that you provide to the Fund or that the Fund collects from other sources. In the event that you hold shares of the Fund through a broker-dealer or other financial intermediary, the privacy policy of the financial intermediary would govern how your nonpublic personal information would be shared with unaffiliated third parties. CATEGORIES OF INFORMATION THE FUND COLLECTS. The Fund collects the following nonpublic personal information about you: 1. Information from the Consumer: this category includes information the Fund receives from you on or in applications or other forms, correspondence, or conversations (such as your name, address, phone number, social security number, assets, income and date of birth); and 2. Information about the Consumer's transactions: this category includes information about your 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. -------------------------------------------------------------------------------- 18 SUMMARY OF GENERAL INFORMATION (UNAUDITED) 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 (UNAUDITED) The Fund is listed on the American Stock Exchange, LLC (symbol "CRF"). The share price is published in: THE NEW YORK TIMES (daily) under the designation "Cnrstn TR" and THE WALL STREET JOURNAL (daily) and BARRON'S (each Monday) under the designation "CornstnTtlRtn." The net asset value per share is available weekly and may be obtained by contacting the Fund at the general inquiry phone number. NOTICE IS HEREBY GIVEN IN ACCORDANCE WITH SECTION 23(C) OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, THAT CORNERSTONE TOTAL RETURN FUND, INC. MAY FROM TIME TO TIME PURCHASE SHARES OF ITS CAPITAL STOCK IN THE OPEN MARKET. This report, including the financial statements herein, is sent to the shareholders of the Fund for their information. It is not a prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or of any securities mentioned in the report. -------------------------------------------------------------------------------- 19 CORNERSTONE TOTAL RETURN FUND, INC. ================================================================================ DIRECTORS AND CORPORATE OFFICERS Ralph W. Bradshaw Chairman of the Board of Directors and President William A. Clark Director and Vice President Thomas H. Lenagh Director Edwin Meese III Director Scott B. Rogers Director Andrew A. Strauss Director Glenn W. Wilcox, Sr. Director Gary A. Bentz Chief Compliance Officer Thomas R. Westle Secretary Jodi B. Levine Treasurer INVESTMENT MANAGER STOCK TRANSFER AGENT AND REGISTRAR Cornerstone Advisors, Inc. American Stock Transfer & Trust Co. One West Pack Square 59 Maiden Lane Suite 1650 New York, NY 10038 Asheville, NC 28801 ADMINISTRATOR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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. As of the end of the period covered by this report, the Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer, principal financial officer, and persons performing similar functions. A copy of the code is filed as an EX.99.CODEETH to this Form. There were no amendments to the code during the calendar year ended December 31, 2004. There were no waivers or implicit waivers from the code granted by the registrant during the year ended December 31, 2004. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The registrant's board of directors has determined that it does not have an audit committee financial expert serving on its audit committee. At this time, the registrant believes that the experience provided by each member of the audit committee together offer the registrant adequate oversight for the registrant's level of financial complexity. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) through (d). The information in the table below is provided for services rendered to the registrant by its independent registered public accounting firm, Tait, Weller & Baker, for its years ended December 31, 2003 and December 31, 2004. 2004 2003 ---------- ---------- Audit Fees $11,800 $11,000 Audit-related Fees 0 Tax $2,200 2,000 Other 0 ---------- --------- Total $14,000 $13,000 ---------- --------- (e)(1) Audit Committee Pre-Approval Policies and Procedures. Before the auditor is (i) engaged by the Registrant to render audit, audit related or permissible non-audit services to the Registrant or (ii) with respect to non-audit services to be provided by the auditor to the Registrant's investment adviser or any entity in the investment Registrant complex, if the nature of the services provided relate directly to the operations or financial reporting of the Registrant, either: (a) the Audit Committee shall pre-approve such engagement; or (b) such engagement shall be entered into pursuant to pre-approval policies and procedures established by the Audit Committee. Any such policies and procedures must be detailed as to the particular service and not involve any delegation of the Audit Committee's responsibilities to the Registrant's investment adviser. The Audit Committee may delegate to one or more of its members the authority to grant pre-approvals. The pre-approval policies and procedures shall include the requirement that the decisions of any member to whom authority is delegated under this provision shall be presented to the full Audit Committee at its next scheduled meeting. Under certain limited circumstances, pre-approvals are not required if certain de minimis thresholds are not exceeded, as such thresholds are set forth by the Audit Committee and in accordance with applicable SEC rules and regulations. (e)(2) None of the services provided to the Registrant described in paragraphs (b)-(d) of Item 4 were pre-approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X. (f) No disclosures are required by this Item 4(f). (g) None (h) No disclosures are required by this Item 4(h) ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. The registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities and Exchange Act of 1934, as amended. Glenn Wilcox (Chair), Andrew A. Strauss, Scott Rogers, Thomas Lenagh and Edwin Meese III are the members of the Registrant's audit committee. ITEM 6. SCHEDULE OF INVESTMENTS.
-------------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2004 -------------------------------------------------------------------------------------- NO. OF DESCRIPTION SHARES VALUE -------------------------------------------------------------------------------------- EQUITY SECURITIES - 99.60% UNITED STATES - 98.27% CLOSED-END DOMESTIC FUNDS - 6.97% Adams Express Co. 38,800 $ 509,056 Boulder Total Return Fund, Inc. 21,100 395,625 Dreman/Claymore Dividend & Income Fund 11,000 206,800 General American Investors Co., Inc. 2,500 78,250 Salomon Brothers Fund, Inc. (The) 13,300 172,900 Tri-Continental Corp. 109,000 1,992,520 Zweig Fund, Inc. 165,900 920,745 ----------- 4,275,896 ----------- CONSUMER DISCRETIONARY - 12.73% Bed Bath & Beyond Inc. + 2,500 99,575 Best Buy Co. Inc. 2,500 148,550 Carnival Corp. 5,300 305,439 Clear Channel Communications, Inc. 2,700 90,423 Comcast Corp., Class A + 8,508 283,146 Comcast Corp., Special Class A + 4,500 147,780 Costco Wholesale Corp. 2,600 125,866 Dana Corp. 2,500 43,325 Delphi Corp. 5,100 46,002 Eastman Kodak Co. 2,500 80,625 Ford Motor Co. 15,200 222,528 Fortune Brands, Inc. 2,500 192,950 Gap, Inc. (The) 6,900 145,728 General Motors Corp. 2,500 100,150 Harley-Davidson, Inc 2,500 151,875 Harrah's Entertainment, Inc. 2,500 167,225 Hilton Hotels Corp. 2,500 56,850 Home Depot, Inc. (The) 14,800 632,552 J.C. Penney Co. Inc. 2,500 103,500 Kohl's Corp. + 2,500 122,925 Limited Brands, Inc. 2,000 46,040 Lowe's Companies, Inc. 3,700 213,083 Mattel, Inc. 4,500 87,705 McDonald's Corp. 8,100 259,686 McGraw-Hill Companies, Inc. (The) 2,500 228,850 Monsanto Co. 1,773 98,490 Office Depot, Inc. + 2,500 43,400 Omnicom Group Inc. 1,500 126,480 Reebok International Ltd. 2,500 110,000 Rockwell Automation, Inc. 2,500 123,875 -------------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2004 (continued) -------------------------------------------------------------------------------------- NO. OF DESCRIPTION SHARES VALUE -------------------------------------------------------------------------------------- Staples, Inc. 2,100 70,791 Starbucks Corp. + 2,500 155,900 Target Corp. 4,600 238,878 Time Warner Inc. + 25,500 495,720 TJX Companies, Inc. (The) 4,000 100,520 Tribune Co. 2,500 105,350 Univision Communications Inc., Class A + 2,500 73,175 Viacom Inc., non-voting Class B 9,000 327,510 Wal-Mart Stores, Inc. 24,900 1,315,218 Walt Disney Co. (The) 11,700 325,260 ----------- 7,812,945 ----------- CONSUMER STAPLES - 7.62% Albertson's, Inc. 2,500 59,700 Altria Group, Inc. 10,700 653,770 Anheuser-Busch Companies, Inc. 3,700 187,701 Archer-Daniels-Midland Co. 5,650 126,051 Avon Products, Inc. 2,500 96,750 Campbell Soup Co. 3,200 95,648 Coca-Cola Co. (The) 13,500 562,005 Coca-Cola Enterprises Inc. 2,500 52,125 Colgate-Palmolive Co. 2,600 133,016 ConAgra Foods, Inc. 2,500 73,625 General Mills, Inc. 2,500 124,275 Gillette Co. (The) 5,100 228,378 H.J. Heinz Co. 2,700 105,273 Kimberly-Clark Corp. 2,500 164,525 Kroger Co. (The) + 6,600 115,764 PepsiCo, Inc. 10,000 522,000 Procter & Gamble Co. (The) 15,000 826,200 Safeway Inc.+ 4,900 96,726 Sara Lee Corp. 2,600 62,764 Walgreen Co. 5,600 214,872 Wm. Wrigley Jr. Co. 2,500 172,975 ----------- 4,674,143 ----------- ENERGY - 6.56% Anadarko Petroleum Corp. 2,500 162,025 Burlington Resources, Inc. 2,500 108,750 CenterPoint Energy, Inc. 5,700 64,410 ChevronTexaco Corp. 16,604 871,876 ConocoPhillips 3,669 318,579 Exxon Mobil Corp. 36,000 1,845,360 Occidental Petroleum Corp. 2,500 145,900 Reliant Energy Inc.+ 4,494 61,343 Schlumberger Ltd. 5,100 341,445 Unocal Corp. 2,500 108,100 ----------- 4,027,788 ----------- FINANCIALS - 18.49% AFLAC Inc. 4,000 159,360 Allstate Corp. (The) 5,200 268,944 -------------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2004 (continued) -------------------------------------------------------------------------------------- NO. OF DESCRIPTION SHARES VALUE -------------------------------------------------------------------------------------- American Express Co. 6,100 343,857 American International Group, Inc. 18,331 1,203,797 AmSouth Bancorporation 2,500 64,750 Bank of America Corp. 20,740 974,573 Bank of New York Co., Inc. (The) 5,900 197,178 BB&T Corp. 2,000 84,100 Capital One Financial Corp. 1,000 84,210 Charles Schwab Corp. (The) 8,200 98,072 Citigroup Inc. 32,600 1,570,668 Countrywide Financial Corp. 3,500 129,535 Fannie Mae 5,700 405,897 Fifth Third Bancorp 2,500 118,200 Fiserv, Inc. + 2,500 100,475 Freddie Mac 3,300 243,210 Goldman Sachs Group, Inc. (The) 6,000 624,240 Hartford Financial Services Group, Inc. (The) 1,600 110,896 JPMorgan Chase & Co. 12,700 495,427 KeyCorp 2,500 84,750 Lehman Brothers Holdings Inc. 2,500 218,700 Marsh & McLennan Companies, Inc. 4,600 151,340 MBNA Corp. 7,550 212,834 Mellon Financial Corp. 2,300 71,553 Merrill Lynch & Co., Inc. 1,100 65,747 MetLife Inc. 6,000 243,060 Moody's Corp. 1,000 86,850 Morgan Stanley 6,200 344,224 National City Corp. 5,000 187,750 Northern Trust Corp. 1,100 53,438 PNC Financial Services Group, Inc. 1,400 80,416 Progressive Corp. (The) 2,500 212,100 Providian Financial Corp.+ 2,500 41,175 Prudential Financial, Inc. 2,500 137,400 SLM Corp. 2,500 133,475 St. Paul Travelers Companies, Inc. (The) 2,292 84,964 State Street Corp. 1,600 78,592 SunTrust Banks, Inc. 1,500 110,820 U.S. Bancorp 9,700 303,804 Wachovia Corp. 8,100 426,060 Washington Mutual, Inc. 4,250 179,690 Wells Fargo & Co. 9,000 559,350 ----------- 11,345,481 ----------- HEALTHCARE - 11.15% Aetna Inc. 1,000 124,750 Amgen Inc.+ 8,300 532,445 Baxter International Inc. 2,600 89,804 Becton, Dickinson & Co. 2,500 142,000 Biogen Idec Inc. + 2,500 166,525 Biomet, Inc. 2,500 108,475 Boston Scientific Corp. + 5,000 177,750 Bristol-Myers Squibb Co. 9,600 245,952 Cardinal Health, Inc. 2,500 145,375 -------------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2004 (continued) -------------------------------------------------------------------------------------- NO. OF DESCRIPTION SHARES VALUE -------------------------------------------------------------------------------------- Caremark Rx, Inc.+ 2,500 98,575 CIGNA Corp. 800 65,256 Eli Lilly & Co. 6,600 374,550 Forest Laboratories, Inc. + 2,500 112,150 Genzyme Corp. + 1,500 87,105 Health Management Associates, Inc., Class A 2,500 56,800 Johnson & Johnson 18,200 1,154,244 King Pharmaceuticals, Inc. + 2,500 31,000 McKesson Corp. 2,500 78,650 Medco Health Solutions, Inc. + 1,531 63,690 Medtronic, Inc. 7,100 352,657 Merck & Co. Inc. 12,700 408,178 Pfizer Inc. 42,460 1,141,749 Schering-Plough Corp. 8,400 175,392 Stryker Corp. 2,000 96,500 Tenet Healthcare Corp. + 5,000 54,900 UnitedHealth Group Inc. 5,000 440,150 Wyeth 7,500 319,425 ----------- 6,844,047 ----------- INDUSTRIALS - 11.14% 3M Co. 5,000 410,350 Apollo Group, Inc., Class A+ 1,000 80,710 Boeing Co. (The) 3,900 201,903 Burlington Northern Santa Fe Corp. 2,000 94,620 Caterpillar Inc. 2,500 243,775 Cendant Corp. 7,100 165,998 CSX Corp. 2,500 100,200 Danaher Corp. 2,500 143,525 Deere & Co. 2,500 186,000 Dover Corp. 1,000 41,940 Emerson Electric Co. 2,000 140,200 FedEx Corp. 2,500 246,225 General Dynamics Corp. 2,500 261,500 General Electric Co. 58,000 2,117,000 Honeywell International Inc. 3,300 116,853 Illinois Tool Works Inc. 2,500 231,700 Lockheed Martin Corp. 2,500 138,875 Masco Corp. 4,600 168,038 Paychex, Inc. 2,500 85,200 Raytheon Co. 2,500 97,075 Southwest Airlines Co. 6,100 99,308 Transocean Inc. + 2,500 105,975 Tyco International Ltd. 11,600 414,584 United Parcel Service, Inc., Class B 6,500 555,490 United Technologies Corp. 2,200 227,370 Waste Management, Inc. 5,300 158,682 ----------- 6,833,096 ----------- INFORMATION TECHNOLOGY - 15.53% Agere Systems Inc, Class A + 75 103 Agilent Technologies, Inc. + 5,000 120,500 -------------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2004 (continued) -------------------------------------------------------------------------------------- NO. OF DESCRIPTION SHARES VALUE -------------------------------------------------------------------------------------- Analog Devices, Inc. 2,500 92,300 Apple Computer, Inc. + 2,500 161,000 Applied Materials, Inc. + 13,400 229,140 Cisco Systems, Inc. + 35,000 675,500 Computer Associates International, Inc. 2,700 83,862 Corning Inc. + 7,500 88,275 Dell Inc.+ 16,200 682,668 eBay Inc. + 3,500 406,980 Electronic Data Systems Corp. 7,500 173,250 EMC Corp. + 8,000 118,960 First Data Corp. 4,325 183,985 Freescale Semiconductor Inc., Class B+ 1,777 32,626 Hewlett-Packard Co. 15,842 332,207 Intel Corp. 38,500 900,515 International Business Machines Corp. 8,200 808,356 JDS Uniphase Corp. + 9,700 30,749 Lucent Technologies Inc. + 15,000 56,400 Maxim Integrated Products Inc. 2,500 105,975 Micron Technology, Inc. + 5,500 67,925 Microsoft Corp. 66,800 1,784,228 Motorola, Inc. 16,100 276,920 Network Appliance, Inc. + 2,500 83,050 Oracle Corp. + 33,600 460,992 PerkinElmer, Inc. 1,500 33,735 QUALCOMM Inc. 9,300 394,320 Sanmina-SCI Corp. + 4,000 33,880 Siebel Systems, Inc. + 5,000 52,500 Solectron Corp. + 5,700 30,381 Sun Microsystems, Inc. + 17,600 94,688 Symantec Corp. + 2,500 64,400 Texas Instruments Inc. 13,500 332,370 Waters Corp. + 2,500 116,975 Xerox Corp. + 6,000 102,060 Yahoo! Inc. + 8,500 320,280 ----------- 9,532,055 ----------- MATERIALS - 2.77% Air Products & Chemicals, Inc. 2,500 144,925 Alcan Inc. 1,500 73,560 Alcoa Inc. 4,300 135,106 Dow Chemical Co. (The) 4,700 232,697 E.I. du Pont de Nemours & Co. 5,800 284,490 Georgia-Pacific Corp. 2,500 93,700 International Paper Co. 4,800 201,600 Newmont Mining Corp. 2,500 111,025 Nucor Corp. 2,500 130,850 Praxair, Inc. 2,500 110,375 Rohm & Hass Co. 2,500 110,575 Weyerhaeuser Co. 1,000 67,220 ----------- 1,696,123 ----------- -------------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2004 (continued) -------------------------------------------------------------------------------------- NO. OF DESCRIPTION SHARES VALUE -------------------------------------------------------------------------------------- REAL ESTATE INVESTMENT TRUSTS - 0.26% Simon Property Group Inc. 2,500 161,675 ----------- TELECOMMUNICATION SERVICES - 2.85% AT&T Corp. 5,260 100,255 BellSouth Corp. 10,200 283,458 SBC Communications Inc. 25,600 659,712 Sprint Corp. 4,100 101,885 Verizon Communications Inc. 14,900 603,599 ----------- 1,748,909 ----------- UTILITIES - 2.20% American Electric Power Co., Inc. 5,500 188,870 Dominion Resources, Inc. 2,000 135,480 Duke Energy Corp. 6,600 167,178 Edison International 2,500 80,075 FirstEnergy Corp. 2,500 98,775 Scottish Power plc, ADR 4,000 124,640 Sempra Energy 2,500 91,700 Southern Co. (The) 2,500 83,800 TXU Corp. 3,700 238,872 Williams Companies, Inc. (The) 2,500 40,725 Xcel Energy, Inc. 5,500 100,100 ----------- 1,350,215 ----------- TOTAL UNITED STATES 60,302,373 (cost $60,887,946) ----------- CZECH REPUBLIC - 1.33% CONSUMER DISCRETIONARY - 1.33% Bonton AS +# 68,590 136,257 Bonton Book AS +# 68,590 136,257 Bonton Discs AS +# 68,590 136,257 Bonton Film Entertainment AS +# 68,590 136,257 Bonton Music AS +# 68,590 136,257 Bonton Pictures AS +# 68,590 136,257 ----------- TOTAL CZECH REPUBLIC (cost $894,867) 817,542 ----------- TOTAL EQUITY SECURITIES (cost $61,782,813) 61,119,915 ----------- PRINCIPAL AMOUNT (000'S) --------- Short-Term Investments - 0.98% Repurchase Agreements - 0.98% Bear, Stearns & Co. Inc. (Agreement dated 12/31/04 to be repurchased at $343,127), 1.50%, 01/03/05 $343 343,084 ----------- -------------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2004 (concluded) -------------------------------------------------------------------------------------- PRINCIPAL AMOUNT DESCRIPTION (000'S) VALUE -------------------------------------------------------------------------------------- Bear, Stearns & Co. Inc. (Agreement dated 12/31/04 to be repurchased at $259,384), 1.16%*, 01/03/05 ** 259 259,359 ----------- TOTAL SHORT-TERM INVESTMENTS (cost - $602,443) 602,443 ----------- TOTAL INVESTMENTS - 100.58% (cost - $62,385,256) 61,722,358 ----------- LIABILITIES IN EXCESS OF OTHER ASSETS - (0.58)% (356,981) ----------- NET ASSETS - 100.00% $61,365,377 =========== ------------------------------ + Non-income producing security. # Securities are 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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE SHAREHOLDERS AND BOARD OF DIRECTORS CORNERSTONE TOTAL RETURN FUND, INC. NEW YORK, NEW YORK We have audited the accompanying statement of assets and liabilities of Cornerstone Total Return Fund, Inc., including the schedule of investments, as of December 31, 2004, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the three 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 two 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. 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, 2004, 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 Strategic Value Fund, Inc. as of December 31, 2004, the results of its operations for the year then ended, the changes in its net assets for the each of the two years in the period then ended and the financial highlights for each of the three 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 15, 2005 ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. ISS 2005 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. Vote FOR proposals that relate specifically to soliciting votes for a merger or transaction for which ISS has recommended a FOR vote. Vote AGAINST proposals if the wording is too vague or if the proposal includes "other business." AMEND QUORUM REQUIREMENTS Vote AGAINST proposals to reduce quorum requirements 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: o An auditor has a financial interest in or association with the company, and is therefore not independent o Fees for non-audit services are excessive, or o 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 CASE-BY-CASE on shareholder proposals asking for audit firm rotation, taking into account the tenure of the audit firm, the length of rotation specified in the proposal, any significant audit-related issues at the company, the number of Audit Committee meetings held each year, the number of financial experts serving on the committee, and whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive price. TRANSACT OTHER BUSINESS Vote AGAINST proposals to approve other business when it appears as voting item. 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: o Attend less than 75 percent of the board and committee meetings without a valid excuse o Implement or renew a dead-hand or modified dead-hand poison pill o Adopt a poison pill without shareholder approval since the company's last annual meeting and there is no requirement to put the pill to shareholder vote within 12 months of its adoption o Ignore a shareholder proposal that is approved by a majority of the shares outstanding o Ignore a shareholder proposal that is approved by a majority of the votes cast for two consecutive years o Failed to act on takeover offers where the majority of the shareholders tendered their shares o Are inside directors or affiliated outsiders and sit on the audit, compensation, or nominating committees o 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 o 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. o Are inside directors or affiliated outside directors and the full board is less than majority independent o Sit on more than six public company boards, or on more than two public boards in addition to their own if they are CEOs of public companies. o Are on the compensation committee when there is a negative correlation between chief executive pay and company performance o Have failed to address the issue(s) that resulted in any of the directors receiving more than 50% withhold votes out of those cast at the previous board election AGE LIMITS Vote AGAINST shareholder or management proposals to limit the tenure of outside directors either through term limits or mandatory retirement ages. 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. 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 based on the extent that shareholders have access to the board through their own nominations. DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY PROTECTION Proposals on director and officer indemnification and liability protection should be evaluated on a CASE-BYCASE 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: o 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 o 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) Generally vote FOR shareholder proposals requiring the position of chairman be filled by an independent director unless there are compelling reasons to recommend against the proposal, such as a counterbalancing governance structure. This should include all of the following: o Designated lead director, elected by and from the independent board members with clearly delineated and comprehensive duties. (The role may alternatively reside with a presiding director, vice chairman, or rotating lead director). o Two-thirds independent board o All-independent key committees o Established governance guidelines Additionally, the company should not have under-performed its peers. 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. OPEN ACCESS Vote CASE-BY-CASE on shareholder proposals asking for open access taking into account the ownership threshold specified in the proposal and the proponent's rationale for targeting the company in terms of board and director conduct. 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. Vote CASE-BY-CASE shareholder proposals asking that the company adopt a holding or retention period for its executives (for holding stock after the vesting or exercise of equity awards), taking into account any stock ownership requirements or holding period/retention ratio already in place and the actual ownership level of executives. TERM LIMITS Vote AGAINST shareholder or management proposals to limit the tenure of outside directors either through term limits or mandatory retirement ages. 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: o Long-term financial performance of the target company relative to its industry; management's track record o Background to the proxy contest o Qualifications of director nominees (both slates) o 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 requesting that the company submit its poison pill to a shareholder vote or redeem it. Vote FOR shareholder proposals asking that any future pill be put to a shareholder vote. 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. 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: o Purchase price o Fairness opinion o Financial and strategic benefits o How the deal was negotiated o Conflicts of interest o Other alternatives for the business o Noncompletion risk. ASSET SALES Votes on asset sales should be determined on a CASE-BY-CASE basis, considering the following factors: o Impact on the balance sheet/working capital o Potential elimination of diseconomies o Anticipated financial and operating benefits o Anticipated use of funds o Value received for the asset o Fairness opinion o How the deal was negotiated o 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: o Dilution to existing shareholders' position o Terms of the offer o Financial issues o Management's efforts to pursue other alternatives o Control issues o 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: o The reasons for the change o Any financial or tax benefits o Regulatory benefits o Increases in capital structure o Changes to the articles of incorporation or bylaws of the company. o 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: o Increases in common or preferred stock in excess of the allowable maximum as calculated by the ISS Capital Structure model o 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: o Prospects of the combined company, anticipated financial and operating benefits o Offer price o Fairness opinion o How the deal was negotiated o Changes in corporate governance o Change in the capital structure o 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: o Tax and regulatory advantages o Planned use of the sale proceeds o Valuation of spinoff o Fairness opinion o Benefits to the parent company o Conflicts of interest o Managerial incentives o Corporate governance changes o 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. 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: o It is intended for financing purposes with minimal or no dilution to current shareholders o 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). 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 equity-based 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 along with dilution to voting power. Once ISS determines the estimated cost of the plan, we compare it to a company-specific dilution cap. Our model determines a company-specific allowable pool of shareholder wealth that may be transferred from the company to plan participants, adjusted for: o Long-term corporate performance (on an absolute basis and relative to a standard industry peer group and an appropriate market index), o Cash compensation, and o Categorization of the company as emerging, growth, or mature. These adjustments are pegged to market capitalization. Vote AGAINST plans that expressly permit the repricing of underwater stock options without shareholder approval. Generally vote AGAINST plans in which (1) there is a disconnect between the CEO's pay and company performance (an increase in pay and a decrease in performance) and the main source of the pay increase (over half) is equity-based and (2) the CEO is the participant of the equity proposal. A decrease in performance is based on negative one- and three-year total shareholder returns. An increase in pay is based on the CEO's total direct compensation (salary, cash bonus, present value of stock options, face value of restricted stock, face value of long-term incentive plan payouts, and all other compensation) increasing over the previous year. Also may WITHHOLD votes from the Compensation Committee members. Generally vote AGAINST plans if the company's most recent three-year burn rate exceeds one standard deviation in excess of the industry mean and is over two percent of common shares outstanding. See Table 1 for details. A company with high three-year average burn rates may avoid triggering the burn rate policy by committing to the industry average over the next years. However, the above general voting guidelines for pay for performance may change if the compensation committee members can demonstrate that they have improved committee performance based on additional public filing such as an DEFA 14A or 8K. The additional filing needs to present strong and compelling evidence of improved performance with new information that has not been disclosed in the original proxy statement. The reiteration of the compensation committee report will not be sufficient evidence of improved committee performance. Evidence of improved compensation committee performance includes all of the following: o The compensation committee has reviewed all components of the CEO's compensation, including the following: -Base salary, bonus, long-term incentives -Accumulative realized and unrealized stock option and restricted stock gains -Dollar value of perquisites and other personal benefits to the CEO and the cost to the company -Earnings and accumulated payment obligations under the company's nonqualified deferred compensation program -Actual projected payment obligations under the company's supplemental executive retirement plan (SERPs) A tally sheet setting forth all the above components was prepared and reviewed affixing dollar amounts under the various payout scenarios. o A tally sheet with all the above components should be disclosed for the following termination scenarios: -Payment if termination occurs within 12 months: $_____ -Payment if "not for cause" termination occurs within 12 months: $_____ -Payment if "change of control" termination occurs within 12 months: $_____ o The compensation committee is committed to provide additional information on the named executives' annual cash bonus program and/or long-term incentive cash plan for the current fiscal year. The compensation committee will provide full disclosure of the qualitative and quantitative performance criteria and hurdle rates used to determine the payouts of the cash program. From this disclosure, shareholders will know the minimum level of performance required for any cash bonus to be delivered as well as the maximum cash bonus payable for superior performance. TABLE 1 : PROXY SEASON 2005 BURN RATE THRESHOLDS
RUSSELL 3000 NON-RUSSELL 3000 ------------------------------------------------------------------- --------------------------------------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- Standard Mean + Standard Mean + Std Std GICS GICS Dsec Mean Deviation Dev Mean Deviation Dev ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 1010 Energy 1.60% 1.02% 2.61% 2.59% 2.19% 4.78% ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 1510 Materials 1.55% 0.81% 2.36% 2.54% 1.92% 4.46% ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 2010 Capital Goods 1.86% 1.19% 3.05% 3.23% 2.93% 6.17% ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 2020 Commercial Services & 2.87% 1.53% 4.40% 4.39% 3.68% 8.07% Supplies ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 2030 Transportation 2.10% 1.50% 3.60% 2.44% 2.22% 4.66% ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 2510 Automobiles & Components 2.10% 1.37% 3.48% 2.90% 2.28% 5.18% ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 2520 Consumer Durables & Apparel 2.40% 1.51% 3.90% 3.42% 2.79% 6.21% ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 2530 Hotels Restaurants & Leisure 2.39% 1.08% 3.48% 3.30% 2.87% 6.17% ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 2540 Media 2.34% 1.50% 3.84% 4.12% 2.89% 7.01% ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 2550 Retailing 2.89% 1.95% 4.84% 4.26% 3.50% 7.75% ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 3010 to Food & Staples Retailing 1.98% 1.50% 3.48% 3.37% 3.32% 6.68% 3030 ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 3510 Health Care Equipment & 3.24% 1.96% 5.20% 4.55% 3.24% 7.79% Services ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 3520 Pharmaceuticals & 3.60% 1.72% 5.32% 5.77% 4.15% 9.92% Biotechnology ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 4010 Banks 1.44% 1.17% 2.61% 1.65% 1.60% 3.25% ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 4020 Diversified Financials 3.12% 2.54% 5.66% 5.03% 3.53% 8.55% ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 4030 Insurance 1.45% 0.88% 2.32% 2.47% 1.77% 4.24% ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 4040 Real Estate 1.01% 0.89% 1.90% 1.51% 1.50% 3.01% ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 4510 Software & Services 5.44% 3.05% 8.49% 8.08% 6.01% 14.10% ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 4520 Technology Hardware & 4.00% 2.69% 6.68% 5.87% 4.25% 10.12% Equipment ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 4530 Semiconductors & 5.12% 2.86% 7.97% 6.79% 3.95% 10.74% Semiconductor Equipment ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 5010 Telecommunication Services 2.56% 2.39% 4.95% 4.66% 3.90% 8.56% ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- ------------ ------------------------------- --------- --------- ---------- --------- -------- --------- 5510 Utilities 0.90% 0.65% 1.55% 3.74% 4.63% 8.38% ------------ ------------------------------- --------- --------- ---------- --------- -------- ---------
The repetition of the compensation committee report does not meet ISS' requirement of compelling and strong evidence of improved disclosure. The level of transparency and disclosure is at the highest level where shareholders can understand the mechanics of the annual cash bonus and/or long-term incentive cash plan based on the additional disclosure. o The compensation committee is committed to grant a substantial portion of performance-based equity awards to the named executive officers. A substantial portion of performance-based awards would be at least 50 percent of the shares awarded to each of the named executive officers. Performance-based equity awards are earned or paid out based on the achievement of company performance targets. The company will disclose the details of the performance criteria (e.g., return on equity) and the hurdle rates (e.g., 15 percent) associated with the performance targets. From this disclosure, shareholders will know the minimum level of performance required for any equity grants to be made. The performance-based equity awards do not refer to non-qualified stock options1 or performance-accelerated grants2. Instead, performance-based equity awards are performance contingent grants where the individual will not receive the equity grant by not meeting the target performance and vice versa. The level of transparency and disclosure is at the highest level where shareholders can understand the mechanics of the performance-based equity awards based on the additional disclosure. o The compensation committee has the sole authority to hire and fire outside compensation consultants. The role of the outside compensation consultant is to assist the compensation committee to analyze executive pay packages or contracts and understand the company's financial measures. BASED ON THE ADDITIONAL DISCLOSURE OF IMPROVED PERFORMANCE OF THE COMPENSATION COMMITTEE, ISS WILL GENERALLY VOTE FOR THE COMPENSATION COMMITTEE MEMBERS UP FOR ANNUAL ELECTION AND VOTE FOR THE EMPLOYEE-BASED STOCK PLAN IF THERE IS ONE ON THE BALLOT. HOWEVER, ISS IS NOT LIKELY TO VOTE FOR THE COMPENSATION COMMITTEE MEMBERS AND/OR THE EMPLOYEE-BASED STOCK PLAN IF ISS BELIEVES THE COMPANY HAS NOT PROVIDED COMPELLING AND SUFFICIENT EVIDENCE OF TRANSPARENT ADDITIONAL DISCLOSURE OF EXECUTIVE COMPENSATION BASED ON THE ABOVE REQUIREMENTS. DIRECTOR COMPENSATION Votes on compensation plans for directors are determined on a CASE-BY-CASE basis, using a proprietary, quantitative model developed by ISS. On occasion, director stock plans that set aside a relatively small of shares when combined with employee or executive stock compensation plans exceed the allowable cap. In such cases, starting proxy season 2005, ISS will supplement the analytical approach with a qualitative review of board compensation for companies, taking into consideration: o Director stock ownership guidelines - A minimum of three times the annual cash retainer. o Vesting schedule or mandatory holding/deferral period - A minimum vesting of three years for stock options or restricted stock, or - Deferred stock payable at the end of a three-year deferral period. o Mix between cash and equity - A balanced mix of cash and equity, for example 40% cash/60% equity or 50% cash/50% equity. - If the mix is heavier on the equity component, the vesting schedule or deferral period should be more stringent, with the lesser of five years or the term of directorship. (1) Non-qualified stock options are not performance-based awards unless the grant or the vesting of the stock options is tied to the achievement of a pre-determined and disclosed performance measure. A rising stock market will generally increase share prices of all companies, despite of the company's underlying performance. (2) Performance-accelerated grants are awards that vest earlier based on the achievement of a specified measure. However, these grants will ultimately vest over time even without the attainment of the goal(s). o Retirement/Benefit and Perquisites programs - No retirement/benefits and perquisites provided to non-employee directors. o Quality of disclosure - Provide detailed disclosure on cash and equity compensation delivered to each non-employee director for the most recent fiscal year in a table. The column headers for the table may include the following: name of each non-employee director, annual retainer, board meeting fees, committee retainer, committee-meeting fees, and equity grants. For ISS to recommend a vote FOR director equity plans based on the above qualitative features, a company needs to demonstrate that it meets all the above qualitative features in its proxy statement. 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. In cases where the exchange is not dollar-for-dollar, the request for new or additional shares for such equity program will be considered in the quantitative model. However, the cost would be lower than full-value awards since part of the deferral compensation is in-lieu-of cash compensation. 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: o Historic trading patterns o Rationale for the repricing o Value-for-value exchange o Treatment of surrendered options o Option vesting o Term of the option o Exercise price o Participation. QUALIFIED EMPLOYEE STOCK PURCHASE PLANS Votes on qualified 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: o Purchase price is at least 85 percent of fair market value o Offering period is 27 months or less, and o The number of shares allocated to the plan is ten percent or less of the outstanding shares Vote AGAINST qualified employee stock purchase plans where any of the following apply: o Purchase price is less than 85 percent of fair market value, or o Offering period is greater than 27 months, or o The number of shares allocated to the plan is more than ten percent of the outstanding shares NONQUALIFIED EMPLOYEE STOCK PURCHASE PLANS Votes on nonqualified employee stock purchase plans should be determined on a CASE-BY-CASE basis. Vote FOR nonqualified employee stock purchase plans with all the following features: o Broad-based participation (i.e., all employees of the company with the exclusion of individuals with 5 percent or more of beneficial ownership of the company). o Limits on employee contribution, which may be a fixed dollar amount or expressed as a percent of base salary. o Company matching contribution up to 25 percent of employee's contribution, which is effectively a discount of 20 percent from market value. o No discount on the stock price on the date of purchase since there is a company matching contribution. Vote AGAINST nonqualified employee stock purchase plans when any of the plan features do not meet the above criteria. 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.) 401(K) EMPLOYEE BENEFIT PLANS Vote FOR proposals to implement a 401(k) savings plan for employees. 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 AWARDS Generally vote FOR shareholder proposals advocating the use of performance-based awards like indexed, premium-priced, and performance-vested options or performance-based shares, unless: o The proposal is overly restrictive (e.g., it mandates that awards to all employees must be performance-based or all awards to top executives must be a particular type, such as indexed options) o The company demonstrates that it is using a substantial portion of performance-based awards for its top executives GOLDEN PARACHUTES AND EXECUTIVE SEVERANCE AGREEMENTS Vote FOR shareholder proposals to require golden parachutes or 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 parachutes. An acceptable parachute should include the following: o The triggering mechanism should be beyond the control of management o The amount should not exceed three times base amount (defined as the average annual taxable W-2 compensation during the five years prior to the year in which the change of control occurs o Change-in-control payments should be double-triggered, i.e., (1) after a change in control has taken place, and (2) termination of the executive as a result of the change in control. ISS defines change in control as a change in the company ownership structure. PENSION PLAN INCOME ACCOUNTING Generally vote FOR shareholder proposals to exclude pension plan income in the calculation of earnings used in determining executive bonuses/compensation. SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS (SERPS) Generally vote FOR shareholder proposals requesting to put extraordinary benefits contained in SERP agreements to a shareholder vote unless the company's executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans. 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: o The nature of the product and the degree that animal testing is necessary or federally mandated (such as medical products), o The availability and feasibility of alternatives to animal testing to ensure product safety, and o The degree that competitors are using animal-free testing. o Generally vote FOR proposals seeking a report on the company's animal welfare standards unless: o The company has already published a set of animal welfare standards and monitors compliance o The company's standards are comparable to or better than those of peer firms, and o 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: o Whether the proposal focuses on a specific drug and region o 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 o The extent that reduced prices can be offset through the company's marketing budget without affecting R&D spending o Whether the company already limits price increases of its products o Whether the company already contributes life -saving pharmaceuticals to the needy and Third World countries o The extent that peer companies implement price restraints GENETICALLY MODIFIED FOODS Vote AGAINST proposals asking companies to voluntarily label genetically engineered (GE) ingredients in their products or alternatively to provide interim labeling and eventually eliminate GE ingredients due to the costs and feasibility of labeling and/or phasing out the use of GE ingredients. Vote CASE-BY-CASE on proposals asking for a report on the feasibility of labeling products containing GE ingredients taking into account: o The relevance of the proposal in terms of the company's business and the proportion of it affected by the resolution o The quality of the company's disclosure on GE product labeling and related voluntary initiatives and how this disclosure compares with peer company disclosure o Company's current disclosure on the feasibility of GE product labeling, including information on the related costs o Any voluntary labeling initiatives undertaken or considered by the company. Vote CASE-BY-CASE on proposals asking for the preparation of a report on the financial, legal, and environmental impact of continued use of GE ingredients/seeds. o The relevance of the proposal in terms of the company's business and the proportion of it affected by the resolution o The quality of the company's disclosure on risks related to GE product use and how this disclosure compares with peer company disclosure o The percentage of revenue derived from international operations, particularly in Europe, where GE products are more regulated and consumer backlash is more pronounced. Vote AGAINST proposals seeking a report on the health and environmental effects of genetically modified organisms (GMOs). Health studies of this sort are better undertaken by regulators and the scientific community. Vote AGAINST proposals to completely phase out GE ingredients from the company's products or proposals asking for reports outlining the steps necessary to eliminate GE ingredients from the company's products. Such resolutions presuppose that there are proven health risks to GE ingredients (an issue better left to federal regulators) that outweigh the economic benefits derived from biotechnology. 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. HIV/AIDS Vote CASE-BY-CASE on requests for reports outlining the impact of the health pandemic (HIV/AIDS, malaria and tuberculosis) on the company's Sub-Saharan operations and how the company is responding to it, taking into account: o The nature and size of the company's operations in Sub-Saharan Africa and the number of local employees o The company's existing healthcare policies, including benefits and healthcare access for local workers o Company donations to healthcare providers operating in the region Vote AGAINST proposals asking companies to establish, implement, and report on a standard of response to the HIV/AIDS, TB, and Malaria health pandemic in Africa and other developing countries, unless the company has significant operations in these markets and has failed to adopt policies and/or procedures to address these issues comparable to those of industry peers. 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: o Whether the company has adequately disclosed mechanisms in place to prevent abusive lending practices o Whether the company has adequately disclosed the financial risks of its subprime business o Whether the company has been subject to violations of lending laws or serious lending controversies o 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: o Whether the company complies with all local ordinances and regulations o The degree that voluntary restrictions beyond those mandated by law might hurt the company's competitiveness o The risk of any health-related liabilities. Advertising to youth: o Whether the company complies with federal, state, and local laws on the marketing of tobacco or if it has been fined for violations o Whether the company has gone as far as peers in restricting advertising o Whether the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth o Whether restrictions on marketing to youth extend to foreign countries Cease production of tobacco-related products or avoid selling products to tobacco companies: o The percentage of the company's business affected o The economic loss of eliminating the business versus any potential tobacco-related liabilities. o Spinoff tobacco-related businesses: o The percentage of the company's business affected o The feasibility of a spinoff o 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 Generally vote AGAINST request for reports outlining potential environmental damage from drilling in the Arctic National Wildlife Refuge (ANWR) unless: o New legislation is adopted allowing development and drilling in the ANWR region; o The company intends to pursue operations in the ANWR; and o The company does not currently disclose an environmental risk report for their operations in the ANWR. CERES PRINCIPLES Vote CASE-BY-CASE on proposals to adopt the CERES Principles, taking into account: o The company's current environmental disclosure beyond legal requirements, including environmental health and safety (EHS) audits and reports that may duplicate CERES o The company's environmental performance record, including violations of federal and state regulations, level of toxic emissions, and accidental spills o Environmentally conscious practices of peer companies, including endorsement of CERES o Costs of membership and implementation. ENVIRONMENTAL-ECONOMIC RISK REPORT Vote CASE BY CASE on proposals requesting an economic risk assessment of environmental performance considering: o The feasibility of financially quantifying environmental risk factors, o The company's compliance with applicable legislation and/or regulations regarding environmental performance, o The costs associated with implementing improved standards, o The potential costs associated with remediation resulting from poor environmental performance, and o The current level of disclosure on environmental policies and initiatives. 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 proposals requesting a report on greenhouse gas emissions from company operations and/or products unless this information is already publicly disclosed or such factors are not integral to the company's line of business. Generally vote AGAINST proposals that call for reduction in greenhouse gas emissions by specified amounts or within a restrictive time frame unless the company lags industry standards and has been the subject of recent, significant fines or litigation resulting from greenhouse gas emissions. RECYCLING Vote CASE-BY-CASE on proposals to adopt a comprehensive recycling strategy, taking into account: o The nature of the company's business and the percentage affected o The extent that peer companies are recycling o The timetable prescribed by the proposal o The costs and methods of implementation o Whether the company has a poor environmental track record, such as violations of federal and state regulations. RENEWABLE ENERGY In general, vote FOR requests for reports on the feasibility of developing renewable energy sources unless the report is duplicative of existing disclosure or irrelevant to the company's line of business. Generally vote AGAINST proposals requesting that the company invest in renewable energy sources. Such decisions are best left to management's evaluation of the feasibility and financial impact that such programs may have on the company. SUSTAINABILITY REPORT Generally vote FOR proposals requesting the company to report on policies and initiatives related to social, economic, and environmental sustainability, unless: o The company already discloses similar information through existing reports or policies such as an Environment, Health, and Safety (EHS) report; comprehensive Code of Corporate Conduct; and/or Diversity Report; or o The company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI) guidelines or a similar standard within a specified time frame. GENERAL CORPORATE ISSUES OUTSOURCING/ OFFSHORING Vote CASE BY CASE on proposals calling for companies to report on the risks associated with outsourcing, considering: o Risks associated with certain international markets o The utility of such a report to shareholders o The existence of a publicly available code of corporate conduct that applies to international operations 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: o The relevance of the issue to be linked to pay o The degree that social performance is already included in the company's pay structure and disclosed o The degree that social performance is used by peer companies in setting pay o Violations or complaints filed against the company relating to the particular social performance measure o Artificial limits sought by the proposal, such as freezing or capping executive pay o Independence of the compensation committee o Current company pay levels. CHARITABLE/POLITICAL CONTRIBUTIONS Generally vote AGAINST proposals asking the company to affirm political nonpartisanship in the workplace so long as: o The company is in compliance with laws governing corporate political activities, and o 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: o There are serious controversies surrounding the company's China operations, and o 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: o The nature and amount of company business in that country o The company's workplace code of conduct o Proprietary and confidential information involved o Company compliance with U.S. regulations on investing in the country o 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: o 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 o Agreements with foreign suppliers to meet certain workplace standards o Whether company and vendor facilities are monitored and how o Company participation in fair labor organizations o Type of business o Proportion of business conducted overseas o Countries of operation with known human rights abuses o Whether the company has been recently involved in significant labor and human rights controversies or violations o Peer company standards and practices o Union presence in company's international factories o Generally vote FOR reports outlining vendor standards compliance unless any of the following apply: o The company does not operate in countries with significant human rights violations o The company has no recent human rights controversies or violations, or o 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: o Company compliance with or violations of the Fair Employment Act of 1989 o Company antidiscrimination policies that already exceed the legal requirements o The cost and feasibility of adopting all nine principles o The cost of duplicating efforts to follow two sets of standards (Fair Employment and the MacBride Principles) o The potential for charges of reverse discrimination o The potential that any company sales or contracts in the rest of the United Kingdom could be negatively impacted o The level of the company's investment in Northern Ireland o The number of company employees in Northern Ireland o The degree that industry peers have adopted the MacBride Principles o 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: o Whether the company has in the past manufactured landmine components o Whether the company's peers have renounced future production o Vote CASE-BY-CASE on proposals asking a company to renounce future involvement in cluster bomb production, taking into account: o What weapons classifications the proponent views as cluster bombs o Whether the company currently or in the past has manufactured cluster bombs or their components o The percentage of revenue derived from cluster bomb manufacture o 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. OPERATIONS IN NATIONS SPONSORING TERRORISM (IRAN) Vote CASE-BY-CASE on requests for a board committee review and report outlining the company's financial and reputational risks from its operations in Iran, taking into account current disclosure on: o The nature and purpose of the Iranian operations and the amount of business involved (direct and indirect revenues and expenses) that could be affected by political disruption o Compliance with U.S. sanctions and laws SPACED-BASED WEAPONIZATION Generally vote FOR reports on a company's involvement in spaced-based weaponization unless: o The information is already publicly available or o 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: o The board composition is reasonably inclusive in relation to companies of similar size and business or o The board already reports on its nominating procedures and diversity initiatives. Generally vote AGAINST proposals that would call for the adoption of specific committee charter language regarding diversity initiatives unless the company fails to publicly disclose existing equal opportunity or nondiscrimination policies. Vote CASE-BY-CASE on proposals asking the company to increase the representation of women and minorities on the board, taking into account: o The degree of board diversity o Comparison with peer companies o Established process for improving board diversity o Existence of independent nominating committee o Use of outside search firm o 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: o The company has well-documented equal opportunity programs o The company already publicly reports on its company-wide affirmative initiatives and provides data on its workforce diversity, and o The company has no recent EEO-related violations or litigation. Vote AGAINST proposals seeking information on the diversity efforts of suppliers and service providers, which can pose a significant cost and administration burden on the company. GLASS CEILING Generally vote FOR reports outlining the company's progress towards the Glass Ceiling Commission's business recommendations, unless: o The composition of senior management and the board is fairly inclusive o The company has well-documented programs addressing diversity initiatives and leadership development o The company already issues public reports on its company-wide affirmative initiatives and provides data on its workforce diversity, and o The company has had no recent, significant EEO-related violations or litigation SEXUAL ORIENTATION Vote FOR proposals seeking to amend a company's EEO statement in order to prohibit discrimination based on sexual orientation, unless the change would result in excessive costs for the company. Vote AGAINST proposals to ext end company benefits to or eliminate benefits from domestic partners. Benefits decisions should be left to the discretion of the company. 10. MUTUAL FUND PROXIES ELECTION OF DIRECTORS Vote the election of directors on a CASE-BY-CASE basis, considering the following factors: board structure; director independence and qualifications; and compensation of directors within the fund and the family of funds attendance at board and committee meetings. Votes should be withheld from directors who: o attend less than 75 percent of the board and committee meetings o without a valid excuse for the absences. Valid reasons include illness or o absence due to company business. Participation via telephone is acceptable. o In addition, if the director missed only one meeting or one day's o meetings, votes should not be withheld even if such absence dropped the o director's attendance below 75 percent. o ignore a shareholder proposal that is approved by a majority of shares o outstanding; o ignore a shareholder proposal that is approved by a majority of the o votes cast for two consecutive years; o are interested directors and sit on the audit or nominating committee; or o are interested directors and the full board serves as the audit or o nominating committee or the company does not have one of these o committees. CONVERTING CLOSED-END FUND TO OPEN-END FUND Vote conversion proposals on a CASE-BY-CASE basis, considering the following factors: past performance as a closed-end fund; market in which the fund invests; measures taken by the board to address the discount; and past shareholder activism, board activity, and votes on related proposals. Proxy Contests Votes on proxy contests should be determined on a CASE-BY-CASE basis, considering the following factors: o Past performance relative to its peers o Market in which fund invests o Measures taken by the board to address the issues o Past shareholder activism, board activity, and votes on related proposals o Strategy of the incumbents versus the dissidents o Independence of directors o Experience and skills of director candidates o Governance profile of the company o 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: o Proposed and current fee schedules o Fund category/investment objective o Performance benchmarks o Share price performance as compared with peers o Resulting fees relative to peers o Assignments (where the advisor undergoes a change of control) APPROVING 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, and 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; and 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 t he current SEC interpretation. CHANGING A FUNDAMENTAL RESTRICTION TO A NONFUNDAMENTAL RESTRICTION Proposals to change a fundamental restriction to a nonfundamental restriction should be evaluated on a CASEBY- CASE basis, considering the following factors: the fund's target investments, the reasons given by the fund for the change, and 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, consolidation in the target market, and 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, and 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; and terms of the liquidation. CHANGES TO THE CHARTER DOCUMENT Votes on changes to the charter document should be determined on a CASE-BY-CASE basis, considering the following factors: o The degree of change implied by the proposal o The efficiencies that could result o The state of incorporation o Regulatory standards and implications Vote AGAINST any of the following changes: o Removal of shareholder approval requirement to reorganize or terminate the trust or any of its series o Removal of shareholder approval requirement for amendments to the new declaration of trust o Removal of shareholder approval requirement to amend the fund's management contract, allowing the contract to be modified by the investment manager and the trust management, as permitted by the 1940 Act o 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 o Removal of shareholder approval requirement to engage in and terminate subadvisory arrangements o Removal of shareholder approval requirement to change the domicile of the fund CHANGING THE DOMICILE OF A FUND Vote reincorporations on a CASE-BY-CASE basis, considering the following factors: regulations of both states; required fundamental policies of both states; and the increased flexibility available. AUTHORIZING 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, and 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, and changes in corporate governance and their impact on shareholder rights. SHAREHOLDER PROPOSALS TO ESTABLISH DIRECTOR OWNERSHIP REQUIREMENT 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 SHAREHOLDER FOR EXPENSES INCURRED 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 THE 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, and the performance of other funds under the advisor's management. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT COMPANIES AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no material changes to the procedures by which shareholders may recommend nominees to the registrant's Board of Directors since the registrant last provided disclosure in response to the requirements of Item 7(d)(2)(ii)(g) of Schedule 14A in its definitive proxy statement dated April 28, 2004. ITEM 11. CONTROLS AND PROCEDURES. (a) As a date within 90 days from the filing date of this report, the principal executive officer and the principal financial officer concluded that 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 define in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Code of Ethics attached as EX-99.CODEETH. (a)(2) Separate certifications of Principal Executive and Financial Officers pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 attached as EX-99.CERT. (b) Certification of Principal Executive and Financial Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 furnished as EX-99.906CERT. Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. By:/S/ RALPH W. BRADSHAW ------------------------ Name: Ralph W. Bradshaw Title: Principal Executive Officer Date: March 9, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Cornerstone Total Return Fund, Inc. By:/S/ RALPH W. BRADSHAW ------------------------- Name: Ralph W. Bradshaw Title: Principal Executive Officer Date: March 9, 2005 By:/S/ JODI B. LEVINE --------------------- Name: Jodi B. Levine Title: Principal Financial Officer Date: March 9, 2005