-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ApfYeqkOLGOEjL6xz0Z63FP+F/UyR6rIWWwxJblR11fPIKkIe9Jvx3aRq9TN9Glh 1X6tiTOYayWCPSZjlzKgfA== 0000909012-07-000519.txt : 20070309 0000909012-07-000519.hdr.sgml : 20070309 20070309120742 ACCESSION NUMBER: 0000909012-07-000519 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070309 DATE AS OF CHANGE: 20070309 EFFECTIVENESS DATE: 20070309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNERSTONE TOTAL RETURN FUND INC CENTRAL INDEX KEY: 0000033934 IRS NUMBER: 132727013 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-02363 FILM NUMBER: 07683283 BUSINESS ADDRESS: STREET 1: BEAR STEARNS FUNDS MGMT INC. STREET 2: 383 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10179 BUSINESS PHONE: 2122722093 MAIL ADDRESS: STREET 1: BEAR STEARNS FUNDS MGMT INC. STREET 2: 383 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10179 FORMER COMPANY: FORMER CONFORMED NAME: EIS FUND INC DATE OF NAME CHANGE: 20020109 FORMER COMPANY: FORMER CONFORMED NAME: EXCELSIOR INCOME SHARES INC DATE OF NAME CHANGE: 19920703 N-CSR 1 t303257.txt CRF ============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES INVESTMENT COMPANY ACT FILE NUMBER 811-02363 CORNERSTONE TOTAL RETURN FUND, INC. (Exact name of registrant as specified in charter) 383 Madison Avenue, New York, New York 10179 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Jodi Levine 383 Madison Avenue, New York, New York 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, 2006 Date of reporting period: December 31, 2006 Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ============================================================================== ITEM 1. REPORTS TO STOCKHOLDERS. The report of Cornerstone Total Return Fund, Inc. (the "Registrant") to stockholders for the year ended December 31, 2006 follows. ================================================================================ CORNERSTONE TOTAL RETURN FUND, INC. ANNUAL REPORT DECEMBER 31, 2006 ================================================================================ CONTENTS Portfolio Summary 1 Summary Schedule of Investments 2 Statement of Assets and Liabilities 4 Statement of Operations 5 Statement of Changes in Net Assets 6 Financial Highlights 7 Notes to Financial Statements 8 Report of Independent Registered Public Accounting Firm 12 Tax Information 13 Additional Information Regarding the Fund's Directors and Corporate Officers 14 Description of Dividend Reinvestment Plan 17 Proxy Voting and Portfolio Holdings Information 19 Privacy Policy Notice 19 Summary of General Information 20 Shareholder Information 20 ================================================================================ - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. PORTFOLIO SUMMARY - AS OF DECEMBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- SECTOR ALLOCATION Percent of Sector Net Assets - -------------------------------------------------------------------------------- Financials 19.6 - -------------------------------------------------------------------------------- Information Technology 14.1 - -------------------------------------------------------------------------------- Healthcare 10.4 - -------------------------------------------------------------------------------- Industrials 9.8 - -------------------------------------------------------------------------------- Energy 9.6 - -------------------------------------------------------------------------------- Consumer Discretionary 9.6 - -------------------------------------------------------------------------------- Consumer Staples 9.1 - -------------------------------------------------------------------------------- Closed-End Funds 8.0 - -------------------------------------------------------------------------------- Telecommunication Services 3.4 - -------------------------------------------------------------------------------- Utilities 2.8 - -------------------------------------------------------------------------------- Materials 2.3 - -------------------------------------------------------------------------------- Other 1.3 - -------------------------------------------------------------------------------- TOP TEN HOLDINGS, BY ISSUER Percent of Holding Sector Net Assets - -------------------------------------------------------------------------------- 1. Exxon Mobil Corporation Energy 4.7 - -------------------------------------------------------------------------------- 2. General Electric Company Industrials 3.7 - -------------------------------------------------------------------------------- 3. Citigroup Inc. Financials 2.7 - -------------------------------------------------------------------------------- 4. Microsoft Corporation Information Technology 2.5 - -------------------------------------------------------------------------------- 5. Dreman/Claymore Dividend & Income Fund Closed-End Funds 2.2 - -------------------------------------------------------------------------------- 6. Johnson & Johnson Healthcare 2.0 - -------------------------------------------------------------------------------- 7. Adams Express Company Closed-End Funds 1.9 - -------------------------------------------------------------------------------- 8. Bank of America Corporation Financials 1.7 - -------------------------------------------------------------------------------- 9. Procter & Gamble Company (The) Consumer Staples 1.7 - -------------------------------------------------------------------------------- 10. American International Group, Inc. Financials 1.7 - -------------------------------------------------------------------------------- ================================================================================ 1
- -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SUMMARY SCHEDULE OF INVESTMENTS - DECEMBER 31, 2006 - -------------------------------------------------------------------------------- No. of Description Shares Value - -------------------------------------------------------------------------------- EQUITY SECURITIES - 99.14% UNITED STATES - 98.82% CLOSED-END FUNDS - 7.95% Adams Express Company 70,400 $ 976,448 Boulder Total Return Fund, Inc. 13,900 310,526 Dreman/Claymore Dividend & Income Fund 49,500 1,137,510 Liberty All-Star Growth Fund, Inc. 140,800 756,096 Other Closed-End Funds (a) 984,167 ----------- 4,164,747 ----------- CONSUMER DISCRETIONARY - 9.32% Home Depot, Inc. (The) 9,000 361,440 McDonald's Corporation 8,100 359,073 Time Warner Inc. ^ 17,000 370,260 Walt Disney Company (The) 8,000 274,160 Other Consumer Discretionary (a) 3,518,426 ----------- 4,883,359 ----------- CONSUMER STAPLES - 9.09% Altria Group, Inc. 7,700 660,814 Coca-Cola Company (The) 13,500 651,375 PepsiCo, Inc. ^ 5,000 312,750 Procter & Gamble Company (The) 13,972 897,980 Wal-Mart Stores, Inc. 19,000 877,420 Other Consumer Staples (a) 1,362,843 ----------- 4,763,182 ----------- ENERGY - 9.57% Chevron Corporation 10,068 740,300 Exxon Mobil Corporation 32,000 2,452,163 Schlumberger Limited 5,000 315,800 Other Energy (a) 1,502,875 ----------- 5,011,138 ----------- FINANCIALS - 19.62% American International Group, Inc. 12,331 883,639 Bank of America Corporation ^ 17,021 908,751 Citigroup Inc. ^ 25,600 1,425,920 No. of Description Shares Value - -------------------------------------------------------------------------------- FINANCIALS (CONTINUED) Fannie Mae 6,200 $ 368,218 Franklin Resources, Inc. 2,500 275,425 Goldman Sachs Group, Inc. (The) 3,000 598,050 JPMorgan Chase & Co. 12,700 613,410 M&T Bank Corporation 2,500 305,400 Morgan Stanley 3,700 301,291 St. Paul Travelers Companies, Inc. (The) 5,092 273,389 Wachovia Corporation 5,600 318,920 Wells Fargo & Company 18,000 640,080 Other Financials (a) 3,360,577 ----------- 10,273,070 ----------- HEALTHCARE - 10.36% Amgen Inc. * 8,300 566,973 Johnson & Johnson 15,500 1,023,310 Merck & Co. Inc. 8,700 379,320 Pfizer Inc. 24,960 646,464 UnitedHealth Group Incorporated 10,000 537,300 Other Healthcare (a) 2,274,063 ----------- 5,427,430 ----------- INDUSTRIALS - 9.83% FedEx Corp. 2,500 271,550 General Electric Company 52,000 1,934,920 United Parcel Service, Inc., Class B 4,000 299,920 United Technologies Corporation ^ 4,400 275,088 Other Industrials (a) 2,369,846 ----------- 5,151,324 ----------- INFORMATION TECHNOLOGY - 14.08% Apple Computer, Inc. * 5,000 424,200 Cisco Systems, Inc. * 24,500 669,585 Google Inc. ^ * 1,000 460,480 Hewlett-Packard Company 10,000 411,900 Intel Corporation 19,500 394,875 International Business Machines Corporation 5,700 553,755 Microsoft Corporation 43,000 1,283,980 Oracle Corporation * 33,600 575,904 ================================================================================ See accompanying notes to financial statements 2 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SUMMARY SCHEDULE OF INVESTMENTS - DECEMBER 31, 2006 (CONCLUDED) - -------------------------------------------------------------------------------- No. of Description Shares Value - -------------------------------------------------------------------------------- INFORMATION TECHNOLOGY (CONTINUED) Texas Instruments Incorporated 13,500 $ 388,800 Other Information Technology (a) 2,204,955 ----------- 7,368,434 ----------- MATERIALS - 2.32% E. I. du Pont de Nemours and Company 5,800 282,518 Other Materials (a) 934,671 ----------- 1,217,189 ----------- REAL ESTATE INVESTMENT TRUST - 0.48% Total Real Estate Investment Trust (a) 253,225 ----------- TELECOMMUNICATION SERVICES - 3.39% AT&T Inc. 24,699 882,989 Verizon Communications Inc. 10,000 372,400 Other Telecommunication Services (a) 519,957 ----------- 1,775,346 ----------- UTILITIES - 2.81% TXU Corp. 7,400 401,154 Other Utilities (a) 1,069,076 ----------- 1,470,230 ----------- TOTAL UNITED STATES (cost - $44,010,264) 51,758,674 ----------- CZECH REPUBLIC - 0.32% CONSUMER DISCRETIONARY - 0.32% Total Consumer Discretionary # (a) 166,762 ----------- TOTAL CZECH REPUBLIC (cost - $894,864) 166,762 ----------- TOTAL EQUITY SECURITIES (cost - $44,905,128) 51,925,436 ----------- Principal Amount Description (000's) Value - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS - 2.73% REPURCHASE AGREEMENTS - 2.73% Bear, Stearns & Co. Inc. + (Agreements dated 12/29/2006 to be repurchased at $1,433,098)(b) $ 1,432 $ 1,432,470 ----------- TOTAL SHORT-TERM INVESTMENTS (cost - $1,432,470) 1,432,470 ----------- TOTAL INVESTMENTS - 101.87% (cost - $46,337,598) 53,357,906 ----------- LIABILITIES IN EXCESS OF OTHER ASSETS - (1.87)% (978,676) ----------- NET ASSETS - 100.00% $52,379,230 =========== - ------------- * Non-income producing security. + Includes investments purchased with cash collateral received for securities on loan. ^ Security or a portion thereof is out on loan. # Securities are fair valued in accordance with procedures established by the Board of Directors. At December 31, 2006, the Fund held 0.32% of its net assets in securities valued in good faith by the Board of Directors with an aggregate cost of $894,864 and a fair value of $166,762. (a) Represents issues not identified as a top 50 holding in terms of market value and issues or issuers not exceeding 1% of net assets individually or in the aggregate, respectively, as of December 31, 2006. (b) At December 29, 2006, the maturity date for all repurchase agreements held was January 2, 2007 with interest rates ranging from 2.6565% to 5.3130% and collateralized by $1,476,042 in U.S. Treasury Bond Strips.
================================================================================ See accompanying notes to financial statements. 3
- -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 2006 - -------------------------------------------------------------------------------- ASSETS Investments, at value, including collateral for securities on loan of $961,405 (Cost $46,337,598) (1) $ 53,357,906 Receivables: Dividends 85,764 Interest 1,627 Prepaid expenses 1,509 ------------ Total Assets 53,446,806 ------------ LIABILITIES Payables: Upon return of securities loaned 961,405 Investment management fees 44,357 Directors' fees 14,500 Other accrued expenses 46,365 Due to custodian 949 ------------ Total Liabilities 1,067,576 ------------ NET ASSETS (applicable to 5,167,874 shares of common stock outstanding) $ 52,379,230 ============ NET ASSET VALUE PER SHARE ($52,379,230 / 5,167,874) $ 10.14 ============ NET ASSETS CONSISTS OF Capital stock, $0.01 par value; 5,167,874 shares issued and outstanding (15,000,000 shares authorized) $ 51,679 Paid-in capital 60,678,188 Accumulated net realized loss on investments (15,370,945) Net unrealized appreciation in value of investments 7,020,308 ------------ Net assets applicable to shares outstanding $ 52,379,230 ============ - ------------ (1) Includes securities out on loan to brokers with a market value of $954,730.
================================================================================ See accompanying notes to financial statements. 4
- -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2006 - -------------------------------------------------------------------------------- INVESTMENT INCOME Income: Dividends $ 1,145,598 Interest 20,639 Securities lending 14,335 ----------- Total Investment Income 1,180,572 ----------- Expenses: Investment management fees 522,164 Directors' fees 55,498 Legal and audit fees 53,635 Administration fees 52,282 Accounting fees 32,837 Transfer agent fees 28,999 Custodian fees 12,872 Printing 10,551 Insurance 6,643 Stock exchange listing fees 6,282 Miscellaneous 1,176 ----------- Total Expenses 782,939 Less: Fees paid indirectly (30,564) ----------- Net Expenses 752,375 ----------- Net Investment Income 428,197 ----------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized loss from investments (50,353) Capital gain distributions from regulated investment companies 103,660 Net change in unrealized appreciation in value of investments 6,318,611 ----------- Net realized and unrealized gain on investments 6,371,918 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 6,800,115 ===========
================================================================================ See accompanying notes to financial statements. 5
- -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- For the Years Ended December 31, ---------------------------- 2006 2005 ------------ ------------ DECREASE IN NET ASSETS Operations: Net investment income $ 428,197 $ 299,210 Net realized loss from investments (50,353) (464,943) Capital gain distributions from regulated investment companies 103,660 -- Net change in unrealized appreciation/(depreciation) in value of investments 6,318,611 1,364,595 ------------ ------------ Net increase in net assets resulting from operations 6,800,115 1,198,862 ------------ ------------ Dividends and distributions to shareholders: Net investment income (428,197) (299,210) Return-of-capital (10,248,116) (9,996,313) ------------ ------------ Total dividends and distributions to shareholders (10,676,313) (10,295,523) ------------ ------------ Capital stock transactions: Proceeds from 200,573 and 167,470 shares newly issued in reinvestment of dividends and distributions, respectively 2,061,112 1,925,600 ------------ ------------ Total decrease in net assets (1,815,086) (7,171,061) ------------ ------------ NET ASSETS Beginning of year 54,194,316 61,365,377 ------------ ------------ End of year $ 52,379,230 $ 54,194,316 ============ ============
================================================================================ 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, ------------------------------------------------------------ 2006 2005 2004 2003 2002 ---- ---- ---- ---- ---- PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 10.91 $ 12.78 $ 13.89 $ 12.89 $ 18.30 -------- -------- -------- -------- -------- Net investment income# 0.09 0.06 0.10 0.08 0.15 Net realized and unrealized gain/(loss) on investments 1.25 0.18 0.87 2.91 (3.57) -------- -------- -------- -------- -------- Net increase/(decrease) in net assets resulting from operations 1.34 0.24 0.97 2.99 (3.42) -------- -------- -------- -------- -------- Dividends and distributions to shareholders: Net investment income (0.09) (0.06) (0.10) (0.08) (0.18) Return-of-capital (2.02) (2.05) (2.01) (1.91) (1.80) -------- -------- -------- -------- -------- Total dividends and distributions to shareholders (2.11) (2.11) (2.11) (1.99) (1.98) -------- -------- -------- -------- -------- Capital stock transactions: Anti-dilutive effect due to capital stock repurchased -- -- -- -- 0.02 Anti-dilutive/(dilutive) effect due to shares issued in reinvestment of dividends and distributions -- -- 0.03 -- (0.03) -------- -------- -------- -------- -------- Total capital stock transactions -- -- 0.03 -- (0.01) -------- -------- -------- -------- -------- Net asset value, end of year $ 10.14 $ 10.91 $ 12.78 $ 13.89 $ 12.89 ======== ======== ======== ======== ======== Market value, end of year $ 19.62 $ 14.65 $ 17.95 $ 17.95 $ 11.35 ======== ======== ======== ======== ======== Total investment return (a) 64.15% (2.07)% 15.11% 82.96% (19.30)% ======== ======== ======== ======== ======== RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000 omitted) $ 52,379 $ 54,194 $ 61,365 $ 65,642 $ 60,151 Ratio of expenses to average net assets, net of fee waivers, if any (b) 1.44% 1.47% 1.41% 1.20% 1.50% Ratio of expenses to average net assets, excluding fee waivers, if any (c) 1.50% 1.52% 1.45% 1.43% 2.07% Ratio of expenses to average net assets, net of fee waivers, if any (c) 1.50% 1.50% 1.43% 1.23% 1.63% Ratio of net investment income to average net assets 0.82% 0.53% 0.75% 0.65% 1.01% Portfolio turnover rate 11.29% 9.84% 12.15% 3.62% 86.60% - ------------------------------------------------------------------------------------------------------------ # 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 capital appreciation with current income as a secondary objective by investing primarily in U.S. and non-U.S. companies. The Fund is registered under the Investment Company Act of 1940, as amended, as a closed-end, diversified management investment company. The following is a summary of significant accounting policies consistently followed by the Fund: MANAGEMENT ESTIMATES: The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") requires management to make certain estimates and assumptions that may affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION: Investments are stated at value in the accompanying financial statements. All equity securities shall be valued at the closing price on the exchange or market on which the security is primarily traded ("Primary Market"). If the security did not trade on the Primary Market, it shall be valued at the closing price on another exchange where it trades. If there are no such sale prices, the value shall be the most recent bid, and if there is no bid, the security shall be valued at the most recent asked. If no pricing service is available and there are more than two dealers, the value shall be the mean of the highest bid and lowest ask. If there is only one dealer, then the value shall be the mean if bid and ask are available, otherwise the value shall be the bid. All other securities and assets are valued as determined in good faith by the Board of Directors. Short-term investments having a maturity of 60 days or less are valued on the basis of amortized cost. Securities and assets for which market quotations are not readily available are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Board. Fair valuation methodologies and procedures may include, but are not limited to: analysis and review of financial and non-financial information abut the company; comparisons to the valuation and changes in valuation of similar securities, including reference to special reports prepared by analysts and or reports published in the financial press, the financial conditions and prospects of the issuer available, including considering any recent management or capital structure changes or other recent events that may impact the price of the security; and evaluation of any other information that could be indicative of the value of the security. At December 31, 2006, the Fund held 0.32% of its net assets in securities valued in good faith by the Board of Directors with an aggregate cost of $894,867 and a fair value of $166,762. The net asset value per share of the Fund is calculated weekly and on the last business day of the month with the exception of those days on which the American Stock Exchange, LLC is closed. In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 157, Fair Value Measurements, which clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. Adoption of SFAS 157 requires the use of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. At this time, the Fund is in the process of reviewing SFAS 157 against its current valuation policies to determine future applicability. ================================================================================ 8 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- REPURCHASE AGREEMENTS: The Fund has agreed to purchase securities from financial institutions subject to the seller's agreement to repurchase them at an agreed-upon time and price ("repurchase agreements"). The financial institutions with whom the Fund enters into repurchase agreements are banks and broker/dealers, which Cornerstone Advisors, Inc. (the Fund's "Investment Manager" or "Cornerstone") considers creditworthy. The seller under a repurchase agreement will be required to maintain the value of the securities as collateral, subject to the agreement at not less than the repurchase price plus accrued interest. Cornerstone monitors daily, the mark-to-market of the value of the collateral, and, if necessary, requires the seller to maintain additional securities, so that the value of the collateral is not less than the repurchase price. Default by or bankruptcy of the seller would, however, expose the Fund to possible loss because of adverse market action or delays in connection with the disposition of the underlying securities. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: Investment transactions are accounted for on the trade date. The cost of investments sold is determined by use of the specific identification method for both financial reporting and income tax purposes. Interest income is recorded on an accrual basis; dividend income is recorded on the ex-dividend date. TAXES: No provision is made for U.S. federal income or excise taxes as it is the Fund's intention to continue to qualify as a regulated investment company and to make the requisite distributions to its shareholders which will be sufficient to relieve it from all or substantially all U.S. federal income and excise taxes. In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. ("FIN") 48, Accounting for Uncertainty in Income Taxes. FIN 48 is effective for financial statements issued for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. The Fund does not expect the FASB's issuance of FIN 48 to materially impact the Fund's financial condition or results of operations. DISTRIBUTIONS TO SHAREHOLDERS: Effective January 2002, the Fund initiated a fixed, monthly distribution to shareholders. On November 29, 2006, this distribution policy was updated to provide for the annual resetting of the monthly distribution amount per share, beginning in 2007, based on the Fund's net asset value on the last business day in each October. The terms of the distribution policy will be reviewed and approved at least annually by the Fund's Board of Directors and can be modified at their discretion. To the extent that these distributions exceed the current earnings of the Fund, the balance will be generated from sales of portfolio securities held by the Fund, which will either be short-term or long-term capital gains or a tax-free return-of-capital. To the extent these distributions are not represented by net investment income and capital gains, they will not represent yield or investment return on the Fund's investment portfolio. The Fund plans to maintain this distribution policy even if regulatory requirements would make part of a return-of-capital, necessary to maintain the distribution, taxable to shareholders and to disclose that portion of the distribution that is classified as ordinary income. Although it has no current intention to do so, the Board may terminate this distribution policy at any time and such termination may have an adverse effect on the market price for the Fund's common shares. The Fund determines annually whether to distribute any net realized long-term capital gains in excess of net realized short-term capital losses, including capital loss carryovers, if any. To the extent that the Fund's taxable income in any calendar year exceeds the aggregate amount distributed pursuant to this distribution policy, an additional distribution may be made to avoid the payment of a 4% U.S. federal excise tax, and to the extent that the aggregate amount ================================================================================ 9 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- distributed in any calendar year exceeds the Fund's taxable income, the amount of that excess may constitute a return-of-capital for tax purposes. A return-of-capital distribution reduces the cost basis of an investor's shares in the Fund. Dividends and distributions to shareholders are recorded by the Fund on the ex-dividend date. NOTE B. AGREEMENTS Cornerstone serves as the Fund's Investment Manager with respect to all investments. As compensation for its investment management services, Cornerstone receives from the Fund, an annual fee, calculated weekly and paid monthly, equal to 1.00% of the Fund's average weekly net assets. During the year ended December 31, 2006, Cornerstone voluntarily agreed to waive its management fees from the Fund to the extent that the Fund's net monthly operating expenses (including basic legal fees but excluding other legal expenses) exceed a rate of 0.125% of average net assets. For the year ended December 31, 2006, Cornerstone earned $522,164 for investment management services, of which no amounts were required to be waived. The Investment Manager may discontinue such undertaking at any time during the fiscal year without notice to fund shareholders. Included in the Statement of Operations, under the caption FEES PAID INDIRECTLY, are expense offsets of $30,564 arising from credits earned on portfolio transactions executed with a broker, pursuant to a directed brokerage arrangement. The Fund paid or accrued approximately $39,035 for the year ended December 31, 2006 for legal services to Blank Rome LLP ("Blank"), counsel to the Fund. Thomas R. Westle, partner of Blank, serves as Secretary of the Fund. NOTE C. INVESTMENT IN SECURITIES For the year ended December 31, 2006, purchases and sales of securities, other than short-term investments, were $5,900,360 and $14,369,287 respectively. NOTE D. SECURITIES LENDING To generate additional income, the Fund may lend up to 33(1)/3% of its total assets. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn interest on the investment of cash collateral. Loans are subject to termination by the Fund or the borrower at any time, and are, therefore, not considered to be illiquid investments. Loans of securities are required at all times to be secured by collateral equal to at least 100% of the market value of securities on loan. However, in the event of default or bankruptcy of the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. In the event that the borrower fails to return securities, and collateral maintained by the lender is insufficient to cover the value of loaned securities, the borrower is obligated to pay the amount of the shortfall (and interest thereon) to the Fund. However, there can be no assurance the Fund can recover this amount. The value of securities on loan to brokers at December 31, 2006, was $954,730. During the year ended December 31, 2006, the Fund earned $14,335 in securities lending income which is included under the caption SECURITIES LENDING in the Statement of Operations. NOTE E. FEDERAL INCOME TAXES Income and capital gains distributions are determined in accordance with federal income tax regulations, which may differ from GAAP. These differences are primarily due to differing treatments of losses deferred due to wash sales and Post-October losses (as later defined), and excise tax regulations. The tax character of dividends and distributions paid during the years ended December 31, for the Fund were as follows: ORDINARY INCOME RETURN-OF-CAPITAL --------------- ----------------- 2006 2005 2006 2005 ---- ---- ---- ---- $428,197 $299,210 $10,248,116 $9,996,313 ================================================================================ 10 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONCLUDED) - -------------------------------------------------------------------------------- At December 31, 2006 the components of distributable earnings on a tax basis, for the Fund were as follows: Accumulated net realized loss $(15,319,316) Unrealized appreciation 6,968,679 ------------ Total accumulated deficit $ (8,350,637) ============ Under current tax law, certain capital losses realized after October 31 within a taxable year may be deferred and treated as occurring on the first day of the following tax year ("Post-October losses"). For the tax period ended December 31, 2006, the Fund did not incur Post-October losses. At December 31, 2006, the Fund had a capital loss carryforward for U.S. federal income tax purposes of $15,319,316, of which $12,887,270 expires in 2008, $1,170,157 expires in 2009, $425,706 expires in 2011, $358,321 expires in 2012, $420,772 expires in 2013 and $57,090 expires in 2014. At December 31, 2006, the identified cost for federal income tax purposes, as well as the gross unrealized appreciation from investments for those securities having an excess of value over cost, gross unrealized depreciation from investments for those securities having an excess of cost over value and the net unrealized appreciation from investments were $46,389,227, $10,503,487, $(3,534,808) and $6,968,679, respectively. ================================================================================ 11 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors Cornerstone Total Return Fund, Inc. New York, New York We have audited the accompanying statement of assets and liabilities of Cornerstone Total Return Fund, Inc., including the schedule of investments as of December 31, 2006, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2006, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Cornerstone Total Return Fund, Inc. as of December 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. TAIT, WELLER & BAKER LLP Philadelphia, Pennsylvania February 7, 2007 ================================================================================ 12 2006 TAX INFORMATION (UNAUDITED) Cornerstone Total Return Fund, Inc. (the "Fund") is required by Subchapter M of the Internal Revenue Code of 1986, as amended, to advise its shareholders within 60 days of the Fund's year end (December 31, 2006) as to the U.S. federal tax status of the dividends and distributions received by the Fund's shareholders in respect of such fiscal year. As indicated in this notice, significant portions of the Fund's distributions for 2006 were comprised of a return-of-capital; accordingly these distributions do NOT represent yield or investment return on the Fund's portfolio. During the year ended December 31, 2006 the following dividends and distributions per share were paid by the Fund:
SOURCES OF DIVIDENDS AND DISTRIBUTIONS (PER SHARE AMOUNTS) PAYMENT DATES: 1/31/06 2/28/06 3/31/06 4/28/06 5/31/06 6/30/06 Ordinary Income(1) $ 0.0076 $ 0.0076 $ 0.0076 $ 0.0076 $ 0.0076 $ 0.0076 Return-of-Capital(2) $ 0.1684 $ 0.1684 $ 0.1684 $ 0.1684 $ 0.1684 $ 0.1684 -------- -------- -------- -------- -------- -------- Total: $ 0.1760 $ 0.1760 $ 0.1760 $ 0.1760 $ 0.1760 $ 0.1760 ======== ======== ======== ======== ======== ======== PAYMENT DATES: 7/31/06 8/31/06 9/29/06 10/31/06 11/30/06 12/29/06 Ordinary Income(1) $ 0.0076 $ 0.0076 $ 0.0076 $ 0.0076 $ 0.0076 $ 0.0076 Return-of-Capital(2) $ 0.1684 $ 0.1684 $ 0.1684 $ 0.1684 $ 0.1684 $ 0.1684 -------- -------- -------- -------- -------- -------- Total: $ 0.1760 $ 0.1760 $ 0.1760 $ 0.1760 $ 0.1760 $ 0.1760 ======== ======== ======== ======== ======== ======== - ---------------------------------------------------------------------------------------------------------- (1) ORDINARY INCOME DIVIDENDS - This is the total per share amount of ordinary income dividends and short-term capital gain distributions (if applicable) included in the amount reported in Box 1a on Form 1099-DIV. (2) RETURN-OF-CAPITAL - This is the per share amount of return-of-capital, or sometimes called nontaxable distributions reported in Box 3 - under the title "Nondividend distributions" - on Form 1099-DIV. This amount should NOT be reported as taxable income on your current return. Rather, it should be treated as a reduction in the original cost basis of your investment in the Fund.
The Fund has met the requirements to pass through all of its (100%) ordinary income dividends as qualified dividends, which are subject to a maximum federal tax rate of 15%. This is reported in Box 1b on Form 1099-DIV. Ordinary income dividends should be reported as dividend income on Form 1040. Please note that to utilize the lower tax rate for qualifying dividend income, shareholders generally must have held their shares in the Fund for at least 61 days during the 121 day period beginning 60 days before the ex-dividend date. Foreign shareholders will generally be subject to U.S. withholding tax on the amount of the actual ordinary income dividend paid by the Fund. In general, distributions received by tax-exempt recipients (e.g., IRA's and Keoghs) need not be reported as taxable income for U.S. federal income tax purposes. However, some retirement trusts (e.g., corporate, Keogh and 403(b)(7) plans) may need this information for their annual information reporting. Shareholders are strongly advised to consult their own tax advisers with respect to the tax consequences of their investment in the Fund. ================================================================================ 13
ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND CORPORATE OFFICERS (UNAUDITED) NUMBER OF PORTFOLIOS IN NAME AND POSITION FUND COMPLEX ADDRESS* POSITION(S) PRINCIPAL OCCUPATION WITH FUND OVERSEEN BY (BIRTH DATE) HELD WITH FUND OVER LAST 5 YEARS SINCE DIRECTORS - -------------------------------------------------------------------------------------------------------------------- Ralph W. Chairman of the President, Cornerstone Advisors, Inc.; 2001 2 Bradshaw** Board of Financial Consultant; President and (Dec. 1950) Directors and Director of Cornerstone Strategic President Value Fund, Inc. William A. Director and Vice Director and Stockholder of Cornerstone 2004 2 Clark** President Advisors, Inc.; Director and Vice President (Oct. 1945) of Cornerstone Strategic Value Fund, Inc.; former financial consultant of Deep Discount Advisors, Inc. Glenn W. Director; Audit Chairman of the Board and Chief 2001 2 Wilcox, Sr. Committee Executive Officer of Wilcox Travel (Dec. 1931) Chairman, Agency, Inc.; Director of Cornerstone Nominating and Strategic Value Fund, Inc. Corporate Governance Committee Member Thomas H. Director; Audit, Independent Financial Adviser; Director 2002 2 Lenagh Nominating and of Photonics Products Group; Director of (Nov. 1924) Corporate Cornerstone Total Return Fund, Inc.; Governance Director of Adams Express and Committee Petroleum and Resources; Retired Member Treasurer and Investment Manager of Ford Foundation. Edwin Director; Audit, Distinguished Fellow, The Heritage 2001 2 Meese III Nominating and Distinguished Fellow, The Heritage (Dec. 1931) Corporate Foundation Washington D.C.; Governance Distinguished Visiting Fellow at the Committee Hoover Institution, Stanford University; Member Senior Adviser, Revelation L.P .; formerly U.S. Attorney General under President Ronald Reagan; Director of Cornerstone Strategic Value Fund, Inc.
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ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND CORPORATE OFFICERS (UNAUDITED) (CONTINUED) NUMBER OF PORTFOLIOS IN NAME AND POSITION FUND COMPLEX ADDRESS* POSITION(S) PRINCIPAL OCCUPATION WITH FUND OVERSEEN BY (BIRTH DATE) HELD WITH FUND OVER LAST 5 YEARS SINCE DIRECTORS - -------------------------------------------------------------------------------------------------------------------- Scott B. Rogers Director; Audit, Chairman, Board of Health Partners, 2001 2 (July 1955) Nominating and Inc.; Chief Executive Officer, Asheville Corporate Buncombe Community Christian Governance Ministry; and President, ABCCM Committee Doctor's Medical Clinic; Appointee, NC Member Governor's Commission on Welfare to Work; Director of Cornerstone Strategic Value Fund, Inc. Andrew A. Director; Attorney and senior member of Strauss 2001 2 Strauss Chairman of & Associates, P.A., Attorneys, Asheville (Nov. 1953) Nominating and and Hendersonville, NC; previous Corporate President of White Knight Healthcare, Governance Inc. and LMV Leasing, Inc., a wholly Committees and owned subsidiary of Xerox Credit Audit Committee Corporation; Director of Cornerstone Member Strategic Value Fund, Inc.
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ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND CORPORATE OFFICERS (UNAUDITED) (CONCLUDED) NAME AND POSITION ADDRESS* POSITION(S) PRINCIPAL OCCUPATION WITH FUND (BIRTH DATE) HELD WITH FUND OVER LAST 5 YEARS SINCE - -------------------------------------------------------------------------------------------------------------- Gary A. Bentz Chief Compliance Chairman and Chief Financial Officer of 2004 (June 1956) Officer Cornerstone Advisors, Inc.; previous Director, Vice President and Treasurer of the Fund and Cornerstone Strategic Value Fund, Inc., Financial Consultant, C.P.A., Chief Compliance Officer of Cornerstone Strategic Value Fund, Inc. Thomas R. Westle Secretary Partner, Blank Rome LLP, a law firm; 2001 405 Lexington Avenue previous partner, Spitzer & Feldman P.C., New York, NY 10174 a law firm; Secretary of Cornerstone Strategic (Dec. 1953) Value Fund, Inc. Jodi B. Levine Treasurer Associate Director, Bear, Stearns & Co. Inc.; 2004 (Aug. 1969) Treasurer of Cornerstone Strategic Value Fund, Inc. - -------------------------------------------------------------------------------------------------------------- * The mailing address of each Director and/or Officer with respect to the Fund's operation is 383 Madison Ave. -23rd Floor, New York, NY 10179 unless otherwise indicated. ** Designates a director who is an "interested person" of the Fund as defined by the Investment Company Act of 1940, as amended. Messrs. Bradshaw and Clark are interested persons of the Fund by virtue of their current positions with the Investment Manager of the Fund.
================================================================================ 16 DESCRIPTION OF DIVIDEND REINVESTMENT PLAN (UNAUDITED) Cornerstone Total Return Fund, Inc. operates a Dividend Reinvestment Plan (the "Plan"), sponsored and administered by American Stock Transfer & Trust Company (the "Agent"), pursuant to which the Fund's income dividends or capital gains or other distributions (each, a "Distribution" and collectively, "Distributions"), net of any applicable U.S. withholding tax, are reinvested in shares of the Fund. American Stock Transfer & Trust Company serves as the Agent that administers the Plan for the shareholders in the Plan. Shareholders automatically participate in the Fund's Plan, unless and until an election is made to withdraw from the Plan on behalf of such participating shareholder. Shareholders who do not wish to have Distributions automatically reinvested should so notify the Agent at P.O. Box 922, Wall Street Station, New York, New York 10269-0560. Under the Plan, the Fund's Distributions to shareholders are reinvested in full and fractional shares as described below. When the Fund declares a Distribution the Agent, on the shareholder's behalf, will (i) receive additional authorized shares from the Fund either newly issued or repurchased from shareholders by the Fund and held as treasury stock ("Newly Issued Shares") or (ii) purchase outstanding shares on the open market, on the American Stock Exchange, LLC or elsewhere, with cash allocated to it by the Fund ("Open Market Purchases"). The method for determining the number of shares to be received when Distributions are reinvested will vary depending upon whether the net asset value of the Fund's shares is higher or lower than its market price. If the net asset value of the Fund's shares is lower than its market price, the number of Newly Issued Shares received will be determined by dividing the amount of the Distribution either by the Fund's net asset value per share or by 95% of its market price, whichever is higher. If the net asset value of the Fund's shares is higher than its market price, shares acquired by the Agent in Open Market Purchases will be allocated to the reinvesting shareholders based on the average cost of such Open Market Purchases. Whenever the Fund declares a Distribution and the net asset value of the Fund's shares is higher than its market price, the Agent will apply the amount of such Distribution payable to Plan participants of the Fund in Fund shares (less such Plan participant's pro rata share of brokerage commissions incurred with respect to Open Market Purchases in connection with the reinvestment of such Distribution) to the purchase on the open market of Fund shares for such Plan participant's account. Such purchases will be made on or after the payable date for such Distribution, and in no event more than 30 days after such date except where temporary curtailment or suspension of purchase is necessary to comply with applicable provisions of federal securities laws. The Agent may aggregate a Plan participant's purchases with the purchases of other Plan participants, and the average price (including brokerage commissions) of all shares purchased by the Agent shall be the price per share allocable to each Plan participant. Registered shareholders who do not wish to have their Distributions automatically reinvested should so notify the Fund in writing. If a shareholder has not elected to receive cash Distributions and the Agent does not receive notice of an election to receive cash Distributions prior to the record date of any Distribution, the shareholder will automatically receive such Distributions in additional shares. Participants in the Plan may withdraw from the Plan by providing written notice to the Agent at least 30 days prior to the applicable Distribution payment date. When a Participant withdraws from the Plan, or upon suspension or termination of the Plan at the sole discretion of the Fund's Board of Directors, certificates for whole shares credited to his or her account under the Plan will, upon request, be issued. Whether or not a participant requests that certificates for whole shares be issued, a cash payment will be made for any fraction of a share credited to such account. The Agent will maintain all shareholder accounts in the Plan and furnish written confirmations of all transactions in the accounts, including information needed by shareholders for personal and tax records. The Agent will hold shares in the account of the Plan ================================================================================ 17 DESCRIPTION OF DIVIDEND REINVESTMENT PLAN (UNAUDITED)(CONCLUDED) participant in non-certificated form in the name of the participant, and each shareholder's proxy will include those shares purchased pursuant to the Plan. Each participant, nevertheless, has the right to receive certificates for whole shares owned. The Agent will distribute all proxy solicitation materials to participating shareholders. In the case of shareholders, such as banks, brokers or nominees, that hold shares for others who are beneficial owners participating in the Plan, the Agent will administer the Plan on the basis of the number of shares certified from time to time by the record shareholder as representing the total amount of shares registered in the shareholder's name and held for the account of beneficial owners participating in the Plan. Neither the Agent nor the Fund shall have any responsibility or liability beyond the exercise of ordinary care for any action taken or omitted pursuant to the Plan, nor shall they have any duties, responsibilities or liabilities except such as expressly set forth herein. Neither shall they be liable hereunder for any act done in good faith or for any good faith omissions to act, including, without limitation, failure to terminate a participants account prior to receipt of written notice of his or her death or with respect to prices at which shares are purchased or sold for the participants account and the terms on which such purchases and sales are made, subject to applicable provisions of the federal securities laws. All correspondence concerning the Plan should be directed to the Agent at P.O. Box 922, Wall Street Station, New York, New York 10269-0560. Certain transactions can be performed online at www.amstock.com or by calling the toll free number 888-556-0422. ================================================================================ 18 PROXY VOTING AND PORTFOLIO HOLDINGS INFORMATION (UNAUDITED) Information regarding how the Cornerstone Total Return Fund, Inc. (the "Fund") voted proxies related to its portfolio securities during the 12-month period ended June 30 of each year as well as the policies and procedures that the Fund uses to determine how to vote proxies relating to its portfolio securities are available by calling (212) 272-3550 or on the website of the Securities and Exchange Commission, http://www.sec.gov. This report incorporates a Summary Schedule of Investments for the Fund. A complete Schedule of Investments for the Fund may be obtained free of charge by contacting the Fund at (212) 272-3550. The Fund files a complete schedule of its portfolio holdings for the first and third quarters of its fiscal year with the SEC on Form N-Q. The Fund's Forms N-Q are available on the SEC's website at http://www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the SEC's Public Reference Room may be obtained by calling (202) 551-8090. PRIVACY POLICY NOTICE (UNAUDITED) The following is a description of Cornerstone Total Return Fund, Inc.'s (the "Fund") policies regarding disclosure of nonpublic personal information that you provide to the Fund or that the Fund collects from other sources. In the event that you hold shares of the Fund through a broker-dealer or other financial intermediary, the privacy policy of the financial intermediary would govern how your nonpublic personal information would be shared with unaffiliated third parties. CATEGORIES OF INFORMATION THE FUND COLLECTS. The Fund collects the following nonpublic personal information about you: 1. Information from the Consumer: this category includes information the Fund receives from you on or in applications or other forms, correspondence, or conversations (such as your name, address phone number, social security number, assets, income and date of birth); and 2. Information about the Consumer's transactions: this category includes information about your trans- actions with the Fund, its affiliates, or others (such as your account number and balance, payment history, parties to transactions, cost basis information, and other financial information). CATEGORIES OF INFORMATION THE FUND DISCLOSES. The Fund does not disclose any nonpublic personal information about their current or former shareholders to unaffiliated third parties, except as required or permitted by law. The Fund is permitted by law to disclose all of the information it collects, as described above, to its service providers (such as the Fund's custodian, administrator and transfer agent) to process your transactions and otherwise provide services to you. CONFIDENTIALITY AND SECURITY. The Fund restricts access to your nonpublic personal information to those persons who require such information to provide products or services to you. The Fund maintains physical, electronic and procedural safeguards that comply with federal standards to guard your nonpublic personal information. ================================================================================ 19 SUMMARY OF GENERAL INFORMATION (UNAUDITED) Cornerstone Total Return Fund, Inc. is a closed-end, diversified investment company whose shares trade on the American Stock Exchange, LLC. Its investment objective is to seek capital appreciation with current income as a secondary objective by investing primarily in U.S. and non-U.S. companies. The Fund is managed by Cornerstone Advisors, Inc. SHAREHOLDER INFORMATION (UNAUDITED) The Fund is listed on the American Stock Exchange, LLC (symbol "CRF"). The share price is published in: THE NEW YORK TIMES (daily) under the designation "Cnrstn TR" and THE WALL STREET JOURNAL (daily) and BARRON'S (each Monday) under the designation "CornstnTtlRtn." The net asset value per share is available weekly and may be obtained by contacting the Fund at the general inquiry phone number. - -------------------------------------------------------------------------------- NOTICE IS HEREBY GIVEN IN ACCORDANCE WITH SECTION 23(C) OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, THAT CORNERSTONE TOTAL RETURN FUND, INC. MAY FROM TIME TO TIME PURCHASE SHARES OF ITS CAPITAL STOCK IN THE OPEN MARKET. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This report, including the financial statements herein, is sent to the shareholders of the Fund for their information. It is not a prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or of any securities mentioned in the report. - -------------------------------------------------------------------------------- ================================================================================ 20 CORNERSTONE TOTAL RETURN FUND, INC. ITEM 2. CODE OF ETHICS. (a) As of the end of the period covered by this report, the Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer, principal accounting officer, and persons performing similar functions. (c) and (d). During the period covered by this report, there was no amendment to, and no waiver granted from, any provision of the code of ethics that applies to the Registrant's principal executive officer, principal accounting officer, and persons performing similar functions. (f)(1) Pursuant to Item 12(a), the Registrant is attaching as an exhibit (EX-99.CODE ETH) a copy of its code of ethics that applies to its principal executive officer, principal financial officer, and persons performing similar functions. (f)(3) The Registrant undertakes to provide to any person without charge, upon request, a copy of its code of ethics. This can be accomplished by calling the Registrant at (212)272-3550. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The registrant's board of directors has determined that it does not have an audit committee financial expert serving on its audit committee. (a)(2) Not applicable (a)(3) At this time, the registrant believes that the experience provided by each member of the audit committee together offer the registrant adequate oversight for the registrant's level of financial complexity. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) through (d). The information in the table below is provided for services rendered to the registrant by its independent registered public accounting firm, Tait, Weller & Baker LLP, for the Registrant's fiscal years ended December 31, 2006 and December 31, 2005. 2006 2005 ---- ---- Audit Fees $13,000 $12,300 Audit-related Fees -- -- Tax Fees (1) $ 2,500 $ 2,300 All Other Fees -- -- ------- ------- Total $15,500 $14,600 ======= ======= (1) Tax services in connection with the registrant's excise tax calculations and review of the registrant's applicable tax returns. (e)(1) Audit Committee Pre-Approval Policies and Procedures. Before the auditor is (i) engaged by the Registrant to render audit, audit related or permissible non-audit services to the Registrant or (ii) with respect to non-audit services to be provided by the auditor to the Registrant's investment adviser or any entity in the investment Registrant complex, if the nature of the services provided relate directly to the operations or financial reporting of the Registrant, either: (a) the Audit Committee shall pre-approve such engagement; or (b) such engagement shall be entered into pursuant to pre-approval policies and procedures established by the Audit Committee. Any such policies and procedures must be detailed as to the particular service and not involve any delegation of the Audit Committee's responsibilities to the Registrant's investment adviser. The Audit Committee may delegate to one or more of its members the authority to grant pre-approvals. The pre-approval policies and procedures shall include the requirement that the decisions of any member to whom authority is delegated under this provision shall be presented to the full Audit Committee at its next scheduled meeting. Under certain limited circumstances, pre-approvals are not required if certain de minimis thresholds are not exceeded, as such thresholds are set forth by the Audit Committee and in accordance with applicable SEC rules and regulations. (e)(2) None of the services provided to the Registrant described in paragraphs (b)-(d) of Item 4 were pre-approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X. (f) No disclosures are required by this Item 4(f). (g) There were no non-audit fees billed by Tait, Weller & Baker LLP for services rendered to the Registrant, the Registrant's investment advisor (not including any sub-advisor whose role is primarily portfolio management and is subcontracted with or overseen by another investment advisor) or any entity controlling, controlled by, or under common control with the investment advisor that provides ongoing services to the Registrant for the Registrant's last two fiscal years (December 31, 2005 and December 31, 2006). (h) No disclosures are required by this Item 4(h). ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. (a) The Registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities and Exchange Act of 1934, as amended. Glenn Wilcox (Chair), Edwin Meese, Thomas Lenagh, Andy Strauss and Scott Rogers are the members of the Registrant's audit committee. (b) Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 - -------------------------------------------------------------------------------- NO. OF DESCRIPTION SHARES VALUE - -------------------------------------------------------------------------------- EQUITY SECURITIES - 99.14% UNITED STATES - 98.82% CLOSED-END FUNDS - 7.95% Adams Express Company 70,400 $ 976,448 Boulder Total Return Fund, Inc. 13,900 310,526 Central Europe and Russia Fund, Inc. (The) 2,500 134,525 Cohen & Steers Select Utility Fund, Inc. 6,000 146,880 Dreman/Claymore Dividend & Income Fund 49,500 1,137,510 H&Q Healthcare Investors 5,100 83,997 H&Q Life Sciences Investors 6,000 80,880 Japan Equity Fund ^ 13,000 109,980 John Hancock Bank and Thrift Opportunity Fund 9,000 90,630 Liberty All-Star Growth Fund, Inc. 140,800 756,096 Neuberger Berman Real Estate Income Fund Inc. 8,500 236,895 Petroleum & Resources Corporation 3,000 100,380 ----------- 4,164,747 ----------- CONSUMER DISCRETIONARY - 9.32% Bed Bath & Beyond Inc. ^ * 2,500 95,250 Best Buy Co., Inc. ^ 3,750 184,462 CBS Corporation 2,000 62,360 Coach, Inc. * 2,500 107,400 Comcast Corporation, Special Class A * 4,500 188,460 Comcast Corporation, Class A * 6,008 254,319 Ford Motor Company 14,000 105,140 Fortune Brands, Inc. ^ 2,500 213,475 Goodyear Tire & Rubber Company (The) * 2,500 52,475 Harley-Davidson, Inc. 2,500 176,175 Hilton Hotels Corporation 2,500 87,250 Home Depot, Inc. (The) 9,000 361,440 J.C. Penney Company, Inc. 2,500 193,400 Kohl's Corporation * 2,500 171,075 Lowe's Companies, Inc. 4,900 152,635 Marriott International, Inc., Class A 5,000 238,600 Mattel, Inc. 4,500 101,970 McDonald's Corporation 8,100 359,073 McGraw-Hill Companies, Inc. (The) 2,500 170,050 Nordstrom, Inc. 2,500 123,350 Office Depot, Inc. * 2,500 95,425 Omnicom Group Inc. ^ 1,500 156,810 Staples, Inc. 3,150 84,105 Starbucks Corporation * 2,500 88,550 Target Corporation 4,600 262,430 Time Warner Inc. ^ 17,000 370,260 TJX Companies, Inc. (The) 2,500 71,200 Viacom Inc., Class B * 2,000 82,060 Walt Disney Company (The) 8,000 274,160 ----------- 4,883,359 ----------- 1 NO. OF DESCRIPTION SHARES VALUE - -------------------------------------------------------------------------------- CONSUMER STAPLES - 9.09% Altria Group, Inc. 7,700 660,814 Archer-Daniels-Midland Company 3,000 95,880 Campbell Soup Company 3,200 124,448 Coca-Cola Company (The) 13,500 651,375 Colgate-Palmolive Company 2,500 163,100 ConAgra Foods, Inc. 2,500 67,500 CVS Corporation 3,000 92,730 General Mills, Inc. 2,500 144,000 H.J. Heinz Company 2,700 121,527 Kroger Co. (The) 3,600 83,052 PepsiCo, Inc. ^ 5,000 312,750 Procter & Gamble Company (The) 13,972 897,980 Safeway Inc. ^ 4,900 169,344 Sara Lee Corporation 2,600 44,278 Walgreen Co. 5,600 256,984 Wal-Mart Stores, Inc. 19,000 877,420 ----------- 4,763,182 ----------- ENERGY - 9.57% Anadarko Petroleum Corp. 5,000 217,600 BJ Services Company 3,000 87,960 Chevron Corporation 10,068 740,300 ConocoPhillips ^ 2,500 179,875 Devon Energy Corporation 2,500 167,700 El Paso Corporation 3,000 45,840 Exxon Mobil Corporation 32,000 2,452,163 Halliburton Company 5,000 155,250 Marathon Oil Corp. 2,500 231,250 Norsk Hydro ADR 2,500 76,675 Occidental Petroleum Corporation 2,500 122,075 Peabody Energy Corporation ^ 2,500 101,025 Schlumberger Limited 5,000 315,800 XTO Energy, Inc. 2,500 117,625 ----------- 5,011,138 ----------- FINANCIALS - 19.62% AFLAC Incorporated 1,500 69,000 American Express Company 3,500 212,345 American International Group, Inc. 12,331 883,639 Ameriprise Financial, Inc. 1,220 66,490 Aon Corporation 2,500 88,350 Bank of America Corporation ^ 17,021 908,751 BB&T Corporation 4,500 197,685 Charles Schwab Corporation (The) 8,200 158,588 Chubb Corporation (The) 5,000 264,550 Cincinnati Financial Corporation 2,500 113,275 Citigroup Inc. ^ 25,600 1,425,920 Countrywide Financial Corporation ^ 3,500 148,575 Fannie Mae 6,200 368,218 Franklin Resources, Inc. 2,500 275,425 Freddie Mac 3,300 224,070 Goldman Sachs Group, Inc. (The) 3,000 598,050 Hartford Financial Services Group, Inc. (The) 1,600 149,296 JPMorgan Chase & Co. 12,700 613,410 KeyCorp 2,500 95,075 2 NO. OF DESCRIPTION SHARES VALUE - -------------------------------------------------------------------------------- Lehman Brothers Holdings Inc. 2,500 195,300 M&T Bank Corporation 2,500 305,400 Mellon Financial Corporation 2,300 96,945 Merrill Lynch & Co., Inc. 1,100 102,410 Metlife, Inc. 3,000 177,030 Moody's Corporation 2,000 138,120 Morgan Stanley 3,700 301,291 Northern Trust Corporation 1,100 66,759 PNC Financial Services Group, Inc. 1,400 103,656 Prudential Financial, Inc. 2,500 214,650 Regions Financial Corporation 1,993 74,538 SLM Corporation 2,500 121,925 St. Paul Travelers Companies, Inc. (The) 5,092 273,389 State Street Corporation 1,600 107,904 Synovus Corporation 2,500 77,075 Wachovia Corporation 5,600 318,920 Wells Fargo & Company 18,000 640,080 Western Union Company ^ 4,325 96,966 ----------- 10,273,070 ----------- HEALTHCARE - 10.36% Aetna Inc. ^ 4,000 172,720 Amgen Inc. * 8,300 566,973 Biomet, Inc. 2,500 103,175 Caremark Rx, Inc. 2,500 142,775 Eli Lilly and Company 4,100 213,610 Gilead Sciences, Inc. * 2,500 162,325 Johnson & Johnson 15,500 1,023,310 Laboratory Corporation of America Holdings * 2,500 183,675 Medco Health Solutions, Inc. * 1,531 81,817 Medtronic, Inc. 4,500 240,795 Merck & Co. Inc. 8,700 379,320 Pfizer Inc. 24,960 646,464 Schering-Plough Corporation ^ 8,400 198,576 St. Jude Medical, Inc. * 2,500 91,400 Stryker Corporation ^ 2,000 110,220 UnitedHealth Group Incorporated 10,000 537,300 Waters Corporation * 2,500 122,425 Wyeth 5,000 254,600 Zimmer Holdings, Inc. * 2,500 195,950 ----------- 5,427,430 ----------- INDUSTRIALS - 9.83% 3M Co. 2,500 194,825 Boeing Company (The) 1,400 124,376 Caterpillar Inc. 2,500 153,325 CSX Corporation 5,000 172,150 Danaher Corporation ^ 2,500 181,100 Dover Corporation ^ 1,000 49,020 FedEx Corp. 2,500 271,550 General Dynamics Corporation 2,500 185,875 General Electric Company 52,000 1,934,920 Honeywell International Inc. 3,300 149,292 Illinois Tool Works Inc. 5,000 230,950 Lockheed Martin Corporation 2,500 230,175 3 NO. OF DESCRIPTION SHARES VALUE - -------------------------------------------------------------------------------- Norfolk Southern Corporation 2,500 125,725 Raytheon Company 2,500 132,000 Rockwell Automation, Inc. 2,500 152,700 Southwest Airlines Co. 6,100 93,452 United Parcel Service, Inc., Class B 4,000 299,920 United Technologies Corporation ^ 4,400 275,088 Waste Management, Inc. 5,300 194,881 ----------- 5,151,324 ----------- INFORMATION TECHNOLOGY - 14.08% Advanced Micro Devices * 2,500 50,875 Agilent Technologies Inc. * 5,000 174,250 Altera Corporation ^ * 2,500 49,200 Apple Computer, Inc. * 5,000 424,200 Applied Materials, Inc. ^ 8,000 147,600 Broadcom Corporation - Class A * 2,500 80,775 Cisco Systems, Inc. * 24,500 669,585 Corning Incorporated * 3,500 65,485 Dell Inc. * 5,700 143,013 eBay Inc. * 4,000 120,280 EMC Corporation * 8,000 105,600 First Data Corporation 4,325 110,374 Fiserv, Inc. * 2,500 131,050 Google Inc. ^ * 1,000 460,480 Hewlett-Packard Company 10,000 411,900 Intel Corporation 19,500 394,875 International Business Machines Corporation 5,700 553,755 Intuit Inc. * 2,500 76,275 Microsoft Corporation 43,000 1,283,980 Motorola, Inc. 11,100 228,216 Network Appliance, Inc. * 2,500 98,200 Oracle Corporation * 33,600 575,904 Paychex, Inc. 2,500 98,850 QUALCOMM Inc. 6,800 256,972 Texas Instruments Incorporated 13,500 388,800 Xerox Corporation * 3,000 50,850 Yahoo! Inc. * 8,500 217,090 ----------- 7,368,434 ----------- MATERIALS - 2.32% Air Products & Chemicals, Inc. 2,500 175,700 Alcoa Inc. 3,000 90,030 Dow Chemical Company (The) 3,500 139,790 E. I. du Pont de Nemours and Company 5,800 282,518 International Paper Company 2,300 78,430 Monsanto Company 3,546 186,271 Nucor Corporation ^ 2,500 136,650 Rohm and Hass Company 2,500 127,800 ----------- 1,217,189 ----------- REAL ESTATE INVESTMENT TRUST - 0.48% Simon Property Group, Inc. ^ 2,500 253,225 ----------- 253,225 ----------- TELECOMMUNICATIONS SERVICES - 3.39% AT&T Inc. 24,699 882,989 4 NO. OF DESCRIPTION SHARES VALUE - -------------------------------------------------------------------------------- BellSouth Corporation 5,200 244,972 Nokia ADR 2,500 50,800 Qwest Communications International Inc. * 10,000 83,700 Sprint Nextel Corporation ^ 7,437 140,485 Verizon Communications Inc. 10,000 372,400 ----------- 1,775,346 ----------- UTILITIES - 2.81% AES Corporation (The) * 3,000 66,120 Alleghany Energy Inc. * 2,500 114,775 American Electric Power Company, Inc. 5,500 234,190 Duke Energy Corporation ^ 6,600 219,186 FirstEnergy Corp. 2,500 150,525 Southern Company (The) 2,500 92,150 TXU Corp. 7,400 401,154 Williams Companies, Inc. (The) 2,500 65,300 Xcel Energy, Inc. 5,500 126,830 ----------- 1,470,230 ----------- TOTAL UNITED STATES (cost - $44,010,264) 51,758,674 ----------- CZECH REPUBLIC - 0.32% CONSUMER DISCRETIONARY - 0.32% Bonton a.s. * # 137,180 3,861 Bonton Book a.s. * # 68,590 32,860 Bonton Film Entertainment a.s. * # 68,590 82,149 Bonton Music a.s. * # 68,590 45,428 Bonton Pictures a.s. * # 68,590 2,464 ----------- 166,762 ----------- TOTAL CZECH REPUBLIC (cost - $894,864) 166,762 ----------- TOTAL EQUITY SECURITIES (cost - $44,905,128) 51,925,436 ----------- PRINCIPAL AMOUNT (000'S) ------- SHORT-TERM INVESTMENTS - 2.73% REPURCHASE AGREEMENTS - 2.73% Bear, Stearns and Co., Inc. + ++ (Agreement dated 12/29/2006 to be repurchased at $657,099), 2.6565%, 1/2/2007, collateralized by $676,013 in U.S. Treasury Bond Strips) $ 657 656,905 Bear, Stearns and Co., Inc. (Agreement dated 12/29/2006 to be repurchased at $471,319), 4.8500%, 1/2/2007, collateralized by $486,340 in U.S. Treasury Bond Strips) 471 471,065 Bear, Stearns and Co., Inc. + ++ (Agreement dated 12/29/2006 to be repurchased at $304,680), 5.3130%, 1/2/2007, collateralized by $313,689 in U.S. Treasury Bond Strips) 305 304,500 5 NO. OF DESCRIPTION SHARES VALUE - -------------------------------------------------------------------------------- 1,432,470 ----------- TOTAL SHORT-TERM INVESTMENTS (cost - $1,432,470) 1,432,470 ----------- TOTAL INVESTMENTS - 101.87% 53,357,906 ----------- (cost - $46,337,598) 53,357,906 ----------- LIABILITIES IN EXCESS OF OTHER ASSETS - (1.87)% (978,676) ----------- NET ASSETS - 100.00% $52,379,230 =========== ADR American Depositary Receipt * Non-income producing security. + Stated interest rate, before rebate earned by borrower of securities on loan. ++ Represents investment purchased with collateral received for securities on loan. ^ Security or a portion thereof is out on loan. # Securities are fair valued in accordance with procedures established by the Board of Directors. At December 31, 2006, the Fund held 0.32% of its net assets in securities valued in good faith by the Board of Directors with an aggregate cost of $894,864 and a fair value of $166,762. 6 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE SHAREHOLDERS AND BOARD OF DIRECTORS CORNERSTONE TOTAL RETURN FUND, INC. NEW YORK, NEW YORK We have audited the accompanying statement of assets and liabilities of Cornerstone Total Return Fund, Inc., including the schedule of investments as of December 31, 2006, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2006, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Cornerstone Total Return Fund, Inc. as of December 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of investments in securities as of December 31, 2006 appearing in Item 6 of this Form N-CSR is presented for the purpose of additional analysis and is not a required part of the basic financial statements. This additional information is the responsibility of the Fund's management. Such information has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. TAIT, WELLER & BAKER LLP PHILADELPHIA, PENNSYLVANIA FEBRUARY 7, 2007 ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. The Registrant has delegated the voting of proxies relating to its voting securities to its investment adviser, Cornerstone Advisors, Inc. (the "Investment Manager"). The respective Proxy Voting Policies and Procedures of the Registrant and the Investment Manager are attached as Exhibit 99.VOTEREG. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. (a)(1) All information contained in this item and its subparts is as of the date of this filing, unless otherwise noted. Ralph W. Bradshaw and William A. Clark are employees of Cornerstone Advisors, Inc. (the Investment Manager) and portfolio managers of the Fund. Mr. Bradshaw has acted as the portfolio manager since 2001. Mr. Clark has acted as the portfolio manager since 2003. Ralph W. Bradshaw occupation for the last five years is President of Cornerstone Advisors, Inc. and a Financial Consultant. William A. Clark occupation for the last five years is Director and Stockholder of Cornerstone Advisors, Inc. and a former financial consultant of Deep Discount Advisors, Inc. (a)(2)(i) Ralph W. Bradshaw and William A. Clark (a)(2)(ii)(A) Registered Investment Companies - Ralph W. Bradshaw and William A. Clark each manages one other registered closed-end fund (Cornerstone Strategic Value Fund, Inc.) As of December 31, 2006, the total assets of Cornerstone Strategic Value Fund, Inc. was $141.6 million. (a)(2)(ii)(B) Not applicable (a)(2)(ii)(C) Not applicable (a)(2)(iii) None. Ralph W. Bradshaw and William A. Clark manage no accounts where the Advisory Fee is based on the performance of the account. (a)(2)(iv) None. (a)(3) As of the most recent fiscal year end December 31, 2006, the compensation paid to both Ralph W. Bradshaw and William A. Clark was fixed. (a)(4) The dollar range of equity securities owned in the registrant beneficially by each portfolio manager is as follows: for Ralph W. Bradshaw it is in the range of $50,001-$100,000 and for William A. Clark it is also in the range of $50,001-$100,000. (b) None. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT COMPANY AND AFFILIATED PURCHASERS. None. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 11. CONTROLS AND PROCEDURES. (a) The Registrant's principal executive officer and principal financial officer have evaluated the Registrant's disclosure controls and procedures as of a date within 90 days of this filing and have concluded that the Registrant's disclosure controls and procedures are effective, as of such date, in ensuring that information required to be disclosed by the registrant in this Form N-CSR was recorded, processed, summarized, and reported timely. (b) The Registrant's principal executive officer and principal financial officer are aware of no changes in the Registrant's internal control over financial reporting that occurred during the Registrant's last fiscal half-year that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Code of Ethics attached as EX-99.CODE ETH. (a)(2) Separate certifications of Principal Executive and Financial Officers pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 attached as EX-99.CERT. (b) Certification of Principal Executive and Financial Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 furnished as EX-99.906 CERT. (99) Proxy Voting Policies of the Registrant attached as EX-99.VOTEREG. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. By: /s/ Ralph W. Bradshaw --------------------- Name: Ralph W. Bradshaw Title: Principal Executive Officer Date: March 9, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Cornerstone Total Return Fund, Inc. By: /s/ Ralph W. Bradshaw --------------------- Name: Ralph W. Bradshaw Title: Principal Executive Officer Date: March 9, 2007 By: /s/ Jodi B. Levine ------------------ Name: Jodi B. Levine Title: Principal Financial Officer Date: March 9, 2007 EX-99.CODE ETH 2 exh99codeeth.txt CORNERSTONE STRATEGIC VALUE FUND, INC. CORNERSTONE TOTAL RETURN FUND, INC. CODE OF ETHICS FOR SENIOR OFFICERS Preamble Section 406 of the Sarbanes-Oxley Act of 2002 directs that rules be adopted disclosing whether a company has a code of ethics for senior financial officers. The U.S. Securities and Exchange Commission (the "SEC") has adopted rules requiring annual disclosure of an investment company's code of ethics applicable to the company's principal executive as well as principal financial officers, if such a code has been adopted. In response, the Cornerstone Strategic Value Fund, Inc. and Cornerstone Total Return Fund, Inc. (the "Funds") have each adopted this Code of Ethics. Statement of Policy It is the obligation of the senior officers of each Fund to provide full, fair, timely and comprehensible disclosure--financial and otherwise--to the Fund's shareholders, regulatory authorities and the general public. In fulfilling that obligation, senior officers must act ethically, honestly and diligently. This Code is intended to enunciate guidelines to be followed by persons who serve each Fund in senior officer positions. No Code of Ethics can address every situation that a senior officer might face; however, as a guiding principle, senior officers should strive to implement the spirit as well as the letter of applicable laws, rules and regulations, and to provide the type of clear and complete disclosure and information each Fund's shareholders have a right to expect. The purpose of this Code of Ethics (the "Code") is to promote high standards of ethical conduct by Covered Persons (as defined below) in their capacities as officers of the Funds, to instruct them as to what is considered to be inappropriate and unacceptable conduct or activities for officers and to prohibit such conduct or activities. This Code supplements other policies that the Funds and its adviser have adopted or may adopt in the future with which Fund officers are also required to comply (e.g., code of ethics relating to personal trading and conduct). Covered Persons This Code applies to those persons appointed by the each Fund's Board of Directors as Chief Executive Officer, President, Chief Financial Officer and Chief Accounting Officer, or persons performing similar functions. Promotion of Honest and Ethical Conduct In serving as an officer of a Fund, each Covered Person must maintain high standards of honesty and ethical conduct and must encourage his colleagues who provide services to a Fund, whether directly or indirectly, to do the same. -1- Each Covered Person understands that as an officer of a Fund, he has a duty to act in the best interests of the Fund and its shareholders. The interests of the Covered Person's personal interests should not be allowed to compromise the Covered Person from fulfilling his duties as an officer of the Fund. If a Covered Person believes that his personal interests are likely to materially compromise his objectivity or his ability to perform the duties of his role as an officer of a Fund, he should consult with the Fund's chief legal officer or outside counsel. Under appropriate circumstances, a Covered Person should also consider whether to present the matter to the Directors of a Fund or a committee thereof. No Covered Person shall suggest that any person providing, or soliciting to be retained to provide, services to a Fund give a gift or an economic benefit of any kind to him in connection with the person's retention or the provision of services. Promotion of Full, Fair, Accurate, Timely and Understandable Disclosure No Covered Person shall create or further the creation of false or misleading information in any SEC filing or report to Fund shareholders. No Covered Person shall conceal or fail to disclose information within the Covered Person's possession legally required to be disclosed or necessary to make the disclosure made not misleading. If a Covered Person shall become aware that information filed with the SEC or made available to the public contains any false or misleading information or omits to disclose necessary information, he shall promptly report it to Fund counsel, who shall advise such Covered Person whether corrective action is necessary or appropriate. Each Covered Person, consistent with his responsibilities, shall exercise appropriate supervision over, and shall assist, Fund service providers in developing financial information and other disclosure that complies with relevant law and presents information in a clear, comprehensible and complete manner. Each Covered Person shall use his best efforts within his area of expertise to assure that Fund reports reveal, rather than conceal, each Fund's financial condition. Each Covered Person shall seek to obtain additional resources if he believes that available resources are inadequate to enable the Fund to provide full, fair and accurate financial information and other disclosure to regulators and Fund shareholders. Each Covered Person shall inquire of other Fund officers and service providers, as appropriate, to assure that information provided is accurate and complete and presented in an understandable format using comprehensible language. Each Covered Person shall diligently perform his services to the Fund, so that information can be gathered and assessed early enough to facilitate timely filings and issuance of reports and required certifications. -2- Promotion of Compliance with Applicable Government Laws, Rules and Regulations Each Covered Person shall become and remain knowledgeable concerning the laws and regulations relating to each Fund and their operations and shall act with competence and due care in serving as an officer of a Fund. Each Covered Person with specific responsibility for financial statement disclosure will become and remain knowledgeable concerning relevant auditing standards, generally accepted accounting principles, FASB pronouncements and other accounting and tax literature and developments. Each Covered Person shall devote sufficient time to fulfilling his responsibilities to the Funds. Each Covered Person shall cooperate with each Fund's independent auditors, regulatory agencies and internal auditors in their review or inspection of the Fund and its operations. No Covered Person shall knowingly violate any law or regulation relating to a Fund or their operations or seek to illegally circumvent any such law or regulation. No Covered Person shall engage in any conduct involving dishonesty, fraud, deceit or misrepresentation involving a Fund or its operations. Promoting Prompt Internal Reporting of Violations Each Covered Person shall promptly report his own violations of this Code and violations by other Covered Persons of which he is aware to the Chairman of the Fund's Audit Committee. Any requests for a waiver from or an amendment to this Code shall be made to the Chairman of the Fund's Audit Committee. All waivers and amendments shall be disclosed as required by law. Sanctions Failure to comply with this Code will subject the violator to appropriate sanctions, which will vary based on the nature and severity of the violation. Such sanctions may include censure, suspension or termination of position as an officer of the Fund. Sanctions shall be imposed by the Fund's Audit Committee, subject to review by the entire Board of Directors of the Fund. Each Covered Person shall be required to certify annually whether he has complied with this Code. No Rights Created This Code of Ethics is a statement of certain fundamental principles, policies and procedures that govern the Fund's senior officers in the conduct of the Fund's business. It is not intended to and does not create any rights in any employee, investor, supplier, competitor, shareholder or any other person or entity. -3- Recordkeeping Each Fund will maintain and preserve for a period of not less than six (6) years from the date such action is taken, the first two (2) years in an easily accessible place, a copy of the information or materials supplied to the Board (i) that provided the basis for any amendment or waiver to this Code and (ii) relating to any violation of the Code and sanctions imposed for such violation, together with a written record of the approval or action taken by the Board. Amendments The Directors will make and approve such changes to this Code of Ethics as they deem necessary or appropriate to effectuate the purposes of this Code. -4- CODE OF ETHICS FOR SENIOR OFFICERS I HEREBY CERTIFY THAT: (1) I have read and I understand the Code of Ethics for Senior Officers adopted by the Cornerstone Strategic Value Fund, Inc. and the Cornerstone Total Return Fund, Inc.(the "Code of Ethics"); (2) I recognize that I am subject to the Code of Ethics; (3) I have complied with the requirements of the Code of Ethics during the calendar year ending December 31, _______; and (4) I have reported all violations of the Code of Ethics required to be reported pursuant to the requirements of the Code during the calendar year ending December 31, _____. Set forth below exceptions to items (3) and (4), if any: __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ Name: _________________ Date: _________________ EX-99.CERT 3 exh99cert.txt EX-99.CERT CERTIFICATIONS I, Ralph W. Bradshaw, certify that: 1. I have reviewed this report on Form N-CSR of Cornerstone Total Return Fund, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) the registrant and have: (a)Designed such disclosure controls and procedures or caused such disclosures controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosures controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 9, 2007 /s/ Ralph W. Bradshaw - --------------------- Ralph W. Bradshaw Chairman and President (Principal Executive Officer) Exhibit 12(a)(2) EX-99.CERT CERTIFICATIONS I, Jodi B. Levine, certify that: 1. I have reviewed this report on Form N-CSR of Cornerstone Total Return Fund, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) the registrant and have: (a) Designed such disclosure controls and procedures or caused such disclosures controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosures controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 9, 2007 /s/ Jodi B. Levine - ------------------ Jodi B. Levine Treasurer (Principal Financial Officer) EX-99.906CERT 4 exh99-906cert.txt EXHIBIT 99.906CERT SECTION 906 CERTIFICATIONS SECTION 906 CERTIFICATIONS Ralph W. Bradshaw, Principal Executive Officer, and Jodi B. Levine, Principal Financial Officer, of the Cornerstone Total Return Fund, Inc. (the "Fund"), each certify to his knowledge that: (1) The Fund's periodic report on Form N-CSR for the period ended December 31, 2006 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Fund. /s/ Ralph W. Bradshaw /s/ Jodi B. Levine - --------------------- ------------------ Ralph W. Bradshaw Jodi B. Levine Chairman and President Treasurer (Principal Executive Officer) (Principal Financial Officer) March 9, 2007 March 9, 2007 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Fund and will be retained by the Fund and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.VOTEREG 5 ex99-votereg.txt - -------------------------------------------------------------------------------- ISS 2007 US Proxy Voting Guidelines Summary - -------------------------------------------------------------------------------- (LOGO) ISS INSTITUTIONAL SHAREHOLDER SERVICES 2099 GAITHER ROAD SUITE 501 ROCKVILLE, MD 20850-4045 (301) 556-0500 FAX (301) 556-0486 WWW.ISSPROXY.COM Copyright (C) 2006 by Institutional Shareholder Services. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without permission in writing from the publisher. Requests for permission to make copies of any part of this work should be sent to: Institutional Shareholder Services Marketing Department 2099 Gaither Road Rockville, MD 20850 ISS is a trademark used herein under license. ================================================================================ ISS 2007 Proxy Voting Guidelines Summary Effective for Meetings Feb 1, 2007 Updated December 15, 2006 The following is a condensed version of the proxy voting recommendations contained in the ISS Proxy Voting Manual. 1. OPERATIONAL ITEMS ...................................................... 6 Adjourn Meeting ....................................................... 6 Amend Quorum Requirements ............................................. 6 Amend Minor Bylaws .................................................... 6 Auditor Indemnification and Limitation of Liability ................... 6 Auditor Ratification .................................................. 6 Change Company Name ................................................... 7 Change Date, Time, or Location of Annual Meeting ...................... 7 Transact Other Business ............................................... 7 2. BOARD OF DIRECTORS: .................................................... 8 Voting on Director Nominees in Uncontested Elections .................. 8 2007 Classification of Directors ...................................... 10 Age Limits ............................................................ 11 Board Size ............................................................ 11 Classification/Declassification of the Board .......................... 11 Cumulative Voting ..................................................... 11 Director and Officer Indemnification and Liability Protection ......... 12 Establish/Amend Nominee Qualifications ................................ 12 Filling Vacancies/Removal of Directors ................................ 12 Independent Chair (Separate Chair/CEO) ................................ 13 Majority of Independent Directors/Establishment of Committees ......... 13 Majority Vote Shareholder Proposals ................................... 13 Office of the Board ................................................... 14 Open Access ........................................................... 14 Performance Test for Directors ........................................ 14 Stock Ownership Requirements .......................................... 15 Term Limits ........................................................... 15 3. PROXY CONTESTS ......................................................... 16 Voting for Director Nominees in Contested Elections ................... 16 Reimbursing Proxy Solicitation Expenses ............................... 16 Confidential Voting ................................................... 16 4. ANTITAKEOVER DEFENSES AND VOTING RELATED ISSUES ........................ 17 Advance Notice Requirements for Shareholder Proposals/Nominations ............................................... 17 Amend Bylaws without Shareholder Consent .............................. 17 Poison Pills .......................................................... 17 Shareholder Ability to Act by Written Consent ......................... 17 Shareholder Ability to Call Special Meetings .......................... 17 Supermajority Vote Requirements ....................................... 17 5. MERGERS AND CORPORATE RESTRUCTURINGS ................................... 18 Overall Approach .................................................. 18 Appraisal Rights .......................................................... 18 ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 2 ================================================================================ Asset Purchases ....................................................... 18 Asset Sales ........................................................... 19 Bundled Proposals ..................................................... 19 Conversion of Securities .............................................. 19 Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans .......................................... 19 Formation of Holding Company .......................................... 19 Going Private Transactions (LBOs, Minority Squeezeouts, and Going Dark) ..................................................... 20 Joint Ventures ........................................................ 20 Liquidations .......................................................... 20 Mergers and Acquisitions/ Issuance of Shares to Facilitate Merger or Acquisition .................................... 20 Private Placements/Warrants/Convertible Debentures .................... 20 Spinoffs .............................................................. 21 Value Maximization Proposals .......................................... 21 6. STATE OF INCORPORATION ................................................. 22 Control Share Acquisition Provisions .................................. 22 Control Share Cash-out Provisions ..................................... 22 Disgorgement Provisions ............................................... 22 Fair Price Provisions ................................................. 22 Freeze-out Provisions ................................................. 22 Greenmail ............................................................. 22 Reincorporation Proposals ............................................. 23 Stakeholder Provisions ................................................ 23 State Antitakeover Statutes ........................................... 23 7. CAPITAL STRUCTURE ...................................................... 24 Adjustments to Par Value of Common Stock .............................. 24 Common Stock Authorization ............................................ 24 Dual-Class Stock ...................................................... 24 Issue Stock for Use with Rights Plan .................................. 24 Preemptive Rights ..................................................... 24 Preferred Stock ....................................................... 24 Recapitalization ...................................................... 25 Reverse Stock Splits .................................................. 25 Share Repurchase Programs ............................................. 25 Stock Distributions: Splits and Dividends ............................. 25 Tracking Stock ........................................................ 25 8. EXECUTIVE AND DIRECTOR COMPENSATION .................................... 26 Equity Compensation Plans ............................................. 26 Cost of Equity Plans .................................................. 26 Repricing Provisions .................................................. 26 Pay-for Performance Disconnect ........................................ 26 Three-Year Burn Rate/Burn Rate Commitment ............................. 28 Poor Pay Practices .................................................... 29 Specific Treatment of Certain Award Types in Equity Plan Evaluations: . 30 Dividend Equivalent Rights ............................................ 30 Liberal Share Recycling Provisions .................................... 30 Other Compensation Proposals and Policies ............................. 30 401(k) Employee Benefit Plans ......................................... 30 Director Compensation ................................................. 30 Director Retirement Plans ............................................. 31 Employee Stock Ownership Plans (ESOPs) ................................ 31 Employee Stock Purchase Plans-- Qualified Plans ....................... 31 ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 3 ================================================================================ Employee Stock Purchase Plans-- Non-Qualified Plans ................... 31 Incentive Bonus Plans and Tax Deductibility Proposals (OBRA-Related Compensation Proposals) ............................... 32 Options Backdating .................................................... 32 Option Exchange Programs/Repricing Options ............................ 32 Stock Plans in Lieu of Cash ........................................... 33 Transfer Programs of Stock Options .................................... 33 Shareholder Proposals on Compensation ................................. 33 Advisory Vote on Executive Compensation (Say-on-Pay) .................. 33 Compensation Consultants- Disclosure of Board or Company's Utilization ............................................... 33 Disclosure/Setting Levels or Types of Compensation for Executives and Directors ........................................ 34 Option Repricing ...................................................... 34 Pay for Superior Performance .......................................... 34 Pension Plan Income Accounting ........................................ 34 Performance-Based Awards .............................................. 35 Severance Agreements for Executives/Golden Parachutes ................. 35 Supplemental Executive Retirement Plans (SERPs) ....................... 35 9. CORPORATE RESPONSIBILITY ............................................... 36 Consumer Issues and Public Safety ..................................... 36 Animal Rights ......................................................... 36 Drug Pricing .......................................................... 36 Drug Reimportation .................................................... 36 Genetically Modified Foods ............................................ 36 Handguns .............................................................. 37 HIV/AIDS .............................................................. 37 Predatory Lending ..................................................... 37 Tobacco ............................................................... 38 Toxic Chemicals ....................................................... 38 Environment and Energy ................................................ 38 Arctic National Wildlife Refuge ....................................... 38 CERES Principles ...................................................... 39 Climate Change ........................................................ 39 Concentrated Area Feeding Operations (CAFOs) .......................... 39 Environmental-Economic Risk Report .................................... 39 Environmental Reports ................................................. 39 Global Warming ........................................................ 40 Kyoto Protocol Compliance ............................................. 40 Land Use .............................................................. 40 Nuclear Safety ........................................................ 40 Operations in Protected Areas ......................................... 40 Recycling ............................................................. 40 Renewable Energy ...................................................... 41 Sustainability Report ................................................. 41 General Corporate Issues .............................................. 41 Charitable/Political Contributions .................................... 41 Disclosure of Lobbying Expenditures/Initiatives ....................... 42 Link Executive Compensation to Social Performance ..................... 42 Outsourcing/Offshoring ................................................ 42 Labor Standards and Human Rights ...................................... 42 China Principles ...................................................... 42 Country-specific Human Rights Reports ................................. 42 International Codes of Conduct/Vendor Standards ....................... 42 MacBride Principles ................................................... 43 Military Business ..................................................... 43 ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 4 ================================================================================ Foreign Military Sales/Offsets ........................................ 43 Landmines and Cluster Bombs ........................................... 43 Nuclear Weapons ....................................................... 44 Operations in Nations Sponsoring Terrorism (e.g., Iran) ............... 44 Spaced-Based Weaponization ............................................ 44 Workplace Diversity ................................................... 44 Board Diversity ....................................................... 44 Equal Employment Opportunity (EEO) .................................... 44 Glass Ceiling ......................................................... 45 Sexual Orientation .................................................... 45 10. MUTUAL FUND PROXIES ................................................... 46 Election of Directors ................................................. 46 Converting Closed-end Fund to Open-end Fund ........................... 46 Proxy Contests ........................................................ 46 Investment Advisory Agreements ........................................ 46 Approving New Classes or Series of Shares ............................. 46 Preferred Stock Proposals ............................................. 46 1940 Act Policies ..................................................... 46 Changing a Fundamental Restriction to a Nonfundamental Restriction .... 47 Change Fundamental Investment Objective to Nonfundamental ............. 47 Name Change Proposals ................................................. 47 Change in Fund's Subclassification .................................... 47 Disposition of Assets/Termination/Liquidation ......................... 47 Changes to the Charter Document ....................................... 47 Changing the Domicile of a Fund ....................................... 48 Authorizing the Board to Hire and Terminate Subadvisors Without Shareholder Approval ........................................ 48 Distribution Agreements ............................................... 48 Master-Feeder Structure ............................................... 48 Mergers ............................................................... 48 Shareholder Proposals for Mutual Funds .................................... 48 Establish Director Ownership Requirement .............................. 48 Reimburse Shareholder for Expenses Incurred ........................... 48 Terminate the Investment Advisor ...................................... 48 ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 5 ================================================================================ 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 if supporting that merger or transaction. 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). Auditor Indemnification and Limitation of Liability Consider the issue of auditor indemnification and limitation of liability on a CASE-BY-CASE basis. Factors to be assessed include, but are not limited to: o The terms of the auditor agreement- the degree to which these agreements impact shareholders' rights; o Motivation and rationale for establishing the agreements; o Quality of disclosure; and o Historical practices in the audit area. WTHHOLD against members of an audit committee in situations where there is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm. Auditor Ratification 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 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, or o Fees for non-audit services ("Other" fees) are excessive. Non-audit fees are excessive if: Non-audit ("other") fees >audit fees + audit-related fees + tax compliance/preparation fees Tax compliance and preparation include the preparation of original and amended tax returns, refund claims and tax payment planning. All other services in the tax category, such as tax advice, planning or consulting should be added to "Other" fees. If the breakout of tax fees cannot be determined, add all tax fees to "Other" fees. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 6 ================================================================================ 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: o The tenure of the audit firm; o The length of rotation specified in the proposal; o Any significant audit-related issues at the company; o The number of Audit Committee meetings held each year; o The number of financial experts serving on the committee; and o Whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive price. 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, and/or location of the annual meeting unless the proposed change is unreasonable. Vote AGAINST shareholder proposals to change the date, time, and/or location of the annual meeting unless the current scheduling or location is unreasonable. TRANSACT OTHER BUSINESS Vote AGAINST proposals to approve other business when it appears as voting item. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 7 ================================================================================ 2. BOARD OF DIRECTORS: VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS Vote CASE-BY-CASE on director nominees, examining, but not limited to, the following factors: o Composition of the board and key board committees; o Attendance at board and committee meetings; o Corporate governance provisions and takeover activity; o Disclosures under Section 404 of Sarbanes-Oxley Act; o Long-term company performance relative to a market and peer index; o Extent of the director's investment in the company; o Existence of related party transactions; o Whether the chairman is also serving as CEO; o Whether a retired CEO sits on the board; o Number of outside boards at which a director serves; o Majority vote standard for director elections without a provision to allow for plurality voting when there are more nominees than seats. WITHHOLD from individual directors who: o Attend less than 75 percent of the board and committee meetings without a valid excuse (such as illness, service to the nation, work on behalf of the company); o Sit on more than six public company boards; o Are CEOs of public companies who sit on the boards of more than two public companies besides their own-- withhold only at their outside boards. WITHHOLD from the entire board of directors, (except from new nominees, who should be considered on a CASE-BY-CASE basis) if: o The company's proxy indicates that not all directors attended 75% of the aggregate of their board and committee meetings, but fails to provide the required disclosure of the names of the directors involved. If this information cannot be obtained, withhold from all incumbent directors; o The company's poison pill has a dead-hand or modified dead-hand feature. Withhold every year until this feature is removed; o The board adopts or renews a poison pill without shareholder approval since the beginning of 2005, does not commit to putting it to shareholder vote within 12 months of adoption, or reneges on a commitment to put the pill to a vote, and has not yet received a withhold recommendation for this issue; o The board failed to act on a shareholder proposal that received approval by a majority of the shares outstanding the previous year; o The board failed to act on a shareholder proposal that received approval of the majority of shares cast for the previous two consecutive years; o The board failed to act on takeover offers where the majority of the shareholders tendered their shares; o At the previous board election, any director received more than 50 percent withhold votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold rate; o The company is a Russell 3000 company that underperformed its industry group (GICS group) under the criteria discussed in the section "Performance Test for Directors". WITHHOLD from Inside Directors and Affiliated Outside Directors (per the Classification of Directors below) when: o The inside or affiliated outside director serves on any of the three key committees: audit, compensation, or nominating; ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 8 ================================================================================ o The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; o The company lacks a formal nominating committee, even if board attests that the independent directors fulfill the functions of such a committee; o The full board is less than majority independent. WITHHOLD from the members of the Audit Committee if: o The non - audit fees paid to the auditor are excessive (see discussion under Auditor Ratification); o A material weakness identified in the Section 404 Sarbanes-Oxley Act disclosures rises to a level of serious concern; there are chronic internal control issues and an absence of established effective control mechanisms; o There is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm. WITHHOLD from the members of the Compensation Committee if: o There is a negative correlation between the chief executive's pay and company performance (see discussion under Equity Compensation Plans); o The company reprices underwater options for stock, cash or other consideration without prior shareholder approval, even if allowed in their equity plan; o The company fails to submit one-time transfers of stock options to a shareholder vote; o The company fails to fulfill the terms of a burn rate commitment they made to shareholders; o The company has backdated options (see "Options Backdating" policy); o The company has poor compensation practices (see "Poor Pay Practices" policy). Poor pay practices may warrant withholding votes from the CEO and potentially the entire board as well. WITHHOLD from directors, individually or the entire board, for egregious actions or failure to replace management as appropriate. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 9 ================================================================================ 2007 CLASSIFICATION OF DIRECTORS - -------------------------------------------------------------------------------- INSIDE DIRECTOR (I) o Employee of the company or one of its affiliates(1); o Non-employee officer of the company if among the five most highly paid individuals (excluding interim CEO); o Listed as a Section 16 officer(2); o Current interim CEO; o Beneficial owner of more than 50 percent of the company's voting power (this may be aggregated if voting power is distributed among more than one member of a defined group). AFFILIATED OUTSIDE DIRECTOR (AO) o Board attestation that an outside director is not independent; o Former CEO of the company; o Former CEO of an acquired company within the past five years; o Former interim CEO if the service was longer than 18 months. If the service was between twelve and eighteen months an assessment of the interim CEO's employment agreement will be made;(3) o Former executive(2) of the company, an affiliate or an acquired firm within the past five years; o Executive(2) of a former parent or predecessor firm at the time the company was sold or split off from the parent/predecessor within the past five years; o Executive, former executive, general or limited partner of a joint venture or partnership with the company; o Relative(4) of a current Section 16 officer of company or its affiliates; o Relative(4) of a current employee of company or its affiliates where additional factors raise concern (which may include, but are not limited to, the following: a director related to numerous employees; the company or its affiliates employ relatives of numerous board members; or a non-Section 16 officer in a key strategic role); o Relative(4) of former Section 16 officer, of company or its affiliate within the last five years; o Currently provides (or a relative(4) provides) professional services(5) to the company, to an affiliate of the company or an individual officer of the company or one of its affiliates in excess of $10,000 per year; o Employed by (or a relative(4) is employed by) a significant customer or supplier(6); o Has (or a relative(4) has) any transactional relationship with the company or its affiliates excluding investments in the company through a private placement; (6) o Any material financial tie or other related party transactional relationship to the company; o Party to a voting agreement to vote in line with management on proposals being brought to shareholder vote; o Has (or a relative4 has) an interlocking relationship as defined by the SEC involving members of the board of directors or its Compensation and Stock Option Committee; (7) o Founder (8) of the company but not currently an employee; o Is (or a relative4 is) a trustee, director or employee of a charitable or non-profit organization that receives grants or endowments(6) from the company or its affiliates(1). INDEPENDENT OUTSIDE DIRECTOR (IO) o No material(9) connection to the company other than a board seat. - -------------------------------------------------------------------------------- FOOTNOTES: (1) "Affiliate" includes a subsidiary, sibling company, or parent company. ISS uses 50 percent control ownership by the parent company as the standard for applying its affiliate designation. (2) "Executives" (officers subject to Section 16 of the Securities and Exchange Act of 1934) include the chief executive, operating, financial, legal, technology, and accounting officers of a company (including the president, treasurer, secretary, controller, or any vice president in charge of a principal business unit, division or policy function). - -------------------------------------------------------------------------------- ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 10 ================================================================================ - -------------------------------------------------------------------------------- (3) ISS will look at the terms of the interim CEO's employment contract to determine if it contains severance pay, long-term health and pension benefits or other such standard provisions typically contained in contracts of permanent, non-temporary CEOs. ISS will also consider if a formal search process was underway for a full-time CEO at the time. (4) "Relative" follows the SEC's new definition of "immediate family members" which covers spouses, parents, children, step-parents, step-children, siblings, in-laws, and any person (other than a tenant or employee) sharing the household of any director, nominee for director, executive officer, or significant shareholder of the company. (5) Professional services can be characterized as advisory in nature and generally include the following: investment banking / financial advisory services; commercial banking (beyond deposit services); investment services; insurance services; accounting/audit services; consulting services; marketing services; and legal services. The case of participation in a banking syndicate by a non-lead bank should be considered a transaction (and hence subject to the associated materiality test) rather than a professional relationship. (6) If the company makes or receives annual payments exceeding the greater of $200,000 or five percent of the recipient's gross revenues. (The recipient is the party receiving the financial proceeds from the transaction). (7) Interlocks include: (a) executive officers serving as directors on each other's compensation or similar committees (or, in the absence of such a committee, on the board) or (b) executive officers sitting on each other's boards and at least one serves on the other's compensation or similar committees (or, in the absence of such a committee, on the board). (8) The operating involvement of the Founder with the company will be considered. Little to no operating involvement may cause ISS to deem the Founder as an independent outsider. (9) For purposes of ISS' director independence classification, "material" will be defined as a standard of relationship (financial, personal or otherwise) that a reasonable person might conclude could potentially influence one's objectivity in the boardroom in a manner that would have a meaningful impact on an individual's ability to satisfy requisite fiduciary standards on behalf of shareholders. - -------------------------------------------------------------------------------- AGE LIMITS Vote AGAINST shareholder or management proposals to limit the tenure of outside directors through 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 Generally vote AGAINST proposals to eliminate cumulative voting. Generally vote FOR proposals to restore or provide for cumulative voting unless the company meets all of the following criteria: o Majority vote standard in director elections, including a carve-out for plurality voting in contested situations; o Annually elected board; o Two-thirds of the board composed of independent directors; o Nominating committee composed solely of independent directors; ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 11 ================================================================================ o Confidential voting; however, there may be a provision for suspending confidential voting during proxy contests; o Ability of shareholders to call special meetings or act by written consent with 90 days' notice; o Absence of superior voting rights for one or more classes of stock; o Board does not have the right to change the size of the board beyond a stated range that has been approved by shareholders; o The company has not under-performed its both industry peers and index on both a one-year and three-year total shareholder returns basis*, unless there has been a change in the CEO position within the last three years; and o No director received a WITHHOLD vote level of 35% or more of the votes cast in the previous election. * Starting in 2007, the industry peer group used for this evaluation will change from the 4-digit GICS group to the average of the 12 companies in the same 6-digit GICS group that are closest in revenue to the company. To fail, the company must under-perform its index and industry group on all 4 measures (1 and 3 year on industry peers and index). DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY PROTECTION Vote CASE-BY-CASE on proposals on director and officer indemnification and liability protection 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 liability for acts, such as negligence, that are more serious violations of fiduciary obligation than mere carelessness. Vote AGAINST proposals that would expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts that previously the company was permitted to provide indemnification for at the discretion of the company's board (i.e. "permissive indemnification") but that previously the company was not required to indemnify. 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 If 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 If only 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 shareholders' ability to remove directors with or without cause. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 12 ================================================================================ 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 CHAIR (SEPARATE CHAIR/CEO) Generally vote FOR shareholder proposals requiring the position of chair 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; however the director must serve a minimum of one year in order to qualify as a lead director.) At a minimum these should include: - Presides at all meetings of the board at which the chairman is not present, including executive sessions of the independent directors, - Serves as liaison between the chairman and the independent directors, - Approves information sent to the board, - Approves meeting agendas for the board, - Approves meetings schedules to assure that there is sufficient time for discussion of all agenda items, - Has the authority to call meetings of the independent directors, - If requested by major shareholders, ensures that he is available for consultation and direct communication; o Two-thirds independent board; o All-independent key committees; o Established governance guidelines; o The company should not have underperformed both its industry peers and index on both a one-year and three-year total shareholder returns basis*, unless there has been a change in the Chairman/CEO position within that time; o The company does not have any problematic governance issues. * Starting in 2007, the industry peer group used for this evaluation will change from the 4-digit GICS group to the average of the 12 companies in the same 6-digit GICS group that are closest in revenue to the company. To fail, the company must under-perform its index and industry group on all 4 measures (1 and 3 year on industry peers and index). 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' definition of independent outsider. (See Classification of Directors.) 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. MAJORITY VOTE SHAREHOLDER PROPOSALS Generally vote FOR precatory and binding resolutions requesting that the board change the company's bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast, provided it does not conflict with the state law where the company is incorporated. Binding resolutions need to allow for a carve-out for a plurality vote standard when there are more nominees than board seats. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 13 ================================================================================ Companies are strongly encouraged to also adopt a post-election policy (also know as a director resignation policy) that will provide guidelines so that the company will promptly address the situation of a holdover director. OFFICE OF THE BOARD Generally vote FOR shareholders proposals requesting that the board establish an Office of the Board of Directors in order to facilitate direct communications between shareholders and non-management directors, unless the company has all of the following: o Established a communication structure that goes beyond the exchange requirements to facilitate the exchange of information between shareholders and members of the board; o Effectively disclosed information with respect to this structure to its shareholders; o Company has not ignored majority-supported shareholder proposals or a majority withhold vote on a director nominee; and o The company has an independent chairman or a lead/presiding director, according to ISS' definition. This individual must be made available for periodic consultation and direct communication with major shareholders. OPEN ACCESS Generally vote FOR reasonably crafted shareholder proposals providing shareholders with the ability to nominate director candidates to be included on management's proxy card, provided the proposal substantially mirrors the SEC's proposed two-trigger formulation (see the proposed "Security Holder Director Nominations" rule (http://www.sec.gov/rules/proposed/34-48626.htm) or ISS' comment letter to the SEC dated 6/13/2003, available on ISS website under Governance Center- ISS Position Papers). PERFORMANCE TEST FOR DIRECTORS WITHHOLD from directors of Russell 3000 companies that underperformed relative to their industry peers. The criterion used to evaluate such underperformance is a combination of four performance measures: One measurement will be a market-based performance metric and three measurements will be tied to the company's operational performance. The market performance metric in the methodology is five-year Total Shareholder Return (TSR) on a relative basis within each four-digit GICS group. The three operational performance metrics are sales growth, EBITDA growth, and pre-tax operating Return on Invested Capital (ROIC) on a relative basis within each four-digit GICS group. All four metrics will be time-weighted as follows: 40 percent on the trailing 12 month period and 60 percent on the 48 month period prior to the trailing 12 months. This methodology emphasizes the company's historical performance over a five-year period yet also accounts for near-term changes in a company's performance. The table below summarizes the new framework: - -------------------------------------------------------------------------------- Metrics Basis of Evaluation Weighting 2nd Weighting - -------------------------------------------------------------------------------- Operational 50% Performance - -------------------------------------------------------------------------------- 5-year Average Management 33.3% pre-tax efficiency in operating ROIC deploying assets - -------------------------------------------------------------------------------- 5-year Sales Top-Line 33.3% Growth - -------------------------------------------------------------------------------- 5-year EBITDA Core-earnings 33.3% Growth - -------------------------------------------------------------------------------- Sub Total 100% - -------------------------------------------------------------------------------- ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 14 ================================================================================ - -------------------------------------------------------------------------------- Stock 50% Performance - -------------------------------------------------------------------------------- 5-year TSR Market - -------------------------------------------------------------------------------- Total 100% - -------------------------------------------------------------------------------- Adopt a two-phased approach. In 2007 (Year 1), the worst performers (bottom five percent) within each of the 24 GICS groups will automatically receive cautionary language, except for companies that have already received cautionary language or withhold votes in 2006 under the current policy. The latter may be subject to withhold votes in 2007. For 2008 (Year 2), WITHHOLD votes from director nominees if a company continues to be in the bottom five percent within its GICS group for that respective year and/or shows no improvement in its most recent trailing 12 months operating and market performance relative to its peers in its GICS group. This policy would be applied on a rolling basis going forward. 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 stock ownership on the part of directors is desired, the company should determine the appropriate ownership requirement. Vote CASE-BY-CASE on 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 through term limits. However, scrutinize boards where the average tenure of all directors exceeds 15 years for independence from management and for sufficient turnover to ensure that new perspectives are being added to the board. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 15 ================================================================================ 3. PROXY CONTESTS Voting for Director Nominees in Contested Elections Vote CASE-BY-CASE on the election of directors in contested elections, considering the following factors: o Long-term financial performance of the target company relative to its industry; o Management's track record; o Background to the proxy contest; o Qualifications of director nominees (both slates); o Strategic plan of dissident slate and quality of critique against management; o Likelihood that the proposed goals and objectives can be achieved (both slates); o Stock ownership positions. REIMBURSING PROXY SOLICITATION EXPENSES Vote CASE-BY-CASE on proposals to reimburse proxy solicitation expenses. When voting in conjunction with support of a dissident slate, vote FOR the reimbursement of all appropriate proxy solicitation expenses associated with the election. 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. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 16 ================================================================================ 4. ANTITAKEOVER DEFENSES AND VOTING RELATED ISSUES Advance Notice Requirements for Shareholder Proposals/Nominations Vote CASE-BY-CASE on advance notice proposals, supporting 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 UNLESS the company has: (1) A shareholder approved poison pill in place; or (2) The company has adopted a policy concerning the adoption of a pill in the future specifying that the board will only adopt a shareholder rights plan if either: o Shareholders have approved the adoption of the plan; or o The board, in its exercise of its fiduciary responsibilities, determines that it is in the best interest of shareholders under the circumstances to adopt a pill without the delay in adoption that would result from seeking stockholder approval (i.e. the "fiduciary out" provision). A poison pill adopted under this fiduciary out will be put to a shareholder ratification vote within twelve months of adoption or expire. If the pill is not approved by a majority of the votes cast on this issue, the plan will immediately terminate. Vote FOR shareholder proposals calling for poison pills to be put to a vote within a time period of less than one year after adoption. If the company has no non-shareholder approved poison pill in place and has adopted a policy with the provisions outlined above, vote AGAINST the proposal. If these conditions are not met, vote FOR the proposal, but with the caveat that a vote within twelve months would be considered sufficient. Vote CASE-by-CASE on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan. Rights plans should contain the following attributes: o No lower than a 20% trigger, flip-in or flip-over; o A term of no more than three years; o No dead-hand, slow-hand, no-hand or similar feature that limits the ability of a future board to redeem the pill; o Shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a qualifying offer is announced, ten percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill. SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT Vote AGAINST proposals to restrict or prohibit shareholder ability to take action by written consent. Vote FOR proposals to allow or make easier shareholder action by written consent. SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS Vote AGAINST proposals to restrict or prohibit shareholder ability to call special meetings. Vote FOR proposals that remove restrictions on the right of shareholders to act independently of management. SUPERMAJORITY VOTE REQUIREMENTS Vote AGAINST proposals to require a supermajority shareholder vote. Vote FOR proposals to lower supermajority vote requirements. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 17 ================================================================================ 5. MERGERS AND CORPORATE RESTRUCTURINGS OVERALL APPROACH For mergers and acquisitions, review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing factors including: o VALUATION - Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction and strategic rationale. o MARKET REACTION - How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal. o STRATEGIC RATIONALE - Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions. o NEGOTIATIONS AND PROCESS - Were the terms of the transaction negotiated at arm's-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation "wins" can also signify the deal makers' competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value. o CONFLICTS OF INTEREST - Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the "ISS Transaction Summary" section of this report is an aggregate figure that can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists. o GOVERNANCE - Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance. 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 Non-completion risk. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 18 ================================================================================ ASSET SALES Vote CASE-BY-CASE on asset sales, 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 Vote CASE-BY-CASE on bundled or "conditional" 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 Vote CASE-BY-CASE on proposals regarding conversion of securities. 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 Vote CASE-BY-CASE on proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan, 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 Vote CASE-BY-CASE on proposals regarding the formation of a holding company, 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. 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 (see discussion under "Capital Structure"); o Adverse changes in shareholder rights. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 19 ================================================================================ GOING PRIVATE TRANSACTIONS (LBOS, MINORITY SQUEEZEOUTS, AND GOING DARK) Vote CASE-BY-CASE on going private transactions, taking into account the following: o Offer price/premium; o Fairness opinion; o How the deal was negotiated; o Conflicts of interest; o Other alternatives/offers considered; and o Non-completion risk. Vote CASE-BY-CASE on "going dark" transactions, determining whether the transaction enhances shareholder value by taking into consideration: o Whether the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and market research of the stock); o Cash-out value; o Whether the interests of continuing and cashed-out shareholders are balanced; and o The market reaction to public announcement of transaction. JOINT VENTURES Vote CASE-BY-CASE on proposals to form joint ventures, taking into account the following: o Percentage of assets/business contributed; o Percentage ownership; o Financial and strategic benefits; o Governance structure; o Conflicts of interest; o Other alternatives; o Noncompletion risk. LIQUIDATIONS Vote CASE-BY-CASE on liquidations, taking into account the following: o Management's efforts to pursue other alternatives; o Appraisal value of assets; and o 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 Vote CASE-BY-CASE on mergers and acquisitions, determining whether the transaction enhances shareholder value by giving consideration to items listed under "Mergers and Corporate Restructurings: Overall Approach." PRIVATE PLACEMENTS/WARRANTS/CONVERTIBLE DEBENTURES Vote CASE-BY-CASE on proposals regarding private placements, taking into consideration: 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 private placement if it is expected that the company will file for bankruptcy if the transaction is not approved. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 20 ================================================================================ SPINOFFS Vote CASE-BY-CASE on spin-offs, considering: 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: o Prolonged poor performance with no turnaround in sight; o Signs of entrenched board and management; o Strategic plan in place for improving value; o Likelihood of receiving reasonable value in a sale or dissolution; and o Whether company is actively exploring its strategic options, including retaining a financial advisor. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 21 ================================================================================ 6. STATE OF INCORPORATION CONTROL SHARE ACQUISITION PROVISIONS Control share acquisition statutes function by denying shares their voting rights when they contribute to ownership in excess of certain thresholds. Voting rights for those shares exceeding ownership limits may only be restored by approval of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes effectively require a hostile bidder to put its offer to a shareholder vote or risk voting disenfranchisement if the bidder continues buying up a large block of shares. 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 CASH-OUT PROVISIONS Control share cash-out statutes give dissident shareholders the right to "cash-out" of their position in a company at the expense of the shareholder who has taken a control position. In other words, when an investor crosses a preset threshold level, remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the highest acquiring price. Vote FOR proposals to opt out of control share cash-out statutes. DISGORGEMENT PROVISIONS Disgorgement provisions require an acquirer or potential acquirer of more than a certain percentage of a company's stock to disgorge, or pay back, to the company any profits realized from the sale of that company's stock purchased 24 months before achieving control status. All sales of company stock by the acquirer occurring within a certain period of time (between 18 months and 24 months) prior to the investor's gaining control status are subject to these recapture-of-profits provisions. Vote FOR proposals to opt out of state disgorgement provisions. FAIR PRICE PROVISIONS Vote CASE-BY-CASE on proposals to adopt fair price provisions (provisions that stipulate that an acquirer must pay the same price to acquire all shares as it paid to acquire the control shares), 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. FREEZE-OUT PROVISIONS Vote FOR proposals to opt out of state freeze-out provisions. Freeze-out provisions force an investor who surpasses a certain ownership threshold in a company to wait a specified period of time before gaining control of the company. GREENMAIL Greenmail payments are targeted share repurchases by management of company stock from individuals or groups seeking control of the company. Since only the hostile party receives payment, usually at a substantial premium over the market value of its shares, the practice discriminates against all other shareholders. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 22 ================================================================================ Vote FOR proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a company's ability to make greenmail payments. Vote CASE-BY-CASE on anti-greenmail proposals when they are bundled with other charter or bylaw amendments. REINCORPORATION PROPOSALS Vote CASE-BY-CASE on proposals to change a company's state of incorporation, taking into consideration both financial and corporate governance concerns, including: o The reasons for reincorporating; o A comparison of the governance provisions; o Comparative economic benefits; and o A comparison of the jurisdictional laws. Vote FOR re-incorporation when the economic factors outweigh any neutral or negative governance changes. STAKEHOLDER PROVISIONS Vote AGAINST proposals that ask the board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination. STATE ANTITAKEOVER STATUTES Vote CASE-BY-CASE on 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, anti-greenmail provisions, and disgorgement provisions). ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 23 ================================================================================ 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 Vote CASE-BY-CASE on proposals to increase the number of shares of common stock authorized for issuance using a model developed by ISS. 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. In addition, for capital requests less than or equal to 300 percent of the current authorized shares that marginally fail the calculated allowable cap (i.e., exceed the allowable cap by no more than 5 percent), on a CASE-BY-CASE basis, vote FOR the increase based on the company's performance and whether the company's ongoing use of shares has shown prudence. Factors should include, at a minimum, the following: o Rationale; o Good performance with respect to peers and index on a five-year total shareholder return basis; o Absence of non-shareholder approved poison pill; o Reasonable equity compensation burn rate; o No non-shareholder approved pay plans; and o Absence of egregious equity compensation practices. DUAL-CLASS STOCK Vote AGAINST proposals to create a new class of common stock with superior voting rights. 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 create a new class of nonvoting or sub-voting 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 non-shareholder approved shareholder rights plan (poison pill). PREEMPTIVE RIGHTS Vote CASE-BY-CASE on shareholder proposals that seek preemptive rights, taking into consideration: 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). ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 24 ================================================================================ 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 Vote CASE-BY-CASE on recapitalizations (reclassifications of securities), taking into account the following: o More simplified capital structure; o Enhanced liquidity; o Fairness of conversion terms; o Impact on voting power and dividends; o Reasons for the reclassification; o Conflicts of interest; and o 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. Vote CASE-BY-CASE on proposals to implement a reverse stock split that do not proportionately reduce the number of shares authorized for issue based on the allowable increased calculated using the Capital Structure model. 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 Vote CASE-BY-CASE on the creation of tracking stock, weighing the strategic value of the transaction against such factors as: o Adverse governance changes; o Excessive increases in authorized capital stock; o Unfair method of distribution; o Diminution of voting rights; o Adverse conversion features; o Negative impact on stock option plans; and o Alternatives such as spin-off. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 25 ================================================================================ 8. EXECUTIVE AND DIRECTOR COMPENSATION EQUITY COMPENSATION PLANS Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity plan if any of the following factors apply: o The total cost of the company's equity plans is unreasonable; o The plan expressly permits the repricing of stock options without prior shareholder approval; o There is a disconnect between CEO pay and the company's performance; o The company's three year burn rate exceeds the greater of 2% and the mean plus 1 standard deviation of its industry group; or o The plan is a vehicle for poor pay practices. Each of these factors is further described below: COST OF EQUITY PLANS Generally, vote AGAINST equity plans if the cost is unreasonable. For non-employee director plans, vote FOR the plan if certain factors are met (see Director Compensation section). The cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which is measured using a binomial option pricing model that assesses the amount of shareholders' equity flowing out of the company to employees and directors. SVT is expressed as both a dollar amount and as a percentage of market value, and includes the new shares proposed, shares available under existing plans, and shares granted but unexercised. All award types are valued. For omnibus plans, unless limitations are placed on the most expensive types of awards (for example, full value awards), the assumption is made that all awards to be granted will be the most expensive types. See discussion of specific types of awards. The Shareholder Value Transfer is reasonable if it falls below the company-specific allowable cap. The allowable cap is determined as follows: The top quartile performers in each industry group (using the Global Industry Classification Standard GICS) are identified. Benchmark SVT levels for each industry are established based on these top performers' historic SVT. Regression analyses are run on each industry group to identify the variables most strongly correlated to SVT. The benchmark industry SVT level is then adjusted upwards or downwards for the specific company by plugging the company-specific performance measures, size and cash compensation into the industry cap equations to arrive at the company's allowable cap. REPRICING PROVISIONS Vote AGAINST plans that expressly permit the repricing of underwater stock options without prior shareholder approval, even if the cost of the plan is reasonable. Also, WITHHOLD from members of the Compensation Committee who approved and/or implemented an option exchange program by repricing and buying out underwater options for stock, cash or other consideration or canceling underwater options and regranting options with a lower exercise price without prior shareholder approval, even if such repricings are allowed in their equity plan. Vote AGAINST plans if the company has a history of repricing options without shareholder approval, and the applicable listing standards would not preclude them from doing so. PAY-FOR PERFORMANCE DISCONNECT Generally vote AGAINST plans in which: o there is a disconnect between the CEO's pay and company performance (an increase in pay and a decrease in performance); o the main source of the pay increase (over half) is equity-based, and ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 26 ================================================================================ o the CEO is a participant of the equity proposal. Performance decreases are based on negative one- and three-year total shareholder returns. CEO pay increases are based on the CEO's total direct compensation (salary, cash bonus, present value of stock options, face value of restricted stock, value of non-equity incentive payouts, change in pension value and nonqualified deferred compensation earnings, and all other compensation) increasing over the previous year. WITHHOLD votes from the Compensation Committee members when the company has a pay for performance disconnect. On a CASE-BY-CASE basis, vote for equity plans and FOR compensation committee members with a pay-for-performance disconnect if compensation committee members can present strong and compelling evidence of improved committee performance. This evidence must go beyond the usual compensation committee report disclosure. This additional evidence necessary 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 total 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). 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 providing 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. 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 granting 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 ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 27 ================================================================================ to be made. The performance-based equity awards do not refer to non-qualified stock options(1) or performance-accelerated grants.(2) 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. THREE-YEAR BURN RATE/BURN RATE COMMITMENT Generally vote AGAINST plans if the company's most recent three-year burn rate exceeds one standard deviation in excess of the industry mean (per the following Burn Rate Table) and is over two percent of common shares outstanding. The three-year burn rate policy does not apply to non-employee director plans unless outside directors receive a significant portion of shares each year. However, vote FOR equity plans if the company fails this burn rate test but the company commits in a public filing to a three-year average burn rate equal to its GICS group burn rate mean plus one standard deviation (or 2%, whichever is greater), assuming all other conditions for voting FOR the plan have been met. If a company fails to fulfill its burn rate commitment, vote to WITHHOLD from the compensation committee. - -------------- (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). ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 28 ================================================================================
2007 BURN RATE TABLE Russell 3000 Non-Russell 3000 - ------------------------------------------------------------------------ -------------------------------- Standard Mean + Standard Mean + GICS Description Mean Deviation STDEV Mean Deviation STDEV 1010 Energy 1.37% 0.92% 2.29% 1.76% 2.01% 3.77% 1510 Materials 1.23% 0.62% 1.85% 2.21% 2.15% 4.36% 2010 Capital Goods 1.60% 0.98% 2.57% 2.34% 1.98% 4.32% 2020 Commercial Services & Supplies 2.39% 1.42% 3.81% 2.25% 1.93% 4.18% 2030 Transportation 1.30% 1.01% 2.31% 1.92% 1.95% 3.86% 2510 Automobiles & 1.93% 0.98% 2.90% 2.37% 2.32% 4.69% Components 2520 Consumer Durables & Apparel 1.97% 1.12% 3.09% 2.02% 1.68% 3.70% 2530 Hotels Restaurants & 2.22% 1.19% 3.41% 2.29% 1.88% 4.17% Leisure 2540 Media 1.78% 0.92% 2.70% 3.26% 2.36% 5.62% 2550 Retailing 1.95% 1.10% 3.05% 2.92% 2.21% 5.14% 3010, 3020, 3030 Food & Staples 1.66% 1.25% 2.91% 1.90% 2.00% 3.90% Retailing 3510 Health Care Equipment & Services 2.87% 1.32% 4.19% 3.51% 2.31% 5.81% 3520 Pharmaceuticals & Biotechnology 3.12% 1.38% 4.50% 3.96% 2.89% 6.85% 4010 Banks 1.31% 0.89% 2.20% 1.15% 1.10% 2.25% 4020 Diversified 2.13% 1.64% 3.76% 4.84% 5.03% 9.87% Financials 4030 Insurance 1.34% 0.88% 2.22% 1.60% 1.96% 3.56% 4040 Real Estate 1.21% 1.02% 2.23% 1.21% 1.02% 2.23% 4510 Software & Services 3.77% 2.05% 5.82% 5.33% 3.13% 8.46% 4520 Technology Hardware & Equipment 3.05% 1.65% 4.70% 3.58% 2.34% 5.92% 4530 Semiconductors & Semiconductor 3.76% 1.64% 5.40% 4.48% 2.46% 6.94% Equip. 5010 Telecommunication 1.71% 0.99% 2.70% 2.98% 2.94% 5.92% Services 5510 Utilities 0.84% 0.51% 1.35% 0.84% 0.51% 1.35%
For companies that grant both full value awards and stock options to their employees, ISS shall apply a premium on full value awards for the past three fiscal years. The guideline for applying the premium is as follows:
- ---------------------------------------------------------------------------------------------------------- CHARACTERISTICS ANNUAL STOCK PRICE PREMIUM VOLATILITY - ---------------------------------------------------------------------------------------------------------- High annual volatility 53% and higher 1 full-value award will count as 1.5 option shares Moderate annual volatility 25% - 52% 1 full-value award will count as 2.0 option shares Low annual volatility Less than 25% 1 full-value award will count as 4.0 option shares - ----------------------------------------------------------------------------------------------------------
POOR PAY PRACTICES Vote AGAINST equity plans if the plan is a vehicle for poor compensation practices. WITHHOLD from compensation committee members, CEO, and potentially the entire board, if the company has poor compensation practices. The following practices, while not exhaustive, are examples of poor compensation practices that may warrant withholding votes: o Egregious employment contracts (e.g., those containing multi-year guarantees for bonuses and grants); o Excessive perks that dominate compensation (e.g., tax gross-ups for personal use of corporate aircraft); ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 29 o Huge bonus payouts without justifiable performance linkage or proper disclosure; o Performance metrics that are changed (e.g., canceled or replaced during the performance period without adequate explanation of the action and the link to performance); o Egregious pension/SERP (supplemental executive retirement plan) payouts (e.g., the inclusion of additional years of service not worked or inclusion of performance-based equity awards in the pension calculation); o New CEO awarded an overly generous new hire package (e.g., including excessive "make whole" provisions or any of the poor pay practices listed in this policy); o Excessive severance provisions (e.g., including excessive change in control payments); o Change in control payouts without loss of job or substantial diminution of job duties; o Internal pay disparity; o Options backdating (covered in a separate policy); and o Other excessive compensation payouts or poor pay practices at the company. SPECIFIC TREATMENT OF CERTAIN AWARD TYPES IN EQUITY PLAN EVALUATIONS: DIVIDEND EQUIVALENT RIGHTS Options that have Dividend Equivalent Rights (DERs) associated with them will have a higher calculated award value than those without DERs under the binomial model, based on the value of these dividend streams. The higher value will be applied to new shares, shares available under existing plans, and shares awarded but not exercised per the plan specifications. DERS transfer more shareholder equity to employees and non-employee directors and this cost should be captured. LIBERAL SHARE RECYCLING PROVISIONS Under net share counting provisions, shares tendered by an option holder to pay for the exercise of an option, shares withheld for taxes or shares repurchased by the company on the open market can be recycled back into the equity plan for awarding again. All awards with such provisions should be valued as full-value awards. Stock-settled stock appreciation rights (SSARs) will also be considered as full-value awards if a company counts only the net shares issued to employees towards their plan reserve. OTHER COMPENSATION PROPOSALS AND POLICIES 401(K) EMPLOYEE BENEFIT PLANS Vote FOR proposals to implement a 401(k) savings plan for employees. DIRECTOR COMPENSATION Vote CASE-BY-CASE on compensation plans for non-employee directors, based on the cost of the plans against the company's allowable cap. On occasion, director stock plans that set aside a relatively small number of shares when combined with employee or executive stock compensation plans exceed the allowable cap. Vote for the plan if ALL of the following qualitative factors in the board's compensation are met and disclosed in the proxy statement: o Director stock ownership guidelines with 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; or ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 30 - 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. o No retirement/benefits and perquisites provided to non-employee directors; and o Detailed disclosure provided 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. DIRECTOR RETIREMENT PLANS Vote AGAINST retirement plans for non-employee directors. Vote FOR shareholder proposals to eliminate retirement plans for non-employee directors. 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). EMPLOYEE STOCK PURCHASE PLANS-- QUALIFIED PLANS Vote CASE-BY-CASE on qualified employee stock purchase plans. 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. EMPLOYEE STOCK PURCHASE PLANS-- NON-QUALIFIED PLANS Vote CASE-by-CASE on nonqualified employee stock purchase plans. 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. If the company matching contribution exceeds 25 percent of employee's contribution, evaluate the cost of the plan against its allowable cap. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 31 ================================================================================ 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. Vote CASE-BY-CASE on amendments to existing plans to increase shares reserved and to qualify for favorable tax treatment under the provisions of Section 162(m) as long as the plan does not exceed the allowable cap and the plan does not violate any of the supplemental policies. 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. OPTIONS BACKDATING In cases where a company has practiced options backdating, WITHHOLD on a CASE-BY-CASE basis from the members of the compensation committee, depending on the severity of the practices and the subsequent corrective actions on the part of the board. WITHHOLD from the compensation committee members who oversaw the questionable options grant practices or from current compensation committee members who fail to respond to the issue proactively, depending on several factors, including, but not limited to: o Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes; o Length of time of options backdating; o Size of restatement due to options backdating; o Corrective actions taken by the board or compensation committee, such as canceling or repricing backdated options, or recoupment of option gains on backdated grants; o Adoption of a grant policy that prohibits backdating, and creation of a fixed grant schedule or window period for equity grants going forward. OPTION EXCHANGE PROGRAMS/REPRICING OPTIONS Vote CASE-by-CASE on management proposals seeking approval to exchange/reprice options taking into consideration: o Historic trading patterns--the stock price should not be so volatile that the options are likely to be back "in-the-money" over the near term; o Rationale for the re-pricing--was the stock price decline beyond management's control? o Is this a value-for-value exchange? o Are surrendered stock options added back to the plan reserve? o Option vesting--does the new option vest immediately or is there a black-out period? o Term of the option--the term should remain the same as that of the replaced option; o Exercise price--should be set at fair market or a premium to market; o Participants--executive officers and directors should be excluded. If the surrendered options are added back to the equity plans for re-issuance, then also take into consideration the company's three-year average burn rate. In addition to the above considerations, evaluate the intent, rationale, and timing of the repricing proposal. The proposal should clearly articulate why the board is choosing to conduct an exchange program at this point in time. Repricing underwater options after a recent precipitous ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 32 ================================================================================ drop in the company's stock price demonstrates poor timing. Repricing after a recent decline in stock price triggers additional scrutiny and a potential AGAINST vote on the proposal. At a minimum, the decline should not have happened within the past year. Also, consider the terms of the surrendered options, such as the grant date, exercise price and vesting schedule. Grant dates of surrendered options should be far enough back (two to three years) so as not to suggest that repricings are being done to take advantage of short-term downward price movements. Similarly, the exercise price of surrendered options should be above the 52-week high for the stock price. Vote FOR shareholder proposals to put option repricings to a shareholder vote. STOCK PLANS IN LIEU OF CASH Vote CASE-by-CASE on plans which provide participants with the option of taking all or a portion of their cash compensation in the form of stock. Vote FOR non-employee director only equity plans which provide a dollar-for-dollar cash for stock exchange. Vote CASE-by-CASE on plans which do not provide a dollar-for-dollar cash for stock exchange. In cases where the exchange is not dollar-for-dollar, the request for new or additional shares for such equity program will be considered using the binomial option pricing model. In an effort to capture the total cost of total compensation, ISS will not make any adjustments to carve out the in-lieu-of cash compensation. TRANSFER PROGRAMS OF STOCK OPTIONS One-time Transfers: WITHHOLD votes from compensation committee members if they fail to submit one-time transfers for to shareholders for approval. Vote CASE-BY-CASE on one-time transfers. Vote FOR if: o Executive officers and non-employee directors are excluded from participating; o Stock options are purchased by third-party financial institutions at a discount to their fair value using option pricing models such as Black-Scholes or a Binomial Option Valuation or other appropriate financial models; o There is a two-year minimum holding period for sale proceeds (cash or stock) for all participants. Additionally, management should provide a clear explanation of why options are being transferred and whether the events leading up to the decline in stock price were beyond management's control. A review of the company's historic stock price volatility should indicate if the options are likely to be back "in-the-money" over the near term. SHAREHOLDER PROPOSALS ON COMPENSATION ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY) Generally, vote FOR shareholder proposals that call for non-binding shareholder ratification of the compensation of the named Executive Officers and the accompanying narrative disclosure of material factors provided to understand the Summary Compensation Table. COMPENSATION CONSULTANTS- DISCLOSURE OF BOARD OR COMPANY'S UTILIZATION Generally vote FOR shareholder proposals seeking disclosure regarding the Company, Board, or Board committee's use of compensation consultants, such as company name, business relationship(s) and fees paid. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 33 ================================================================================ DISCLOSURE/SETTING LEVELS OR TYPES OF COMPENSATION FOR EXECUTIVES AND DIRECTORS 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 CASE-BY-CASE on 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 REPRICING Vote FOR shareholder proposals to put option repricings to a shareholder vote. PAY FOR SUPERIOR PERFORMANCE Generally vote FOR shareholder proposals based on a case-by-case analysis that requests the board establish a pay-for-superior performance standard in the company's executive compensation plan for senior executives. The proposals call for: o the annual incentive component of the plan should utilize financial performance criteria that can be benchmarked against peer group performance, and provide that no annual bonus be awarded based on financial performance criteria unless the company exceeds the median or mean performance of a disclosed group of peer companies on the selected financial criteria; o the long-term equity compensation component of the plan should utilize financial and/or stock price performance criteria that can be benchmarked against peer group performance, and any options, restricted shares, or other equity compensation used should be structured so that compensation is received only when company performance exceeds the median or mean performance of the peer group companies on the selected financial and stock price performance criteria; and o the plan disclosure should allow shareholders to monitor the correlation between pay and performance. Consider the following factors in evaluating this proposal: o What aspects of the company's annual and long -term equity incentive programs are performance driven? o If the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle rates disclosed to shareholders or are they benchmarked against a disclosed peer group? o Can shareholders assess the correlation between pay and performance based on the current disclosure? o What type of industry and stage of business cycle does the company belong to? 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. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 34 ================================================================================ PERFORMANCE-BASED AWARDS Vote CASE-BY-CASE on shareholder proposal requesting that a significant amount of future long-term incentive compensation awarded to senior executives shall be performance-based and requesting that the board adopt and disclose challenging performance metrics to shareholders, based on the following analytical steps: o First, vote FOR shareholder proposals advocating the use of performance-based equity awards, such as performance contingent options or restricted stock, indexed options or premium-priced options, unless the proposal is overly restrictive or if the company has demonstrated that it is using a "substantial" portion of performance-based awards for its top executives. Standard stock options and performance-accelerated awards do not meet the criteria to be considered as performance-based awards. Further, premium-priced options should have a premium of at least 25 percent and higher to be considered performance-based awards. o Second, assess the rigor of the company's performance-based equity program. If the bar set for the performance-based program is too low based on the company's historical or peer group comparison, generally vote FOR the proposal. Furthermore, if target performance results in an above target payout, vote FOR the shareholder proposal due to program's poor design. If the company does not disclose the performance metric of the performance-based equity program, vote FOR the shareholder proposal regardless of the outcome of the first step to the test. In general, vote FOR the shareholder proposal if the company does not meet both of the above two steps. SEVERANCE AGREEMENTS FOR EXECUTIVES/GOLDEN PARACHUTES 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, but is not limited to, 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. Change in control is defined as a change in the company ownership structure. 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. Generally vote FOR shareholder proposals requesting to limit the executive benefits provided under the company's supplemental executive retirement plan (SERP) by limiting covered compensation to a senior executive's annual salary and excluding of all incentive or bonus pay from the plan's definition of covered compensation used to establish such benefits. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 35 ================================================================================ 9. CORPORATE RESPONSIBILITY CONSUMER ISSUES AND PUBLIC SAFETY ANIMAL RIGHTS Generally vote AGAINST proposals to phase out the use of animals in product testing unless: o The company is conducting animal testing programs that are unnecessary or not required by regulation; o The company is conducting animal testing when suitable alternatives are accepted and used at peer firms; o The company has been the subject of recent, significant controversy related to its testing programs. 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 Generally vote AGAINST proposals requesting that companies implement specific price restraints on pharmaceutical products unless the company fails to adhere to legislative guidelines or industry norms in its product pricing. Vote CASE-BY-CASE on proposals requesting that the company evaluate their product pricing considering: o The existing level of disclosure on pricing policies; o Deviation from established industry pricing norms; o The company's existing initiatives to provide its products to needy consumers; o Whether the proposal focuses on specific products or geographic regions. DRUG REIMPORTATION Generally vote FOR proposals requesting that companies report on the financial and legal impact of their policies regarding prescription drug reimportation unless such information is already publicly disclosed. Generally vote AGAINST proposals requesting that companies adopt specific policies to encourage or constrain prescription drug reimportation. 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. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 36 ================================================================================ 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. Evaluate the following: 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. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 37 ================================================================================ 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. Spin-off tobacco-related businesses: o The percentage of the company's business affected; o The feasibility of a spin-off; 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. TOXIC CHEMICALS Generally vote FOR resolutions requesting that a company discloses its policies related to toxic chemicals. Vote CASE-BY-CASE on resolutions requesting that companies evaluate and disclose the potential financial and legal risks associated with utilizing certain chemicals, considering: o Current regulations in the markets in which the company operates; o Recent significant controversy, litigation, or fines stemming from toxic chemicals or ingredients at o the company; and o The current level of disclosure on this topic. Generally vote AGAINST resolutions requiring that a company reformulate its products within a certain timeframe unless such actions are required by law in specific markets. 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: ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 38 ================================================================================ 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. CLIMATE CHANGE In general, vote FOR resolutions requesting that a company disclose information on the impact of climate change on the company's operations unless: o The company already provides current, publicly-available information on the perceived impact that climate change may have on the company as well as associated policies and procedures to address such risks and/or opportunities; o The company's level of disclosure is comparable to or better than information provided by industry peers; and o There are no significant fines, penalties, or litigation associated with the company's environmental performance. CONCENTRATED AREA FEEDING OPERATIONS (CAFOS) Vote FOR resolutions requesting that companies report to shareholders on the risks and liabilities associated with CAFOs unless: o The company has publicly disclosed guidelines for its corporate and contract farming operations, including compliance monitoring; or o The company does not directly source from CAFOs. 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. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 39 ================================================================================ 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. KYOTO PROTOCOL COMPLIANCE Generally vote FOR resolutions requesting that companies outline their preparations to comply with standards established by Kyoto Protocol signatory markets unless: o The company does not maintain operations in Kyoto signatory markets; o The company already evaluates and substantially discloses such information; or, o Greenhouse gas emissions do not significantly impact the company's core businesses. LAND USE Generally vote AGAINST resolutions that request the disclosure of detailed information on a company's policies related to land use or development unless the company has been the subject of recent, significant fines or litigation stemming from its land use. NUCLEAR SAFETY Generally vote AGAINST resolutions requesting that companies report on risks associated with their nuclear reactor designs and/or the production and interim storage of irradiated fuel rods unless: o The company does not have publicly disclosed guidelines describing its policies and procedures for addressing risks associated with its operations; o The company is non-compliant with Nuclear Regulatory Commission (NRC) requirements; or o The company stands out amongst its peers or competitors as having significant problems with safety or environmental performance related to its nuclear operations. OPERATIONS IN PROTECTED AREAS Generally vote FOR requests for reports outlining potential environmental damage from operations in protected regions, including wildlife refuges unless: o The company does not currently have operations or plans to develop operations in these protected regions; or, o The company provides disclosure on its operations and environmental policies in these regions comparable to industry peers. 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. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 40 ================================================================================ 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; a comprehensive Code of Corporate Conduct; and/or a 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 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 publish in newspapers and public media the company's political contributions as such publications could present significant cost to the company without providing commensurate value to shareholders. Vote CASE-BY-CASE on proposals to improve the disclosure of a company's political contributions considering: o Recent significant controversy or litigation related to the company's political contributions or governmental affairs; and o The public availability of a policy on political contributions. Vote AGAINST proposals barring 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. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 41 ================================================================================ DISCLOSURE OF LOBBYING EXPENDITURES/INITIATIVES Vote CASE-BY-CASE on proposals requesting information on a company's lobbying initiatives, considering any significant controversy or litigation surrounding a company's public policy activities, the current level of disclosure on lobbying strategy, and the impact that the policy issue may have on the company's business 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. 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. 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 o 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; ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 42 ================================================================================ 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. 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 o 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. 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. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 43 ================================================================================ 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 (e.g., 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 a terrorism-sponsoring state, taking into account current disclosure on: o The nature and purpose of the 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 non-discrimination 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 o 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. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 44 ================================================================================ 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 extend company benefits to or eliminate benefits from domestic partners. Benefits decisions should be left to the discretion of the company. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 45 ================================================================================ 10. MUTUAL FUND PROXIES ELECTION OF DIRECTORS Vote CASE-BY-CASE on the election of directors and trustees, following the same guidelines for uncontested directors for public company shareholder meetings. However, mutual fund boards do not usually have compensation committees, so do not withhold for the lack of this committee. CONVERTING CLOSED-END FUND TO OPEN-END FUND Vote CASE-BY-CASE on conversion proposals, considering the following factors: o Past performance as a closed-end fund; o Market in which the fund invests; o Measures taken by the board to address the discount; and o Past shareholder activism, board activity, and votes on related proposals. PROXY CONTESTS Vote CASE-BY-CASE on proxy contests, 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 Vote CASE-BY-CASE on investment advisory agreements, 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 Vote CASE-BY-CASE on the authorization for or increase in preferred shares, considering the following factors: o Stated specific financing purpose; o Possible dilution for common shares; o Whether the shares can be used for antitakeover purposes. 1940 ACT POLICIES Vote CASE-BY-CASE on policies under the Investment Advisor Act of 1940, considering the following factors: o Potential competitiveness; o Regulatory developments; o Current and potential returns; and o Current and potential risk. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 46 ================================================================================ Generally vote FOR these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with the current SEC interpretation. CHANGING A FUNDAMENTAL RESTRICTION TO A NONFUNDAMENTAL RESTRICTION Vote CASE-BY-CASE on proposals to change a fundamental restriction to a non-fundamental restriction, considering the following factors: o The fund's target investments; o The reasons given by the fund for the change; and o 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 non-fundamental. NAME CHANGE PROPOSALS Vote CASE-BY-CASE on name change proposals, 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 Vote CASE-BY-CASE on changes in a fund's sub-classification, considering the following factors: o Potential competitiveness; o Current and potential returns; o Risk of concentration; o Consolidation in target industry. DISPOSITION OF ASSETS/TERMINATION/LIQUIDATION Vote CASE-BY-CASE on proposals to dispose of assets, to terminate or liquidate, considering the following factors: o Strategies employed to salvage the company; o The fund's past performance; o The terms of the liquidation. CHANGES TO THE CHARTER DOCUMENT Vote CASE-BY-CASE on changes to the charter document, considering the following factors: The degree of change implied by the proposal; The efficiencies that could result; The state of incorporation; Regulatory standards and implications. Vote AGAINST any of the following changes: 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; ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 47 ================================================================================ o Removal of shareholder approval requirement to change the domicile of the fund. CHANGING THE DOMICILE OF A FUND Vote CASE-BY-CASE on re-incorporations, considering the following factors: o Regulations of both states; o Required fundamental policies of both states; o 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 CASE-BY-CASE on distribution agreement proposals, considering the following factors: o Fees charged to comparably sized funds with similar objectives; o The proposed distributor's reputation and past performance; o The competitiveness of the fund in the industry; o The terms of the agreement. MASTER-FEEDER STRUCTURE Vote FOR the establishment of a master-feeder structure. MERGERS Vote CASE-BY-CASE on merger proposals, considering the following factors: o Resulting fee structure; o Performance of both funds; o Continuity of management personnel; o Changes in corporate governance and their impact on shareholder rights. SHAREHOLDER PROPOSALS FOR MUTUAL FUNDS 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. REIMBURSE SHAREHOLDER FOR EXPENSES INCURRED Vote CASE-BY-CASE on shareholder proposals to reimburse proxy solicitation expenses. When supporting the dissidents, vote FOR the reimbursement of the proxy solicitation expenses. TERMINATE THE INVESTMENT ADVISOR Vote CASE-BY-CASE on proposals to terminate the investment advisor, considering the following factors: o Performance of the fund's Net Asset Value (NAV); o The fund's history of shareholder relations; o The performance of other funds under the advisor's management. ================================================================================ (C) 2006 Institutional Shareholder Services Inc. All Rights Reserved. 48 -----END PRIVACY-ENHANCED MESSAGE-----