N-CSR 1 t302414.txt ================================================================================ 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 811-05150 CORNERSTONE STRATEGIC VALUE 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, 2005 Date of reporting period: December 31, 2005 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 Strategic Value Fund, Inc. (the "Registrant") to stockholders for the year ended December 31, 2005 follows. ================================================================================ CORNERSTONE STRATEGIC VALUE FUND, INC. ANNUAL REPORT DECEMBER 31, 2005 ================================================================================ 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 STRATEGIC VALUE FUND, INC. PORTFOLIO SUMMARY - AS OF DECEMBER 31, 2005 (UNAUDITED) -------------------------------------------------------------------------------- SECTOR ALLOCATION Percent of Sector Net Assets -------------------------------------------------------------------------------- Financials 20.0 -------------------------------------------------------------------------------- Information Technology 15.1 -------------------------------------------------------------------------------- Healthcare 12.6 -------------------------------------------------------------------------------- Consumer Discretionary 10.7 -------------------------------------------------------------------------------- Industrials 10.5 -------------------------------------------------------------------------------- Consumer Staples 10.3 -------------------------------------------------------------------------------- Energy 9.1 -------------------------------------------------------------------------------- Utilities 3.5 -------------------------------------------------------------------------------- Telecommunication Services 2.9 -------------------------------------------------------------------------------- Materials 2.3 -------------------------------------------------------------------------------- Closed-End Domestic Funds 2.2 -------------------------------------------------------------------------------- Other 0.8 -------------------------------------------------------------------------------- TOP TEN HOLDINGS, BY ISSUER Percent of Holding Sector Net Assets -------------------------------------------------------------------------------- 1. General Electric Co. Industrials 3.6 -------------------------------------------------------------------------------- 2. Exxon Mobil Corp. Energy 3.4 -------------------------------------------------------------------------------- 3. Microsoft Corp. Information Technology 2.7 -------------------------------------------------------------------------------- 4. Citigroup Inc. Financials 2.6 -------------------------------------------------------------------------------- 5. Procter & Gamble Co. (The) Consumer Staples 2.2 -------------------------------------------------------------------------------- 6. EMC Corp. Information Technology 2.1 -------------------------------------------------------------------------------- 7. Bank of America Corp. Financials 1.8 -------------------------------------------------------------------------------- 8. American International Group, Inc. Financials 1.8 -------------------------------------------------------------------------------- 9. Johnson & Johnson Healthcare 1.8 -------------------------------------------------------------------------------- 10. Pfizer Inc. Healthcare 1.7 -------------------------------------------------------------------------------- ================================================================================ 1
-------------------------------------------------------------------------------- CORNERSTONE STRATEGIC VALUE FUND, INC. SUMMARY SCHEDULE OF INVESTMENTS - DECEMBER 31, 2005 -------------------------------------------------------------------------------- No. of Description Shares Value -------------------------------------------------------------------------------- EQUITY SECURITIES - 99.39% CLOSED-END DOMESTIC FUNDS - 2.21% Tri-Continental Corp. 77,000 $ 1,430,660 Zweig Fund, Inc. 176,600 932,448 Other Closed-End Domestic Funds (a) 724,845 ------------- 3,087,953 ------------- CONSUMER DISCRETIONARY - 10.67% Comcast Corp., Class A + 35,037 909,561 eBay, Inc. + 19,000 821,750 Home Depot, Inc. (The) 30,600 1,238,688 Time Warner Inc. 76,000 1,325,440 Other Consumer Discretionary (a) 10,610,494 ------------- 14,905,933 ------------- CONSUMER STAPLES - 10.33% Altria Group, Inc. 29,300 2,189,296 Coca-Cola Co. (The) 32,500 1,310,075 PepsiCo, Inc. 24,800 1,465,184 Procter & Gamble Co. (The) 53,297 3,084,830 Wal-Mart Stores, Inc. 39,800 1,862,640 Other Consumer Staples (a) 4,526,042 ------------- 14,438,067 ------------- ENERGY - 9.12% ChevronTexaco Corp. 27,532 1,562,992 ConocoPhillips 17,974 1,045,727 Exxon Mobil Corp. 84,000 4,718,280 Schlumberger Ltd. 11,000 1,068,650 Other Energy (a) 4,344,949 ------------- 12,740,598 ------------- FINANCIALS - 19.96% American International Group, Inc. 37,531 2,560,740 Bank of America Corp. 55,616 2,566,678 Citigroup Inc. 74,300 3,605,779 Freddie Mac 14,500 947,575 No. of Description Shares Value -------------------------------------------------------------------------------- FINANCIALS (CONTINUED) Goldman Sachs Group, Inc. (The) 7,300 $ 932,283 JPMorgan Chase & Co. 48,332 1,918,297 Morgan Stanley 15,500 879,470 U.S. Bancorp ^ 28,401 848,906 Wachovia Corp. ^ 22,600 1,194,636 Wells Fargo & Co. 24,200 1,520,486 Other Financials (a) 10,908,663 ------------- 27,883,513 ------------- HEALTHCARE - 12.62% Abbott Laboratories ^ 21,000 828,030 Amgen Inc. + 18,900 1,490,454 Eli Lilly & Co. 14,500 820,555 Johnson & Johnson 40,900 2,458,090 Medtronic, Inc. 21,500 1,237,755 Merck & Co. Inc. 28,000 890,680 Pfizer Inc. ^ 99,660 2,324,071 UnitedHealth Group Inc. 23,000 1,429,220 Wyeth 19,200 884,544 Other Healthcare (a) 5,268,027 ------------- 17,631,426 ------------- INDUSTRIALS - 10.44% Boeing Company (The) 11,700 821,808 General Electric Co. 141,700 4,966,585 Tyco International Ltd. 33,397 963,837 United Parcel Service, Inc., Class B 16,300 1,224,945 Other Industrials (a) 6,604,458 ------------- 14,581,633 ------------- INFORMATION TECHNOLOGY - 15.10% Cisco Systems, Inc. + 96,400 1,650,368 Dell Inc. + 29,700 890,703 EMC Corp. + 212,648 2,896,266 Intel Corp. 82,500 2,059,200 International Business Machines Corp. 21,000 1,726,200 ================================================================================ See accompanying notes to financial statements 2 -------------------------------------------------------------------------------- CORNERSTONE STRATEGIC VALUE FUND, INC. SUMMARY SCHEDULE OF INVESTMENTS - DECEMBER 31, 2005(CONTINUED) -------------------------------------------------------------------------------- No. of Description Shares Value -------------------------------------------------------------------------------- INFORMATION TECHNOLOGY (CONTINUED) Microsoft Corp. 142,100 $ 3,715,915 QUALCOMM Inc. ^ 21,000 904,680 Other Information Technology (a) 7,254,019 ------------- 21,097,351 ------------- MATERIALS - 2.28% Total Materials (a) 3,177,109 ------------- REAL ESTATE INVESTMENT TRUSTS - 0.22% Total Real Estate Investment Trusts (a) 306,520 ------------- TELECOMMUNICATION SERVICES - 2.92% AT&T Inc. 48,364 1,184,434 Sprint Corp. 38,446 898,099 Verizon Communications Inc. ^ 37,100 1,117,452 Other Telecommunication Services (a) 875,700 ------------- 4,075,685 ------------- UTILITIES - 3.52% Total Utilities (a) 4,926,918 ------------- TOTAL EQUITY SECURITIES (cost - $126,420,026) 138,852,706 ------------- Principal Amount Description (000's) Value -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS - 2.11% REPURCHASE AGREEMENTS - 2.11% Bear, Stearns & Co. Inc.* (Agreement dated 12/31/05 to be repurchased at $2,945,898) (b) $ 2,945 $ 2,944,899 ------------- TOTAL SHORT-TERM INVESTMENTS (cost - $2,944,899) 2,944,899 ------------- TOTAL INVESTMENTS - 101.50% (cost - $129,364,925) 141,797,605 ------------- LIABILITIES IN EXCESS OF OTHER ASSETS - (1.50)% (2,091,489) ------------- NET ASSETS - 100.00% $ 139,706,116 ============= --------- + Non-income producing security. ^ Security or a portion thereof is out on loan. * Includes investments purchased with cash collateral received for securities on loan. (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, 2005. (b) At December 31, 2005, the maturity date for all repurchase agreements held was 01/03/06, with interest rates ranging from 2.00% to 4.00%, and collateralized by $3,035,279 in U.S. Treasury Bonds.
================================================================================ See accompanying notes to financial statements. 3
-------------------------------------------------------------------------------- CORNERSTONE STRATEGIC VALUE FUND, INC. STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 2005 -------------------------------------------------------------------------------- ASSETS Investments, at value, including collateral for securities on loan of $1,708,575 (Cost $129,364,925) (1) $ 141,797,605 Receivables: Securities sold 178,970 Dividends 177,445 Interest 4,855 Prepaid expenses 1,994 ------------- Total Assets 142,160,869 ------------- LIABILITIES Payables: Upon return of securities loaned 1,708,575 Securities purchased 537,266 Investment management fees 114,157 Directors' fees 28,161 Other accrued expenses 66,594 ------------- Total Liabilities 2,454,753 ------------- NET ASSETS (applicable to 24,710,305 shares of common stock outstanding) $ 139,706,116 ============= NET ASSET VALUE PER SHARE ($139,706,116 / 24,710,305) $ 5.65 ============= NET ASSETS CONSISTS OF Capital stock, $0.001 par value; 24,710,305 shares issued and outstanding (100,000,000 shares authorized) $ 24,710 Paid-in capital 159,540,411 Cost of 2,239,440 shares repurchased (26,999,661) Accumulated net realized loss on investments (5,292,024) Net unrealized appreciation in value of investments 12,432,680 ------------- Net assets applicable to shares outstanding $ 139,706,116 ============= ---------------- (1) Includes securities out on loan to brokers with a market value of $1,685,896.
================================================================================ See accompanying notes to financial statements. 4
-------------------------------------------------------------------------------- CORNERSTONE STRATEGIC VALUE FUND, INC. STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2005 -------------------------------------------------------------------------------- INVESTMENT INCOME Income: Dividends (net of foreign taxes withheld of $428) $ 2,506,367 Securities lending 38,615 Interest 34,513 ------------ Total Investment Income 2,579,495 ------------ Expenses: Investment management fees 1,446,817 Administration fees 144,796 Legal and audit fees 113,957 Directors' fees 108,000 Printing 41,533 Accounting fees 40,933 Custodian fees 26,072 Transfer agent fees 22,999 Stock exchange listing fees 16,087 Insurance 7,199 Miscellaneous 4,000 ------------ Total Expenses 1,972,393 Less: Management fee waivers (153,244) Less: Fees paid indirectly (74,407) ------------ Net Expenses 1,744,742 ------------ Net Investment Income 834,753 ------------ NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain from investments 27,008,793 Net change in unrealized appreciation in value of investments (22,438,516) ------------ Net realized and unrealized gain on investments 4,570,277 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 5,405,030 ============
================================================================================ See accompanying notes to financial statements. 5
-------------------------------------------------------------------------------- CORNERSTONE STRATEGIC VALUE FUND, INC. STATEMENT OF CHANGES IN NET ASSETS -------------------------------------------------------------------------------- For the Years Ended December 31, ------------------------------ 2005 2004 ------------- ------------- INCREASE/(DECREASE) IN NET ASSETS Operations: Net investment income $ 834,753 $ 646,242 Net realized gain/(loss) from investments 27,008,793 (127,914) Net change in unrealized appreciation in value of investments (22,438,516) 12,198,020 ------------- ------------- Net increase in net assets resulting from operations 5,405,030 12,716,348 ------------- ------------- Dividends and distributions to shareholders: Net investment income (980,195) (729,442) Net realized capital gains (24,369,995) -- Return-of-capital -- (13,677,285) ------------- ------------- Total dividends and distributions to shareholders (25,350,190) (14,406,727) ------------- ------------- Capital stock transactions: Net assets received in conjunction with Merger Agreement -- 127,962,525 Proceeds from 832,602 and 263,935 shares newly issued in reinvestment of dividends and distributions, respectively 4,961,290 1,852,533 ------------- ------------- Net increase in net assets resulting from capital stock transactions 4,961,290 129,815,058 ------------- ------------- Total increase/(decrease) in net assets (14,983,870) 128,124,679 ------------- ------------- NET ASSETS Beginning of year 154,689,986 26,565,307 ------------- ------------- End of year $ 139,706,116 $ 154,689,986 ============= =============
================================================================================ See accompanying notes to financial statements 6 -------------------------------------------------------------------------------- CORNERSTONE STRATEGIC VALUE 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, 2005 2004 2003 2002 2001 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 6.48 $ 6.90 $ 6.41 $ 9.20 $ 11.31 --------- -------- -------- -------- --------- Net investment income/(loss) # 0.03 0.05 0.04 (0.01) (0.06) Net realized and unrealized gain/(loss) on investments and foreign currency related translations 0.18 0.55 1.44 (2.29) (2.13) --------- -------- -------- -------- --------- Net increase/(decrease) in net assets resulting from operations 0.21 0.60 1.48 (2.30) (2.19) --------- -------- -------- -------- --------- Dividends and distributions to shareholders: Net investment income (0.04) (0.05) (0.04) -- -- Net realized gain on investments and foreign currency related transactions (1.00) -- -- -- -- Return-of-capital -- (0.99) (0.95) (0.50) -- --------- -------- -------- -------- --------- Total dividends and distributions to shareholders (1.04) (1.04) (0.99) (0.50) -- --------- -------- -------- -------- --------- Capital stock transactions: Anti-dilutive effect due to capital stock repurchased -- -- -- 0.02 0.08 Anti-dilutive/(dilutive) effect due to shares issued in reinvestment of dividends and distributions -- 0.02 -- (0.01) -- --------- -------- -------- -------- --------- Total capital stock transactions -- 0.02 -- 0.01 0.08 --------- -------- -------- -------- --------- Net asset value, end of year $ 5.65 $ 6.48 $ 6.90 $ 6.41 $ 9.20 ========= ======== ======== ======== ========= Market value, end of year $ 7.05 $ 8.51 $ 9.00 $ 5.85 $ 8.05 ========= ======== ======== ======== ========= Total investment return (a) (1.32)% 8.38% 77.69% (20.85)% (23.98)% ========= ======== ======== ======== ========= RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000 omitted) $ 139,706 $ 154,690 $ 26,565 $ 24,376 $ 35,256 Ratio of expenses to average net assets, net of fee waivers, if any (b) 1.20% 1.28% 1.20% 1.80% 1.77% Ratio of expenses to average net assets, excluding fee waivers, if any (c) 1.36% 1.50% 1.59% 2.17% 2.11% Ratio of expenses to average net assets, net of fee waivers, if any (c) 1.26% 1.36% 1.25% 1.86% 1.95% Ratio of net investment income/(loss) to average net assets 0.58% 0.73% 0.68% (0.13)% (0.64)% Portfolio turnover rate 21.60% 39.05% 11.88% 29.63% 59.83% ------------------------------------------------------------------------------------------------------------------ # 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 STRATEGIC VALUE FUND, INC. NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE A. SIGNIFICANT ACCOUNTING POLICIES Cornerstone Strategic Value Fund, Inc. (the "Fund") was incorporated in Maryland on May 1, 1987 and commenced investment operations on June 30, 1987. Its investment objective is to seek long-term capital appreciation through investment in equity securities of companies listed in the United States. The Fund is registered under the Investment Company Act of 1940, as amended, as a closed-end, diversified management investment company. On June 25, 2004, the Fund consummated tax-free mergers with Progressive Return Fund, Inc. ("PGF") and Investors First Fund, Inc. ("MGC") (collectively, the "Predecessor Funds"). Pursuant to the terms of the agreements governing the mergers, each share of common stock of the Predecessor Funds was converted into an equivalent dollar amount of full shares of common stock of the Fund, based on the net asset values of the Fund, MGC and PGF as of June 25, 2004 ($6.47, $10.42 and $20.96, respectively), resulting in a conversion ratio of 1.6094 and 3.2378 shares of the Fund for each share of MGC and PGF, respectively. This resulted in the issuance of 15,955,350 and 3,808,891 Fund shares for MGC and PGF, respectively. Cash was paid in lieu of fractional shares. Net assets of the Fund, MGC and PGF as of the merger date were $25,105,399, $103,302,250 and $24,660,275, including unrealized appreciation/(depreciation) of $2,516,413, $23,078,675 and $(2,519,953), respectively. In addition, PGF's net assets included undistributed capital losses of $13,754,555. Total net assets after the merger were $153,067,924. 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, 2005, the Fund held no securities valued in good faith by the Board of Directors. The net asset value per share of the Fund is calculated weekly and on the last business day of the month with the exception of those days on which the American Stock Exchange, LLC is closed. ================================================================================ 8 -------------------------------------------------------------------------------- CORNERSTONE STRATEGIC VALUE 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. DISTRIBUTIONS OF INCOME AND GAINS: Effective June 25, 2002, the Fund initiated a fixed, monthly distribution to shareholders. To the extent that these distributions exceed the current earnings of the Fund, the balance will be generated from sales of portfolio securities held by the Fund, which will either be short-term or long-term capital gains or a tax-free return-of-capital. To the extent these distributions are not represented by net investment income and capital gains, they will not represent yield or investment return on the Fund's investment portfolio. The Fund plans to maintain this distribution policy even if regulatory requirements would make part of a return-of-capital, necessary to maintain the distribution, taxable to shareholders and to disclose that portion of the distribution that is classified as ordinary income. Although it has no current intention to do so, the Board may terminate this distribution policy at any time and such termination may have an adverse effect on the market price for the Fund's common shares. The Fund determines annually whether to distribute any net realized long-term capital gains in excess of net realized short-term capital losses, including capital loss carryovers, if any. To the extent that the Fund's taxable income in any calendar year exceeds the aggregate amount distributed pursuant to this distribution policy, an additional distribution may be made to avoid the payment of a 4% U.S. federal excise tax, and to the extent that the aggregate amount distributed in any calendar year exceeds the Fund's taxable income, the amount of that excess may constitute a return-of-capital for tax purposes. A return-of-capital distribution reduces the cost basis of an investor's shares in the Fund. Dividends and distributions to shareholders are recorded by the Fund on the ex-dividend date. NOTE B. AGREEMENTS Cornerstone serves as the Fund's Investment Manager with respect to all investments. As compensation for its investment management services, Cornerstone receives from the Fund, an annual fee, calculated weekly and paid monthly, equal to 1.00% of the Fund's average weekly net assets. During the year ended December 31, 2005, Cornerstone volun- ================================================================================ 9 -------------------------------------------------------------------------------- CORNERSTONE STRATEGIC VALUE FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- tarily agreed to waive its management fees from the Fund to the extent that monthly operating expenses exceed a rate of 0.10% of average net assets calculated monthly. For the year 2006, Cornerstone undertakes to waive its advisory fees to the extent that the Fund's net monthly operating expenses (including basic legal fees but excluding other legal expenses) exceed a specified rate of average net assets of 0.10%. For the year ended December 31, 2005, Cornerstone earned $1,446,817 for investment management services, of which it waived $153,244. 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 $74,407 arising from credits earned on portfolio transactions executed with a broker, pursuant to a directed brokerage arrangement. The Fund paid or accrued approximately $95,955 for the year ended December 31, 2005 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, 2005, purchases and sales of securities, other than short-term investments, were $31,215,063 and $51,120,254 respectively. NOTE D. SECURITIES LENDING To generate additional income, the Fund may lend up to 10% 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, 2005, was $1,685,896. During the year ended December 31, 2005, the Fund earned $38,615 in securities lending income which is included under the caption Interest 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 --------------- ----------------- 2005 2004 2005 2004 ---- ---- ---- ---- $980,195 $729,442 -- $13,677,285 LONG-TERM CAPITAL GAINS ----------------------- 2005 2004 ---- ---- $24,369,995 -- At December 31, 2005, the components of distributable earnings on a tax basis, for the Fund were as follows: Accumulated net realized loss $ (5,292,024) Unrealized appreciation 12,432,680 ------------ Total distributable earnings $ 7,140,656 ============ ================================================================================ 10 -------------------------------------------------------------------------------- CORNERSTONE STRATEGIC VALUE FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- The Fund reclassified $145,442 from distributions in excess of net investment income and $34,657 from accumulated net realized loss to paid-in capital to adjust for certain permanent book/tax differences. 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, 2005, the Fund did not incur Post-October losses. At December 31, 2005, the Fund had a capital loss carryforward for U.S. federal income tax purposes of $5,292,024 of which $2,547,381 expires in 2008, $1,281,365 expires in 2009, $693,207 expires in 2010, $635,700 expires in 2011 and $134,371 expires in 2012. At December 31, 2005, 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 $129,364,925, $18,929,755, $(6,497,075) and $12,432,680, respectively. ================================================================================ 11 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors Cornerstone Strategic Value Fund, Inc. New York, New York We have audited the accompanying statement of assets and liabilities of Cornerstone Strategic Value Fund, Inc., including the schedule of investments as of December 31, 2005, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for the year ended December 31, 2001 have been audited by other auditors, whose report dated February 8, 2002 expressed an unqualified opinion on such financial highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not 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. Our procedures included confirmation of securities owned as of December 31, 2005 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Cornerstone Strategic Value Fund, Inc. as of December 31, 2005, 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 four 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, 2006 ================================================================================ 12 2005 TAX INFORMATION (UNAUDITED) Cornerstone Strategic Value 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, 2005) as to the U.S. federal tax status of the dividends and distributions received by the Fund's shareholders in respect of such fiscal year. During the year ended December 31, 2005 the following dividends and distributions per share were paid by the Fund:
SOURCES OF DIVIDENDS AND DISTRIBUTIONS (PER SHARE AMOUNTS) PAYMENT DATES: 1/31/05 2/28/05 3/31/05 4/29/05 5/31/05 6/30/05 ------- ------- ------- ------- ------- ------- Ordinary Income(1) $ 0.003 $ 0.003 $ 0.003 $ 0.003 $ 0.003 $ 0.003 Long-term Capital Gains(2) $ 0.084 $ 0.084 $ 0.084 $ 0.084 $ 0.084 $ 0.084 ------- ------- ------- ------- ------- ------- Total: $ 0.087 $ 0.087 $ 0.087 $ 0.087 $ 0.087 $ 0.087 ======= ======= ======= ======= ======= ======= PAYMENT DATES: 7/31/05 8/31/05 9/30/05 10/31/05 11/30/05 12/30/05 ------- ------- ------- -------- -------- -------- Ordinary Income(1) $ 0.003 $ 0.003 $ 0.003 $ 0.003 $ 0.003 $ 0.003 Long-term Capital Gains(2) $ 0.084 $ 0.084 $ 0.084 $ 0.084 $ 0.084 $ 0.084 ------- ------- ------- ------- ------- ------- Total: $ 0.087 $ 0.087 $ 0.087 $ 0.087 $ 0.087 $ 0.087 ======= ======= ======= ======= ======= ======= -------------------------------------------------------------------------------------------------------- (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) LONG-TERM CAPITAL GAINS- This is the per share amount of the total long-term capital gain distributions reported in Box 2a on Form 1099-DIV.
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. Long-term capital gain distributions arise from gains on securities held by the Fund for more than one year. They are subject to a maximum federal rate of 15%. Foreign shareholders will generally be subject to U.S. withholding tax on the amount of their distribution(s). In general, distributions received by tax-exempt recipients (e.g., IRA's and Keoghs) need not be reported as taxable income for U.S. federal income tax purposes. However, some retirement trusts (e.g., corporate, Keogh and 403(b)(7) plans) may need this information for their annual information reporting. Shareholders are strongly advised to consult their own tax advisers with respect to the tax consequences of their investment in the Fund. ================================================================================ 13
ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND CORPORATE OFFICERS (UNAUDITED) NUMBER OF PORTFOLIOS IN NAME AND POSITION FUND COMPLEX ADDRESS POSITION(S) PRINCIPAL OCCUPATION WITH FUND OVERSEEN BY (AGE)* HELD WITH FUND OVER LAST 5 YEARS SINCE DIRECTORS -------------------------------------------------------------------------------------------------------------------- Ralph W. Chairman of the President, Cornerstone Advisors, Inc.; 1998 2 Bradshaw** Board of Financial Consultant; previous Director (55) Directors and of The Austria Fund, Inc.; President President and Director of Cornerstone Total Return Fund, Inc. William A. Director and Vice Director and Stockholder of 2004 2 Clark** President Cornerstone Advisors, Inc., former (60) financial consultant of Deep Discount Advisors, Inc.; previous Director of The Austria Fund, Inc.; Director of Cornerstone Total Return Fund, Inc. Glenn W. Director; Audit Chairman of the Board and Chief 2000 2 Wilcox, Sr. Committee Executive Officer of Wilcox Travel (74) Chairman, Agency, Inc.; Director, Champion Nominating and Industries, Inc.; Chairman of Tower Corporate Associates, Inc. (a real estate venture); Governance Director of Wachovia Corp. WNC Committee Regional Advisory Board; Director and Member Chairman of Audit Committee of Cornerstone Total Return Fund, Inc. Thomas H. Director; Audit, Chairman of the Board of Photonics 1987 2 Lenagh Nominating and Products Group; Independent Financial (83) Corporate Adviser; Director of The Adams Express Governance Company and Petroleum and Resources Committee Corporation; Director of Cornerstone Member Total Return Fund, Inc. Edwin Director; Audit, Distinguished Fellow, The Heritage 2001 2 Meese III Nominating and Foundation, Washington D.C.; (74) Corporate Distinguished Visiting Fellow at the Governance Hoover Institution, Stanford University; Committee Senior Adviser, Revelation L.P .; formerly Member U.S. Attorney General under President Ronald Reagan; Director of Carrington Laboratories Inc.; Director of Cornerstone Total Return Fund, Inc. ================================================================================ 14 ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND CORPORATE OFFICERS (UNAUDITED) (CONTINUED) NUMBER OF PORTFOLIOS IN NAME AND POSITION FUND COMPLEX ADDRESS POSITION(S) PRINCIPAL OCCUPATION WITH FUND OVERSEEN BY (AGE)* HELD WITH FUND OVER LAST 5 YEARS SINCE DIRECTORS ---------------------------------------------------------------------------------------------------------------------- Scott B. Rogers Director; Audit, Chief Executive Officer, Asheville 2000 2 (50) Nominating and Buncombe Community Christian Corporate Ministry; President, ABCCM Doctor's Governance Medical Clinic; Appointee, NC Committee Governor's Commission on Welfare to Member Work; Chairman and Director, Recycling Unlimited; Director of A-B Vision Board, Interdenominational Ministerial Alliance, Faith Partnerships, Inc.; Director of Cornerstone Total Return Fund, Inc. Andrew A. Director; Attorney and senior member of Strauss 2000 2 Strauss Chairman of & Associates, P.A., Attorneys, Asheville (52) 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 Memorial Member Mission Hospital Foundation, Deerfield Episcopal Retirement Community and Asheville Symphony; Director of Cornerstone Total Return Fund, Inc. ================================================================================ 15 ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND CORPORATE OFFICERS (UNAUDITED) (CONCLUDED) NAME AND POSITION ADDRESS POSITION PRINCIPAL OCCUPATION WITH FUND (AGE)* HELD WITH FUND OVER LAST 5 YEARS SINCE ----------------------------------------------------------------------------------------------------------------- Gary A. Bentz** Chief Compliance Chief Financial Officer, Chairman and 2004 (49) Officer Stockholder of Cornerstone Advisors, Inc.; previous Director, Vice President and Treasurer of the Fund and Cornerstone Total Return Fund; previous Director of The Austria Fund, Inc., Financial Consultant, Certified Public Accountant; Chief Compliance Officer of Cornerstone Total Return Fund, Inc. Thomas R. Westle Secretary Partner, Blank Rome LLP, a law firm; previous 2000 405 Lexington Avenue partner, Spitzer & Feldman P.C., a law firm. New York, NY 10174 (52) Jodi B. Levine Treasurer Associate Director, Bear Stearns & Co. Inc. 2004 (36) ------------------------------------------------------------------------------------------------------------------ * 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) Shareholders who have Shares registered directly in their own names automatically participate in the Fund's Dividend Reinvestment Plan (the "Plan"), unless and until an election is made to withdraw from the Plan on behalf of such participating shareholders. Shareholders who do not wish to have distributions automatically reinvested should so notify American Stock Transfer & Trust Co. (the "Agent") at P.O. Box 922, Wall Street Station, New York, NY 10269-0560 or call (877) 248-6416. Under the Plan, all of the Fund's dividends and other distributions to shareholders are reinvested in full and fractional Shares as described below. When the Fund declares an income dividend or a capital gain or other distribution (each, a "Distribution" and collectively, "Distributions"), the Agent, on the shareholders' behalf, will: (i) receive additional authorized shares from the Fund either newly issued or repurchased from shareholders by the Fund and held as treasury stock ("Newly Issued Shares") or, (ii) at the sole discretion of the Board of Directors, be authorized to purchase outstanding shares on the open market, on the American Stock Exchange, LLC or elsewhere, with cash allocated to it by the Fund ("Open Market Purchases"). Shares acquired by the Agent in Open Market Purchases will be allocated to the reinvesting shareholders based on the average cost of such Open Market Purchases. Alternatively, the Agent will allocate Newly Issued Shares to the reinvesting shareholders at the lower of (i) a price equal to the average closing price of the Fund over the five trading days preceding the payment of such distribution, or (ii) the net asset value of the Fund as last determined prior to such payment date. Registered shareholders who acquire their shares through Open Market Purchases and who do not wish to have their Distributions automatically reinvested should so notify the Fund in writing. If a Shareholder has not elected to receive cash Distributions and the Agent does not receive notice of an election to receive cash Distributions prior to the record date of any distribution, the shareholder will automatically receive such Distributions in additional Shares. Participants in the Plan may withdraw from the Plan by providing written notice to the Agent at least 30 days prior to the applicable Distribution payment date. When a participant withdraws from the Plan, or upon termination of the Plan as provided below, certificates for whole shares credited to his/her account under the Plan will, upon request, be issued. Whether or not a participant requests that certificates for whole shares be issued, a cash payment will be made for any fraction of a Share credited to such account. The Agent will maintain all shareholder accounts in the Plan and furnish written confirmations of all transactions in the accounts, including information needed by shareholders for personal and tax records. The Agent will hold shares in the account of each Plan participant in non-certificated form in the name of the participant, and each shareholder's proxy will include those shares purchased pursuant to the Plan. Each participant, nevertheless, has the right to receive certificates for whole shares owned. The Agent will distribute all proxy solicitation materials to participating shareholders. In the case of shareholders, such as banks, brokers or nominees, that hold shares for others who are beneficial owners participating in the Plan, the Agent will administer the Plan on the basis of the number of shares certified from time to time by the record shareholder as representing the total amount of shares registered in the Shareholder's name and held for the account of beneficial owners participating in the Plan. There will be no charge to participants for reinvesting Distributions other than their share of brokerage commissions as discussed below. The Agent's fees for administering the Plan and handling the reinvestment of Distributions will be paid by the ================================================================================ 17 DESCRIPTION OF DIVIDEND REINVESTMENT PLAN (UNAUDITED) (CONCLUDED) Fund. Each participant's account will be charged a pro-rata share of brokerage commissions incurred with respect to the Agent's Open Market Purchases in connection with the reinvestment of Distributions. Brokerage charges for purchasing small amounts of shares for individual accounts through the Plan are expected to be less than the usual brokerage charges for such transactions because the Agent will be purchasing shares for all the participants in blocks and pro-rating the lower commission that may be attainable. The automatic reinvestment of Distributions will not relieve participants of any income tax that may be payable on such Distributions. Participants who receive shares pursuant to the Plan as described above will recognize taxable income in the amount of the fair market value of those shares. In the case of non-U.S. participants whose Distributions are subject to U.S. income tax withholding and in the case of participants subject to 28% federal backup withholding, the Agent will reinvest Distributions after deduction of the amount required to be withheld. The Fund reserves the right to amend or terminate the Plan by written notice to participants. All correspondence concerning the Plan should be directed to the Agent at the address referred to in the first paragraph of this section. ================================================================================ 18 PROXY VOTING AND PORTFOLIO HOLDINGS INFORMATION (UNAUDITED) Information regarding how the Cornerstone Strategic Value 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: o by calling (212) 272-3550; o on the website of the Securities and Exchange Commission, http://www.sec.gov. This report incorporates a Summary Schedule of Investments for the Fund. A complete Schedule of Investments for the Fund may be obtained free of charge by contacting the Fund at (212) 272-3550. The Fund files a complete schedule of its portfolio holdings for the first and third quarters of its fiscal year with the SEC on Form N-Q. The Fund's Forms N-Q are available on the SEC's website at http://www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330. PRIVACY POLICY NOTICE (UNAUDITED) The following is a description of Cornerstone Strategic Value 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) The Fund - Cornerstone Strategic Value Fund, Inc. is a closed-end, diversified investment company whose shares trade on the American Stock Exchange, LLC. Its investment objective is to seek long-term capital appreciation through investment in equity securities of companies listed in the United States. The Fund is managed by Cornerstone Advisors, Inc. SHAREHOLDER INFORMATION (UNAUDITED) The Fund is listed on the American Stock Exchange, LLC (symbol "CLM"). The share price is published in: THE NEW YORK TIMES (daily) under the designation "CornerStrt" and THE WALL STREET JOURNAL (daily) and BARRON'S (each Monday) under the designation "CornstnStrat." 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 STRATEGIC VALUE 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 STRATEGIC VALUE FUND, INC. ================================================================================ DIRECTORS AND CORPORATE OFFICERS Ralph W. Bradshaw Chairman of the Board of Directors and President William A. Clark Director and Vice President Thomas H. Lenagh Director Edwin Meese III Director Scott B. Rogers Director Andrew A. Strauss Director Glenn W. Wilcox, Sr. Director Gary A. Bentz Chief Compliance Officer Thomas R. Westle Secretary Jodi B. Levine Treasurer STOCK TRANSFER AGENT INVESTMENT MANAGER AND REGISTRAR Cornerstone Advisors, Inc. American Stock Transfer & One West Pack Square Trust Co. Suite 1650 59 Maiden Lane Asheville, NC 28801 New York, NY 10038 INDEPENDENT REGISTERED ADMINISTRATOR PUBLIC ACCOUNTING FIRM Bear Stearns Funds Tait, Weller & Baker, LLP Management Inc. 1818 Market Street 383 Madison Avenue Suite 2400 New York, NY 10179 Philadelphia, PA 19103 CUSTODIAN LEGAL COUNSEL Custodial Trust Company Blank Rome LLP 101 Carnegie Center 405 Lexington Avenue Princeton, NJ 08540 New York, NY 10174 EXECUTIVE OFFICES 383 Madison Avenue New York, NY 10179 For shareholder inquiries, registered shareholders should call (800) 937-5449. For general inquiries, please call (212) 272-3550. AMERICAN STOCK EXCHANAGE(R) LISTED CLM(tm) ITEM 2. CODE OF ETHICS. (a) As of the end of the period covered by this report, the Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer, principal accounting officer, and persons performing similar functions. (c) and (d). During the period covered by this report, there was no amendment to, and no waiver granted from, any provision of the code of ethics that applies to the Registrant's principal executive officer, principal accounting officer, and persons performing similar functions. (f)(1) Pursuant to Item 12(a), 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. 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, 2005 and December 31, 2004. 2005 2004 ------- ------- Audit Fees $15,600 $15,000 Audit-related Fees -- -- Tax (1) $ 3,100 $ 3,000 Other -- $ 4,250* ------- ------- Total $18,700 $22,250 ======= ======= (1) Tax services in connection with the registrant's excise tax calculations and review of the registrant's applicable tax returns. * These fees are related to the mergers of Progressive Return Fund, Inc. and Investors First Fund, Inc. with and into Cornerstone Strategic Value Fund, Inc. (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, 2004 and December 31, 2005). (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 STRATEGIC VALUE FUND, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2005 EQUITY SECURITIES - 99.39% SHARES VALUE ------ ----- CLOSED-END DOMESTIC FUNDS - 2.21% Adams Express Co. 49,500 $ 621,225 General American Investors Company, Inc. 3,000 103,620 Tri-Continental Corp. 77,000 1,430,660 Zweig Fund, Inc. 176,600 932,448 ----------- 3,087,953 =========== CONSUMER DISCRETIONARY - 10.67% Acco Brands Corporation 235 5,757 Bed Bath & Beyond Inc. + 4,200 151,830 Best Buy Co., Inc. ^ 7,125 309,795 Black & Decker Corp. 3,000 260,880 Carnival Corp. 11,800 630,946 CCE Spinco, Inc. + ^^ 1,100 14,410 Circuit City Stores, Inc. 5,000 112,950 Clear Channel Communications, Inc. 8,800 276,760 Comcast Corp., Class A + 35,037 909,561 D.R. Horton, Inc. 7,000 250,110 Eastman Kodak Co. 1,400 32,760 eBay, Inc. + 19,000 821,750 Federated Department Stores, Inc. 5,526 366,540 Ford Motor Company 26,300 203,036 Fortune Brands, Inc. 3,500 273,070 Gannett Co., Inc. 6,000 363,420 Gap, Inc. (The) ^ 12,200 215,208 Goodyear Tire & Rubber Company (The) + ^ 4,500 78,210 Harley-Davidson, Inc. ^ 4,400 226,556 Hilton Hotels Corp. 11,200 270,032 Home Depot, Inc. (The) 30,600 1,238,688 J.C. Penney Company, Inc. 4,500 250,200 Kohl's Corp. + ^ 5,000 243,000 Lowe's Companies, Inc. ^ 11,200 746,592 Marriott International, Inc., Class A 2,100 140,637 Mattel, Inc. 5,500 87,010 McDonald's Corp. ^ 17,600 593,472 News Corporation, Class A 30,000 466,500 NIKE, Inc., Class B 2,300 199,617 Omnicom Group Inc. 4,100 349,033 Reebok International Ltd. 1,500 87,345 Sears Holdings Corp. + 503 58,112 Staples, Inc. 10,800 245,268 Starbucks Corp. + 10,800 324,108 Target Corporation 11,800 648,646 Time Warner Inc. 76,000 1,325,440 TJX Companies, Inc. (The) 7,000 162,610 Univision Communications Inc., Class A + 7,000 205,730 Viacom Inc., non-voting Class B 23,900 779,140 Walt Disney Co. (The) 29,200 699,924 Yum! Brands, Inc. 6,000 281,280 ----------- 14,905,933 =========== CONSUMER STAPLES - 10.33% Altria Group, Inc. 29,300 2,189,296 Anheuser-Busch Companies, Inc. 16,700 717,432 Archer Daniels Midland Company 5,460 134,644 Campbell Soup Company 2,000 59,540 Coca-Cola Co. (The) 32,500 1,310,075 Coca-Cola Enterprises Inc. 6,500 124,605 Colgate-Palmolive Company 11,100 608,835 ConAgra Foods, Inc. ^ 4,400 89,232 Costco Wholesale Corp. 6,500 321,555 CVS Corp. 5,000 132,100 General Mills, Inc. 9,500 468,540 H.J. Heinz Co. 6,600 222,552 Kimberly-Clark Corporation 6,900 411,585 Kroger Co. (The) + 4,800 90,624 Pepsi Bottling Group, Inc. (The) 4,000 114,440 PepsiCo, Inc. 24,800 1,465,184 Procter & Gamble Co. (The) 53,297 3,084,830 Sara Lee Corp. 11,500 217,350 Sysco Corp. 5,800 180,090 Walgreen Co. 14,300 632,918 Wal-Mart Stores, Inc. 39,800 1,862,640 ----------- 14,438,067 =========== ENERGY - 9.12% Anadarko Petroleum Corp. 5,900 559,025 Baker Hughes Inc. ^ 8,100 492,318 ChevronTexaco Corp. 27,532 1,562,992 ConocoPhillips 17,974 1,045,727 Devon Energy Corporation 5,000 312,700 Exxon Mobil Corp. 84,000 4,718,280 FMC Technologies, Inc. + 7,300 313,316 Marathon Oil Corp. 7,500 457,275 Occidental Petroleum Corp. 8,000 639,040 Peabody Energy Corp. ^ 8,000 659,360 Schlumberger Ltd. 11,000 1,068,650 Transocean Inc. + 2,500 174,225 Western Gas Resources, Inc. 11,000 517,990 XTO Energy Inc. 5,000 219,700 ----------- 12,740,598 =========== FINANCIALS - 19.96% AFLAC Inc. 7,000 324,940 Allstate Corp. (The) 9,300 502,851 American Express Company 15,600 802,776 American International Group, Inc. 37,531 2,560,740 Ameriprise Financial, Inc. 3,120 127,920 AONCorporation 4,900 176,155 Bank of America Corp. 55,616 2,566,678 Bank of New York Co., Inc. (The) 11,400 363,090 Charles Schwab Corporation (The) 12,000 176,040 Citigroup Inc. 74,300 3,605,779 Fannie Mae 13,000 634,530 Fifth Third Bancorp 9,000 339,480 Franklin Resources, Inc. ^ 3,700 347,837 Freddie Mac 14,500 947,575 Goldman Sachs Group, Inc. (The) 7,300 932,283 Hartford Financial Services Group, Inc. (The) 6,000 515,340 JPMorgan Chase & Co. 48,332 1,918,297 Lehman Brothers Holding Inc. 3,600 461,412 Marsh & McLennan Companies, Inc. ^ 10,100 320,776 MBNA Corp. 24,600 668,136 Merrill Lynch & Co., Inc. 10,700 724,711 MetLife, Inc. 15,200 744,800 Morgan Stanley 15,500 879,470 National City Corp. 12,700 426,339 Northern Trust Corp. ^ 3,500 181,370 PNC Financial Services Group, Inc. 7,100 438,993 Prudential Financial, Inc. ^ 8,200 600,158 St. Paul Travelers Companies, Inc. (The) 9,476 423,293 State Street Corp. 3,500 194,040 SunTrust Banks, Inc. 7,600 552,976 U.S. Bancorp ^ 28,401 848,906 UnumProvident Corp. 8,100 184,275 Wachovia Corp. ^ 22,600 1,194,636 Washington Mutual, Inc. 15,550 676,425 Wells Fargo & Co. 24,200 1,520,486 ----------- 27,883,513 =========== HEALTHCARE - 12.62% Abbott Laboratories ^ 21,000 828,030 Aetna Inc. 6,000 565,860 Amgen Inc. + 18,900 1,490,454 Applera Corp. - Applied Biosystems Group 8,000 212,480 Becton, Dickinson & Co. 3,900 234,312 Biogen Idec Inc. 8,000 362,640 Boston Scientific Corp. + 12,300 301,227 Bristol-Myers Squibb Co. ^ 30,500 700,890 Cardinal Health, Inc. 5,450 374,687 Caremark Rx, Inc. + 9,000 466,110 Eli Lilly & Co. 14,500 820,555 Guidant Corp. 6,400 414,400 HCA, Inc. 8,500 429,250 Hospira, Inc. + ^ 3,700 158,286 IMS Health Inc. 7,400 184,408 Johnson & Johnson 40,900 2,458,090 McKesson Corp. 2,300 118,657 Medco Health Solutions, Inc. + 6,687 373,135 Medtronic, Inc. 21,500 1,237,755 Merck & Co. Inc. 28,000 890,680 Pfizer Inc. ^ 99,660 2,324,071 Schering-Plough Corp. 17,000 354,450 Tenet Healthcare Corp. + 2,250 17,235 United Health Group Inc. 23,000 1,429,220 Wyeth 19,200 884,544 ----------- 17,631,426 =========== INDUSTRIALS - 10.44% 3M Co. 10,400 806,000 Boeing Company (The) 11,700 821,808 Caterpillar Inc. 11,800 681,686 Cendant Corp. 19,000 327,750 CSX Corp. 5,000 253,850 Emerson Electric Co. 8,500 634,950 FedEx Corp. 4,500 465,255 General Dynamics Corp. 3,100 353,555 General Electric Co. 141,700 4,966,585 Honeywell International Inc. 12,500 465,625 Illinois Tool Works Inc. 2,400 211,176 Lockheed Martin Corp. 4,000 254,520 Masco Corp. 4,200 126,798 Northrop Grumman Corp. 5,000 300,550 Rockwell Automation, Inc. 2,500 147,900 Southwest Airlines Co. 6,450 105,973 Tyco International Ltd. 33,397 963,837 Union Pacific Corp. 2,000 161,020 United Parcel Service, Inc., Class B 16,300 1,224,945 United Technologies Corp. 14,400 805,104 Waste Management, Inc. 8,200 248,870 Yellow Roadway Corp. + 5,691 253,876 ----------- 14,581,633 =========== INFORMATION TECHNOLOGY - 15.10% Adobe Systems Inc. 9,200 340,032 Altera Corp. + 3,400 63,002 Analog Devices, Inc. 6,700 240,329 Apple Computer, Inc. + 3,000 215,670 Applied Materials, Inc. 23,800 426,972 Automatic Data Processing, Inc. 9,900 454,311 Cisco Systems, Inc. + 96,400 1,650,368 Corning Inc. + 17,000 334,220 Dell Inc. + 29,700 890,703 Electronic Arts Inc. + 2,000 104,620 Electronic Data Systems Corp. 10,000 240,400 EMC Corp. + 212,648 2,896,266 First Data Corporation 11,324 487,045 Freescale Semiconductor Inc., Class B + 6,512 163,907 Hewlett-Packard Co. 27,900 798,777 Intel Corp. 82,500 2,059,200 International Business Machines Corp. 21,000 1,726,200 Linear Technology Corp. ^ 6,500 234,455 Lucent Technologies Inc. + 10,700 28,462 Maxim Integrated Products, Inc. 2,300 83,352 Micron Technology, Inc. + 11,500 153,065 Microsoft Corp. 142,100 3,715,915 Motorola, Inc. 34,700 783,873 Oracle Corp. + 46,100 562,881 Paychex, Inc. 4,200 160,104 QUALCOMM Inc. ^ 21,000 904,680 Sanmina-SCI Corp. + 5,500 23,430 Siebel Systems, Inc. 2,500 26,450 Solectron Corp. + ^ 3,000 10,980 Sun Microsystems, Inc. + ^ 7,500 31,425 Symantec Corp. + 10,000 175,000 Texas Instruments Inc. ^ 23,900 766,473 Yahoo! Inc. + 8,800 344,784 ----------- 21,097,351 =========== MATERIALS - 2.28% Air Products & Chemicals, Inc. 1,000 59,190 Alcoa Inc. 14,200 419,894 Dow Chemical Co. (The) 15,400 674,828 E.I. du Pont de Nemours & Co. 14,800 629,000 International Paper Co. 10,500 352,905 Monsanto Co. 5,080 393,852 Newmont Mining Corporation 7,000 373,800 Praxair, Inc. ^ 3,000 158,880 Rohm & Haas Co. 1,000 48,420 Weyerhaeuser Co. 1,000 66,340 ----------- 3,177,109 =========== REAL ESTATE INVESTMENT TRUSTS- 0.22% Simon Property Group, Inc. 4,000 306,520 =========== TELECOMMUNICATIONS SERVICES - 2.92% ALLTEL Corporation 4,000 252,400 AT&T Inc. 48,364 1,184,434 BellSouth Corporation ^ 23,000 623,300 Sprint Corp. 38,446 898,099 Verizon Communications Inc. ^ 37,100 1,117,452 ----------- 4,075,685 =========== UTILITIES - 3.52% American Electric Power Co., Inc. 10,700 396,863 CenterPoint Energy, Inc. ^ 13,900 178,615 Dominion Resources, Inc. 7,100 548,120 Duke Energy Corp. 13,300 365,085 Edison International 4,000 174,440 Exelon Corp. 11,000 584,540 FirstEnergy Corp. 5,000 244,950 FPL Group, Inc. 7,000 290,920 PG&E Corp. Holdings Company ^ 9,000 334,080 Progress Energy, Inc. ^ 3,500 153,720 Public Service Enterprises Group Inc. 6,000 389,820 Southern Co. (The) 11,900 410,907 TXU Corp. ^ 9,400 471,786 Williams Companies, Inc. (The) 10,000 231,700 Xcel Energy, Inc. ^ 8,200 151,372 ----------- 4,926,918 =========== TOTAL EQUITY SECURITIES (cost - $126,420,026) 138,852,706 =========== SHORT-TERM INVESTMENTS - 2.11% PRINCIPAL REPURCHASE AGREEMENTS - 2.11% AMOUNT (000'S) -------------- Bear, Stearns & Co. Inc. (Agreement dated 12/30/05 to be repurchased $1,236,764) 3.20%, 01/03/06, collateralized by $1,273,982 in U.S. Treasury Bonds $1,236 1,236,324 Bear, Stearns & Co. Inc. * ** (Agreement dated 12/30/05 to be repurchased at $900,293), 2.00%, 01/03/06, collateralized by $928,220 in U.S. Treasury Bonds 900 900,093 Bear, Stearns & Co. Inc. * ** (Agreement dated 12/30/05 to be repurchased at $808,841), 4.00%, 01/03/06, collateralized by $833,077 in U.S. Treasury Bonds 808 808,482 ----------- TOTAL SHORT-TERM INVESTMENTS (cost - $2,944,899) 2,944,899 =========== TOTAL INVESTMENTS - 101.50% (cost - $129,364,925) 141,797,605 LIABILITIES IN EXCESS OF OTHER ASSETS - (1.50%) (2,091,489) ------------- NET ASSETS - 100% $139,706,116 ============= -------------------------------------------------------------------- + Non-income producing security. ^ Security or a portion thereof is out on loan ^^ Effective January 9, 2006, CCE Spinco, Inc. changed its name to Live Nation, Inc. * Stated interest rate, before rebate earned by borrower of securities on loan. ** Represents investment purchased with collateral received for securities on loan. ADR American Depository Receipts
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors Cornerstone Strategic Value Fund, Inc. New York, New York We have audited the accompanying statement of assets and liabilities of Cornerstone Strategic Value Fund, Inc., including the schedule of investments as of December 31, 2005, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for the year ended December 31, 2001 have been audited by other auditors, whose report dated February 8, 2002 expressed an unqualified opinion on such financial highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not 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. Our procedures included confirmation of securities owned as of December 31, 2005 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Cornerstone Strategic Value Fund, Inc. as of December 31, 2005, 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 four 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, 2005 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, 2006 ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. The Registrant and Cornerstone Advisors, Inc. share the same Proxy Voting Policies and Procedures. The respective Proxy Voting Policies and Procedures of the Registrant and Adviser are attached as EXHIBIT99.VOTEREG ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. (a)(1) All information contained in this item and its subparts is as of the date of this filing, unless otherwise noted. Ralph W. Bradshaw and William A. Clark are employees of Cornerstone Advisors, Inc. (the Investment Manager) and portfolio managers of the Fund. 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 manage one other registered closed-end fund. (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, 2005, 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 over $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 and Adviser attached as EX-99.VOTEREG. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. By: /S/ RALPH W. BRADSHAW ------------------------- Name: Ralph W. Bradshaw Title: Principal Executive Officer Date: March 10, 2006 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 Strategic Value Fund, Inc. By: /S/ RALPH W. BRADSHAW ------------------------- Name: Ralph W. Bradshaw Title: Principal Executive Officer Date: March 10, 2006 By: /S/ JODI B. LEVINE ---------------------- Name: Jodi B. Levine Title: Principal Financial Officer Date: March 10, 2006