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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.
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(Exact name of registrant as specified in charter)
383 Madison Avenue, New York, New York 10179
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(Address of principal executive offices) (Zip code)
Jodi Levine
383 Madison Avenue, New York, New York 10179
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(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.
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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.
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CORNERSTONE TOTAL
RETURN FUND, INC.
ANNUAL REPORT
DECEMBER 31, 2005
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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 11
Tax Information 12
Additional Information Regarding the Fund's Directors and
Corporate Officers 13
Description of Dividend Reinvestment Plan 16
Proxy Voting and Portfolio Holdings Information 18
Privacy Policy Notice 18
Summary of General Information 19
Shareholder Information 19
CORNERSTONE TOTAL RETURN FUND, INC.
PORTFOLIO SUMMARY - AS OF DECEMBER 31, 2005 (UNAUDITED)
SECTOR ALLOCATION
Percent of
Sector Net Assets
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Financials 18.5
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Information Technology 14.2
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Healthcare 11.7
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Consumer Discretionary 10.9
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Industrials 10.0
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Consumer Staples 9.1
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Closed-End Domestic Funds 9.0
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Energy 8.5
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Utilities 2.8
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Telecommunication Services 2.5
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Materials 2.4
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Other 0.4
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TOP TEN HOLDINGS, BY ISSUER
Percent of
Holding Sector Net Assets
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1. Tri-Continental Corp. Closed-End Domestic Funds 3.9
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2. General Electric Co. Industrials 3.4
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3. Exxon Mobil Corp. Energy 3.3
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4. Microsoft Corp. Information Technology 2.3
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5. Citigroup Inc. Financials 2.3
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6. Procter & Gamble Co. (The) Consumer Staples 2.1
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7. Johnson & Johnson Healthcare 1.7
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8. Wal-Mart Stores, Inc. Consumer Staples 1.6
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9. Adams Express Co. Closed-End Domestic Funds 1.6
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10. Zweig Fund, Inc. Closed-End Domestic Funds 1.6
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1
CORNERSTONE TOTAL RETURN FUND, INC.
SUMMARY SCHEDULE OF INVESTMENTS - DECEMBER 31, 2005
No. of
Description Shares Value
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EQUITY SECURITIES - 99.89%
UNITED STATES - 99.15%
CLOSED-END DOMESTIC FUNDS - 8.97%
Adams Express Co. 70,400 $ 883,520
Boulder Total Return Fund, Inc. 18,900 317,331
Dreman/Claymore Dividend & Income Fund 19,000 343,520
Tri-Continental Corp. 112,500 2,090,250
Zweig Fund, Inc. 165,900 875,952
Other Closed-End Domestic Funds (a) 348,523
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4,859,096
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CONSUMER DISCRETIONARY - 10.20%
eBay, Inc. + 7,000 302,750
Home Depot, Inc. (The) 12,300 497,904
Time Warner Inc. 25,500 444,720
Viacom Inc., non-voting Class B 9,000 293,400
Other Consumer Discretionary (a) 3,987,403
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5,526,177
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CONSUMER STAPLES - 9.05%
Altria Group, Inc. 10,700 799,504
Coca-Cola Co. (The) 13,500 544,185
PepsiCo, Inc. 7,500 443,100
Procter & Gamble Co. (The) 19,972 1,155,979
Wal-Mart Stores, Inc. 19,000 889,200
Other Consumer Staples (a) 1,074,906
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4,906,874
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ENERGY - 8.45%
ChevronTexaco Corp. 6,568 372,865
ConocoPhillips 5,838 339,655
Exxon Mobil Corp. 32,000 1,797,440
Other Energy (a) 2,068,180
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4,578,140
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FINANCIALS - 18.54%
American Express Company 6,100 313,906
American International Group, Inc. 12,331 841,344
Bank of America Corp. 15,740 726,401
Citigroup Inc. 25,600 1,242,368
Goldman Sachs Group, Inc. (The) 3,000 383,130
JPMorgan Chase & Co. 12,700 504,063
Lehman Brothers Holding Inc. 2,500 320,425
MetLife, Inc. 6,000 294,000
Wachovia Corp. ^ 8,100 428,166
Wells Fargo & Co. 9,000 565,470
Other Financials (a) 4,429,229
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10,048,502
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HEALTHCARE - 11.74%
Amgen Inc. + 8,300 654,538
Johnson & Johnson 15,500 931,550
Medtronic, Inc. 7,100 408,747
Pfizer Inc. ^ 37,460 873,567
UnitedHealth Group Inc. 10,000 621,400
Wyeth 7,500 345,525
Other Healthcare (a) 2,525,434
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6,360,761
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INDUSTRIALS - 9.95%
Caterpillar Inc. 5,000 288,850
General Electric Co. 52,000 1,822,600
United Parcel Service, Inc., Class B 4,000 300,600
Other Industrials (a) 2,978,598
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5,390,648
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INFORMATION TECHNOLOGY - 14.15%
Apple Computer, Inc. + 5,000 359,450
Cisco Systems, Inc. + 35,000 599,200
Dell Inc. + 13,700 410,863
Hewlett-Packard Co. 13,342 381,981
Intel Corp. 32,000 798,720
International Business Machines Corp. 5,700 468,540
Microsoft Corp. 48,000 1,255,200
Motorola, Inc. 16,100 363,699
Oracle Corp. + 33,600 410,256
See accompanying notes to financial statements.
2
CORNERSTONE TOTAL RETURN FUND, INC.
SUMMARY SCHEDULE OF INVESTMENTS - DECEMBER 31, 2005 (CONCLUDED)
No. of
Description Shares Value
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INFORMATION TECHNOLOGY (CONTINUED)
Texas Instruments Inc. ^ 13,500 $ 432,945
Yahoo! Inc. + 8,500 333,030
Other Information
Technology (a) 1,856,644
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7,670,528
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MATERIALS - 2.44%
Total Materials (a) 1,320,568
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REAL ESTATE INVESTMENT TRUSTS - 0.35%
Total Real Estate Investment Trusts (a) 191,575
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TELECOMMUNICATION SERVICES - 2.52%
AT&T Inc. 24,699 604,879
Verizon Communications Inc. ^ 14,900 448,788
Other Telecommunication Services (a) 314,648
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1,368,315
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UTILITIES - 2.79%
TXU Corp. ^ 7,400 371,406
Other Utilities (a) 1,143,075
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1,514,481
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TOTAL UNITED STATES
(cost - $52,539,112) 53,735,665
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CZECH REPUBLIC - 0.74%
CONSUMER DISCRETIONARY - 0.74%
Total Consumer Discretionary # (a) 400,011
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TOTAL CZECH REPUBLIC
(cost - $894,867) 400,011
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TOTAL EQUITY SECURITIES
(cost - $53,433,979) 54,135,676
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Principal
Amount
Description (000's) Value
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SHORT-TERM INVESTMENTS - 1.25%
REPURCHASE AGREEMENTS - 1.25%
Bear, Stearns & Co. Inc. *
(Agreement dated 12/31/05
to be repurchased at
$676,876) (b) $ 677 $ 676,648
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TOTAL SHORT-TERM INVESTMENTS
(cost - $676,648) 676,648
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TOTAL INVESTMENTS - 101.14%
(cost - $54,110,627) 54,812,324
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LIABILITIES IN EXCESS OF
OTHER ASSETS - (1.14)% (618,008)
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NET ASSETS - 100.00% $ 54,194,316
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+ Non-income producing security.
^ 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, 2005, the Fund held 0.74%
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
$400,011.
* 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 $700,806 in U.S. Treasury Bonds.
See accompanying notes to financial statements.
3
CORNERSTONE TOTAL RETURN FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 2005
ASSETS
Investments, at value, including collateral for securities
on loan of $471,189 (Cost $54,110,627) (1) $ 54,812,324
Cash 56
Receivables:
Investments sold 149,441
Dividends 64,781
Interest 2,036
Prepaid expenses 1,520
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Total Assets 55,030,158
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LIABILITIES
Payables:
Upon return of securities loaned 471,189
Investments purchased 222,861
Investment management fees 43,504
Directors' fees 14,486
Other accrued expenses 83,802
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Total Liabilities 835,842
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NET ASSETS (applicable to 4,967,301 shares of common stock outstanding) $ 54,194,316
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NET ASSET VALUE PER SHARE ($54,194,316 / 4,967,301) $ 10.91
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NET ASSETS CONSISTS OF
Capital stock, $0.01 par value; 4,967,301 shares issued and outstanding
(15,000,000 shares authorized) $ 49,673
Paid-in capital 68,867,198
Accumulated net realized loss on investments (15,424,252)
Net unrealized appreciation in value of investments 701,697
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Net assets applicable to shares outstanding $ 54,194,316
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(1) Includes securities out on loan to brokers with a market value of
$465,591.
See accompanying notes to financial statements.
4
CORNERSTONE TOTAL RETURN FUND, INC.
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2005
INVESTMENT INCOME
Income:
Dividends $ 1,106,323
Interest 16,022
Securities lending 10,801
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Total Investment Income 1,133,146
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Expenses:
Investment management fees 565,218
Directors' fees 58,402
Administration fees 56,438
Legal and audit fees 50,600
Printing 36,105
Accounting fees 31,969
Transfer agent fees 29,754
Custodian fees 13,392
Stock exchange listing fees 6,395
Insurance 6,229
Miscellaneous 5,497
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Total Expenses 859,999
Less: Management fee waivers (7,882)
Less: Fees paid indirectly (18,181)
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Net Expenses 833,936
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Net Investment Income 299,210
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NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized loss from investments (464,943)
Net change in unrealized depreciation in value of investments 1,364,595
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Net realized and unrealized gain on investments 899,652
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,198,862
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See accompanying notes to financial statements.
5
CORNERSTONE TOTAL RETURN FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended
December 31,
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2005 2004
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DECREASE IN NET ASSETS
Operations:
Net investment income $ 299,210 $ 462,154
Net realized loss from investments (464,943) (428,172)
Net change in unrealized depreciation
in value of investments 1,364,595 4,649,941
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Net increase in net assets resulting from operations 1,198,862 4,683,923
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Dividends and distributions to shareholders:
Net investment income (299,210) (462,154)
Return-of-capital (9,996,313) (9,584,964)
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Total dividends and distributions to shareholders (10,295,523) (10,047,118)
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Capital stock transactions:
Proceeds from 167,470 and 73,202 newly shares issued
in reinvestment of dividends and distributions, respectively 1,925,600 1,086,831
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Total decrease in net assets (7,171,061) (4,276,364)
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NET ASSETS
Beginning of year 61,365,377 65,641,741
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End of year $ 54,194,316 $ 61,365,377
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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,
----------------------------------------------------------------------
2005 2004 2003 2002 2001
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PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 12.78 $ 13.89 $ 12.89 $ 18.30 $ 18.28
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Net investment income 0.06# 0.10# 0.08# 0.15# 0.52
Net realized and unrealized gain/(loss)
on investments 0.18 0.87 2.91 (3.57) 0.24
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Net increase/(decrease) in net assets resulting
from operations 0.24 0.97 2.99 (3.42) 0.76
---------- ---------- ---------- ---------- ----------
Dividends and distributions to shareholders:
Net investment income (0.06) (0.10) (0.08) (0.18) (0.66)
Return-of-capital (2.05) (2.01) (1.91) (1.80) (0.09)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions to shareholders (2.11) (2.11) (1.99) (1.98) (0.75)
---------- ---------- ---------- ---------- ----------
Capital stock transactions:
Anti-dilutive effect due to capital stock repurchased -- -- -- 0.02 0.01
Anti-dilutive/(dilutive) effect due to shares
issued in reinvestment of dividends and distributions -- 0.03 -- (0.03) --
---------- ---------- ---------- ---------- ----------
Total capital stock transactions -- 0.03 -- (0.01) 0.01
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 10.91 $ 12.78 $ 13.89 $ 12.89 $ 18.30
========== ========== ========== ========== ==========
Market value, end of year $ 14.65 $ 17.95 $ 17.95 $ 11.35 $ 16.29
========== ========== ========== ========== ==========
Total investment return (a) (2.07)% 15.11% 82.96% (19.30)% 8.91%
========== ========== ========== ========== ==========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000 omitted) $ 54,194 $ 61,365 $ 65,642 $ 60,151 $ 39,547
Ratio of expenses to average net assets,
net of fee waivers, if any (b) 1.47% 1.41% 1.20% 1.50% 3.01%
Ratio of expenses to average net assets,
excluding fee waivers, if any (c) 1.52% 1.45% 1.43% 2.07% 3.01%
Ratio of expenses to average net assets,
net of fee waivers, if any (c) 1.50% 1.43% 1.23% 1.63% 3.01%
Ratio of net investment income to average net assets 0.53% 0.75% 0.65% 1.01% 2.77%
Portfolio turnover rate 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 total return consisting of capital appreciation
with current income as a secondary objective. The Fund is registered under the
Investment Company Act of 1940, as amended, as a closed-end, diversified
management investment company.
The following is a summary of significant accounting policies consistently
followed by the Fund:
MANAGEMENT ESTIMATES: The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
("GAAP") requires management to make certain estimates and assumptions that may
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION: Investments are stated at value in the accompanying
financial statements. All equity securities shall be valued at the closing price
on the exchange or market on which the security is primarily traded ("Primary
Market"). If the security did not trade on the Primary Market, it shall be
valued at the closing price on another exchange where it trades. If there are no
such sale prices, the value shall be the most recent bid, and if there is no
bid, the security shall be valued at the most recent asked. If no pricing
service is available and there are more than two dealers, the value shall be the
mean of the highest bid and lowest ask. If there is only one dealer, then the
value shall be the mean if bid and ask are available, otherwise the value shall
be the bid. All other securities and assets are valued as determined in good
faith by the Board of Directors. Short-term investments having a maturity of 60
days or less are valued on the basis of amortized cost. Securities and assets
for which market quotations are not readily available are valued at their fair
value a 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 about 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 0.74% 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 $400,011. The net asset value per share of the Fund is calculated
weekly and on the last business day of the month with the exception of those
days on which the American Stock Exchange, LLC is closed.
REPURCHASE AGREEMENTS: The Fund has agreed to purchase securities from financial
institutions subject to the seller's agreement to repurchase them at an
agreed-upon time and price ("repurchase agreements"). The financial institutions
with whom the Fund enters into repurchase agreements are banks and
broker/dealers, which Cornerstone Advisors, Inc. (the Fund's "Investment
Manager" or "Cornerstone") considers creditworthy. The seller under a repurchase
agreement will be required to maintain the value of the securities as
collateral, subject to the agreement at not less than the repurchase price plus
accrued interest. Cornerstone monitors daily the mark-to-market of the value of
the collateral, and, if necessary, requires the seller to maintain additional
securities, so that the value of the collateral is not less than the repurchase
price. Default by or bankruptcy of the seller could, however, expose the Fund to
possible loss because of adverse market action or delays in connection with the
disposition of the underlying securities.
8
CORNERSTONE TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: Investment transactions are
accounted for on the trade date. The cost of investments sold is determined by
use of the specific identification method for both financial reporting and
income tax purposes. Interest income is recorded on an accrual basis; dividend
income is recorded on the ex-dividend date.
TAXES: No provision is made for U.S. federal income or excise taxes as it is the
Fund's intention to continue to qualify as a regulated investment company and to
make the requisite distributions to its shareholders which will be sufficient to
relieve it from all or substantially all U.S. federal income and excise taxes.
DISTRIBUTIONS OF INCOME AND GAINS: Effective January 2002, the Fund initiated a
fixed, monthly distribution to shareholders. To the extent that these
distributions exceed the current earnings of the Fund, the balance will be
generated from sales of portfolio securities held by the Fund, which will either
be short-term or long-term capital gains or a tax-free return-of-capital. To the
extent these distributions are not represented by net investment income and
capital gains, they will not represent yield or investment return on the Fund's
investment portfolio. The Fund plans to maintain this distribution policy even
if regulatory requirements would make part of a return-of-capital, necessary to
maintain the distribution taxable to shareholders, and to disclose that portion
of the distribution that is classified as ordinary income. Although it has no
current intention to do so, the Board may terminate this distribution policy at
any time and such termination my have an adverse effect on the market price for
the Fund's common shares. The Fund determines annually whether to distribute any
net realized long-term capital gains in excess of net realized short-term
capital losses, including capital loss carryovers, if any. To the extent that
the Fund's taxable income is 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 has agreed to waive its management fees from the Fund to
the extent that monthly operating expenses exceed a rate of 0.125% 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 0.125%. For the year ended December
31, 2005, Cornerstone earned $565,218 for investment management services, of
which it waived $7,882. 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 $18,181 arising from credits earned on portfolio
transactions executed with a broker, pursuant to a directed brokerage
arrangement.
The Fund paid or accrued approximately $37,599 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.
9
CORNERSTONE TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C. INVESTMENT IN SECURITIES
For the year ended December 31, 2005, purchases and sales of securities, other
than short-term investments, were $5,567,358 and $13,398,677, 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 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 $465,591. During the year ended December 31, 2005, the
Fund earned $10,801 in securities lending income that 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 year ended
December 31, for the Fund were as follows:
ORDINARY INCOME RETURN-OF-CAPITAL
--------------- -----------------
2005 2004 2005 2004
---- ---- ---- ----
$299,210 $462,154 $9,996,313 $9,584,964
At December 31, 2005, the components of distributable earnings on a tax basis,
for the Fund were as follows:
Accumulated net realized loss $(15,372,623)
Unrealized appreciation 650,068
------------
Total accumulated deficit $(14,722,555)
============
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 incurred and elected to defer $110,397.
At December 31, 2005, the Fund had a capital loss carryforward for U.S. federal
income tax purposes of $15,262,226, of which $12,887,270 expires in 2008,
$1,170,157 expires in 2009, $425,706 expires in 2011, $358,321 expires in 2012
and $420,772 expires in 2013.
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 $54,162,256, $8,441,990,
$(7,791,922) and $650,068, respectively.
At December 31, 2005, the Fund reclassified $9,996,313 from distributions in
excess of net investment income and $25,673 from accumulated net realized loss
to paid-in capital, to adjust for certain permanent book/tax differences. Net
assets were not affected by this reclassification.
10
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, 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 Total Return 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
11
2005 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, 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. As indicated in this notice, significant portions
of the Fund's distributions for 2005 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, 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) $ 0.0051 $ 0.0051 $ 0.0051 $ 0.0051 $ 0.0051 $ 0.0051
Return-of-Capital(2) $ 0.1709 $ 0.1709 $ 0.1709 $ 0.1709 $ 0.1709 $ 0.1709
-------- -------- -------- -------- -------- --------
Total $ 0.1760 $ 0.1760 $ 0.1760 $ 0.1760 $ 0.1760 $ 0.1760
======== ======== ======== ======== ======== ========
PAYMENT DATES: 7/29/05 8/31/05 9/30/05 10/31/05 11/30/05 12/30/05
-------- -------- -------- -------- -------- --------
Ordinary Income(1) $ 0.0051 $ 0.0051 $ 0.0051 $ 0.0051 $ 0.0051 $ 0.0051
Return-of-Capital(2) $ 0.1709 $ 0.1709 $ 0.1709 $ 0.1709 $ 0.1709 $ 0.1709
-------- -------- -------- -------- -------- --------
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. The 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 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.
12
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.; 2001 2
Bradshaw** Board of Financial Consultant; previous Director
(55) Directors and of The Austria Fund, Inc.; President
President and Director of Cornerstone Strategic
Value 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 Strategic Value Fund, Inc.
Glenn W. Director; Audit Chairman of the Board and Chief 2001 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 Strategic Value Fund, Inc.
Thomas H. Director; Audit, Chairman of the Board of Photonics 2002 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 Strategic Value 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 Strategic Value Fund, Inc.
13
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 2001 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 Strategic Value Fund, Inc.
Andrew A. Director; Attorney and senior member of Strauss 2001 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 Strategic Value Fund, Inc.
14
ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS
AND CORPORATE OFFICERS (UNAUDITED) (CONCLUDED)
NAME AND POSITION
ADDRESS POSITION(S) PRINCIPAL OCCUPATION WITH FUND
(AGE)* HELD WITH FUND OVER LAST 5 YEARS SINCE
---------------------------------------------------------------------------------------------------------
Gary A. Chief Compliance Chief Financial Officer, Chairman and 2004
Bentz** Officer Stockholder of Cornerstone Advisors, Inc.;
(49) previous Director of The Austria Fund, Inc.,
previous Director, Vice President and
Treasurer of Cornerstone Strategic Value
Fund, Inc.; Financial Consultant, Certified
Public Accountant; 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.
(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.
** Designates a director who is an "interested person" of the Fund as
defined by the Investment Company Act of 1940, as amended. Messrs.
Bradshaw and Clark are interested persons of the Fund by virtue of
their current positions with the Investment Manager of the Fund.
15
DESCRIPTION OF DIVIDEND REINVESTMENT PLAN (UNAUDITED)
Shareholders who have Shares registered directly in their own names
automatically participate in the Fund's Dividend Reinvestment Plan (the "Plan"),
unless and until an election is made to withdraw from the Plan on behalf of such
participating shareholders. Shareholders who do not wish to have distributions
automatically reinvested should so notify American Stock Transfer & Trust Co.
(the "Agent") at P.O. Box 922, Wall Street Station, New York, NY 10269-0560 or
call (877) 248-6416. Under the Plan, all of the Fund's dividends and other
distributions to shareholders are reinvested in full and fractional Shares as
described below.
When the Fund declares an income dividend or a capital gain or other
distribution (each, a "Distribution" and collectively, "Distributions"), the
Agent, on the shareholders' behalf, will: (i) receive additional authorized
shares from the Fund either newly issued or repurchased from shareholders by the
Fund and held as treasury stock ("Newly Issued Shares") or, (ii) at the sole
discretion of the Board of Directors, be authorized to purchase outstanding
shares on the open market, on the American Stock Exchange, LLC or elsewhere,
with cash allocated to it by the Fund ("Open Market Purchases").
Shares acquired by the Agent in Open Market Purchases will be allocated to the
reinvesting shareholders based on the average cost of such Open Market
Purchases. Alternatively, the Agent will allocate Newly Issued Shares to the
reinvesting shareholders at the lower of (i) a price equal to the average
closing price of the Fund over the five trading days preceding the payment date
of such distribution or (ii) the net asset value of the Fund as last determined
prior to such payment date.
Registered shareholders who acquire their shares through Open Market Purchases
and who do not wish to have their Distributions automatically reinvested should
so notify the Fund in writing. If a Shareholder has not elected to receive cash
Distributions and the Agent does not receive notice of an election to receive
cash Distributions prior to the record date of any distribution, the shareholder
will automatically receive such Distributions in additional Shares.
Participants in the Plan may withdraw from the Plan by providing written notice
to the Agent at least 30 days prior to the applicable Distributions payment
date. When a participant withdraws from the Plan, or upon termination of the
Plan as provided below, certificates for whole shares credited to his/her
account under the Plan will, upon request, be issued. Whether or not a
participant requests that certificates for whole shares be issued, a cash
payment will be made for any fraction of a Share credited to such account.
The Agent will maintain all shareholder accounts in the Plan and furnish written
confirmations of all transactions in the accounts, including information needed
by shareholders for personal and tax records. The Agent will hold shares in the
account of each Plan participant in non-certificated form in the name of the
participant, and each shareholder's proxy will include those shares purchased
pursuant to the Plan. Each participant, nevertheless, has the right to receive
certificates for whole shares owned. The Agent will distribute all proxy
solicitation materials to participating shareholders.
In the case of shareholders, such as banks, brokers or nominees, that hold
shares for others who are beneficial owners participating in the Plan, the Agent
will administer the Plan on the basis of the number of shares certified from
time to time by the record shareholder as representing the total amount of
shares registered in the Shareholder's name and held for the account of
beneficial owners participating in the Plan.
There will be no charge to participants for reinvesting Distributions other than
their share of brokerage commissions as discussed below. The Agent's fees for
administering the Plan and handling the reinvestment of Distributions will be
paid by the Fund. Each participant's account will be charged a pro-rata share of
brokerage commissions incurred with respect to the Agent's Open Market Purchases
in connection with the reinvestment of Distributions.
16
DESCRIPTION OF DIVIDEND REINVESTMENT PLAN (UNAUDITED) (CONCLUDED)
Brokerage charges for purchasing small amounts of shares for individual accounts
through the Plan are expected to be less than the usual brokerage charges for
such transactions because the Agent will be purchasing shares for all the
participants in blocks and pro-rating the lower commission that may be
attainable.
The automatic reinvestment of Distributions will not relieve participants of any
income tax that may be payable on such Distributions. Participants who receive
shares pursuant to the Plan as described above will recognize taxable income in
the amount of the fair market value of those shares. In the case of non-U.S.
participants whose Distributions are subject to U.S. income tax withholding and
in the case of participants subject to 28% federal backup withholding, the Agent
will reinvest Distributions after deduction of the amount required to be
withheld.
The Fund reserves the right to amend or terminate the Plan by written notice to
participants. All correspondence concerning the Plan should be directed to the
Agent at the address referred to in the first paragraph of this section.
17
PROXY VOTING AND PORTFOLIO HOLDINGS INFORMATION (UNAUDITED)
Information regarding how the Cornerstone Total Return Fund, Inc. (the "Fund")
voted proxies related to its portfolio securities during the 12-month period
ended June 30 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 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.
18
SUMMARY OF GENERAL INFORMATION (UNAUDITED)
The Fund - Cornerstone Total Return Fund, Inc. is a closed-end, diversified
investment company whose shares trade on the American Stock Exchange, LLC. Its
investment objective is to seek total return, consisting of capital appreciation
and current income by investing primarily all of its assets in equity securities
of U.S. and non-U.S. issuers whose securities trade on a U.S. securities
exchange or over the counter or as American Depositary Receipts or other forms
of depositary receipts which trade in the United States. The Fund is managed by
Cornerstone Advisors, Inc.
SHAREHOLDER INFORMATION (UNAUDITED)
The Fund is listed on the American Stock Exchange, LLC (symbol "CRF"). The share
price is published in: THE NEW YORK TIMES (daily) under the designation "Cnrstn
TR" and THE WALL STREET JOURNAL (daily) and BARRON'S (each Monday) under the
designation "CornstnTtlRtn." The net asset value per share is available weekly
and may be obtained by contacting the Fund at the general inquiry phone number.
NOTICE IS HEREBY GIVEN IN ACCORDANCE WITH SECTION 23(C) OF THE INVESTMENT
COMPANY ACT OF 1940, AS AMENDED, THAT CORNERSTONE TOTAL RETURN FUND, INC. MAY
FROM TIME TO TIME PURCHASE SHARES OF ITS CAPITAL STOCK IN THE OPEN MARKET.
This report, including the financial statements herein, is sent to the
shareholders of the Fund for their information. It is not a prospectus, circular
or representation intended for use in the purchase or sale of shares of the Fund
or of any securities mentioned in the report.
19
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CORNERSTONE TOTAL RETURN FUND, INC.
================================================================================
DIRECTORS AND CORPORATE OFFICERS
Ralph W. Bradshaw Chairman of the Board of
Directors and President
William A. Clark Director and Vice President
Thomas H. Lenagh Director
Edwin Meese III Director
Scott B. Rogers Director
Andrew A. Strauss Director
Glenn W. Wilcox, Sr. Director
Gary A. Bentz Chief Compliance Officer
Thomas R. Westle Secretary
Jodi B. Levine Treasurer
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.
[GRAPHIC]
AMERICAN
STOCK EXCHANGE(R)
LISTED
CRF
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 $12,300 $11,800
Tax (1) $ 2,300 $ 2,200
Other -- --
------- -------
Total $14,600 $14,000
======= =======
(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, 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 TOTAL RETURN FUND, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2005
NO. OF
SHARES VALUE
------ -----
EQUITY SECURITIES - 99.89%
UNITED STATES - 99.15%
CLOSED-END DOMESTIC FUNDS - 8.97%
Adams Express Co. 70,400 $ 883,520
Boulder Total Return Fund, Inc. 18,900 317,331
Dreman/Claymore Dividend & Income Fund 19,000 343,520
General American Investors Company, Inc. 2,500 86,350
John Hancock Bank and Thrift Opportunity Fund 28,100 262,173
Tri-Continental Corp. 112,500 2,090,250
Zweig Fund, Inc. 165,900 875,952
-----------
4,859,096
===========
CONSUMER DISCRETIONARY - 10.20%
Apollo Group, Inc., Class A + @ 2,500 151,150
Autonation, Inc. + 2,500 54,325
Bed Bath & Beyond Inc. + 2,500 90,375
Best Buy Co., Inc. @ 3,750 163,050
CCE Spinco, Inc. + ^^ 337 4,415
Clear Channel Communications, Inc. 2,700 84,915
Coach Inc. + 2,500 83,350
Comcast Corp., Class A + 6,008 155,968
Comcast Corp., Special Class A + 4,500 115,605
D.R. Horton, Inc. 2,500 89,325
eBay, Inc. + 7,000 302,750
Ford Motor Company 15,200 117,344
Fortune Brands, Inc. 2,500 195,050
Goodyear Tire & Rubber Company (The) + @ 2,500 43,450
Harley-Davidson, Inc. @ 2,500 128,725
Hilton Hotels Corp. 2,500 60,275
Home Depot, Inc. (The) 12,300 497,904
J.C. Penney Company, Inc. 2,500 139,000
Kohl's Corp. + @ 2,500 121,500
Lowe's Companies, Inc. @ 3,700 246,642
Marriott International, Inc., Class A 2,500 167,425
Mattel, Inc. 4,500 71,190
McDonald's Corp. @ 8,100 273,132
McGraw-Hill Companies, Inc. (The) 2,500 129,075
Nordstrom, Inc. 2,500 93,500
Office Depot, Inc. + 2,500 78,500
Omnicom Group Inc. 1,500 127,695
Pulte Homes, Inc. 2,500 98,400
Staples, Inc. 3,150 71,536
Starbucks Corp. + 5,000 150,050
Target Corporation 4,600 252,862
Time Warner Inc. 25,500 444,720
Tribune Company 2,500 75,650
Univision Communications Inc., Class A + 2,500 73,475
Viacom Inc., non-voting Class B 9,000 293,400
Walt Disney Co. (The) 11,700 280,449
-----------
5,526,177
===========
CONSUMER STAPLES - 9.05%
Albertson's, Inc. 2,500 53,375
Altria Group, Inc. 10,700 799,504
Campbell Soup Company 5,700 169,689
Coca-Cola Co. (The) 13,500 544,185
Coca-Cola Enterprises Inc. 2,500 47,925
General Mills, Inc. 2,500 123,300
H.J. Heinz Co. 2,700 91,044
Kroger Co. (The) + 3,600 67,968
PepsiCo, Inc. 7,500 443,100
Procter & Gamble Co. (The) 19,972 1,155,979
Safeway Inc. 4,900 115,934
Sara Lee Corp. 2,600 49,140
Sysco Corp. 3,500 108,675
Walgreen Co. 5,600 247,856
Wal-Mart Stores, Inc. 19,000 889,200
-----------
4,906,874
===========
ENERGY - 8.45%
Anadarko Petroleum Corp. 2,500 236,875
Baker Hughes Inc. @ 2,500 151,950
Burlington Resources, Inc. 2,500 215,500
ChevronTexaco Corp. 6,568 372,865
ConocoPhillips 5,838 339,655
Devon Energy Corporation 2,500 156,350
El Paso Corp. 3,000 36,480
EOG Resources, Inc. 2,500 183,425
Exxon Mobil Corp. 32,000 1,797,440
Halliburton Co. 2,500 154,900
Occidental Petroleum Corp. 2,500 199,700
Peabody Energy Corp. @ 2,500 206,050
Schlumberger Ltd. 2,500 242,875
Transocean Inc. + 2,500 174,225
XTO Energy Inc. 2,500 109,850
-----------
4,578,140
===========
FINANCIALS - 18.54%
AFLAC Inc. 4,000 185,680
American Express Company 6,100 313,906
American International Group, Inc. 12,331 841,344
Ameriprise Financial, Inc. 1,220 50,020
AmSouth Bancorporation 2,500 65,525
Bank of America Corp. 15,740 726,401
Bank of New York Co., Inc. (The) 5,900 187,915
BB&T Corporation 4,500 188,595
Charles Schwab Corporation (The) 8,200 120,294
Chubb Corp. 2,500 244,125
Cincinnati Financial Corporation 2,500 111,700
Citigroup Inc. 25,600 1,242,368
Countrywide Financial Corporation 3,500 119,665
Fannie Mae 3,200 156,192
Fifth Third Bancorp 2,500 94,300
Freddie Mac 3,300 215,655
Goldman Sachs Group, Inc. (The) 3,000 383,130
Hartford Financial Services Group, Inc. (The) 1,600 137,424
JPMorgan Chase & Co. 12,700 504,063
KeyCorp 2,500 82,325
Lehman Brothers Holding Inc. 2,500 320,425
M&T Bank Corporation 2,500 272,625
Marsh & McLennan Companies, Inc. @ 4,600 146,096
MBNA Corp. 7,550 205,058
Mellon Financial Corporation 2,300 78,775
Merrill Lynch & Co., Inc. 1,100 74,503
MetLife, Inc. 6,000 294,000
Moody's Corporation 2,000 122,840
Morgan Stanley 3,700 209,938
North Fork Bancorporation, Inc. 2,500 68,400
Northern Trust Corp. @ 1,100 57,002
PNC Financial Services Group, Inc. 1,400 86,562
Prudential Financial, Inc. @ 2,500 182,975
SLM Corporation 2,500 137,725
St. Paul Travelers Companies, Inc. (The) 5,092 227,460
State Street Corp. 1,600 88,704
Synovus Financial Corp @ 2,500 67,525
U.S. Bancorp @ 7,200 215,208
Wachovia Corp. @ 8,100 428,166
Washington Mutual, Inc. 5,251 228,418
Wells Fargo & Co. 9,000 565,470
-----------
10,048,502
===========
HEALTH CARE - 11.74%
Aetna Inc. 2,000 188,620
Amgen Inc. + 8,300 654,538
Becton, Dickinson & Co. 2,500 150,200
Biomet, Inc. 2,500 91,425
Bristol-Myers Squibb Co. @ 9,600 220,608
Caremark Rx, Inc. + 2,500 129,475
Eli Lilly & Co. 4,100 232,019
Genzyme Corporation + 1,500 106,170
Health Management Associates, Inc., Class A 2,500 54,900
Johnson & Johnson 15,500 931,550
Laboratory Corporation of America Holdings + 2,500 134,625
McKesson Corp. 2,500 128,975
Medco Health Solutions, Inc. + 1,531 85,430
Medtronic, Inc. 7,100 408,747
Merck & Co. Inc. 8,700 276,747
PerkinElmer, Inc. 1,500 35,340
Pfizer Inc. @ 37,460 873,567
Schering-Plough Corp. 8,400 175,140
St. Jude Medical, Inc. + 2,500 125,500
Stryker Corporation 2,000 88,860
Tenet Healthcare Corp. + 5,000 38,300
United Health Group Inc. 10,000 621,400
Waters Corporation + @ 2,500 94,500
Wyeth 7,500 345,525
Zimmer Holdings, Inc. + 2,500 168,600
-----------
6,360,761
===========
INDUSTRIALS - 9.95%
3M Co. 2,500 193,750
Boeing Company (The) 3,900 273,936
Burlington Northern Sante Fe Corporation 2,000 141,640
Caterpillar Inc. 5,000 288,850
CSX Corp. 2,500 126,925
Danaher Corp. @ 2,500 139,450
Dover Corporation 1,000 40,490
Emerson Electric Co. 2,000 149,400
FedEx Corp. 2,500 258,475
General Dynamics Corp. 2,500 285,125
General Electric Co. 52,000 1,822,600
Honeywell International Inc. 3,300 122,925
Illinois Tool Works Inc. 2,500 219,975
Lockheed Martin Corp. 2,500 159,075
Norfolk Southern Corporation 2,500 112,075
Raytheon Company 2,500 100,375
Rockwell Automation, Inc. 2,500 147,900
Southwest Airlines Co. 6,100 100,223
United Parcel Service, Inc., Class B 4,000 300,600
United Technologies Corp. 4,400 246,004
Waste Management, Inc. 5,300 160,855
-----------
5,390,648
===========
INFORMATION TECHNOLOGY - 14.15%
Adobe Systems Inc. 2,500 92,400
Agilent Technologies, Inc. + 5,000 166,450
Apple Computer, Inc. + 5,000 359,450
Applied Materials, Inc. 8,000 143,520
Autodesk, Inc. 2,500 107,375
Cisco Systems, Inc. + 35,000 599,200
Corning Inc. + 7,500 147,450
Dell Inc. + 13,700 410,863
Electronic Data Systems Corp. 7,500 180,300
EMC Corp. + 8,000 108,960
First Data Corporation 4,325 186,018
Fiserv, Inc. + 2,500 108,175
Freescale Semiconductor Inc., Class B + 1,777 44,727
Hewlett-Packard Co. 13,342 381,981
Intel Corp. 32,000 798,720
International Business Machines Corp. 5,700 468,540
Jabil Circuit, Inc. + 2,500 92,725
Lucent Technologies Inc. + 15,000 39,900
Maxim Integrated Products, Inc. 2,500 90,600
Microsoft Corp. 48,000 1,255,200
Motorola, Inc. 16,100 363,699
Network Appliance, Inc. + 2,500 67,500
Oracle Corp. + 33,600 410,256
Paychex, Inc. 2,500 95,300
QUALCOMM Inc. @ 4,300 185,244
Texas Instruments Inc. @ 13,500 432,945
Yahoo! Inc. + 8,500 333,030
-----------
7,670,528
===========
MATERIALS - 2.44%
Air Products & Chemicals, Inc. 2,500 147,975
Dow Chemical Co. (The) 4,700 205,954
E.I. du Pont de Nemours & Co. 5,800 246,500
International Paper Co. 4,800 161,328
Monsanto Co. 1,773 137,461
Newmont Mining Corporation 2,500 133,500
Nucor Corp. 2,500 166,800
Rohm & Haas Co. 2,500 121,050
-----------
1,320,568
===========
REAL ESTATE INVESTMENT TRUSTS - 0.35%
Simon Property Group, Inc. 2,500 191,575
===========
TELECOMMUNICATIONS SERVICES - 2.52%
AT&T Inc. 24,699 604,879
BellSouth Corporation @ 5,200 140,920
Sprint Corp. 7,437 173,728
Verizon Communications Inc. @ 14,900 448,788
-----------
1,368,315
===========
UTILITIES - 2.79%
AES Corporation + 3,000 47,490
American Electric Power Co., Inc. 5,500 203,995
CenterPoint Energy, Inc. @ 5,700 73,245
Duke Energy Corp. 6,600 181,170
Edison International 2,500 109,025
Exelon Corp. 2,500 132,850
Scottish Power plc, ADR 4,000 149,520
Southern Co. (The) 2,500 86,325
TXU Corp. @ 7,400 371,406
Williams Companies, Inc. (The) 2,500 57,925
Xcel Energy, Inc. @ 5,500 101,530
-----------
1,514,481
===========
TOTAL UNITED STATES (cost - $52,539,112) 53,735,665
===========
CZECH REPUBLIC - 0.74%
CONSUMER DISCRETIONARY - 0.74%
Bonton a.s + # 137,180 7,818
Bonton Book a.s + # 68,590 62,877
Bonton Film Entertainment a.s. + # 68,590 229,892
Bonton Music a.s. + # 68,590 60,126
Bonton Pictures a.s. + # 68,590 39,298
-----------
400,011
===========
TOTAL CZECH REPUBLIC (cost -$894,867) 400,011
-----------
TOTAL EQUITY SECURITIES (cost - $53,433,979) 54,135,676
===========
SHORT-TERM INVESTMENTS - 1.25% PRINCIPAL
AMOUNT
REPURCHASE AGREEMENTS - 1.25% (000'S)
---------
Bear, Stearns & Co. Inc. * ** (Agreement
dated 12/30/05 to be repurchased at
$246,155), 2%, 01/03/06, collateralized by
$255,261 in U.S. Treasury Bonds $246 246,114
Bear, Stearns & Co. Inc. * ** (Agreement
dated 12/30/05 to be repurchased at
$225,150), 4%, 01/03/06, collateralized by
$232,055 in U.S. Treasury Bonds 225 225,075
Bear, Stearns & Co. Inc. (Agreement dated
12/30/05 to be repurchased at $205,513),
3.2%, 01/03/06, collateralized by $213,491
in U.S. Treasury Bonds 205 205,459
-----------
TOTAL SHORT-TERM INVESTMENTS (cost - $676,648) 676,648
===========
TOTAL INVESTMENTS - 101.14%
(cost - $54,110,627) 54,812,324
LIABILITIES IN EXCESS OF OTHER ASSETS - (1.14)% (618,008)
-----------
NET ASSETS - 100% $54,194,316
===========
----------
+ Non-income producing
@ Security or a portion thereof is out on loan
^^ Effective January 9, 2006, CCE Spinco, Inc. changed its name to Live
Nation, Inc.
# Securities are fair valued in accordance with procedures established by
the Board of Directors
* Stated interest rate, before rebate earned by borrower of securities on
loan
** Represents investment purchased with collateral received for securities on
loan.
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, 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 Total Return 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 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. 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.
(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 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 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 Total Return 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