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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 811-05150
---------
Cornerstone Strategic Value Fund, Inc.
--------------------------------------------------
(Exact name of registrant as specified in charter)
383 MADISON AVENUE, NEW YORK, NY 10179
---------------------------------------- ------------------
(Address of principal executive offices) (Zip code)
Jodi B. Levine
383 MADISON AVE, NEW YORK, NY
-----------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-272-3550
------------
Date of fiscal year end: DECEMBER 31, 2003
-----------------
Date of reporting period: JANUARY 1, 2003 THROUGH DECEMBER 31, 2003
-----------------------------------------
Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its regulatory,
disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form
N-CSR, and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
Include a copy of the report transmitted to stockholders pursuant to
Rule 30e-1 under the Act (17 CFR 270.30e-1).
CORNERSTONE STRATEGIC
VALUE FUND, INC.
DECEMBER 31, 2003
This update contains the following two documents:
o Letter from the Fund's Chairman
o Annual Report to Shareholders
LETTER FROM THE FUND'S CHAIRMAN
January 23, 2004
Dear Fellow Shareholders:
We present the following annual report for Cornerstone Strategic Value Fund,
Inc. (the "Fund"), covering the year ended December 31, 2003. At the end of the
period, the Fund's net assets were $26.6 million and the Net Asset Value ("NAV")
per share was $6.90. The share price closed at $9.00 and the Fund's price
discount to NAV improved from 8.7% at the beginning of the year to a premium of
30.4% at the end. After reflecting the reinvestment of monthly distributions
totaling $0.99 per share, the Fund achieved a total investment return at market
value of 77.7% for the year ended December 31, 2003.
CREATING VALUE
Under the leadership of the Board of Directors, the Fund has made substantial
progress in creating value for its shareholders. A concerted effort to reduce
expenses, coupled with the Fund's investment manager volunteering to waive
substantial management fees, held the overall expense ratio to 1.2% for the
year.
As you are aware, the Fund instituted an aggressive fixed, monthly distribution
policy in 2002 designed to provide significant flexibility to all of the Fund's
shareholders. It is our belief that shareholders are well served by this policy
that provides regular distributions whether markets are up or down. We are proud
of this innovative concept and believe it has contributed significantly to the
Fund's positive performance.
Over the long-run, a well-managed, diversified equity portfolio provides the
best risk/reward tradeoff for many investors. Long-term equity returns are
generally found to be higher than those with fixed-income or balanced programs
and favorable tax treatment on capital gains makes the net returns even better
for taxable investors. The Fund's distribution policy recognizes that many
investors are willing to accept the potentially higher asset volatility in this
approach, but would prefer that stable distributions were available to them each
year to either reinvest or utilize for other purposes of their choosing.
Shortly after the end of the year, it is determined what portion of these
distributions is attributable to income, capital gains, or return-of-capital.
This year, the Fund's asset base grew even though a large portion of the year's
distribution was classified as a return-of-capital. It is important for
shareholders to consult their tax advisor on proper recognition of the
return-of-capital distributions with regard to the cost basis of their shares.
Each shareholder has the option to receive their distributions in cash or new
shares of the Fund and may change this election whenever they wish. It is a goal
that long-term investment returns will exceed the level of distributions, but
there is no guarantee that this goal will be met. If the amount of distributions
taken in cash exceeds the total investment return of the Fund, the assets of the
Fund will decline. If the total investment return of the Fund exceeds the amount
of cash distributions, as it did in 2003, the assets of the Fund will increase.
The distributions of those who chose to reinvest in 2003 participated in the
Fund's strong market performance. We encourage you to consider the reinvestment
option for your distributions from the Fund.
--------------------------------------------------------------------------------
1
LETTER FROM THE FUND'S CHAIRMAN (CONTINUED)
ECONOMIC AND MARKET SUMMARY
What a difference a year can make. After shrugging off early concerns centered
on Iraq, the major indices closed out 2003 strongly positive. In addition to
good global news, stocks responded to a fast-recovering economy, benign
inflation, and rising profits. In a reversal of the situation for 2002, almost
every area of the U.S. equity market was up at the end of 2003. Tax cuts,
increased government spending, and the Federal Reserve's accommodative policy
toward low interest rates all contributed to boost economic activity. The U.S.
economy seemed to be running wide-open as the GDP grew at an almost unheard of
annualized rate of 8.2% in the third quarter.
To be sure, both the economy and the markets face risk. Stimulus may generate
enough growth to reawaken inflation concerns and lead to increased interest
rates. Prices for many equities, which are high relative to earnings, may be
vulnerable to even small disappointments. Significantly, the unemployment level
remained surprisingly high, though it dropped near the end of the year. In spite
of this, consumer confidence continues to improve as many continue to anticipate
job growth.
PORTFOLIO PERFORMANCE
The Fund's broadly diversified portfolio performed well in this year's market
climb, turning in double digit performance and comparing well with its benchmark
S&P 500 Index return of 28.7%. We believe that this approach has served well
through both up and down markets of recent years and will continue to benefit
the Fund and its stockholders for the long-term.
The investment manager attempts to enhance portfolio performance by taking
advantage of temporary and occasional pricing inefficiencies in certain
securities. To that end, the percentage of the portfolio represented by
discounted closed-end funds increased. The availability and magnitude of such
opportunities are unpredictable, and therefore, their effect on possible
portfolio out-performance may vary considerably from year to year.
--------------------------------------------------------------------------------
2
LETTER FROM THE FUND'S CHAIRMAN (CONCLUDED)
The Fund's Board of Directors, its officers, and its investment manager are
mindful of the trust that the Fund's shareholders have placed in us. We know you
have a choice, we appreciate your support, and we look forward to continuing our
service to you in the future.
Sincerely,
/s/ Ralph W. Bradshaw
--------------------
Ralph W. Bradshaw
Chairman
IN ADDITION TO HISTORICAL INFORMATION, THIS REPORT CONTAINS FORWARD-LOOKING
STATEMENTS, WHICH MAY CONCERN, AMONG OTHER THINGS, DOMESTIC AND FOREIGN MARKET,
INDUSTRY AND ECONOMIC TRENDS AND DEVELOPMENTS AND GOVERNMENT REGULATION AND
THEIR POTENTIAL IMPACT ON THE FUND'S INVESTMENT PORTFOLIO. THESE STATEMENTS ARE
SUBJECT TO RISKS AND UNCERTAINTIES AND ACTUAL TRENDS, DEVELOPMENTS AND
REGULATIONS IN THE FUTURE AND THEIR IMPACT ON THE FUND COULD BE MATERIALLY
DIFFERENT FROM THOSE PROJECTED, ANTICIPATED OR IMPLIED. THE FUND HAS NO
OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS.
THIS LETTER FROM THE FUND'S CHAIRMAN IS NOT A PART OF THE ANNUAL REPORT TO
SHAREHOLDERS THAT FOLLOWS.
--------------------------------------------------------------------------------
3
CORNERSTONE STRATEGIC
VALUE FUND, INC.
ANNUAL REPORT
DECEMBER 31, 2003
CONTENTS
Portfolio Summary 1
Schedule of Investments 2
Statement of Assets and Liabilities 6
Statement of Operations 7
Statement of Changes in Net Assets 8
Financial Highlights 9
Notes to Financial Statements 10
Report of Independent Accountants 14
Tax Information 15
Additional Information Regarding the Fund's Directors and Officers 16
Description of Dividend Reinvestment & Cash Plan 19
Summary of General Information 21
Shareholder Information 21
Privacy Policy Notice 22
--------------------------------------------------------------------------------
CORNERSTONE STRATEGIC VALUE FUND, INC.
PORTFOLIO SUMMARY - AS OF DECEMBER 31, 2003 (UNAUDITED)
--------------------------------------------------------------------------------
TOP TEN, BY SECTOR
Percent of
Sector Net Assets
------- ---------------------------------------------------- -------------
1. Financials 18.7
------- ---------------------------------------------------- -------------
2. Information Technology 15.8
------- ---------------------------------------------------- -------------
3. Consumer Discretionary 12.5
------- ---------------------------------------------------- -------------
4. Healthcare 11.7
------- ---------------------------------------------------- -------------
5. Industrials 10.8
------- ---------------------------------------------------- -------------
6. Closed-End Domestic Funds 8.8
------- ---------------------------------------------------- -------------
7. Consumer Staples 7.9
------- ---------------------------------------------------- -------------
8. Energy 5.5
------- ---------------------------------------------------- -------------
9. Telecommunication Services 3.4
------- ---------------------------------------------------- -------------
10. Materials 2.6
------- ---------------------------------------------------- -------------
TOP TEN HOLDINGS, BY ISSUER
Percent of
Holding Sector Net Assets
-------- ---------------------------------- --------------------------------- -------------
1. General Electric Co. Industrials 3.4
-------- ---------------------------------- --------------------------------- -------------
2. Microsoft Corp. Information Technology 3.1
-------- ---------------------------------- --------------------------------- -------------
3. Exxon Mobil Corp. Energy 2.9
-------- ---------------------------------- --------------------------------- -------------
4. Pfizer Inc. Healthcare 2.7
-------- ---------------------------------- --------------------------------- -------------
5. Wal-Mart Stores, Inc. Consumer Discretionary 2.7
-------- ---------------------------------- --------------------------------- -------------
6. Tri-Continental Corp. Closed-End Domestic Funds 2.4
-------- ---------------------------------- --------------------------------- -------------
7. Citigroup Inc. Financials 2.4
-------- ---------------------------------- --------------------------------- -------------
8. Intel Corp. Information Technology 2.4
-------- ---------------------------------- --------------------------------- -------------
9. Adams Express Co. Closed-End Domestic Funds 2.3
-------- ---------------------------------- --------------------------------- -------------
10. American International Group, Inc. Financials 2.3
-------- ---------------------------------- --------------------------------- -------------
1
--------------------------------------------------------------------------------
CORNERSTONE STRATEGIC VALUE FUND, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
--------------------------------------------------------------------------------
No. of Value
Description Shares (Note A)
--------------------------------------------------------------------------------
EQUITY SECURITIES - 99.51%
CLOSED-END DOMESTIC FUNDS - 8.77%
Adams Express Co. 49,500 $ 614,295
General American
Investors Co., Inc. 10,500 312,165
Salomon Brothers Fund, Inc. (The) 18,400 221,352
Tri-Continental Corp. 39,000 639,600
Zweig Fund, Inc. 110,400 540,960
----------
2,328,372
----------
CONSUMER DISCRETIONARY - 12.45%
Bed Bath & Beyond Inc. + 1,000 43,350
Best Buy Co., Inc. 1,000 52,240
Carnival Corp. 2,100 83,433
Clear Channel
Communications, Inc. 2,100 98,343
Comcast Corp., Class A + 3,882 127,601
Costco Wholesale Corp. + 1,500 55,770
CVS Corp. 1,500 54,180
Delphi Corp. 2,000 20,420
Ford Motor Co. 6,500 104,000
Fortune Brands, Inc. 1,000 71,490
Gannett Co., Inc. 1,000 89,160
Gap, Inc. (The) 2,700 62,667
General Motors Corp. 1,900 101,460
Goodyear Tire &
Rubber Co. (The) + 2,500 19,650
Harley-Davidson, Inc. 1,000 47,530
Hilton Hotels Corp. 1,500 25,695
Home Depot, Inc. (The) 6,100 216,489
Kohl's Corp. + 1,000 44,940
Lowe's Companies, Inc. 2,500 138,475
Marriott International, Inc.,
Class A 1,000 46,200
--------------------------------------------------------------------------------
No. of Value
Description Shares (Note A)
--------------------------------------------------------------------------------
CONSUMER DISCRETIONARY (CONTINUED)
May Department Stores Co. (The) 1,000 $ 29,070
McDonald's Corp. 2,100 52,143
NIKE, Inc., Class B 1,000 68,460
Omnicom Group Inc. 1,000 87,330
Reebok International Ltd. 1,500 58,980
Staples, Inc. + 1,500 40,950
Starbucks Corp. + 1,200 39,672
Target Corp. 3,200 122,880
Time Warner Inc. + 10,500 188,895
Viacom Inc., non-voting Class B 6,000 266,280
Wal-Mart Stores, Inc. 13,300 705,565
Walt Disney Co. (The) 4,700 109,651
Yum! Brands, Inc. + 1,000 34,400
----------
3,307,369
----------
CONSUMER STAPLES - 7.86%
Albertson's, Inc. 2,500 56,625
Altria Group, Inc. 4,900 266,658
Anheuser-Busch Companies, Inc. 2,200 115,896
Archer-Daniels-Midland Co. 2,415 36,756
Coca-Cola Co. (The) 6,500 329,875
Colgate-Palmolive Co. 1,000 50,050
ConAgra Foods, Inc. 1,900 50,141
General Mills, Inc. 2,500 113,250
Gillette Co. (The) 2,600 95,498
Kimberly-Clark Corp. 900 53,181
Kroger Co. (The) + 3,500 64,785
PepsiCo, Inc. 5,100 237,762
Procter & Gamble Co. (The) 3,800 379,544
Sysco Corp. 3,300 122,859
Walgreen Co. 3,200 116,416
----------
2,089,296
----------
2
--------------------------------------------------------------------------------
CORNERSTONE STRATEGIC VALUE FUND, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003 (CONTINUED)
--------------------------------------------------------------------------------
No. of Value
Description Shares (Note A)
--------------------------------------------------------------------------------
ENERGY - 5.48%
Anadarko Petroleum Corp. 900 $ 45,909
Baker Hughes Inc. 2,500 80,400
CenterPoint Energy, Inc. 2,500 24,225
ChevronTexaco Corp. 3,340 288,543
ConocoPhillips 1,728 113,305
Exxon Mobil Corp. 19,000 779,000
Reliant Resources, Inc. + 1,971 14,506
Schlumberger Ltd. 2,000 109,440
-----------
1,455,328
-----------
FINANCIALS - 18.69%
AFLAC Inc. 1,900 68,742
Allstate Corp. (The) 2,500 107,550
American Express Co. 3,000 144,690
American International Group, Inc. 9,042 599,304
Bank of America Corp. 3,900 313,677
Bank of New York Co., Inc. (The) 2,500 82,800
Bank One Corp. 2,600 118,534
BB&T Corp. 1,600 61,824
Charles Schwab Corp. (The) 2,500 29,600
Citigroup Inc. 13,100 635,874
Fannie Mae 2,200 165,132
Fifth Third Bancorp 2,000 118,200
FleetBoston Financial Corp. 2,400 104,760
Freddie Mac 2,500 145,800
Goldman Sachs Group, Inc. (The) 1,300 128,349
HSBC Holdings plc, ADR 963 75,904
J. P. Morgan Chase & Co. 6,000 220,380
Marsh & McLennan
Companies, Inc. 4,000 191,560
--------------------------------------------------------------------------------
No. of Value
Description Shares (Note A)
--------------------------------------------------------------------------------
FINANCIALS (CONTINUED)
MBNA Corp. 3,000 $ 74,550
Mellon Financial Corp. 1,800 57,798
Merrill Lynch & Co., Inc. 2,000 117,300
MetLife, Inc. 2,700 90,909
Morgan Stanley 3,500 202,545
National City Corp. 2,200 74,668
PNC Financial Services Group 1,100 60,203
Prudential Financial, Inc. 2,500 104,425
State Street Corp. 1,000 52,080
SunTrust Banks, Inc. 1,100 78,650
Travelers Property Casualty Corp.,
Class A 738 12,383
Travelers Property Casualty Corp.,
Class B 1,517 25,743
U.S. Bancorp 4,200 125,076
Wachovia Corp. 3,600 167,724
Washington Mutual, Inc. 3,150 126,378
Wells Fargo & Co. 4,800 282,672
----------
4,965,784
----------
HEALTHCARE - 11.67%
Abbott Laboratories 4,000 186,400
Amgen Inc. + 3,500 216,300
Baxter International Inc. 2,500 76,300
Boston Scientific Corp. + 3,000 110,280
Bristol-Myers Squibb Co. 4,500 128,700
Cardinal Health, Inc. 1,000 61,160
Eli Lilly & Co. 3,000 210,990
HCA Inc. 2,000 85,920
HEALTHSOUTH Corp. + 2,500 11,450
3
--------------------------------------------------------------------------------
CORNERSTONE STRATEGIC VALUE FUND, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003 (CONTINUED)
--------------------------------------------------------------------------------
No. of Value
Description Shares (Note A)
--------------------------------------------------------------------------------
HEALTHCARE (CONTINUED)
Johnson & Johnson 7,500 $ 387,450
McKesson Corp. 1,000 32,160
Medco Health Solutions, Inc. + 723 24,575
Medtronic, Inc. 4,300 209,023
Merck & Co. Inc. 6,000 277,200
Pfizer Inc. 20,500 724,265
Schering-Plough Corp. 2,500 43,475
UnitedHealth Group Inc. 3,000 174,540
Wyeth 3,300 140,085
----------
3,100,273
----------
INDUSTRIALS - 10.80%
3M Co. 2,000 170,060
Automatic Data Processing, Inc. 2,000 79,220
Boeing Co. (The) 3,000 126,420
Caterpillar Inc. 1,300 107,926
Cendant Corp. + 2,700 60,129
Concord EFS, Inc. + 2,500 37,100
Emerson Electric Co. 1,500 97,125
FedEx Corp. 1,000 67,500
General Electric Co. 29,000 898,420
Honeywell International Inc. 2,800 93,604
Illinois Tool Works Inc. 1,000 83,910
Lockheed Martin Corp. 1,500 77,100
Masco Corp. 1,700 46,597
Paychex, Inc. 2,500 93,000
Southwest Airlines Co. 2,700 43,578
Transocean Inc. + 2,500 60,025
Tyco International Ltd. 7,000 185,500
Union Pacific Corp. 1,000 69,480
United Parcel Service, Inc., Class B 3,500 260,925
United Technologies Corp. 1,700 161,109
Waste Management, Inc. 1,700 50,320
----------
2,869,048
----------
No. of Value
Description Shares (Note A)
--------------------------------------------------------------------------------
INFORMATION TECHNOLOGY - 15.78%
Agere Systems Inc., Class A + 115 $ 351
Agere Systems Inc., Class B + 2,830 8,207
Agilent Technologies, Inc. 1,800 52,632
Altera Corp. + 1,500 34,050
Analog Devices, Inc. 1,000 45,650
Applied Materials, Inc. + 2,900 65,105
Cisco Systems, Inc. + 16,900 410,501
Corning Inc. + 3,000 31,290
Dell Inc. + 6,500 220,740
Electronic Data Systems Corp. 1,000 24,540
EMC Corp. + 7,000 90,440
First Data Corp. 5,000 205,450
Hewlett-Packard Co. 7,800 179,166
Intel Corp. 19,500 627,900
International Business
Machines Corp. 5,400 500,472
Linear Technology Corp. 1,000 42,070
Maxim Integrated Products, Inc. 1,000 49,800
Micron Technology, Inc. + 2,500 33,675
Microsoft Corp. 30,200 831,708
Motorola, Inc. 6,600 92,862
Oracle Corp. + 12,300 162,360
QUALCOMM Inc. 2,500 134,825
Sanmina-SCI Corp. + 2,500 31,525
Siebel Systems, Inc. + 2,500 34,675
Solectron Corp. + 3,000 17,730
Sun Microsystems, Inc. + 7,500 33,675
Texas Instruments Inc. 4,900 143,962
Yahoo! Inc. + 1,900 85,823
----------
4,191,184
----------
MATERIALS - 2.56%
Air Products & Chemicals, Inc. 1,000 52,830
Alcoa Inc. 3,100 117,800
Dow Chemical Co. (The) 2,700 112,239
4
--------------------------------------------------------------------------------
CORNERSTONE STRATEGIC VALUE FUND, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003 (CONCLUDED)
--------------------------------------------------------------------------------
No. of Value
Description Shares (Note A)
--------------------------------------------------------------------------------
MATERIALS (CONTINUED)
E. I. du Pont de Nemours & Co. 2,200 $ 100,958
Georgia-Pacific Corp. 1,000 30,670
International Paper Co. 2,000 86,220
Praxair, Inc. 3,000 114,600
Weyerhaeuser Co. 1,000 64,000
----------
679,317
----------
TELECOMMUNICATION SERVICES - 3.39%
AT&T Corp. 2,400 48,720
AT&T Wireless Services Inc. + 4,522 36,131
BellSouth Corp. 6,500 183,950
Lucent Technologies Inc. + 10,700 30,388
Nextel Communications, Inc.,
Class A + 2,500 70,150
SBC Communications Inc. 7,900 205,953
Sprint Corp. (FON Group) 3,000 49,260
Verizon Communications Inc. 7,900 277,132
----------
901,684
----------
UTILITIES - 2.06%
American Electric Power Co., Inc. 1,200 36,612
Dominion Resources, Inc. 1,000 63,830
Duke Energy Corp. 2,800 57,260
Edison International + 2,500 54,825
FirstEnergy Corp. 2,500 88,000
Scottish Power plc, ADR 4,000 108,720
Southern Co. (The) 2,400 72,600
TXU Corp. 1,000 23,720
Xcel Energy, Inc. 2,500 42,450
----------
548,017
----------
TOTAL EQUITY SECURITIES
(cost - $24,321,218) 26,435,672
----------
--------------------------------------------------------------------------------
Principal
Amount Value
Description (000's) (Note A)
--------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - 2.38%
REPURCHASE AGREEMENTS - 2.38%
Bear, Stearns & Co. Inc.
(Agreement dated 12/31/03 to
be repurchased at $139,984),
0.85%, 01/02/04 (Note F) $ 140 $ 139,977
Bear, Stearns & Co. Inc.
(Agreement dated 12/31/03 to
be repurchased at $425,613),
1.06%*, 01/02/04 ** (Note E) 426 425,588
Bear, Stearns & Co. Inc.
(Agreement dated 12/31/03 to
be repurchased at $65,647),
0.94%*, 01/02/04 ** (Note E) 66 65,644
------------
TOTAL SHORT-TERM INVESTMENTS
(cost - $631,209) 631,209
------------
TOTAL INVESTMENTS - 101.89%
(cost - $24,952,427) (Notes A, E, F, G) 27,066,881
------------
LIABILITIES IN EXCESS OF OTHER (501,574)
ASSETS - (1.89)% ------------
NET ASSETS - 100.00% $ 26,565,307
============
+ Non-income producing security.
* Stated interest rate, before rebate earned by borrower of securities on
loan.
* * Represents investment purchased with cash collateral recieved. ADR
American Depositary Receipts.
5
--------------------------------------------------------------------------------
CORNERSTONE STRATEGIC VALUE FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 2003
--------------------------------------------------------------------------------
ASSETS
Investments, at value (Cost $24,952,427) (Notes A, E, F, G) $ 27,066,881
Receivables:
Dividends 34,112
Interest 176
Prepaid expenses 877
------------
Total Assets 27,102,046
------------
LIABILITIES
Payables:
Upon return of securities loaned (Note E) 491,232
Investment management fees (Note B) 15,332
Other accrued expenses 30,175
------------
Total Liabilities 536,739
------------
NET ASSETS (applicable to 3,849,524 shares of common stock outstanding) $ 26,565,307
============
NET ASSET VALUE PER SHARE ($26,565,307 / 3,849,524) $ 6.90
============
NET ASSETS CONSISTS OF
Capital stock, $0.01 par value; 3,849,524 shares outstanding
(25,000,000 shares authorized) $ 38,495
Paid-in capital 52,228,222
Cost of 2,239,440 shares repurchased (26,999,661)
Accumulated net realized loss on investments (816,203)
Net unrealized appreciation in value of investments 2,114,454
------------
Net assets applicable to shares outstanding $ 26,565,307
============
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
6
--------------------------------------------------------------------------------
CORNERSTONE STRATEGIC VALUE FUND, INC.
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2003
--------------------------------------------------------------------------------
INVESTMENT INCOME
Income (Note A):
Dividends $ 461,054
Interest 2,379
-------------
Total Investment Income 463,433
-------------
Expenses:
Investment management fees (Note B) 246,113
Administration fees 50,000
Accounting fees 28,413
Legal and audit fees (Note B) 16,730
Transfer agent fees 14,510
Directors' fees 13,697
Stock exchange listing fees 10,359
Custodian fees 5,970
Insurance 4,604
Miscellaneous 301
-------------
Total Expenses 390,697
Less: Management fee waivers (Note B) (82,098)
Less: Fees paid indirectly (Note B) (13,413)
-------------
Net Expenses 295,186
-------------
Net Investment Income 168,247
-------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized loss from investments (231,146)
Net change in unrealized depreciation in value of investments 5,737,591
-------------
Net realized and unrealized gain on investments 5,506,445
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 5,674,692
=============
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
7
--------------------------------------------------------------------------------
CORNERSTONE STRATEGIC VALUE FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
For the Years Ended
December 31,
----------------------------
2003 2002
------------ ------------
INCREASE/(DECREASE) IN NET ASSETS Operations:
Net investment income/(loss) $ 168,247 $ (38,781)
Net realized loss from investments (231,146) (116,327)
Net change in unrealized appreciation/(depreciation) in value
of investments 5,737,591 (8,612,397)
------------ ------------
Net increase/(decrease) in net assets resulting from
operations 5,674,692 (8,767,505)
------------ ------------
Dividends and distributions to shareholders (Notes A, G):
Net investment income (168,247) --
Return-of-capital (3,636,161) (1,887,643)
------------ ------------
Total dividends and distributions to shareholders (3,804,408) (1,887,643)
------------ ------------
Capital stock transactions (Note D):
Proceeds from 45,927 and 33,037 shares newly issued in
reinvestment of dividends and distributions, respectively 319,214 194,649
Cost of 62,000 shares repurchased -- (419,744)
------------ ------------
Net increase/(decrease) in net assets resulting from capital
stock transactions 319,214 (225,095)
------------ ------------
Total increase/(decrease) in net assets 2,189,498 (10,880,243)
------------ ------------
NET ASSETS
Beginning of year 24,375,809 35,256,052
------------ ------------
End of year $ 26,565,307 $ 24,375,809
============ ============
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
8
--------------------------------------------------------------------------------
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,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ----------- -----------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 6.41 $ 9.20 $ 11.31 $ 14.95 $ 14.52
---------- ---------- ---------- ----------- -----------
Net investment income/(loss) # 0.04 (0.01) (0.06) (0.94) (0.09)
Net realized and unrealized gain/(loss)
on investments and foreign currency
related translations 1.44 (2.29) (2.13) (1.81) 4.04
---------- ---------- ---------- ----------- -----------
Net increase/(decrease) in net assets
resulting from operations 1.48 (2.30) (2.19) (2.75) 3.95
---------- ---------- ---------- ----------- -----------
Dividends and distributions to shareholders:
Net investment income (0.04) -- -- -- --
Net realized gain on investments and
foreign currency related transactions -- -- -- (1.01) (3.87)
Return-of-capital (0.95) (0.50) -- -- --
---------- ---------- ---------- ----------- -----------
Total dividends and distributions to shareholders (0.99) (0.50) -- (1.01) (3.87)
---------- ---------- ---------- ----------- -----------
Capital stock transactions:
Anti-dilutive effect due to capital
stock repurchased -- 0.02 0.08 0.12 0.35
Dilutive effect due to shares issued
in reinvestment of distributions -- (0.01) -- -- --
---------- ---------- ---------- ----------- -----------
Total capital stock transactions -- 0.01 0.08 0.12 0.35
---------- ---------- ---------- ----------- -----------
Net asset value, end of year $ 6.90 $ 6.41 $ 9.20 $ 11.31 $ 14.95
========== ========== ========== =========== ===========
Market value, end of year $ 9.00 $ 5.85 $ 8.05 $ 10.590 $ 14.250
========== ========== ========== =========== ===========
Total investment return (a) (b) 77.69% (20.85)% (23.98)% (19.28)% 40.74%
========== ========== ========== =========== ===========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000 omitted) $ 26,565 $ 24,376 $ 35,256 $ 45,980 $ 66,204
Ratio of expenses to average net assets,
net of fee waivers, if any (c) 1.20% 1.80% 1.77% 1.72% 1.55%
Ratio of expenses to average net assets,
excluding fee waivers, if any (d) 1.59% 2.17 % 2.11% 1.83% 1.64%
Ratio of expenses to average net assets,
net of fee waivers, if any (d) 1.25% 1.86% 1.95% 1.72% 1.55%
Ratio of net investment income/(loss) to
average net assets 0.68% (0.13)% (0.64)% (1.12)% (0.59)%
Portfolio turnover 11.88% 29.63% 59.83% 28.26% 101.54%
------------------------------------------------------------------------------------------------------------------------------
# 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) For the year ended December 31, 2000, the Fund paid federal taxes on
realized long-term capital gains. Total investment return, assuming
reinvestment of distributions and federal taxes paid on long-term capital
gains, is (13.88)%.
(c) Expenses are net of fees paid indirectly. (d) Expenses exclude the reduction
for fees paid indirectly.
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
9
--------------------------------------------------------------------------------
CORNERSTONE STRATEGIC VALUE FUND, INC.
NOTES TO THE 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.
The following is a summary of significant accounting policies consistently
followed by the Fund:
MANAGEMENT ESTIMATES: The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
("GAAP") requires management to make certain estimates and assumptions that may
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION: Investments are stated at value in the accompanying
financial statements. All equity securities shall be valued at the closing price
on the exchange or market on which the security is primarily traded ("Primary
Market"). If the security did not trade on the Primary Market, it shall be
valued at the closing price on another exchange where it trades. If there are no
such sale prices, the value shall be the most recent bid, and if there is no
bid, the security shall be valued at the most recent asked. If no pricing
service is available and there are more than two dealers, the value shall be the
mean of the highest bid and lowest ask. If there is only one dealer, then the
value shall be the mean if bid and ask are available, otherwise the value shall
be the bid. All other securities and assets are valued as determined in good
faith by the Board of Directors. Short-term investments having a maturity of 60
days or less are valued on the basis of amortized cost. The Board of Directors
has established general guidelines for calculating fair value of not readily
marketable securities. At December 31, 2003, the Fund held 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.
REPURCHASE AGREEMENTS: The Fund has agreed to purchase securities from financial
institutions subject to the seller's agreement to repurchase them at an
agreed-upon time and price ("repurchase agreements"). The financial institutions
with whom the Fund enters into repurchase agreements are banks and
broker/dealers, which Cornerstone Advisors, Inc. (the Fund's "Manager" or
"Cornerstone") considers creditworthy. The seller under a repurchase agreement
will be required to maintain the value of 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.
--------------------------------------------------------------------------------
10
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. Prior
thereto, the Fund distributed at least annually to shareholders, substantially
all of its net investment income and net realized short-term capital gains, if
any. The Fund determines annually whether to distribute any net realized
long-term capital gains in excess of net realized short-term capital losses,
including capital loss carryovers, if any. An additional distribution may be
made to the extent necessary to avoid the payment of a 4% U.S. federal excise
tax. Dividends and distributions to shareholders are recorded by the Fund on the
ex-dividend date.
The character of dividends and distributions made during the year ended December
31, 2003 from net investment income or net realized gains may differ from their
ultimate characterization for U.S. federal income tax purposes due to U.S.
generally accepted accounting principles/tax differences in the character of
income and expense recognition.
NOTE B. AGREEMENTS
Cornerstone serves as the Fund's investment manager with respect to all
investments. As compensation for its investment management services, Cornerstone
receives from the Fund, an annual fee, calculated weekly and paid monthly, equal
to 1.00% of the Fund's average weekly net assets. Cornerstone has voluntarily
agreed to waive its management fees from the Fund to the extent that monthly
operating expenses exceed 0.10% of average net assets calculated monthly. For
the year ended December 31, 2003, Cornerstone earned $246,113 for investment
management services, of which it waived $82,098. Effective January 1, 2004, the
Manager has voluntarily undertaken to waive its investment management fees to
the extent such total operating expenses exceed an annualized rate of 0.125% in
a month. The Manager may discontinue such undertaking at any time during the
fiscal year without notice to fund shareholders.
Included in the Statement of Operations, under the caption FEES PAID INDIRECTLY,
are expense offsets of $13,413 arising from credits earned on portfolio
transactions executed with a broker, pursuant to a directed brokerage
arrangement.
The Fund paid or accrued approximately $10,600 and $1,300 for the year ended
December 31, 2003 for legal services to Blank Rome LLP ("Blank") and Spitzer &
Feldman P.C. ("Spitzer"), current and former counsel, respectively, to the Fund.
Thomas R. Westle, a current partner of Blank and former partner of Spitzer,
serves as secretary of the Fund.
At December 31, 2003, pursuant to regulatory filings, separate shareholders
owned approximately 7% and 16% of the outstanding shares of the Fund based on
Schedule 13D/A and Schedule 13G/A filings with the Securities and Exchange
Commission on May 9, 2003 and January 9, 2004, respectively.
--------------------------------------------------------------------------------
11
--------------------------------------------------------------------------------
CORNERSTONE STRATEGIC VALUE FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE C. INVESTMENT IN SECURITIES
For the year ended December 31, 2003, purchases and sales of securities, other
than short-term investments, were $2,909,301 and $6,230,232 respectively.
NOTE D. SHARE REPURCHASE PROGRAM
On October 5, 1998, the Fund commenced a share repurchase program for purposes
of enhancing shareholder value and reducing the discount at which the Fund's
shares traded from their net asset value. The Fund had no repurchases for the
year ended December 31, 2003. For the year ended December 31, 2002, the Fund
repurchased 62,000 of its shares for a total cost of $419,744 at a weighted
average discount of 12.93% from net asset value. The discount of individual
repurchases ranged from 6.11% - 17.42%. The Fund expects to continue to
repurchase its outstanding shares at such time and in such amounts as it
believes will further the accomplishment of its foregoing objectives, subject to
review by the Board of Directors. No limit has been placed on the number of
shares to be purchased by the Fund other than those imposed by federal
securities laws.
All purchases are made in accordance with federal securities laws, with shares
repurchased held in treasury effective January 1, 2002.
NOTE E. SECURITIES LENDING
To generate additional income, the Fund may lend up to 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, 2003, was $474,287. Any cash collateral received is reinvested into
repurchase agreements, which in turn is collateralized by various U.S.
Government and Agency securities. These repurchase agreements have been
segregated to satisfy the future commitment to return the cash collateral.
During the year ended December 31, 2003, the Fund earned $529 in securities
lending income which is included under the caption INTEREST in the Statement of
Operations.
NOTE F. COLLATERAL FOR REPURCHASE AGREEMENT
Listed below is the collateral associated with the repurchase agreement with
Bear, Stearns & Co. Inc. outstanding at December 31, 2003.
PRINCIPAL
AMOUNT MARKET
ISSUER (000'S) MATURITY VALUE
------------------ ----------------------------------
United States
Treasury Bond,
(interest only) $ 260 11/15/15 $ 145,915
==========
NOTE G. FEDERAL INCOME TAXES
Income and capital gains distributions are determined in accordance with federal
income tax
--------------------------------------------------------------------------------
12
--------------------------------------------------------------------------------
CORNERSTONE STRATEGIC VALUE FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
--------------------------------------------------------------------------------
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 characteristics of dividends and distributions paid during the year
ended December 31, 2003 were ordinary income and return-of-capital of $168,247
and $3,636,161, respectively.
At December 31, 2003, the components of distributable earnings on a tax basis,
for the Fund were as follows:
Capital loss carryforward $ (736,070)
Unrealized appreciation 2,114,454
-------------
Total gain $1,378,384
=============
Under current tax law, certain capital losses realized after October 31 within a
taxable year may be deferred and treated as occurring on the first day of the
following tax year ("Post-October losses"). For the tax period ended December
31, 2003, the Fund incurred and elected to defer net realized losses from
investments of $80,133.
At December 31, 2003, the Fund had a capital loss carryforward for U.S. federal
income tax purposes of $736,070 of which $142,060 expires in 2009, $442,997
expires in 2010 and $151,013 expires in 2011.
At December 31, 2003, the identified cost for federal income tax purposes, as
well as the gross unrealized appreciation from investments for those securities
having an excess of value over cost, gross unrealized depreciation from
investments for those securities having an excess of cost over value and the net
unrealized appreciation from investments were $24,952,427, $3,728,026,
$(1,613,572) and $2,114,454, respectively.
At December 31, 2003, the Fund reclassified $3,636,161 from distributions in
excess of net investment income to paid-in capital, to adjust for current period
permanent book/tax differences. Net assets were not affected by the
reclassification.
NOTE H. SUBSEQUENT EVENT
During a meeting held on February 20, 2004, the Fund's Board of Directors
approved two separate mergers (the "Mergers") of the Fund with Progressive
Return Fund, Inc. ("PGF") and with Investors First Fund, Inc. ("MGC"). If either
or both of the separate Mergers receives shareholder approval, each of PGF and
MGC will cease to exist, the Fund will be the surviving legal corporation and
each share of common stock of PGF and MGC will be converted into an equivalent
dollar amount of full and fractional shares of common stock of the Fund based on
the relative net asset values of the Fund and each of PGF and MGC, respectively.
Consummation of each of the separate Mergers are subject to a number of
conditions, including shareholder approval and certain regulatory approvals. The
Mergers of the Fund with either PGF or MGC are separate decisions and not
contingent on each other. It is proposed that the Mergers be effective on or
about May 28, 2004.
--------------------------------------------------------------------------------
13
REPORT OF INDEPENDENT ACCOUNTANTS
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, 2003, and the related statement of operations for the year
then ended, and the statement of changes in net assets and the financial
highlights for each of the two years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits. The financial
highlights for each of the three years in the period ended December 31, 2001
have been audited by other auditors, whose report dated February 18, 2002
expressed an unqualified opinion on such financial highlights.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2003 by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Cornerstone Strategic Value Fund, Inc. as of December 31, 2003, the results of
its operations for the year then ended, and the changes in its net assets and
the financial highlights for each of the two years in the period then ended, in
conformity with accounting principles generally accepted in the United States of
America.
TAIT, WELLER & BAKER
--------------------------
Philadelphia, Pennsylvania
February 13, 2004
--------------------------------------------------------------------------------
14
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, 2003) as to the U.S. federal
tax status of dividends and distributions received by the Fund's shareholders in
respect of such fiscal year. During the year ended December 31, 2003 the
following dividends and distributions per share were paid by the Fund:
PAYMENT DATE: 1/31/03 2/28/03 3/31/03 4/30/03 5/30/03 6/30/03
------- ------- ------- ------- ------- -------
Ordinary Income: $ 0.0036 $ 0.0036 $ 0.0036 $ 0.0036 $ 0.0036 $ 0.0036
Return-of-Capital: $ 0.0789 $ 0.0789 $ 0.0789 $ 0.0789 $ 0.0789 $ 0.0789
-------- -------- -------- -------- -------- --------
Total: $ 0.0825 $ 0.0825 $ 0.0825 $ 0.0825 $ 0.0825 $ 0.0825
======== ======== ======== ======== ======== ========
PAYMENT DATE: 7/31/03 8/29/03 9/30/03 10/31/03 11/28/03 12/31/03
-------- -------- -------- -------- -------- --------
Ordinary Income: $ 0.0036 $ 0.0036 $ 0.0036 $ 0.0036 $ 0.0036 $ 0.0038
Return-of-Capital: $ 0.0789 $ 0.0789 $ 0.0789 $ 0.0789 $ 0.0789 $ 0.0832
-------- -------- -------- -------- -------- --------
Total: $ 0.0825 $ 0.0825 $ 0.0825 $ 0.0825 $ 0.0825 $ 0.0870
======== ======== ======== ======== ======== ========
Ordinary income dividends should be reported as dividend income on Form 1040. To
the extent that the distributions represent a return of your investment they are
not taxed as ordinary income dividends and are sometimes referred to as
nontaxable distributions. A return-of-capital distribution reduces the cost
basis of your shares in the Fund.
The Fund has met the requirements to pass through all ordinary income as
qualified dividends as noted on Box 1B on Form 1099-DIV. Please note that to
utilize the lower tax rate for qualifying dividend income shareholders must have
held their shares in the Fund for 60 days or more.
Foreign shareholders will generally be subject to U.S. withholding tax on the
amount of their distribution(s).
In general, distributions received by tax-exempt recipients (E.G., IRA's and
Keoghs) need not be reported as taxable income for U.S. federal income tax
purposes. However, some retirement trusts (E.G., corporate, Keogh and 403(b)(7)
plans) may need this information for their annual information reporting.
Shareholders are strongly advised to consult their own tax advisers with respect
to the tax consequences of their investment in the Fund.
--------------------------------------------------------------------------------
15
ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND OFFICERS (UNAUDITED)
POSITION(S) PRINCIPAL OCCUPATION POSITION WITH FUND
NAME AND ADDRESS (AGE)* HELD WITH FUND OVER LAST 5 YEARS SINCE
-------------------------------- ------------------- -------------------------------------------- --------------------
Ralph W. Bradshaw** (53) Chairman of the President, Cornerstone Advisors, Inc.; 1998; current term
Board of Financial Consultant; Vice President, Deep ends at the 2005
Directors and Discount Advisors, Inc. (1993-1999); Annual Meeting
President Previous Director of The Austria Fund,
Inc.; Director of Investors First Fund,
Inc., Cornerstone Total Return Fund, Inc.
and Progressive Return Fund, Inc.
Thomas H. Lenagh (81) Director Chairman of the Board of Photonics
Products Group; Independent Financial 1987; current term
Adviser; Director of Investors First Fund, ends at the 2006
Inc., Cornerstone Total Return Fund, Inc., Annual Meeting
Progressive Return Fund, Inc., The Adams
Express Company and Petroleum and
Resources Corporation.
Edwin Meese III (72) Director Distinguished Fellow, The Heritage 2001; current
Foundation, Washington D.C.; Distinguished term ends at the
Visiting Fellow at the Hoover Institution, 2005 Annual Meeting
Stanford University; Distinguished Senior
Fellow at the Institute of United States
Studies, University of London; Senior
Adviser, Revelation L.P.; Formerly U.S.
Attorney General under President Ronald
Reagan; Director of Investors First Fund,
Inc., Cornerstone Total Return Fund, Inc.
and Progressive Return Fund, Inc.
--------------------------------------------------------------------------------
16
ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND OFFICERS (UNAUDITED)
(CONTINUED)
POSITION(S) PRINCIPAL OCCUPATION POSITION WITH FUND
NAME AND ADDRESS (AGE)* HELD WITH FUND OVER LAST 5 YEARS SINCE
-------------------------------- ------------------- -------------------------------------------- --------------------
Scott B. Rogers (48) Director Chief Executive Officer, Asheville 2000; current
Buncombe Community Christian Ministry; term ends at the
President, ABCCM Doctor's Medical Clinic; 2006 Annual
Director, Faith Partnerships Inc.; Meeting
Director, A-B Vision Board; Appointee, NC
Governor's Commission on Welfare to Work;
Chairman and Director, Recycling
Unlimited; Director, Interdenominational
Ministerial Alliance; Director of
Progressive Return Fund, Inc. and
Cornerstone Total Return Fund, Inc.
Andrew A. Strauss (50) Director Attorney and senior member of Strauss & 2000; current
Associates, P.A., Attorneys, Asheville and term ends at the
Hendersonville, NC; previous President of 2004 Annual
White Knight Healthcare, Inc. and LMV Meeting
Leasing, Inc., a wholly owned subsidiary
of Xerox Credit Corporation; Director of
Investors First Fund, Inc., Cornerstone
Total Return Fund, Inc., Progressive
Return Fund, Inc., Investors First Fund,
Inc., Memorial Mission Hospital
Foundation, Deerfield Episcopal Retirement
Community and Asheville Symphony.
Glenn W. Wilcox, Sr. (72) Director Chairman of the Board and Chief Executive 2000; current
Officer of Wilcox Travel Agency, Inc.; term ends at
Director, Champion Industries, Inc.; the 2004
Chairman of Tower Associates, Inc. (a real Annual
estate venture); Director and Chairman of Meeting
Audit Committee Investors First Fund,
Inc.; Director, Wachovia Corp.; Board
Trustee Appalachian State University;
Director and Chairman of Audit Committee
of Progressive Return Fund, Inc. and
Cornerstone Total Return Fund, Inc.
--------------------------------------------------------------------------------
17
ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND OFFICERS (UNAUDITED)
(CONCLUDED)
POSITION(S) PRINCIPAL OCCUPATION POSITION WITH FUND
NAME AND ADDRESS (AGE)* HELD WITH FUND OVER LAST 5 YEARS SINCE
-------------------------------- ------------------- -------------------------------------------- --------------------
Gary A. Bentz** (47) Director, Vice Chief Financial Officer, Chairman Director since
President and and Shareholder of Cornerstone Advisors, 2002; current term
Treasurer Inc.; Previous Director of The Austria ends at the 2006
Fund, Inc.; Financial Consultant, Annual Meeting,
Certified Public Accountant; Chief Vice President and
Financial Officer of Deep Discount Treasurer since
Advisors, Inc. (1993-2000); Director, Vice 2001
President and Treasurer of Cornerstone
Total Return Fund, Inc. and Progressive
Return Fund, Inc.
Thomas R. Westle (50) Secretary Partner, Blank Rome LLP (October 31, 2003 2000
405 Lexington Avenue - Present); prior thereto Partner, Spitzer
New York, NY 10174 & Feldman P.C. (May, 1998-October 30,
2003).
--------------------------------------------------------------------------------
* The mailing address of each Director with respect to the Fund's operation is
383 Madison Ave. -23rd Floor, New York, NY 10179. **Designates a director who is
an "interested person" of the Fund as defined by the Investment Company Act of
1940, as amended. Messrs. Bradshaw and Bentz are interested persons of the Fund
by virtue of their current positions with the Investment Manager of the Fund.
--------------------------------------------------------------------------------
18
DESCRIPTION OF DIVIDEND REINVESTMENT & CASH PLAN (UNAUDITED)
Shareholders who have Shares registered directly in their own names
automatically participate in the Fund's Dividend Reinvestment & Cash Plan (the
"Plan"), unless and until an election is made to withdraw from the Plan on
behalf of such participating shareholders. Shareholders who do not wish to have
distributions automatically reinvested should so notify American Stock Transfer
& Trust Co. (the "Agent") at P.O. Box 922, Wall Street Station, New York, NY
10269-0560 or call (877) 248-6416. Under the Plan, all of the Fund's dividends
and other distributions to shareholders are reinvested in full and fractional
Shares as described below.
When the Fund declares an income dividend or a capital gain or other
distribution (each, a "Dividend" and collectively, "Dividends"), the Agent, on
the shareholders' behalf, will: (i) receive additional authorized shares from
the Fund either newly issued or repurchased from shareholders by the Fund and
held as treasury stock ("Newly Issued Shares") or, (ii) at the sole discretion
of the Board of Directors, be authorized to purchase outstanding shares on the
open market, on the American Stock Exchange, LLC or elsewhere, with cash
allocated to it by the Fund ("Open Market Purchases").
Shares acquired by the Agent in Open Market Purchases will be allocated to the
reinvesting shareholders based on the average cost of such Open Market
Purchases. Alternatively, the Agent will allocate Newly Issued Shares to the
reinvesting shareholders at a price equal to the average closing price of the
Fund over the five trading days preceding the payment date of such dividend.
Registered shareholders who acquire their shares through Open Market Purchases
and who do not wish to have their Dividends automatically reinvested should so
notify the Fund in writing. If a Shareholder has not elected to receive cash
Dividends and the Agent does not receive notice of an election to receive cash
Dividends prior to the record date of any dividend, the shareholder will
automatically receive such Dividends in additional Shares.
Participants in the Plan may withdraw from the Plan by providing written notice
to the Agent at least 30 days prior to the applicable Dividend payment date.
When a participant withdraws from the Plan, or upon termination of the Plan as
provided below, certificates for whole shares credited to his/her account under
the Plan will, upon request, be issued. Whether or not a participant requests
that certificates for whole shares be issued, a cash payment will be made for
any fraction of a Share credited to such account.
The Agent will maintain all shareholder accounts in the Plan and furnish written
confirmations of all transactions in the accounts, including information needed
by shareholders for personal and tax records. The Agent will hold shares in the
account of each Plan participant in non-certificated form in the name of the
participant, and each shareholder's proxy will include those shares purchased
pursuant to the Plan. Each participant, nevertheless, has the right to receive
certificates for whole shares owned. The Agent will distribute all proxy
solicitation materials to participating shareholders.
In the case of shareholders, such as banks, brokers or nominees, that hold
shares for others who are beneficial owners participating in the Plan, the Agent
will administer the Plan on the basis of the number of shares certified from
time to time by the record shareholder as representing the total amount of
shares registered in the Shareholder's name and held for the account of
beneficial owners participating in the Plan.
There will be no charge to participants for reinvesting Dividends other than
their share of brokerage commissions as discussed below. The Agent's fees for
administering the Plan and
--------------------------------------------------------------------------------
19
DESCRIPTION OF DIVIDEND REINVESTMENT & CASH PLAN (UNAUDITED) (CONCLUDED)
handling the reinvestment of Dividends will be paid by the Fund. Each
participant's account will be charged a pro-rata share of brokerage commissions
incurred with respect to the Agent's Open Market Purchases in connection with
the reinvestment of Dividends.
Brokerage charges for purchasing small amounts of shares for individual accounts
through the Plan are expected to be less than the usual brokerage charges for
such transactions because the Agent will be purchasing shares for all the
participants in blocks and pro-rating the lower commission that may be
attainable.
The automatic reinvestment of Dividends will not relieve participants of any
income tax that may be payable on such Dividends. Participants who receive
shares pursuant to the Plan as described above will recognize taxable income in
the amount of the fair market value of those shares. In the case of non-U.S.
participants whose Dividends are subject to U.S. income tax withholding and in
the case of participants subject to 28% federal backup withholding, the Agent
will reinvest Dividends after deduction of the amount required to be withheld.
The Fund reserves the right to amend or terminate the Plan by written notice to
participants. All correspondence concerning the Plan should be directed to the
Agent at the address referred to in the first paragraph of this section.
--------------------------------------------------------------------------------
20
SUMMARY OF GENERAL INFORMATION
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
Effective February 21, 2003, 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 this report.
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21
PRIVACY POLICY NOTICE
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 transactions with the Fund, its affiliates, or
others (such as your account number and balance, payment history,
parties to transactions, cost basis information, and other financial
information).
CATEGORIES OF INFORMATION THE FUND DISCLOSES. The Fund does not disclose any
nonpublic personal information about their current or former shareholders to
unaffiliated third parties, except as required or permitted by law. The Fund is
permitted by law to disclose all of the information it collects, as described
above, to its service providers (such as the Fund's custodian, administrator and
transfer agent) to process your transactions and otherwise provide services to
you.
CONFIDENTIALITY AND SECURITY. The Fund restricts access to your nonpublic
personal information to those persons who require such information to provide
products or services to you. The Fund maintains physical, electronic and
procedural safeguards that comply with federal standards to guard your nonpublic
personal information.
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22
CORNERSTONE STRATEGIC VALUE FUND, INC.
DIRECTORS AND CORPORATE OFFICERS
Ralph W. Bradshaw Chairman of the Board of
Directors and President
Gary A. Bentz Director, Vice President
and Treasurer
Thomas H. Lenagh Director
Edwin Meese III Director
Scott B. Rogers Director
Andrew A. Strauss Director
Glenn W. Wilcox, Sr. Director
Thomas R. Westle Secretary
STOCK TRANSFER AGENT AND
INVESTMENT MANAGER REGISTRAR
Cornerstone Advisors, Inc. American Stock Transfer &
One West Pack Square Trust Co.
Suite 1650 59 Maiden Lane
Asheville, NC 28801 New York, NY 10038
ADMINISTRATOR INDEPENDENT ACCOUNTANTS
Bear Stearns Funds Tait, Weller & Baker
Management Inc. 1818 Market Street
383 Madison Avenue Suite 2400
New York, NY 10179 Philadelphia, PA 19103
CUSTODIAN LEGAL COUNSEL
Custodial Trust Company Blank Rome LLP
101 Carnegie Center 405 Lexington Avenue
Princeton, NJ 08540 New York, NY 10174
EXECUTIVE OFFICES
383 Madison Avenue
New York, NY 10179
For shareholder inquiries, registered shareholders should call (800) 937-5449.
For general inquiries, please call (212) 272-3550.
ITEM 2. CODE OF ETHICS.
(a) Disclose whether, as of the end of the period covered by the report, the
registrant has adopted a code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or a
third party. If the registrant has not adopted such a code of ethics,
explain why it has not done so.
THE REGISTRANT HAS ADOPTED A CODE OF ETHICS APPLICABLE TO ITS CHIEF
EXECUTIVE OFFICER, PRESIDENT, CHIEF FINANCIAL OFFICER, OR PERSONS
PERFORMING SIMILAR FUNCTIONS. A COPY OF THE CODE IS FILED AS EXHIBIT
10(A)(1) TO THIS FORM. THERE WERE NO AMENDMENTS TO THE CODE DURING THE YEAR
ENDED DECEMBER 31, 2003. THERE WERE NO WAIVERS OR IMPLICIT WAIVERS FROM THE
CODE GRANTED BY THE REGISTRANT DURING THE YEAR ENDED DECEMBER 31, 2003.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a) (1) Disclose that the registrant's board of directors has
determined that the registrant either:
1
(i) Has at least one audit committee financial expert serving on its
audit committee; or
(ii) Does not have an audit committee financial expert serving on its
audit committee.
(2) If the registrant provides the disclosure required by paragraph
(a)(1)(i) of this Item, it must disclose the name of the audit committee
financial expert and whether that person is "independent." In order to be
considered "independent" for purposes of this Item, a member of an audit
committee may not, other than in his or her capacity as a member of the
audit committee, the board of directors, or any other board committee:
(i) Accept directly or indirectly any consulting, advisory, or other
compensatory fee from the issuer; or
(ii) Be an "interested person" of the investment company as defined in
Section 2(a)(19) of the Act (15 U.S.C. 80a- 2(a)(19)).
(3) If the registrant provides the disclosure required by paragraph
(a)(1)(ii) of this Item, it must explain why it does not have an audit
committee financial expert.
THE REGISTRANT'S BOARD OF DIRECTORS HAS DETERMINED THAT IT DOES NOT HAVE AN
AUDIT COMMITTEE FINANCIAL EXPERT SERVING ON ITS AUDIT COMMITTEE. AT THIS
TIME, THE REGISTRANT BELIEVES THAT THE EXPERIENCE PROVIDED BY EACH MEMBER
OF THE AUDIT COMMITTEE TOGETHER OFFER THE REGISTRANT ADEQUATE OVERSIGHT FOR
THE REGISTRANT'S LEVEL OF FINANCIAL COMPLEXITY.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Disclose, under the caption AUDIT FEES, the aggregate fees billed
for each of the last two fiscal years for professional services rendered by the
principal accountant for the audit of the registrant's annual financial
statements or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for those fiscal
years.
THE AGGREGATE FEES BILLED FOR PROFESSIONAL SERVICES RENDERED BY ITS INDEPENDENT
ACCOUNTANTS, TAIT WELLER & BAKER, FOR THE AUDITS OF THE REGISTRANT'S ANNUAL AND
SEMI-ANNUAL FINANCIAL STATEMENTS FOR 2003 AND 2002 WERE $11,000 FOR EACH OF THE
TWO YEARS.
(b) Disclose, under the caption AUDIT-RELATED FEES, the aggregate fees
billed in each of the last two fiscal years for assurance and related services
by the principal accountant that are reasonably related to the performance of
the audit of the registrant's financial statements and are not reported under
paragraph (a) of this Item. Registrants shall describe the nature of the
services comprising the fees disclosed under this category. THERE WERE NO
AUDIT-RELATED FEES IN 2003 AND 2002.
(c) Disclose, under the caption TAX FEES, the aggregate fees billed in
each of the last two fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and tax planning.
Registrants shall describe the nature of the services comprising the fees
disclosed under this category.
THE AGGREGATE FEES BILLED TO REGISTRANT FOR PROFESSIONAL SERVICES RENDERED BY
TAIT, WELLER & BAKER FOR THE REVIEW OF REGISTRANTS EXCISE TAX CALCULATIONS AND
PREPARATIONS OF FEDERAL, STATE AND EXCISE TAX RETURNS FOR 2003 AND 2002 WERE
$2,000 FOR EACH YEAR OF THE TWO YEARS.
(d) Disclose, under the caption ALL OTHER FEES, the aggregate fees
billed in each of the last two fiscal years for products and services provided
by the principal accountant, other than the services reported in paragraphs (a)
through (c) of this Item.
THE AGGREGATE FEES BILLED TO REGISTRANT BY TAIT, WELLER & BAKER LLP OTHER THAN
FOR THE SERVICES REFERENCED ABOVE FOR 2003 WAS $0 AND FOR 2002 WAS $2,500, WHICH
RELATED TO PROPOSED MERGER-RELATED WORK. IN ADDITION, PRICEWATERHOUSECOOPERS
LLP WAS PAID $1,925 FOR MERGER-RELATED WORK COMPLETED IN 2002.
(e) (1) Disclose the audit committee's pre-approval policies and
procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
PURSUANT TO ITS CHARTER, THE REGISTRANT'S AUDIT COMMITTEE PRE-APPROVES ALL AUDIT
SERVICES PROVIDED BY THE REGISTRANT'S PRINCIPAL ACCOUNTANT FOR THE REGISTRANT
AND ALL PERMISSIBLE NON-AUDIT SERVICES PROVIDED BY THE REGISTRANT'S PRINCIPAL
ACCOUNTANT FOR THE REGISTRANT, ITS INVESTMENT ADVISER AND ANY ENTITY
CONTROLLING, CONTROLLED BY, OR UNDER COMMON CONTROL WITH THE INVESTMENT ADVISER
("ADVISER AFFILIATE") THAT PROVIDES ONGOING SERVICES TO THE FUND, IF THE
ENGAGEMENT BY THE INVESTMENT ADVISER OR ADVISER AFFILIATE RELATES DIRECTLY TO
THE OPERATIONS AND FINANCIAL REPORTING OF THE REGISTRANT.
2
(2) Disclose the percentage of services described in each of paragraphs (b)
through (d) of this Item that were approved by the audit committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
NO SERVICES INCLUDED IN (B) - (D) ABOVE WERE APPROVED PURSUANT TO PARAGRAPH
(C)(7)(I)(C) OF RULE 2-01 OF REGULATION S-X.
(f) If greater than 50 percent, disclose the percentage of hours
expended on the principal accountant's engagement to audit the registrant's
financial statements for the most recent fiscal year that were attributed to
work performed by persons other than the principal accountant's full-time,
permanent employees.
NOT APPLICABLE.
(g) Disclose the aggregate non-audit fees billed by the registrant's
accountant for services rendered to the registrant, and rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the adviser that provides ongoing services to the registrant for
each of the last two fiscal years of the registrant.
THE AGGREGATE FEES BILLED FOR THE MOST RECENT FISCAL YEAR AND THE PRECEDING
FISCAL YEAR BY THE REGISTRANT'S PRINCIPAL ACCOUNTANT FOR NON-AUDIT SERVICES
RENDERED TO THE REGISTRANT, ITS INVESTMENT ADVISER, AND ADVISER AFFILIATE THAT
PROVIDES ONGOING SERVICES TO THE REGISTRANT WERE $2,000 AND $4,500,
RESPECTIVELY. SUCH AMOUNTS RELATE SOLELY TO THE AMOUNTS PREVIOUSLY DISCLOSED IN
ITEM 4(C) -(D). IN ADDITION, PRICEWATERHOUSECOOPERS LLP WAS PAID $1,925 FOR
MERGER-RELATED WORK COMPLETED IN 2002.
(h) Disclose whether the registrant's audit committee of the board of
directors has considered whether the provision of nonaudit services that were
rendered to the registrant's investment adviser (not including any subadviser
whose role is primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity controlling, controlled
by, or under common control with the investment adviser that provides ongoing
services to the registrant that were not pre-approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the
principal accountant's independence.
ALL NON-AUDIT SERVICES RENDERED IN (G) ABOVE WERE PRE-APPROVED BY THE
REGISTRANT'S AUDIT COMMITTEE. TAIT, WELLER & BAKER DID NOT PROVIDE ANY NON-AUDIT
RELATED SERVICES TO THE REGISTRANT'S INVESTMENT ADVISER, OR ANY ENTITY
CONTROLLING, CONTROLLED OR UNDER COMMON CONTROL WITH THE INVESTMENT ADVISER.
ITEMS 5. Audit Committee of Listed Registrants - If the registrant is a listed
issuer as defined in Rule 10A-3 under the Exchange Act (17CRF 240.10A-3) state
whether or not the registrant has a separately-designated standing audit
committee established in accordance with Section 3(a)(58)A of the Exchange Act
(15 U.S.C. 78c(a)(A)). If the registrant has such a committee, however
designated, identify each committee member. If the entire board of directors is
acting as the registrant's audit committee as specified in Section 3(a)(58)(B)
of the Exchange Act (15U.S.C. 78c(a)(58)(B), so state.
THE MEMBERS OF THE AUDIT COMMITTEE ARE GLENN W. WILCOX, SR., THOMAS H. LENAGH,
EDWIN MEESE III, SCOTT B. ROGERS AND ANDREW A. STRAUSS.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
ISS Proxy Voting Guidelines Summary
The following is a condensed version of all proxy voting recommendations
contained in The ISS Proxy Voting Manual.
1. Operational Items
ADJOURN MEETING
Generally vote AGAINST proposals to provide management with the authority to
adjourn an annual or special meeting absent compelling reasons to support the
proposal. AMEND QUORUM REQUIREMENTS Vote AGAINST proposals to reduce quorum
requirements for shareholder meetings below a majority of the shares outstanding
unless there are compelling reasons to support the proposal.
AMEND MINOR BYLAWS
3
Vote FOR bylaw or charter changes that are of a housekeeping nature (updates or
corrections). CHANGE COMPANY NAME Vote FOR proposals to change the corporate
name.
CHANGE DATE, TIME, OR LOCATION OF ANNUAL MEETING
Vote FOR management proposals to change the date/time/location of the annual
meeting unless the proposed change is unreasonable. Vote AGAINST shareholder
proposals to change the date/time/location of the annual meeting unless the
current scheduling or location is unreasonable.
RATIFYING AUDITORS
Vote FOR proposals to ratify auditors, unless any of the following apply: An
auditor has a financial interest in or association with the company, and is
therefore not independent Fees for non-audit services are excessive, or There is
reason to believe that the independent auditor has rendered an opinion which is
neither accurate nor indicative of the company's financial position. Vote
CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit
their auditors from engaging in non-audit services.
Vote FOR shareholder proposals asking for audit firm rotation, unless the
rotation period is so short (less than five years) that it would be unduly
burdensome to the company. Transact Other Business Vote AGAINST proposals to
approve other business when it appears as voting item.
2. Board of Directors
Voting on Director Nominees in Uncontested Elections
Votes on director nominees should be made on a CASE-BY-CASE basis, examining the
following factors: composition of the board and key board committees, attendance
at board meetings, corporate governance provisions and takeover activity,
long-term company performance relative to a market index, directors' investment
in the company, whether the chairman is also serving as CEO, and whether a
retired CEO sits on the board. However, there are some actions by directors that
should result in votes being withheld. These instances include directors who:
Attend less than 75 percent of the board and committee meetings without a valid
excuse Implement or renew a dead-hand or modified dead-hand poison pill Ignore a
shareholder proposal that is approved by a majority of the shares outstanding
Ignore a shareholder proposal that is approved by a majority of the votes cast
for two consecutive years Failed to act on takeover offers where the majority of
the shareholders tendered their shares Are inside directors or affiliated
outsiders and sit on the audit, compensation, or nominating committees Are
inside directors or affiliated outsiders and the full board serves as the audit,
compensation, or nominating committee or the company does not have one of these
committees Are audit committee members and the non-audit fees paid to the
auditor are excessive. In addition, directors who enacted egregious corporate
governance policies or failed to replace management as appropriate would be
subject to recommendations to withhold votes. AGE LIMITS Vote AGAINST
shareholder proposals to impose a mandatory retirement age for outside
directors.
Board Size
Vote FOR proposals seeking to fix the board size or designate a range for the
board size. Vote AGAINST proposals that give management the ability to alter the
size of the board outside of a specified range without shareholder approval.
CLASSIFICATION/DECLASSIFICATION OF THE BOARD Vote AGAINST proposals to classify
the board.
Vote FOR proposals to repeal classified boards and to elect all directors
annually.
CUMULATIVE VOTING
Vote AGAINST proposals to eliminate cumulative
voting.
4
Vote proposals to restore or permit cumulative voting on a CASE-BY-CASE basis
relative to the company's other governance provisions. DIRECTOR AND OFFICER
INDEMNIFICATION AND LIABILITY PROTECTION Proposals on director and officer
indemnification and liability protection should be evaluated on a CASE-BY-CASE
basis, using Delaware law as the standard. Vote AGAINST proposals to eliminate
entirely directors' and officers' liability for monetary damages for violating
the duty of care.
Vote AGAINST indemnification proposals that would expand coverage beyond just
legal expenses to acts, such as negligence, that are more serious violations of
fiduciary obligation than mere carelessness.
Vote FOR only those proposals providing such expanded coverage in cases when a
director's or officer's legal defense was unsuccessful if both of the following
apply: The director was found to have acted in good faith and in a manner that
he reasonably believed was in the best interests of the company, and Only if the
director's legal expenses would be covered.
ESTABLISH/AMEND NOMINEE QUALIFICATIONS
Vote CASE-BY-CASE on proposals that establish or amend director qualifications.
Votes should be based on how reasonable the criteria are and to what degree they
may preclude dissident nominees from joining the board.
Vote AGAINST shareholder proposals requiring two candidates per board seat.
FILLING VACANCIES/REMOVAL OF DIRECTORS Vote AGAINST proposals that provide that
directors may be removed only for cause. Vote FOR proposals to restore
shareholder ability to remove directors with or without cause.
Vote AGAINST proposals that provide that only continuing directors may elect
replacements to fill board vacancies. Vote FOR proposals that permit
shareholders to elect directors to fill board vacancies.
INDEPENDENT CHAIRMAN (SEPARATE CHAIRMAN/CEO)
Vote on a CASE-BY-CASE basis shareholder proposals requiring that the positions
of chairman and CEO be held separately. Because some companies have governance
structures in place that counterbalance a combined position, the following
factors should be taken into account in determining whether the proposal
warrants support:
Designated lead director appointed from the ranks of the independent board
members with clearly delineated duties Majority of independent directors on
board All-independent key committees Committee chairpersons nominated by the
independent directors CEO performance reviewed annually by a committee of
outside directors Established governance guidelines Company performance.
MAJORITY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF COMMITTEES
Vote FOR shareholder proposals asking that a majority or more of directors be
independent unless the board composition already meets the proposed threshold by
ISS's definition of independence.
Vote FOR shareholder proposals asking that board audit, compensation, and/or
nominating committees be composed exclusively of independent directors if they
currently do not meet that standard.
STOCK OWNERSHIP REQUIREMENTS
Generally vote AGAINST shareholder proposals that mandate a minimum amount of
stock that directors must own in order to qualify as a director or to remain on
the board. While ISS favors stock ownership on the part of directors, the
company should determine the appropriate ownership requirement.
TERM LIMITS
Vote AGAINST shareholder proposals to limit the tenure of outside directors.
5
3. PROXY CONTESTS
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Votes in a contested election of directors must be evaluated on a CASE-BY-CASE
basis, considering the following factors: Long-term financial performance of the
target company relative to its industry; management's track record Background to
the proxy contest Qualifications of director nominees (both slates) Evaluation
of what each side is offering shareholders as well as the likelihood that the
proposed objectives and goals can be met; and stock ownership positions.
REIMBURSING PROXY SOLICITATION EXPENSES Voting to reimburse proxy solicitation
expenses should be analyzed on a CASE-BY-CASE basis. In cases where ISS
recommends in favor of the dissidents, we also recommend voting for reimbursing
proxy solicitation expenses. CONFIDENTIAL VOTING Vote FOR shareholder proposals
requesting that corporations adopt confidential voting, use independent vote
tabulators and use independent inspectors of election, as long as the proposal
includes a provision for proxy contests as follows: In the case of a contested
election, management should be permitted to request that the dissident group
honor its confidential voting policy. If the dissidents agree, the policy
remains in place. If the dissidents will not agree, the confidential voting
policy is waived. Vote FOR management proposals to adopt confidential voting.
4. ANTITAKEOVER DEFENSES AND VOTING RELATED ISSUES
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS/NOMINATIONS
Votes on advance notice proposals are determined on a CASE-BY-CASE basis, giving
support to those proposals which allow shareholders to submit proposals as close
to the meeting date as reasonably possible and within the broadest window
possible.
AMEND BYLAWS WITHOUT SHAREHOLDER CONSENT
Vote AGAINST proposals giving the board exclusive authority to amend the bylaws.
Vote FOR proposals giving the board the ability to amend the bylaws in addition
to shareholders.
POISON PILLS
Vote FOR shareholder proposals that ask a company to submit its poison pill for
shareholder ratification. Review on a CASE-BY-CASE basis shareholder proposals
to redeem a company's poison pill. Review on a CASE-BY-CASE basis management
proposals to ratify a poison pill. SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Vote AGAINST proposals to restrict or prohibit shareholder ability to take
action by written consent.
Vote FOR proposals to allow or make easier shareholder action by written
consent. SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS Vote AGAINST proposals to
restrict or prohibit shareholder ability to call special meetings.
Vote FOR proposals that remove restrictions on the right of shareholders to act
independently of management. SUPERMAJORITY VOTE REQUIREMENTS Vote AGAINST
proposals to require a supermajority shareholder vote. Vote FOR proposals to
lower supermajority vote requirements.
5. MERGERS AND CORPORATE RESTRUCTURINGS
APPRAISAL RIGHTS
Vote FOR proposals to restore, or provide shareholders with, rights of
appraisal. ASSET PURCHASES Vote CASE-BY-CASE on asset purchase proposals,
considering the following factors: Purchase price Fairness opinion Financial and
strategic benefits How the deal was negotiated Conflicts of interest Other
alternatives for the business Noncompletion risk.
6
ASSET SALES
Votes on asset sales should be determined on a CASE-BY-CASE basis, considering
the following factors: Impact on the balance sheet/working capital Potential
elimination of diseconomies Anticipated financial and operating benefits
Anticipated use of funds Value received for the asset Fairness opinion How the
deal was negotiated Conflicts of interest.
BUNDLED PROPOSALS
Review on a CASE-BY-CASE basis bundled or "conditioned" proxy proposals. In the
case of items that are conditioned upon each other, examine the benefits and
costs of the packaged items. In instances when the joint effect of the
conditioned items is not in shareholders' best interests, vote against the
proposals. If the combined effect is positive, support such proposals.
CONVERSION OF SECURITIES
Votes on proposals regarding conversion of securities are determined on a
CASE-BY-CASE basis. When evaluating these proposals the investor should review
the dilution to existing shareholders, the conversion price relative to market
value, financial issues, control issues, termination penalties, and conflicts of
interest.
Vote FOR the conversion if it is expected that the company will be subject to
onerous penalties or will be forced to file for bankruptcy if the transaction is
not approved. CORPORATE REORGANIZATION/DEBT RESTRUCTURING/PREPACKAGED BANKRUPTCY
PLANS/REVERSE LEVERAGED BUYOUTS/WRAP PLANS Votes on proposals to increase common
and/or preferred shares and to issue shares as part of a debt restructuring plan
are determined on a CASE-BY-CASE basis, taking into consideration the following:
Dilution to existing shareholders' position Terms of the offer Financial issues
Management's efforts to pursue other alternatives Control issues Conflicts of
interest.
Vote FOR the debt restructuring if it is expected that the company will file for
bankruptcy if the transaction is not approved. FORMATION OF HOLDING COMPANY
Votes on proposals regarding the formation of a holding company should be
determined on a CASE-BY-CASE basis, taking into consideration the following:
The reasons for the change
Any financial or tax benefits
Regulatory benefits increases in capital structure Changes to the articles of
incorporation or bylaws of the company.
Absent compelling financial reasons to recommend the transaction, vote AGAINST
the formation of a holding company if the transaction would include either of
the following: Increases in common or preferred stock in excess of the allowable
maximum as calculated by the ISS Capital Structure model Adverse changes in
shareholder rights
GOING PRIVATE TRANSACTIONS (LBOS AND MINORITY SQUEEZEOUTS)
7
Vote going private transactions on a CASE-BY-CASE basis, taking into account the
following: offer price/premium, fairness opinion, how the deal was negotiated,
conflicts of interest, other alternatives/offers considered, and noncompletion
risk.
JOINT VENTURES
Votes CASE-BY-CASE on proposals to form joint ventures, taking into account the
following: percentage of assets/business contributed, percentage ownership,
financial and strategic benefits, governance structure, conflicts of interest,
other alternatives, and noncompletion risk.
LIQUIDATIONS
Votes on liquidations should be made on a CASE-BY-CASE basis after reviewing
management's efforts to pursue other alternatives, appraisal value of assets,
and the compensation plan for executives managing the liquidation. Vote FOR the
liquidation if the company will file for bankruptcy if the proposal is not
approved. MERGERS AND ACQUISITIONS/ ISSUANCE OF SHARES TO FACILITATE MERGER OR
ACQUISITION Votes on mergers and acquisitions should be considered on a
CASE-BY-CASE basis, determining whether the transaction enhances shareholder
value by giving consideration to the following:
Prospects of the combined company, anticipated financial and operating benefits
Offer price Fairness opinion How the deal was negotiated Changes in corporate
governance Change in the capital structure Conflicts of interest.
PRIVATE PLACEMENTS/WARRANTS/CONVERTIBLE DEBENTURES
Votes on proposals regarding private placements should be determined on a
CASE-BY-CASE basis. When evaluating these proposals the investor should review:
dilution to existing shareholders' position, terms of the offer, financial
issues, management's efforts to pursue other alternatives, control issues, and
conflicts of interest. Vote FOR the private placement if it is expected that the
company will file for bankruptcy if the transaction is not approved.
SPINOFFS
Votes on spinoffs should be considered on a CASE-BY-CASE basis depending on: Tax
and regulatory advantages Planned use of the sale proceeds Valuation of spinoff
Fairness opinion Benefits to the parent company Conflicts of interest Managerial
incentives Corporate governance changes Changes in the capital structure.
VALUE MAXIMIZATION PROPOSALS
Vote CASE-BY-CASE on shareholder proposals seeking to maximize shareholder value
by hiring a financial advisor to explore strategic alternatives, selling the
company or liquidating the company and distributing the proceeds to
shareholders. These proposals should be evaluated based on the following
factors: prolonged poor performance with no turnaround in sight, signs of
entrenched board and management, strategic plan in place for improving value,
likelihood of receiving reasonable value in a sale or dissolution, and whether
company is actively exploring its strategic options, including retaining a
financial advisor.
6. STATE OF INCORPORATION
CONTROL SHARE ACQUISITION PROVISIONS
Vote FOR proposals to opt out of control share acquisition statutes unless doing
so would enable the completion of a takeover that would be detrimental to
shareholders. Vote AGAINST proposals to amend the charter to include control
share acquisition provisions. Vote FOR proposals to restore voting rights to the
control shares. CONTROL SHARE CASHOUT PROVISIONS Vote FOR proposals to opt out
of control share cashout statutes. DISGORGEMENT PROVISIONS Vote FOR proposals to
opt out of state disgorgement provisions.
8
FAIR PRICE PROVISIONS
Vote proposals to adopt fair price provisions on a CASE-BY-CASE basis,
evaluating factors such as the vote required to approve the proposed
acquisition, the vote required to repeal the fair price provision, and the
mechanism for determining the fair price. Generally, vote AGAINST fair price
provisions with shareholder vote requirements greater than a majority of
disinterested shares.
FREEZEOUT PROVISIONS
Vote FOR proposals to opt out of state freezeout provisions.
GREENMAIL
Vote FOR proposals to adopt antigreenmail charter of bylaw amendments or
otherwise restrict a company's ability to make greenmail payments. Review on a
CASE-BY-CASE basis antigreenmail proposals when they are bundled with other
charter or bylaw amendments. REINCORPORATION PROPOSALS Proposals to change a
company's state of incorporation should be evaluated on a CASE-BY-CASE basis,
giving consideration to both financial and corporate governance concerns,
including the reasons for reincorporating, a comparison of the governance
provisions, and a comparison of the jurisdictional laws. Vote FOR
reincorporation when the economic factors outweigh any neutral or negative
governance changes. STAKEHOLDER PROVISIONS Vote AGAINST proposals that ask the
board to consider nonshareholder constituencies or other nonfinancial effects
when evaluating a merger or business combination. STATE ANTITAKEOVER STATUTES
Review on a CASE-BY-CASE basis proposals to opt in or out of state takeover
statutes (including control share acquisition statutes, control share cash-out
statutes, freezeout provisions, fair price provisions, stakeholder laws, poison
pill endorsements, severance pay and labor contract provisions, antigreenmail
provisions, and disgorgement provisions).
7. CAPITAL STRUCTURE
ADJUSTMENTS TO PAR VALUE OF COMMON STOCK
Vote FOR management proposals to reduce the par value of common stock. Common
Stock Authorization Votes on proposals to increase the number of shares of
common stock authorized for issuance are determined on a CASE-BY-CASE basis
using a model developed by ISS. Vote AGAINST proposals at companies with
dual-class capital structures to increase the number of authorized shares of the
class of stock that has superior voting rights. Vote FOR proposals to approve
increases beyond the allowable increase when a company's shares are in danger of
being delisted or if a company's ability to continue to operate as a going
concern is uncertain.
DUAL-CLASS STOCK
Vote AGAINST proposals to create a new class of common stock with superior
voting rights. Vote FOR proposals to create a new class of nonvoting or
subvoting common stock if: It is intended for financing purposes with minimal or
no dilution to current shareholders It is not designed to preserve the voting
power of an insider or significant shareholder ISSUE STOCK FOR USE WITH RIGHTS
PLAN Vote AGAINST proposals that increase authorized common stock for the
explicit purpose of implementing a shareholder rights plan (poison pill).
PREEMPTIVE RIGHTS
Review on a CASE-BY-CASE basis shareholder proposals that seek preemptive
rights. In evaluating proposals on preemptive rights, consider the size of a
company, the characteristics of its shareholder base, and the liquidity of the
stock.
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PREFERRED STOCK Vote AGAINST proposals authorizing the creation of new classes
of preferred stock with unspecified voting, conversion, dividend distribution,
and other rights ("blank check" preferred stock). Vote FOR proposals to create
"declawed" blank check preferred stock (stock that cannot be used as a takeover
defense). Vote FOR proposals to authorize preferred stock in cases where the
company specifies the voting, dividend, conversion, and other rights of such
stock and the terms of the preferred stock appear reasonable.
Vote AGAINST proposals to increase the number of blank check preferred stock
authorized for issuance when no shares have been issued or reserved for a
specific purpose. Vote CASE-BY-CASE on proposals to increase the number of blank
check preferred shares after analyzing the number of preferred shares available
for issue given a company's industry and performance in terms of shareholder
returns.
RECAPITALIZATION
Votes CASE-BY-CASE on recapitalizations (reclassifications of securities),
taking into account the following: more simplified capital structure, enhanced
liquidity, fairness of conversion terms, impact on voting power and dividends,
reasons for the reclassification, conflicts of interest, and other alternatives
considered.
REVERSE STOCK SPLITS
Vote FOR management proposals to implement a reverse stock split when the number
of authorized shares will be proportionately reduced. Vote FOR management
proposals to implement a reverse stock split to avoid delisting. Votes on
proposals to implement a reverse stock split that do not proportionately reduce
the number of shares authorized for issue should be determined on a CASE-BY-CASE
basis using a model developed by ISS.
SHARE REPURCHASE PROGRAMS
Vote FOR management proposals to institute open-market share repurchase plans in
which all shareholders may participate on equal terms. STOCK DISTRIBUTIONS:
SPLITS AND DIVIDENDS Vote FOR management proposals to increase the common share
authorization for a stock split or share dividend, provided that the increase in
authorized shares would not result in an excessive number of shares available
for issuance as determined using a model developed by ISS.
TRACKING STOCK
Votes on the creation of tracking stock are determined on a CASE-BY-CASE basis,
weighing the strategic value of the transaction against such factors as: adverse
governance changes, excessive increases in authorized capital stock, unfair
method of distribution, diminution of voting rights, adverse conversion
features, negative impact on stock option plans, and other alternatives such as
spinoff.
8. EXECUTIVE AND DIRECTOR COMPENSATION
Votes with respect to compensation plans should be determined on a CASE-BY-CASE
basis. Our methodology for reviewing compensation plans primarily focuses on the
transfer of shareholder wealth (the dollar cost of pay plans to shareholders
instead of simply focusing on voting power dilution). Using the expanded
compensation data disclosed under the SEC's rules, ISS will value every award
type. ISS will include in its analyses an estimated dollar cost for the proposed
plan and all continuing plans. This cost, dilution to shareholders' equity, will
also be expressed as a percentage figure for the transfer of shareholder wealth,
and will be considered long with dilution to voting power. Cash compensation,
and Categorization of the company as emerging, growth, or mature. These
adjustments are pegged to market capitalization. ISS will continue to examine
other features of proposed pay plans such as administration, payment terms, plan
duration, and whether the administering committee is permitted to reprice
underwater stock options without shareholder approval. DIRECTOR COMPENSATION
Votes on compensation plans for directors are determined on a CASE-BY-CASE
basis, using a proprietary, quantitative model developed by ISS.
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STOCK PLANS IN LIEU OF CASH
Votes for plans which provide participants with the option of taking all or a
portion of their cash compensation in the form of stock are determined on a
CASE-BY-CASE basis. Vote FOR plans which provide a dollar-for-dollar cash for
stock exchange. Votes for plans which do not provide a dollar-for-dollar cash
for stock exchange should be determined on a CASE-BY-CASE basis using a
proprietary, quantitative model developed by ISS. DIRECTOR RETIREMENT PLANS Vote
AGAINST retirement plans for nonemployee directors.
Vote FOR shareholder proposals to eliminate retirement plans for nonemployee
directors. MANAGEMENT PROPOSALS SEEKING APPROVAL TO REPRICE OPTIONS Votes on
management proposals seeking approval to reprice options are evaluated on a
CASE-BY-CASE basis giving consideration to the following:
Historic trading patterns Rationale for the repricing Value-for-value exchange
Option vesting Term of the option Exercise price Participation.
EMPLOYEE STOCK PURCHASE PLANS
Votes on employee stock purchase plans should be determined on a CASE-BY-CASE
basis. Vote FOR employee stock purchase plans where all of the following apply:
Purchase price is at least 85 percent of fair market value Offering period is 27
months or less, and Potential voting power dilution (VPD) is ten percent or
less. Vote AGAINST employee stock purchase plans where any of the following
apply: Purchase price is less than 85 percent of fair market value, or Offering
period is greater than 27 months, or VPD is greater than ten percent INCENTIVE
BONUS PLANS AND TAX DEDUCTIBILITY PROPOSALS (OBRA-RELATED COMPENSATION
PROPOSALS) Vote FOR proposals that simply amend shareholder-approved
compensation plans to include administrative features or place a cap on the
annual grants any one participant may receive to comply with the provisions of
Section 162(m).
Vote FOR proposals to add performance goals to existing compensation plans to
comply with the provisions of Section 162(m) unless they are clearly
inappropriate. Votes to amend existing plans to increase shares reserved and to
qualify for favorable tax treatment under the provisions of Section 162(m)
should be considered on a CASE-BY-CASE basis using a proprietary, quantitative
model developed by ISS. Generally vote FOR cash or cash and stock bonus plans
that are submitted to shareholders for the purpose of exempting compensation
from taxes under the provisions of Section 162(m) if no increase in shares is
requested.
EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS)
Vote FOR proposals to implement an ESOP or increase authorized shares for
existing ESOPs, unless the number of shares allocated to the ESOP is excessive
(more than five percent of outstanding shares.) is 401(K) EMPLOYEE BENEFIT PLANS
Vote FOR proposals to implement a 401(k) savings plan for employees.
SHAREHOLDER PROPOSALS REGARDING EXECUTIVE AND DIRECTOR PAY Generally, vote FOR
shareholder proposals seeking additional disclosure of executive and director
pay information, provided the information requested is relevant to shareholders'
needs, would not put the company at a competitive disadvantage relative to its
industry, and is not unduly burdensome to the company.
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Vote AGAINST shareholder proposals seeking to set absolute levels on
compensation or otherwise dictate the amount or form of compensation. Vote
AGAINST shareholder proposals requiring director fees be paid in stock only.
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
Vote on a CASE-BY-CASE basis for all other shareholder proposals regarding
executive and director pay, taking into account company performance, pay level
versus peers, pay level versus industry, and long term corporate outlook.
OPTION EXPENSING
Generally vote FOR shareholder proposals asking the company to expense stock
options, unless the company has already publicly committed to expensing options
by a specific date. PERFORMANCE-BASED STOCK OPTIONS Vote CASE-BY-CASE on
shareholder proposals advocating the use of performance-based stock options
(indexed, premium-priced, and performance-vested options), taking into account:
Whether the proposal mandates that all awards be performance-based Whether the
proposal extends beyond executive awards to those of lower-ranking employees
Whether the company's stock-based compensation plans meet ISS's SVT criteria and
do not violate our repricing guidelines.
GOLDEN AND TIN PARACHUTES
Vote FOR shareholder proposals to require golden and tin parachutes (executive
severance agreements) to be submitted for shareholder ratification, unless the
proposal requires shareholder approval prior to entering into employment
contracts. Vote on a CASE-BY-CASE basis on proposals to ratify or cancel golden
or tin parachutes. An acceptable parachute should include the following:
The parachute should be less attractive than an ongoing employment opportunity
with the firm The triggering mechanism should be beyond the control of
management The amount should not exceed three times base salary plus guaranteed
benefits
9. SOCIAL AND ENVIRONMENTAL ISSUES
CONSUMER ISSUES AND PUBLIC SAFETY
ANIMAL RIGHTS
Vote CASE-BY-CASE on proposals to phase out the use of animals in product
testing, taking into account: The nature of the product and the degree that
animal testing is necessary or federally mandated (such as medical products),
The availability and feasibility of alternatives to animal testing to ensure
product safety, and The degree that competitors are using animal-free testing.
Generally vote FOR proposals seeking a report on the company's animal welfare
standards unless: The company has already published a set of animal welfare
standards and monitors compliance The company's standards are comparable to or
better than those of peer firms, and There are no serious controversies
surrounding the company's treatment of animals
DRUG PRICING
Vote CASE-BY-CASE on proposals asking the company to implement price restraints
on pharmaceutical products, taking into account: Whether the proposal focuses on
a specific drug and region Whether the economic benefits of providing subsidized
drugs (e.g., public goodwill) outweigh the costs in terms of reduced profits,
lower R&D spending, and harm to competitiveness The extent that reduced prices
can be offset through the company's marketing budget without affecting R&D
spending Whether the company already limits price increases of its products
Whether the company already contributes life-saving pharmaceuticals to the needy
and Third World countries The extent that peer companies implement price
restraints Genetically Modified Foods
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Vote CASE-BY-CASE on proposals to label genetically modified (GMO) ingredients
voluntarily in the company's products, or alternatively to provide interim
labeling and eventually eliminate GMOs, taking into account:
The costs and feasibility of labeling and/or phasing out
The nature of the company's business and the proportion of it affected by the
proposal The proportion of company sales in markets requiring labeling or
GMO-free products The extent that peer companies label or have eliminated GMOs
Competitive benefits, such as expected increases in consumer demand for the
company's products The risks of misleading consumers without federally mandated,
standardized labeling Alternatives to labeling employed by the company. Vote FOR
proposals asking for a report on the feasibility of labeling products containing
GMOs. Vote AGAINST proposals to completely phase out GMOs from the company's
products. Such resolutions presuppose that there are proven health risks to
GMOs-an issue better left to federal regulators-which outweigh the economic
benefits derived from biotechnology. Vote CASE-BY-CASE on reports outlining the
steps necessary to eliminate GMOs from the company's products, taking into
account: The relevance of the proposal in terms of the company's business and
the proportion of it affected by the resolution The extent that peer companies
have eliminated GMOs The extent that the report would clarify whether it is
viable for the company to eliminate GMOs from its products Whether the proposal
is limited to a feasibility study or additionally seeks an action plan and
timeframe actually to phase out GMOs
The percentage of revenue derived from international operations, particularly in
Europe, where GMOs are more regulated. Vote AGAINST proposals seeking a report
on the health and environmental effects of GMOs and the company's strategy for
phasing out GMOs in the event they become illegal in the United States. Studies
of this sort are better undertaken by regulators and the scientific community.
If made illegal in the United States, genetically modified crops would
automatically be recalled and phased out. Handguns Generally vote AGAINST
requests for reports on a company's policies aimed at curtailing gun violence in
the United States unless the report is confined to product safety information.
Criminal misuse of firearms is beyond company control and instead falls within
the purview of law enforcement agencies. Predatory Lending Vote CASE-BY CASE on
requests for reports on the company's procedures for preventing predatory
lending, including the establishment of a board committee for oversight, taking
into account:
Whether the company has adequately disclosed mechanisms in place to prevent
abusive lending practices Whether the company has adequately disclosed the
financial risks of its subprime business Whether the company has been subject to
violations of lending laws or serious lending controversies Peer companies'
policies to prevent abusive lending practices. Tobacco Most tobacco-related
proposals should be evaluated on a CASE-BY-CASE basis, taking into account the
following factors: Second-hand smoke: Whether the company complies with all
local ordinances and regulations The degree that voluntary restrictions beyond
those mandated by law might hurt the company's competitiveness The risk of any
health-related liabilities. Advertising to youth: Whether the company complies
with federal, state, and local laws on the marketing of tobacco or if it has
been fined for violations Whether the company has gone as far as peers in
restricting advertising Whether the company entered into the Master Settlement
Agreement, which restricts marketing of tobacco to youth
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Whether restrictions on marketing to youth extend to foreign countries Cease
production of tobacco-related products or avoid selling products to tobacco
companies: The percentage of the company's business affected The economic loss
of eliminating the business versus any potential tobacco-related liabilities.
Spinoff tobacco-related businesses: The percentage of the company's business
affected The feasibility of a spinoff Potential future liabilities related to
the company's tobacco business. Stronger product warnings: Vote AGAINST
proposals seeking stronger product warnings. Such decisions are better left to
public health authorities. Investment in tobacco stocks: Vote AGAINST proposals
prohibiting investment in tobacco equities. Such decisions are better left to
portfolio managers.
ENVIRONMENT AND ENERGY Arctic National Wildlife Refuge Vote
CASE-BY-CASE on reports outlining potential environmental damage from drilling
in the Arctic National Wildlife Refuge (ANWR), taking into account: Whether
there are publicly available environmental impact reports; Whether the company
has a poor environmental track record, such as violations of federal and state
regulations or accidental spills; and The current status of legislation
regarding drilling in ANWR.
CERES Principles
Vote CASE-BY-CASE on proposals to adopt the CERES Principles, taking into
account: The company's current environmental disclosure beyond legal
requirements, including environmental health and safety (EHS) audits and reports
that may duplicate CERES The company's environmental performance record,
including violations of federal and state regulations, level of toxic emissions,
and accidental spills Environmentally conscious practices of peer companies,
including endorsement of CERES Costs of membership and implementation.
Environmental Reports
Generally vote FOR requests for reports disclosing the company's environmental
policies unless it already has well-documented environmental management systems
that are available to the public. Global Warming Generally vote FOR reports on
the level of greenhouse gas emissions from the company's operations and
products, unless the report is duplicative of the company's current
environmental disclosure and reporting or is not integral to the company's line
of business. However, additional reporting may be warranted. The company's level
of disclosure lags that of its competitors, or The company has a poor
environmental track record, such as violations of federal and state regulations.
Recycling Vote CASE-BY-CASE on proposals to adopt a comprehensive recycling
strategy, taking into account:
The nature of the company's business and the percentage affected The extent that
peer companies are recycling The timetable prescribed by the proposal The costs
and methods of implementation Whether the company has a poor environmental track
record, such as violations of federal and state regulations. Renewable Energy
Vote CASE-BY-CASE on proposals to invest in renewable energy sources, taking
into account: The nature of the company's business and the percentage affected
The extent that peer companies are switching from fossil fuels to cleaner
sources The timetable and specific action prescribed by the proposal The costs
of implementation The company's initiatives to address climate change Generally
vote FOR requests for reports on the feasibility of developing renewable energy
sources, unless the report is duplicative of the company's current environmental
disclosure and reporting or is not integral to the company's line of business.
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GENERAL CORPORATE ISSUES
Link Executive Compensation to Social Performance
Vote CASE-BY-CASE on proposals to review ways of linking executive compensation
to social factors, such as corporate downsizings, customer or employee
satisfaction, community involvement, human rights, environmental performance,
predatory lending, and executive/employee pay disparities. Such resolutions
should be evaluated in the context of: The relevance of the issue to be linked
to pay The degree that social performance is already included in the company's
pay structure and disclosed The degree that social performance is used by peer
companies in setting pay Violations or complaints filed against the company
relating to the particular social performance measure Artificial limits sought
by the proposal, such as freezing or capping executive pay Independence of the
compensation committee Current company pay levels.
Charitable/Political Contributions
Generally vote AGAINST proposals asking the company to affirm political
nonpartisanship in the workplace so long as: The company is in compliance with
laws governing corporate political activities, and The company has procedures in
place to ensure that employee contributions to company-sponsored political
action committees (PACs) are strictly voluntary and not coercive.
Vote AGAINST proposals to report or publish in newspapers the company's
political contributions. Federal and state laws restrict the amount of corporate
contributions and include reporting requirements.
Vote AGAINST proposals disallowing the company from making political
contributions. Businesses are affected by legislation at the federal, state, and
local level and barring contributions can put the company at a competitive
disadvantage. Vote AGAINST proposals restricting the company from making
charitable contributions. Charitable contributions are generally useful for
assisting worthwhile causes and for creating goodwill in the community. In the
absence of bad faith, self-dealing, or gross negligence, management should
determine which contributions are in the best interests of the company.
Vote AGAINST proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
LABOR STANDARDS AND HUMAN RIGHTS
China Principles
Vote AGAINST proposals to implement the China Principles unless: There are
serious controversies surrounding the company's China operations, and The
company does not have a code of conduct with standards similar to those
promulgated by the International Labor Organization (ILO). Country-specific
human rights reports Vote CASE-BY-CASE on requests for reports detailing the
company's operations in a particular country and steps to protect human rights,
based on:
The nature and amount of company business in that country The company's
workplace code of conduct Proprietary and confidential information involved
Company compliance with U.S. regulations on investing in the country Level of
peer company involvement in the country. International Codes of Conduct/Vendor
Standards
Vote CASE-BY-CASE on proposals to implement certain human rights standards at
company facilities or those of its suppliers and to commit to outside,
independent monitoring. In evaluating these proposals, the following should be
considered:
The company's current workplace code of conduct or adherence to other global
standards and the degree they meet the standards promulgated by the proponent
Agreements with foreign suppliers to meet certain workplace standards
15
Whether company and vendor facilities are monitored and how Company
participation in fair labor organizations Type of business Proportion of
business conducted overseas Countries of operation with known human rights
abuses Whether the company has been recently involved in significant labor and
human rights controversies or violations Peer company standards and practices
Union presence in company's international factories Generally vote FOR reports
outlining vendor standards compliance unless any of the following apply:
The company does not operate in countries with significant human rights
violations The company has no recent human rights controversies or violations,
or The company already publicly discloses information on its vendor standards
compliance. MacBride Principles Vote CASE-BY-CASE on proposals to endorse or
increase activity on the MacBride Principles, taking into account:
Company compliance with or violations of the Fair Employment Act of 1989 Company
antidiscrimination policies that already exceed the legal requirements The cost
and feasibility of adopting all nine principles The cost of duplicating efforts
to follow two sets of standards (Fair Employment and the MacBride Principles)
The potential for charges of reverse discrimination The potential that any
company sales or contracts in the rest of the United Kingdom could be negatively
impacted The level of the company's investment in Northern Ireland The number of
company employees in Northern Ireland
The degree that industry peers have adopted the MacBride Principles Applicable
state and municipal laws that limit contracts with companies that have not
adopted the MacBride Principles. MILITARY BUSINESS Foreign Military
Sales/Offsets Vote AGAINST reports on foreign military sales or offsets. Such
disclosures may involve sensitive and confidential information. Moreover,
companies must comply with government controls and reporting on foreign military
sales. Landmines and Cluster Bombs Vote CASE-BY-CASE on proposals asking a
company to renounce future involvement in antipersonnel landmine production,
taking into account: Whether the company has in the past manufactured landmine
components Whether the company's peers have renounced future production Vote
CASE-BY-CASE on proposals asking a company to renounce future involvement in
cluster bomb production, taking into account: What weapons classifications the
proponent views as cluster bombs Whether the company currently or in the past
has manufactured cluster bombs or their components The percentage of revenue
derived from cluster bomb manufacture Whether the company's peers have renounced
future production Nuclear Weapons Vote AGAINST proposals asking a company to
cease production of nuclear weapons components and delivery systems, including
disengaging from current and proposed contracts. Components and delivery systems
serve multiple military and non-military uses, and withdrawal from these
contracts could have a negative impact on the company's business. Spaced-Based
Weaponization Generally vote FOR reports on a company's involvement in
spaced-based weaponization unless: The information is already publicly available
or The disclosures sought could compromise proprietary information.
16
WORKPLACE DIVERSITY Board Diversity
Generally vote FOR reports on the company's efforts to diversify the board,
unless: The board composition is reasonably inclusive in relation to companies
of similar size and business or The board already reports on its nominating
procedures and diversity initiatives. Vote CASE-BY-CASE on proposals asking the
company to increase the representation of women and minorities on the board,
taking into account: The degree of board diversity Comparison with peer
companies Established process for improving board diversity Existence of
independent nominating committee Use of outside search firm History of EEO
violations. Equal Employment Opportunity (EEO) Generally vote FOR reports
outlining the company's affirmative action initiatives unless all of the
following apply: company. Glass Ceiling Generally vote FOR reports outlining the
company's progress towards the Glass Ceiling Commission's business
recommendations, unless: The composition of senior management and the board is
fairly inclusive The company has well-documented programs addressing diversity
initiatives and leadership development The company already issues public reports
on its company-wide affirmative initiatives and provides data on its workforce
diversity, and The company has had no recent, significant EEO-related violations
or litigation Sexual Orientation Vote CASE-BY-CASE on proposals to amend the
company's EEO policy to include sexual orientation, taking into account: Whether
the company's EEO policy is already in compliance with federal, state and local
laws Whether the company has faced significant controversies or litigation
regarding unfair treatment of gay and lesbian employees The industry norm for
including sexual orientation in EEO statements Existing policies in place to
prevent workplace discrimination based on sexual orientation Vote AGAINST
proposals to extend company benefits to or eliminate benefits from domestic
partners. Benefit decisions should be left to the discretion of the company.
10. Mutual Fund Proxies Election of Directors Vote to elect directors on a
CASE-BY-CASE basis, considering the following factors: Board structure Director
independence and qualifications Attendance at board and committee meetings.
Votes should be withheld from directors who: Attend less than 75 percent of the
board and committee meetings without a valid excuse for the absences. Valid
reasons include illness or absence due to company business. Participation via
telephone is acceptable. In addition, if the director missed only one meeting or
one day's meetings, votes should not be withheld even if such absence dropped
the director's attendance below 75 percent.
Ignore a shareholder proposal that is approved by a majority of shares
outstanding Ignore a shareholder proposal that is approved by a majority of the
votes cast for two consecutive years Are interested directors and sit on the
audit or nominating committee, or Are interested directors and the full board
serves as the audit or nominating committee or the company does not have one of
these committees.
Convert Closed-end Fund to Open-end Fund
Vote conversion proposals on a CASE-BY-CASE basis, considering the following
factors: Past performance as a closed end fund Market in which the fund invests
Measures taken by the board to address the discount
17
Past shareholder activism, board activity Votes on related proposals.
Proxy Contests Votes on proxy contests should be determined on a CASE-BY-CASE
basis, considering the following
factors: Past performance relative to its peers Market in which fund invests
Measures taken by the board to address the issues Strategy of the incumbents
versus the dissidents Independence of directors Experience and skills of
director candidates Governance profile of the company Evidence of management
entrenchment Investment Advisory Agreements Votes on investment advisory
agreements should be determined on a CASE-BY-CASE basis, considering the
following factors: Proposed and current fee schedules Fund category/investment
objective Performance benchmarks Share price performance compared to peers
Resulting fees relative to peers Assignments (where the advisor undergoes a
change in control) Approve New Classes or Series of Shares Vote FOR the
establishment of new classes or series of shares. Preferred Stock Proposals
Votes on the authorization for or increase in preferred shares should be
determined on a CASE-BY-CASE basis, considering the following factors:
Stated specific financing purpose
Possible dilution for common shares
Whether the shares can be used for antitakeover purposes. 1940 Act Policies
Votes on 1940 Act policies should be determined on a CASE-BY-CASE basis,
considering the following factors:
Potential competitiveness Regulatory developments Current and potential returns
Current and potential risk.
Generally vote FOR these amendments as long as the proposed changes do not
fundamentally alter the investment focus of the fund and do comply with the
current SEC interpretation. Change Fundamental Restriction to Nonfundamental
Restriction Proposals to change a fundamental restriction to a nonfundamental
restriction should be evaluated on a CASE-BY-CASE basis, considering the
following factors: The fund's target investments The reasons given by the fund
for the change The projected impact of the change on the portfolio.
Change Fundamental Investment Objective to Nonfundamental Vote AGAINST proposals
to change a fund's fundamental investment objective to nonfundamental.
Name Change Proposals
Votes on name change proposals should be determined on a CASE-BY-CASE basis,
considering the following factors: Political/economic changes in the target
market Consolidation in the target market Current asset composition Change in
Fund's Subclassification
18
Votes on changes in a fund's subclassification should
be determined on a CASE-BY-CASE basis, considering the following factors:
Potential competitiveness
Current and potential returns
Risk of concentration
Consolidation in target industry
Disposition of Assets/Termination/Liquidation
Vote these proposals on a CASE-BY-CASE basis, considering the following factors:
Strategies employed to salvage the company The fund's past performance Terms of
the liquidation.
Changes to the Charter Document
Votes on chances to the charter document should be determined on a CASE-BY-CASE
basis, considering the following factors: The degree of change implied by the
proposal The efficiencies that could result The state of incorporation
Regulatory standards and implications. Vote AGAINST any of the following
changes:
Removal of shareholder approval requirement to reorganize or terminate the trust
or any of its series Removal of shareholder approval requirement for amendments
to the new declaration of trust Removal of shareholder approval requirement to
amend me fund's a management contract, allowing the contract to be modified by
the investment manager and the trust management, as permitted by the 1940 Act
Allow the trustees to impose other fees in addition to sales charges on
investment in a fund, such as deferred sales charges and redemption fees that
may be imposed upon redemption of a fund's shares Removal of shareholder
approval requirement to engage in and terminate subadvisory arrangements Removal
of shareholder approval requirement to change the domicile of the fund Change
the Fund's Domicile Vote reincorporations on a CASE-BY-CASE basis, considering
the following factors: Regulations of both states Required fundamental policies
of both states Increased flexibility available Authorize the Board to Hire and
Terminate Subadvisors Without Shareholder Approval Vote AGAINST proposals
authorizing the board to hire/terminate subadvisors without shareholder
approval. Distribution Agreements Vote these proposals on a CASE-BY-CASE basis,
considering the following factors: Fees charged to comparably sized funds with
similar objectives The proposed distributor's reputation and past performance
The competitiveness of the fund in the industry Terms of the agreement
Master-Feeder Structure Vote FOR the establishment of a master-feeder structure.
Mergers
Vote merger proposals on a CASE-BY-CASE basis, considering the following
factors:
Resulting fee structure
Performance of both funds
Continuity of management personnel
Changes in corporate governance and their impact on shareholder rights.
Shareholder Proposals to Establish Director Ownership Requirement Generally vote
AGAINST shareholder proposals that mandate a specific minimum amount of stock
that directors must own in order to qualify as a director or to remain on the
board. While ISS favors stock ownership on the part of directors, the company
should determine the appropriate ownership requirement. Shareholder
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Proposals to Reimburse Proxy Solicitation Expenses Voting to reimburse proxy
solicitation expenses should be analyzed on a CASE-BY-CASE basis. In cases where
ISS recommends in favor of the dissidents, we also recommend voting for
reimbursing proxy solicitation expenses. Shareholder Proposals to Terminate
Investment Advisor Vote to terminate the investment advisor on a CASE-BY-CASE
basis, considering the following factors: Performance of the fund's NAV The
fund's history of shareholder relations The performance of other funds under the
advisor's management.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(A) AS OF A DATE WITHIN 90 DAYS FROM THE FILING DATE OF THIS REPORT,
THE PRINCIPAL EXECUTIVE OFFICER AND THE PRINCIPAL FINANCIAL OFFICER
CONCLUDED THAT THE REGISTRANT'S DISCLOSURE CONTROLS AND PROCEDURES (AS
DEFINED IN RULE 30A-3(C) UNDER THE INVESTMENT COMPANY ACT OF 1940 (THE
"ACT")) WERE EFFECTIVE BASED ON THEIR EVALUATION OF THE DISCLOSURE
CONTROLS AND PROCEDURES REQUIRED BY RULE 30A-3(B) UNDER THE ACT AND
RULES 13A-15(B) OR 15D-15(B) UNDER THE SECURITIES AND EXCHANGE ACT OF
1934.
(B) THERE WERE NO CHANGES IN THE REGISTRANT'S INTERNAL CONTROL OVER
FINANCIAL REPORTING (AS DEFINED IN RULE 30A-3(D) UNDER THE ACT) THAT
OCCURRED DURING THE REGISTRANT'S SECOND FISCAL HALF-YEAR THAT HAVE
MATERIALLY AFFECTED, OR ARE REASONABLY LIKELY TO MATERIALLY AFFECT, THE
REGISTRANT'S INTERNAL CONTROL OVER FINANCIAL REPORTING.
ITEM 10. EXHIBITS.
File the exhibits listed below as part of this Form. Letter or number
the exhibits in the sequence indicated.
(a)(1) The registrant's code of ethics is an exhibit to this
report.
(a)(2) The certifications of the registrant as required by Rule
30a-2(a) under the Act are exhibits to this report.
(b)The certifications of the registrant as required by Rule
30a-2(b) under the Act are an exhibit to this report.
SIGNATURES
[See General Instruction F]
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) CORNERSTONE STRATEGIC VALUE FUND, INC.
By (Signature and Title)* /S/ RALPH W. BRADSHAW
------------------------------------------------------
RALPH W. BRADSHAW,
CHAIRMAN AND PRESIDENT (PRINCIPAL EXECUTIVE OFFICER)
Date: March 8, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /S/ RALPH W. BRADSHAW
------------------------------------------------------
RALPH W. BRADSHAW
CHAIRMAN AND PRESIDENT (PRINCIPAL EXECUTIVE OFFICER)
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Date: March 8, 2004
By (Signature and Title)* /S/ GARY A. BENTZ
---------------------------
GARY A. BENTZ
PRINCIPAL FINANCIAL OFFICER
Date: March 8, 2004
* Print the name and title of each signing officer under his or her signature.
ALL CERTIFICATIONS (UNDER THE ACT'S SECTION 302 AND 906) SHOULD BE INCLUDED IN
ONE EDGAR EX-99.
CERT EXHIBIT DOCUMENT TO FORM N-CSR)
21