CRF
CORNERSTONE
STRATEGIC RETURN
FUND, INC.
==================
SEMI-ANNUAL REPORT
JUNE 30, 2000
==================
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
LETTER TO SHAREHOLDERS
================================================================================
August 18, 2000
Dear Fellow Shareholders:
We are pleased to report on the investment performance and activities of the
Cornerstone Strategic Return Fund, Inc., formerly The Central European Value
Fund, Inc., for the period from January 1, 2000 through June 30, 2000. The net
asset value of the Fund increased +2.8% through the first half of 2000
substantially outperforming the Central European Stock Index (CESI) which
declined -8.7% in $US terms. However, with the Fund in transition, the price
declined and the discount widened to -19.5% at June 30, 2000. We believe that
this discount is moderate as investors better understand the benefits of the
Fund's direction.
It is incumbent on the Board to continually evaluate the operations of the Fund
in the process of achieving its objectives and to offer proactive direction and
oversight. This evaluation process has been continuing for years and has
resulted in change in the investment focus before. The Fund began as the Czech
Republic Fund and operated under that focus for some years. On February 20,
1998, acting on the Board of Directors' recommendation, shareholders approved a
change in the Fund's investment mandate to permit greater access to investment
opportunities by expanding the investment flexibility to broader European
exposure. Prompted by changing opportunities in the Fund's former area of
investments and the departure of PIMCO Advisors as Investment Manager and OpCap
Advisors as Investment Adviser, shareholders were asked to approve further
changes to allow investments in both U.S. and non-U.S. securities. As you can
see in the voting results included in this report, shareholders overwhelmingly
endorsed these changes at the Annual Meeting held on June 27, 2000.
The Fund has continued to fulfill its commitment to repurchase its own shares
whenever they trade at more than a nominal discount. Through the first six
months of the year, the Fund has purchased 642,600 shares at an average discount
of 22.34%. These share repurchases are beneficial to shareholders because they
allow the Fund to purchase its own portfolio at a discount, thus increasing the
net asset value per share of the remaining shares. As of June 30, 2000 they have
added $.36 to the net asset value per share. In addition, they provide liquidity
for those shareholders wishing to sell their position.
The Board of Directors and its Chairman are committed to the goal of long-term
capital appreciation. We are confident that the direction being taken as the
Fund transitions into its new investment focus is the right one to achieve this
goal. We know that you have a choice and we appreciate the trust you have placed
in us by choosing this Fund. Thank you for your continued support and
confidence.
Sincerely,
/S/SIGNATURE
Ralph W. Bradshaw
Chairman
1
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
OVERVIEW JUNE 30, 2000
================================================================================
PORTFOLIO REVIEW:
During the quarter ending on June 30, 2000, the portfolio prepared for its
transition from a fund that concentrated its investments primarily in Central
Europe to one that would follow a global investment philosophy. At the annual
shareholders meeting held on Tuesday, June 27, 2000, shareholders approved the
change in the Fund's investment policy to focus chiefly on securities of US and
non-US issuers.
Clemente Capital, Inc., started to serve as the investment adviser of the Fund
on April 1, 2000.
MARKET AND PORTFOLIO PERFORMANCE
The quarter was a difficult period for the Fund as the benchmark, the Central
European Stock Index, declined by 17.44% in US dollars. The Fund managed to
outperform the index, but still declined by 9.69%, helped partly by a higher
cash position. The weak market performance is attributable to profit taking
after the strong performance in the previous six-month period, as well as
general weakness in markets around the globe, particularly with
Technology-Media-Telecommunication stocks, which were over represented in the
Fund.
Immediately upon the approval of the new investment policy, the Fund purchased
US securities and non-US ADRs. From a weighting of 86.9% in Central European
stocks on March 31, 2000, the Fund's asset allocation at the end of the June
quarter was: US-47.1%, non-US ADRs-14.0%, Central Europe-24.2%, and liabilities
in excess of other assets (40.8%). The aggressive shift to reflect the new
policy continued into the beginning of the third quarter. Our new benchmark is
the S&P 500.
Sincerely,
/S/SIGNATURE
Leopoldo M. Clemente, Jr.
Portfolio Manager
Clemente Capital, Inc.
2
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) JUNE 30, 2000
================================================================================
SHARES VALUE
--------------------------------------------------------------------------------
EQUITIES - 85.3%
CANADA - 2.0%
COMMUNICATION SERVICES - 2.0%
21,000 Nortel Networks Corporation .......................... $1,433,250
----------
Total Canada (cost - $1,428,300) ..................... 1,433,250
----------
CZECH REPUBLIC - 9.2%
COMMUNICATION SERVICES - 4.9%
30,000 Ceske Radiokomunikace GDR * .......................... 1,335,000
130,000 Cesky Telecom ........................................ 2,200,204
----------
3,535,204
----------
CONSUMER CYCLICALS - 0.5%
72,800 Bonton(a) * .......................................... 338,450
----------
CONSUMER STAPLES - 1.8%
8,350 Tabak ................................................ 1,301,462
----------
FINANCE - 0.7%
98,500 Ceska Sporitelna * ................................... 530,723
----------
UTILITIES - 1.3%
350,000 Ceske Energeticke Zavody * ........................... 926,448
----------
Total Czech Republic (cost - $7,107,270) ............ 6,632,287
----------
FINLAND - 2.5%
TECHNOLOGY - 2.5%
36,000 Nokia Corporation ADR ................................ 1,797,750
----------
Total Finland (cost - $1,799,150) ................... 1,797,750
----------
FRANCE - 5.1%
CONSUMER STAPLES - 2.6%
68,000 Groupe Danone ADR .................................... 1,831,750
----------
FINANCE - 2.5%
23,000 AXA ADR .............................................. 1,829,938
----------
Total France (cost - $3,619,812) ..................... 3,661,688
----------
HUNGARY - 8.5%
BASIC MATERIALS - 1.1%
25,000 BorsodChem GDR ...................................... 775,000
----------
COMMUNICATION SERVICES - 4.3%
89,900 Magyar Tavkozlesi ADR ................................ 3,095,931
----------
FINANCE - 1.1%
15,000 Orszagos Takarekpenztar es Kereskedelmi (OTP) Bank ... 783,852
----------
3
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED) (UNAUDITED) JUNE 30, 2000
================================================================================
SHARES VALUE
--------------------------------------------------------------------------------
EQUITIES (CONTINUED)
HUNGARY (CONTINUED)
HEALTHCARE - 2.0%
10,000 Egis Gyogyszergyar ................................ $ 419,526
19,000 Gedeon Richter GDR ................................ 1,026,000
-----------
1,445,526
-----------
Total Hungary (cost - $4,796,400) ................. 6,100,309
-----------
JAPAN - 2.3%
COMMUNICATIONS SERVICES - 2.3%
25,000 Nippon Telegraph and Telephone ADR ................ 1,709,375
-----------
Total Japan (cost - $1,706,812) ................... 1,709,375
-----------
POLAND - 6.5%
COMMUNICATION SERVICES - 5.0%
45,000 Agora GDR * ....................................... 1,147,500
75,627 Elektrim * ........................................ 868,397
225,000 Telekomunikacja Polska GDR ........................ 1,569,375
-----------
3,585,272
-----------
CONSUMER CYCLICALS - 0.2%
14,421 Orbis * ........................................... 112,602
-----------
FINANCE - 1.3%
13,000 BRE Bank .......................................... 403,041
24,750 Powszechny Bank Kredytowy ......................... 560,433
-----------
963,474
-----------
Total Poland (cost - $3,698,539) .................. 4,661,348
-----------
SWEDEN - 2.1%
TECHNOLOGY - 2.1%
75,000 Ericsson LM ADR ................................... 1,500,000
-----------
Total Sweden (cost - $1,484,064) .................. 1,500,000
-----------
UNITED STATES - 47.1%
CAPITAL GOODS - 2.9%
40,000 General Electric Company .......................... 2,120,000
-----------
CONSUMER CYCLICALS - 5.6%
38,000 Home Depot Incorporated ........................... 1,897,625
28,000 Time Warner Incorporated .......................... 2,128,000
-----------
4,025,625
-----------
4
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED) (UNAUDITED) JUNE 30, 2000
================================================================================
SHARES VALUE
--------------------------------------------------------------------------------
EQUITIES (CONTINUED)
UNITEDSTATES (CONTINUED)
ENERGY - 2.9%
44,000 Halliburton Company ................................ $2,076,250
-----------
FINANCE - 5.2%
15,000 American International Group ....................... 1,762,500
33,000 Citigroup Incorporated ............................. 1,988,250
-----------
3,750,750
-----------
HEALTHCARE - 11.2%
19,000 Johnson & Johnson .................................. 1,935,625
38,000 Medtronic Incorporated ............................. 1,892,875
27,000 Merck & Company Incorporated ....................... 2,068,875
45,000 Pfizer Incorporated ................................ 2,160,000
-----------
8,057,375
-----------
TECHNOLOGY - 17.2%
35,000 American Online Incorporated * ..................... 1,846,250
21,000 Analog Devices * ................................... 1,596,000
34,000 Automatic Data Processing Incorporated ............. 1,821,125
29,000 Cisco Systems Incorporated * ....................... 1,843,312
20,000 EMC Corporation * .................................. 1,538,750
13,000 Intel Corporation .................................. 1,737,938
25,000 Microsoft Corporation * ............................ 2,000,000
-----------
12,383,375
-----------
UTILITIES - 2.1%
33,000 AES Corporation * .................................. 1,505,625
-----------
Total United States (cost - $33,436,064) ........... 33,919,000
-----------
Total Equities (cost- $59,076,411) ................. 61,415,007
-----------
PRINCIPAL
AMOUNT
$(000)
---------
SHORT TERM OBLIGATIONS - 55.5%
REPURCHASE AGREEMENT - 41.6%
29,918 State Street Repurchase Agreement 5.25% due 07/03/2000
(Collateral $16,795,000 U.S. Treasury Bill 5.25% due 02/15/29;
$15,280,000 FNMA 5.8% due 03/15/02; Total Market Value of
Collateral $29,920,313)
(cost - $29,918,000) ................................ 29,918,000
-----------
5
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
SCHEDULE OF INVESTMENTS (CONCLUDED) (UNAUDITED) JUNE 30, 2000
================================================================================
PRINCIPAL
AMOUNT
$(000) VALUE
--------------------------------------------------------------------------------
SHORT TERM OBLIGATIONS (CONTINUED)
U.S. GOVERNMENT AGENCY NOTES - 13.9%
10,000 United States Treasury Bills 5. 01% due 07/06/2000 - 13.9%
(cost - $9,993,055) ............................ $ 9,993,055
------------
Total Short Term Obligations (cost- $39,911,055) 39,911,055
------------
Total Investments (cost - $98,987,466) (b). ... 140.8% 101,326,062
Liabilities in excess of other assets .......... (40.8%)(29,352,622)
------ ------------
Net Assets ..................................... 100.0% $71,973,440
------ ------------
------ ------------
-----------
* NON-INCOME PRODUCING
(A) FAIR VALUED, TOTALING $338,450 OR 0.5% OF NET ASSETS.
(B) THE COST BASIS OF PORTFOLIO SECURITIES FOR FEDERAL INCOME TAX PURPOSES IS
$98,987,466. AGGREGATE GROSS UNREALIZED APPRECIATION FOR SECURITIES IN WHICH
THERE IS AN EXCESS OF VALUE OVER TAX COST IS $4,210,896, AGGREGATE GROSS
UNREALIZED DEPRECIATION FOR SECURITIES IN WHICH THERE IS AN EXCESS OF TAX
COST OVER THE VALUE IS $1,872,300, AND THE NET UNREALIZED APPRECIATION FOR
FEDERAL INCOME TAX PURPOSES IS $2,338,596.
ADR AMERICAN DEPOSITARY RECEIPT
GDR GLOBAL DEPOSITARY RECEIPT
See Accompanying Notes to Financial Statements
6
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 2000
================================================================================
ASSETS
Investments, at value (cost-- $98,987,466) ................... $101,326,062
Cash (including foreign currency of $428,017
with a cost of $425,862) ................................... 892,021
Foreign withholding taxes reclaimable ........................ 10,984
Dividends receivable ......................................... 54,480
Interest receivable .......................................... 4,363
Receivable for investments sold .............................. 4,494,674
Prepaid expenses and other assets ............................ 8,130
------------
Total Assets ............................................ 106,790,714
------------
LIABILITIES
Payable for Fund shares repurchased .......................... 97,984
Payable for investments purchased ............................ 34,521,165
Investment management fee payable ............................ 59,778
Administration fee payable ................................... 4,182
Other payables and accrued expenses .......................... 134,165
------------
Total Liabilities ....................................... 34,817,274
------------
Total Net Assets ............................................. $71,973,440
------------
------------
COMPOSITION OF NET ASSETS:
Capital stock, $0.001 par value; 5,878,047 shares issued
(100,000,000 shares authorized) ............................ $5,878
Paid-in capital in excess of par ............................. 74,893,468
Cost of 727,760 shares held in treasury stock ................ (7,619,682)
Accumulated net investment loss .............................. (364,470)
Accumulated net realized gain on investments ................. 2,685,184
Net unrealized appreciation of investments and other assets
and liabilities denominated in foreign currency ............ 2,373,062
------------
Total Net Assets ............................................. $71,973,440
------------
------------
Shares Outstanding ........................................... 5,150,287
------------
Net Asset Value Per Share ($71,973,440/5,150,287) ............ $13.97
------------
------------
See Accompanying Notes to Financial Statements
7
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2000
================================================================================
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Interest ............................................................. $531,805
Dividends (net of foreign withholding taxes of $87,830) .............. 481,800
----------
Total investment income ......................................... 1,013,605
----------
EXPENSES:
Investment management fee ............................................ 411,352
Legal fees ........................................................... 138,883
Custodian fees ....................................................... 98,732
Administration fees .................................................. 69,223
Directors' fees & expenses ........................................... 60,781
Reports and notices to shareholders .................................. 36,388
Transfer agent fees .................................................. 34,794
Insurance expense .................................................... 20,796
Auditing and tax service fees ........................................ 15,840
Miscellaneous ........................................................ 10,433
Interest expense ..................................................... 9,203
New York Stock Exchange listing fee .................................. 8,041
----------
Total expenses .................................................. 914,466
Less: expense offset ........................................ (1,643)
----------
Net expenses ................................................ 912,823
----------
Net investment income ....................................... 100,782
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on:
Investments ..................................................... 4,620,415
Foreign currency transactions ................................... (729,800)
Net change in unrealized appreciation/depreciation on investments and
other assets and liabilities denominated in foreign currency. ..... (3,974,828)
----------
Net realized and unrealized loss on investments and foreign
currency transactions. ...................................... (84,213)
----------
Net increase in net assets from investment operations ........... $16,569
----------
----------
</TABLE>
See Accompanying Notes to Financial Statements
8
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED FROM
JUNE 30, SEPTEMBER 1, 1999 FOR THE
2000 TO YEAR ENDED
(UNAUDITED) DECEMBER 31, 1999 AUGUST 31, 1999
------------ ----------------- ---------------
OPERATIONS:
<S> <C> <C> <C>
Net investment income (loss) .................................... $100,782 ($329,292) $1,445,990
Net realized gain on investments and foreign
currency transactions ........................................ 3,890,615 82,756 (1,317,794)
Net change in unrealized appreciation/depreciation
on investments and other assets and liabilities
denominated in foreign currency .............................. (3,974,828) 1,400,018 14,034,023
----------- ----------- -----------
Net increase in net assets resulting
from operations ..................................... 16,569 1,153,482 14,162,219
----------- ----------- -----------
DIVIDENDS AND DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income ........................................... -- -- (1,376,063)
Net realized gain on investments ................................ -- -- (3,908,901)
Paid-in capital in excess of par ................................ -- -- (581,327)
----------- ----------- -----------
Total dividends and distribution to shareholders ........... -- -- (5,866,291)
----------- ----------- -----------
CAPITAL SHARE TRANSACTIONS:
Cost of Fund shares repurchased (642,060 shares and
85,700 shares, respectively) ................................. (6,765,860) (853,822) --
----------- ----------- -----------
Net decrease in net assets resulting from
capital share transactions ................................... (6,765,860) (853,822) --
----------- ----------- -----------
Total increase (decrease) in net assets ................ (6,749,291) 299,660 8,295,928
----------- ----------- -----------
NET ASSETS
Beginning of period ............................................. 78,722,731 78,423,071 70,127,143
----------- ----------- -----------
End of period ................................................... $71,973,440 $78,722,731 $78,423,071
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See Accompanying Notes to Financial Statements
9
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
FINANCIAL HIGHLIGHTS
JUNE 30, 2000
================================================================================
Selected data for a share of common stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED FOR THE PERIOD
JUNE 30, 2000 SEPTEMBER 1, 1999
(UNAUDITED) TO DECEMBER 31, 1999 (1)
----------------- -----------------------
<S> <C> <C>
Net asset value, beginning of period .............................. $13.59 $13.34
------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss). ..................................... 0.02 (0.06)(2)
Net realized and unrealized gain (loss) on investments, forward
foreign currency contracts and foreign currency transactions ... -- 0.28 (2)
------- -------
Total from investment operations .................................. 0.02 0.22
------- -------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................. -- --
Net realized gain on investments .................................. -- --
Paid-in capital in excess of par .................................. -- --
------- -------
Total dividends and distributions to shareholders ................. -- --
------- -------
CAPITAL SHARE TRANSACTIONS:
Anti-dilutive effect of shares repurchased ........................ 0.36 0.03
Dilutive effect of rights offering ................................ -- --
------- -------
Net asset value, end of period .................................... $13.97 $13.59
------- -------
------- -------
Market value, end of period ....................................... $11.250 $11.875
Total Investment Return (5) (6) ................................... (5.3)% 5.6%
RATIOS / SUPPLEMENTAL DATA:
Net assets, end of period ( 000) .................................. $71,973 $78,723
Ratios of expenses to average net assets (7) ...................... 2.22%(8) 2.28%(8)
Ratios of net investment income (loss) to average net assets ...... 0.25%(8) (1.37)%(8)
Portfolio Turnover ................................................ 81% 18%
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------
1999 1998 1997 1996
------------------------------------------------
Net asset value, beginning of period .............................. $11.93 $16.05 $17.23 $13.13
------- -------- ------- ---------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss). ..................................... 0.25 0.10 (0.14) (0.07)
Net realized and unrealized gain (loss) on investments, forward
foreign currency contracts and foreign currency transactions ... 2.16 (4.08) (0.54) 5.35
------- -------- ------- ---------
Total from investment operations .................................. 2.41 (3.98) (0.68) 5.28
------- -------- ------- ---------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................. (0.23) (0.07) -- (0.25)
Net realized gain on investments .................................. (0.67) (0.07) (0.50) --
Paid-in capital in excess of par .................................. (0.10) -- -- --
------- -------- ------- ---------
Total dividends and distributions to shareholders ................. (1.00) (0.14) (0.50) (0.25)
------- -------- ------- ---------
CAPITAL SHARE TRANSACTIONS:
Anti-dilutive effect of shares repurchased ........................ -- -- -- --
Dilutive effect of rights offering ................................ -- -- -- (0.93)
------- -------- ------- ---------
Net asset value, end of period .................................... $13.34 $11.93 $16.05 $17.23
------- -------- ------- ---------
------- -------- ------- ---------
Market value, end of period ....................................... $11.25 $8.0625 $13.625 $14.75
Total Investment Return (5) (6) ................................... 51.3% (40.1)% (4.5)% 32.2%
RATIOS / SUPPLEMENTAL DATA:
Net assets, end of period ( 000) .................................. $78,423 $70,127 $94,322 $101,274
Ratios of expenses to average net assets (7) ...................... 2.19% 2.09% 2.09% 2.14%
Ratios of net investment income (loss) to average net assets ...... 1.94% 0.65% (0.87)% (0.51)%
Portfolio Turnover ................................................ 73% 73% 56% 42%
<CAPTION>
FOR THE PERIOD
SEPTEMBER 30, 1994 (3)
TO AUGUST 31, 1995
----------------------
Net asset value, beginning of period .............................. $13.77(4)
--------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss). ..................................... 0.29
Net realized and unrealized gain (loss) on investments, forward
foreign currency contracts and foreign currency transactions ... (0.83)
--------
Total from investment operations .................................. (0.54)
--------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................. (0.10)
Net realized gain on investments .................................. --
Paid-in capital in excess of par .................................. --
--------
Total dividends and distributions to shareholders ................. (0.10)
--------
CAPITAL SHARE TRANSACTIONS:
Anti-dilutive effect of shares repurchased ........................ --
Dilutive effect of rights offering ................................ --
--------
Net asset value, end of period .................................... $13.13
--------
--------
Market value, end of period ....................................... $12.125
Total Investment Return (5) (6) ................................... (12.8)%
RATIOS / SUPPLEMENTAL DATA:
Net assets, end of period (000) ................................... $57,880
Ratios of expenses to average net assets (7) ...................... 2.39%(8)
Ratios of net investment income (loss) to average net assets ...... 2.41%(8)
Portfolio Turnover ................................................ 20%
<FN>
(1) In December 1999, the Board of Directors changed the Fund's fiscal year-end
from August to December.
(2) Based on average shares outstanding.
(3) Commencement of operations.
(4) Initial public offering price $15.00 per share less underwriting discount of
$0.98 per share and offering costs of $0.25 per share.
(5) Total investment return is calculated assuming a purchase of common stock at
the current market price on the first day and a sale at the current market
price on the last day of each period reported, except that for the period
ended August 31, 1995, total investment return is based on a beginning of
period price of $14.02 (initial offering price of $15.00 less underwriting
discount of $0.98). Dividends and distributions, if any, are assumed, for
purposes of this calculation, to be reinvested at prices obtained under the
Fund's dividend reinvestment plan. Total investment return does not reflect
brokerage commissions or sales charges.
(6) Total return for a period of less than one year is not annualized.
(7) For fiscal years ended after September 1, 1995, ratios inclusive of expenses
offset by earnings credit from custodian bank. (See Note 1g in Notes to
Financial Statements).
(8) Annualized
</FN>
</TABLE>
See Accompanying Notes to Financial Statements
10 & 11
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000
================================================================================
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Central European Value Fund, Inc. (the "Fund") was incorporated in Maryland
on March 3, 1994 and commenced operations on September 30, 1994. At the meeting
of stockholders held on June 27, 2000, the stockholders approved a proposal to
change the name of the Fund to Cornerstone Strategic Return Fund, Inc. The Fund
is registered under the Investment Company Act of 1940, as amended, as a
closed-end, non-diversified management investment company. On December 15, 1999,
the Board of Directors changed the fiscal year end of the Fund from August 31 to
December 31 of each year commencing with December 31, 1999.
At the meeting of stockholders held on June 27, 2000, the stockholders approved
a proposal to change the investment objective of the Fund to seek long-term
capital appreciation by investing in securities of U.S. and non-U.S. issuers. In
addition, the stockholders approved a proposal to change the Fund's investment
strategies and fundamental investment policies to allow the Fund to invest at
least 65% of its total assets, under normal market conditions, in securities of
U.S. issuers. The remaining 35% of its total assets may be invested in non-U.S.
issuers.
Prior to June 27, 2000, the Fund invested at least 65% of its total assets,
under normal market conditions, in the securities of Central European issuers.
In addition, the Fund was permitted to invest up to 35% of its total assets in
Eastern European issuers. The Fund's Board of Directors had approved investment
in the following Central European countries: Austria, Croatia, Czech Republic,
Estonia, Hungary, Poland, Romania, Slovakia and Slovenia.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates. The following is a summary of
significant accounting policies consistently followed by the Fund:
(A) VALUATION OF INVESTMENTS
All securities for which market quotations are readily available are valued at
the last sale price on the day of valuation or if there are no such sales, at
the mean between the last current bid and asked prices. If there was no sales
price on such date and only bid quotations are available, securities are valued
at the last quoted bid price.
Securities for which sales prices and bid and asked quotations are not available
may be valued at the most recently available prices or quotations under policies
adopted by the Board of Directors. Short-term investments having a remaining
maturity of 60 days or less are valued at amortized cost which approximates
market value, or by amortizing their value on the 61st day prior to maturity if
the term to maturity from the date of purchase exceeds 60 days. Securities for
which market values are not readily ascertainable (aggregating $338,450 or 0.5%
of net assets at June 30, 2000) are carried at fair value as determined by or
under the supervision of the Board of Directors.
(B) INVESTMENT TRANSACTIONS AND INVESTMENT INCOME
Investment transactions are recorded on the trade date. Realized gains and
losses on investments and foreign currency transactions are determined on the
identified cost basis. Interest income is recorded on an accrual basis. Dividend
income is recorded on the ex-dividend date except for certain dividends which
are recorded as soon after the ex-dividend date as the Fund, using reasonable
diligence, becomes aware of such dividends.
12
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) JUNE 30, 2000
================================================================================
(C) TAX STATUS
The Fund intends to distribute all of its taxable income and to comply with the
other requirements of the U.S. Internal Revenue Code of 1986 as amended,
applicable to regulated investment companies. Accordingly, no provision for U.S.
federal income taxes is required. In addition, by distributing substantially all
of its ordinary income and long-term capital gains, if any during each calendar
year the Fund intends not to be subject to U.S. federal excise tax.
In accordance with U.S. Treasury regulations, at December 31, 1999, the Fund
elected to defer realized capital and foreign currency losses arising after
October 31, 1999 of $173,853 and $465,252 respectively. Such losses are treated
for tax purposes as arising on January 1, 2000.
At December 31, 1999, the Fund had a capital loss carryforward of $982,499
available as a reduction, to the extent provided in the regulations, of any
future capital gains realized through fiscal year 2007. To the extent that these
losses are used to offset future realized capital gains, such gains will not be
distributed.
The Fund believes that dividend and interest income from its investments in
foreign issuers is subject to the applicable withholding tax rates, which
currently are up to 25% and that capital gains on the sale of securities of
companies domiciled in such countries are not generally subject to taxation in
such countries. Certain of these rates are based upon applicable treaties
between the United States and such countries. Based upon current circumstances,
the Fund believes it is generally entitled to the benefits of the treaties
between the United States and the respective countries and accordingly
recognizes withholding taxes based upon the applicable treaty rates. However,
there is no history of regulatory or legal interpretation of the treaties with
certain countries and there can be no assurance that the benefits of the
treaties with such countries will be available to the Fund.
(D) FOREIGN CURRENCY TRANSLATION
The books and records of the Fund are maintained in U.S. dollars. Foreign
currency amounts are translated into U.S. dollars on the following basis: (i)
the market value of investments, and other assets and liabilities denominated in
foreign currency are translated at the closing rates of exchange on the
valuation date; and (ii) purchases and sales of investments, income and expenses
are translated at the rates of exchange prevailing on the respective dates of
such transactions. The resulting net foreign currency gain or loss is included
in the Statement of Operations.
The Fund does not generally isolate the effect of fluctuations in foreign
currency rates from the effect of fluctuations in the market prices of equity
securities. However, the Fund does isolate the effect of fluctuations in foreign
currency exchange rates when determining the gain or loss upon the sale of
foreign currency denominated debt obligations pursuant to U.S. federal income
tax regulations; such amount is categorized as foreign currency gain or loss for
federal income tax reporting purposes.
Net realized loss on foreign currency transactions of $729,800 represents
foreign currency gains and losses from sales and maturities of debt securities,
transactions in foreign currency, currency gains or losses realized between the
trade and settlement dates on security transactions, and the difference between
the amounts of interest and dividends recorded on the Fund's books and the U. S.
dollar equivalent of the amounts actually received or paid.
13
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) JUNE 30, 2000
================================================================================
(D) FOREIGN CURRENCY TRANSLATION (CONTINUED)
Net foreign currency gain (loss) from valuing foreign currency denominated
assets and liabilities at period end exchange rates is reflected as a component
of net unrealized appreciation of investments and other assets and liabilities
denominated in foreign currency. Net realized foreign currency gain (loss) is
treated as ordinary income (loss) for income tax reporting purposes.
(E) FORWARD FOREIGN CURRENCY CONTRACTS
The Fund may enter into forward foreign currency contracts ("FX contracts") to
hedge its currency exposure. An FX contract is an agreement between two parties
to buy or sell a currency at a set price on a future date. The market value of
an FX contract fluctuates with changes in forward currency exchange rates. FX
contracts are marked to market daily and the change in value is recorded by the
Fund as an unrealized gain or loss. When an FX contract is closed, the Fund
records a realized gain or loss on foreign currency related transactions. In
addition, unrealized gains or losses on certain open contracts are required to
be recognized for U.S. Federal income tax purposes at the close of the Fund's
taxable year and may be treated as ordinary income for such purposes. FX
contracts may involve risks in excess of the unrealized gain or loss that would
be reflected in the Fund's Statement of Assets and Liabilities (e.g. the Fund
could be exposed to risk if the counterparties are unable to meet the terms of
the contracts or if the value of the currency changes unfavorably to the U.S.
dollar). On June 30, 2000, the Fund had no open FX contracts.
(F) DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Dividends and distributions from net investment income and net realized
capital gains are determined in accordance with federal income tax regulations,
which may differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification.
Dividends and distributions which exceed net investment income or net realized
capital gains for financial reporting purposes but not for tax purposes are
reported as dividends in excess of net investment income or distributions in
excess of net realized capital gains. To the extent they exceed net investment
income or net realized capital gains for tax purposes, they are reported as
distributions of paid-in capital in excess of par.
During the period ended December 31, 1999, the Fund reclassified $658,610 from
accumulated net investment loss to paid-in capital in excess of par as a result
of permanent book/tax differences relating to a net operating loss for the
period ended December 31, 1999.
Net assets were not affected by the reclassification.
(G) EXPENSE OFFSET
The Fund benefits from an expense offset arrangement with its custodian bank
whereby uninvested cash balances earn credits which reduce monthly custodian
expenses. Had these cash balances been invested in income producing securities,
they would have generated income for the Fund.
14
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) JUNE 30, 2000
================================================================================
2. INVESTMENT MANAGEMENT, INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES
At its meeting held on March 21, 2000, the Fund's Board of Directors approved an
investment advisory agreement with Clemente Capital, Inc. ("Clemente")
appointing Clemente as the Fund's investment adviser (the "Investment Adviser")
which was approved by the stockholders of the Fund at the stockholders meeting
held on June 27, 2000. On March 21, 2000, the Fund's Board of Directors also
accepted the resignation of and terminated effective April 1, 2000, the
investment management agreement with PIMCO Advisors. L.P. ("PIMCO"), the Fund's
former investment manager and administrator, and the investment advisory
agreement with OpCap Advisors ("OpCap"), a subsidiary of PIMCO and the Fund's
former investment adviser. On September 20, 1999, the Board of Directors of the
Fund approved the assignment of the investment management agreement between the
Fund and Value Advisors LLC, a subsidiary of PIMCO, to PIMCO.
The Investment Adviser is responsible on a day-to-day basis for investing the
Fund's portfolio in accordance with its investments objectives and policies. For
its services, the Fund pays the Investment Adviser a monthly fee at an annual
rate of 1.00% of the Fund's average weekly net assets. Prior to April 1, 2000,
PIMCO supervised the Fund's investment program and OpCap was responsible for the
day-to-day management of the Fund's portfolio. For its services, PIMCO received
a monthly fee at an annual rate of 1.00% of the Fund's average weekly net assets
and OpCap received from PIMCO a monthly fee at an annual rate of 0.50% of the
Fund's average weekly net assets. During the period ended June 30, 2000,
Clemente received from the Fund $193,400 in investment advisory fees, PIMCO
received from the Fund $217,952 in investment management fees and OpCap received
from PIMCO $108,976 in investment advisory fees.
Effective April 1, 2000, PFPC, Inc. ("PFPC"), serves as the Fund's administrator
(the "Administrator") and receives a monthly fee at an annual rate of 0.15% of
the Fund's average weekly net assets up to $100 million; 0.08% of average weekly
net assets for the next $200 million, and 0.06% of average weekly net assets in
excess $300 million, subject to a minimum annual fee of $97,500. Prior to April
1, 2000, PIMCO served as the Fund's administrator and received a monthly fee at
an annual rate of 0.20% of the Fund's average weekly net assets. Prior to April
1, 2000, PFPC served as the Fund's sub-administrator. During the period ended
June 30, 2000, PIMCO received $43,950 in administration fees.
3. INVESTMENTS IN SECURITIES
Purchases and sales of securities other than short-term debt securities
aggregated $54,981,090 and $70,491,614, respectively, for the period ended June
30, 2000.
4. SHARE REPURCHASE PROGRAM
On October 19, 1999, the Fund announced that it will repurchase its shares of
capital stock on a continuous basis whenever the Fund's shares are trading at
more than a nominal discount to net asset value. During the period ended June
30, 2000, the Fund purchased 642,060 shares of capital stock on the open market
at a total cost of $6,756,860. The weighted average discount of these purchases,
comparing the purchase price to the net asset value at the time of purchase, was
22.34%. During the period ended December 31, 1999, the Fund purchased 85,700
shares of capital stock on the open market at a total cost of $853,822. The
weighted average discount of these purchases, comparing the purchase price to
the net asset value at the time of purchase, was 18.20%. 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 will be made in accordance
with federal securities laws. The shares purchased are held in treasury.
Subsequent to June 30, 2000, the Fund made additional purchases aggregating
105,751 shares of capital stock in the open market at a total cost of
$1,103,989. The weighted average discount of these purchases was 24.86%.
15
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED) (UNAUDITED) JUNE 30, 2000
================================================================================
5. CAPITAL STOCK
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
For the Six For the Period For the Year
Months Ended September 1, 1999 to Ending
June 30, 2000 December 31, 1999 August 31, 1999
-------------- -------------------- ---------------
<S> <C> <C> <C>
Shares outstanding, beginning of period .... 5,792,347 5,878,047 5,878,047
Shares repurchased ......................... (642,060) (85,700) --
--------- --------- ---------
Shares outstanding, end of period .......... 5,150,287 5,792,347 5,878,047
--------- --------- ---------
--------- --------- ---------
</TABLE>
6. CONCENTRATION OF RISK
Certain foreign securities markets are substantially smaller, less developed,
less liquid, and more volatile than the major securities markets in the United
States. Consequently, purchases and sales of securities by the Fund involve
special risks and considerations not present with respect to U.S. securities
markets.
Securities denominated in currencies other than U.S. dollars are subject to
changes in value due to fluctuations in foreign exchange rates. Foreign security
and currency transactions involve certain considerations and risks not typically
associated with those of domestic origin as a result of, among other factors,
the level of governmental supervision and regulation of foreign securities
markets, the possibilities of political or economic instability, the fact that
foreign securities markets may be smaller and less developed, and the fact that
securities, tax and corporate laws may have only recently developed or be in the
developing stages, and laws may not exist to cover all contingencies or to
protect investors adequately.
16
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
RESULTS OF THE ANNUAL SHAREHOLDERS MEETING JUNE 30, 2000
================================================================================
The Fund's annual meeting of Stockholders was held on June 27, 2000. The
following tables provide information concerning the matters voted on at the
meeting:
I. ELECTION OF DIRECTORS
NOMINEE VOTES FOR VOTES ABSTAINED TOTAL VOTING SHARES
------- --------- --------------- -------------------
William A. Clark 4,930,410 280,896 5,211,305
Andrew Strauss 4,945,108 266,198 5,211,305
At June 30, 2000, in addition to William A. Clark and Andrew Strauss, the other
directors of the Fund were as follows:
Gary A. Bentz Scott B. Rogers
Ralph W. Bradshaw Glenn W. Wilcox, Sr.
Edwin Meese III
II. CONSIDERATION OF THE APPROVAL OF THE INVESTMENT MANAGEMENT AGREEMENT BETWEEN
THE FUND AND CLEMENTE CAPITAL, INC.
VOTES FOR VOTES AGAINST VOTES ABSTAINED TOTAL VOTING SHARES
------- --------- --------------- -------------------
4,871,445 300,957 38,904 5,211,305
III. MODIFICATION OF THE FUND'S FUNDAMENTAL POLICIES TO BROADEN THE SCOPE OF THE
FUND'S INVESTMENT STRATEGY.
VOTES FOR VOTES AGAINST VOTES ABSTAINED TOTAL VOTING SHARES
------- --------- --------------- -------------------
3,089,347 483,045 25,762 5,211,305 *
* INCLUDES 1,613,151 BROKER NON VOTES
IV. APPROVAL OF AND AMENDMENT TO THE FUND'S ARTICLES OF INCORPORATION TO CHANGE
THE NAME OF THE FUND TO "THE CORNERSTONE STRATEGIC RETURN FUND, INC."
VOTES FOR VOTES AGAINST VOTES ABSTAINED TOTAL VOTING SHARES
------- --------- --------------- -------------------
4,704,206 483,439 23,660 5,211,305
V. RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS THE
INDEPENDENT ACCOUNTANTS OF THE FUND.
VOTES FOR VOTES AGAINST VOTES ABSTAINED TOTAL VOTING SHARES
------- --------- --------------- -------------------
5,039,040 140,254 32,012 5,211,305
17
<PAGE>
CORNERSTONE STRATEGIC RETURN FUND, INC.
RESULTS OF THE SPECIAL SHAREHOLDERS MEETING JUNE 30, 2000
================================================================================
The Fund's special meeting of Stockholders was held on February 24, 2000. The
following tables provide information concerning the matters voted on at the
meeting:
I. PROPOSAL TO APPROVE A NEW MANAGEMENT AGREEMENT BETWEEN PIMCO ADVISORS L.P.
AND THE FUND.
VOTES FOR VOTES AGAINST VOTES ABSTAINED TOTAL VOTING SHARES
--------- ------------- --------------- -------------------
4,996,974 114,460 23,508 5,134,943
II. PROPOSAL TO APPROVE A NEW INVESTMENT ADVISORY AGREEMENT AMONG PIMCO ADVISORS
L.P., OPCAP ADVISORS AND THE FUND.
VOTES FOR VOTES AGAINST VOTES ABSTAINED TOTAL VOTING SHARES
--------- ------------- --------------- -------------------
5,001,011 113,686 20,245 5,134,943
III. ELECTION OF DIRECTORS
NOMINEE VOTES FOR VOTES ABSTAINED TOTAL VOTING SHARES
------- --------- --------------- -------------------
Edwin Meese III 4,965,378 169,565 5,134,943
Scott B. Rogers 4,966,514 168,429 5,134,943
At June 30, 2000, in addition to Edwin Meese III and Scott B. Rogers, the other
directors of the Fund were as follows:
Gary A. Bentz Andrew Strauss
Ralph W. Bradshaw Glenn W. Wilcox, Sr.
William A. Clark
18
<PAGE>
================================================================================
DIRECTORS AND OFFICERS
RALPH W. BRADSHAW, CHAIRMAN & DIRECTOR
LEOPOLDO M. CLEMENTE, JR., PRESIDENT
GARY A. BENTZ, DIRECTOR & TREASURER
WILLIAM CLARK, DIRECTOR & SECRETARY
EDWIN MEESE III, DIRECTOR
SCOTT B. ROGERS, DIRECTOR
ANDREW W. STRAUSS, DIRECTOR
GLENN W. WILCOX, SR., DIRECTOR
MARIA DISTEFANO, ASSISTANT SECRETARY
--------------------------------------------------------------------------------
EXECUTIVE OFFICES --
152 W. 57th Street, New York, Ny 10019 (For latest net asset value and market
data, please call 212-765-0700 or access our web site at
http://www.clementecapital.com. For shareholder inquiries, please call
1-800-937-5449)
INVESTMENT ADVISERS --
Clemente Capital, Inc.
ADMINISTRATOR -- PFPC Inc.
TRANSFER AGENT AND REGISTRAR --
Equiserve L.P.
CUSTODIAN --
State Street Bank and Trust Company
LEGAL COUNSEL --
Spitzer & Feldman P.C.
INDEPENDENT ACCOUNTANTS --
PricewaterhouseCoopers LLP
19
