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 811-21380
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FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND INCORPORATED
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(Exact name of registrant as specified in charter)
301 E. Colorado Boulevard, Suite 720
PASADENA, CA 91101
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(Address of principal executive offices) (Zip code)
Donald F. Crumrine
Flaherty & Crumrine Inc.
301 E. Colorado Boulevard, Suite 720
PASADENA, CA 91101
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(Name and address of agent for service)
Registrant's telephone number, including area code: 626-795-7300
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Date of fiscal year end: NOVEMBER 30, 2004
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Date of reporting period: MAY 31, 2004
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND
Dear Shareholder:
During Flaherty & Crumrine/Claymore Total Return Fund's ("FLC") recently
concluded 2nd fiscal quarter, the biggest challenge we faced was holding on to
the impressive returns of the 1st quarter. Although the Fund's total return on
Net Asset Value ("NAV") DECLINED 3.2%(1) during the three month period ending
May 31st, results over the first six months of fiscal 2004 INCREASED 0.5%(1).
Over the short history of FLC, the NAV performance has been competitive
with other bond funds. Funds in the process of acquiring an investment
portfolio, as was the case for FLC during much of this period, often lag funds
which are fully invested. For comparison purposes, we have included the average
return on all funds in the Lipper Domestic Investment Grade Bond Fund category.
Although the investment strategies that we use in the Fund typically differ
significantly from those of the bond funds, we believe that FLC provides a
superior way of accomplishing a similar investment objective.
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AVERAGE TOTAL RETURN(2) PER YEAR FOR PERIODS ENDING MAY 31, 2004(1)
LIFE OF
FUND(3)
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Flaherty & Crumrine/Claymore Total Return Fund's
Return on Net Asset Value ................................ 3.3%
Lipper Domestic Investment Grade Bond Funds(4) .............. 4.3%
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(1) Based on monthly data provided by Lipper Inc. Distributions are assumed to
be reinvested at NAV in accordance with Lipper's practice, which differs
from the procedures used elsewhere in this report.
(2) Not annualized.
(3) Since inception on August 26, 2003.
(4) Includes all U.S. Government bond, mortgage bond and term trust and
investment grade bond funds in Lipper's closed-end fund database at each
point in time.
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In early April, we learned that the economy had finally begun to experience
job growth consistent with an expanding economy. As a result, investors stopped
wondering IF the Federal Reserve would raise interest rates, and instead simply
asked WHEN. From a low of 3.7% in mid-March, the yield on the benchmark ten-year
U.S. Treasury had risen a full percentage point by the end of May.
Of course, the Fund's hedging strategy is intended to protect the NAV
against substantial increases in interest rates. So, how did it work? As
expected, the hedge significantly cushioned the decline (without the hedge, the
total return for the quarter would have been -6.5% instead of -3.2%).
Recall that our hedge positions are analogous to an insurance policy. We
make regular "premium" payments to buy protection against rising interest rates.
In order to keep the cost of these payments down, we typically structure the
hedge with a "deductible," meaning some portion of the loss must be absorbed by
the Fund before we can collect on the policy. (For those familiar with options,
we are purchasing OUT-OF-THE-MONEY PUT OPTIONS on the U.S. Treasury Bond future
contract.) During the most recent quarter, the Fund absorbed the entire amount
of the deductible. If long-term interest rates continue to climb, the current
hedge position should neutralize more of the decline in the value of preferred
positions.
Also working against the Fund's NAV was a modest, adverse move in the
relationship between the preferred securities market and U.S. Treasuries. Simply
stated, the price of a typical preferred security fell by more than the price of
a corresponding Treasury bond during the quarter. Since our hedge positions are
tied to Treasuries, this meant the appreciation in the Fund's hedge position
didn't quite keep up with the decline in the value of the preferred securities.
The MARKET PRICE of FLC fell steadily throughout April. Needless to say,
this had a lot of people scratching their heads, including us. We address this
more completely in the Question and Answer section, but the drop can be
attributed primarily to two factors--a concern about rising interest rates and
technical factors in the market. For some owners of FLC as well as other
closed-end income funds, the attitude appeared to be "sell now, ask questions
later." Such across-the-board selling ignores the fundamental differences
between FLC and most other funds, especially its hedging strategy. As the chart
below demonstrates, the relationship of the market price of the Fund's shares to
the NAV has been a bit erratic over time. We'd like to see the price track the
NAV more closely, but obviously that has not been the case.
FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND
PREMIUM/DISCOUNT OF MARKET PRICE TO NAV THROUGH 5/31/2004
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Date Premium/Discount
5/28/04 0.0017
5/21/04 -0.0305
5/14/04 -0.0330
5/7/04 -0.0729
4/30/04 -0.0325
4/23/04 0.0017
4/16/04 0.0107
4/9/04 0.0363
4/2/04 0.0660
3/26/04 0.0444
3/19/04 0.0486
3/12/04 0.0487
3/5/04 0.0312
2/27/04 0.0461
2/20/04 0.0597
2/13/04 0.0581
2/6/04 0.0647
1/30/04 0.0467
1/23/04 0.0465
1/16/04 0.0640
1/9/04 0.0373
1/2/04 0.0444
12/26/03 0.0477
12/19/03 0.0287
12/12/03 0.0365
12/5/03 0.0360
11/28/03 0.0341
11/21/03 0.0482
11/14/03 0.0453
11/7/03 0.0678
10/31/03 0.0466
10/24/03 0.0377
10/17/03 0.0428
10/10/03 0.0305
10/3/03 0.0275
9/26/03 0.0249
9/19/03 0.0362
9/12/03 0.0408
9/5/03 0.0477
8/29/03 0.0491
2
Of course, FLC is all about income. We believe that the Fund's income
should hold up well if the interest rate on long-term Treasury bonds declines.
In addition, if the long-term Treasury interest rate increases substantially,
the Fund's income should reflect a large part of the increase.
In recent weeks, a number of investors have visited the new web site
created by the Fund's adviser, Flaherty & Crumrine. We think you'll find
www.preferredstockguide.com contains useful information about most of the issues
that make up the preferred securities universe. We hope you will also continue
to visit the Fund's web site at www.fcclaymore.com.
Sincerely,
/S/ DONALD F. CRUMRINE /S/ ROBERT M. ETTINGER
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
July 23, 2004
3
QUESTIONS & ANSWERS
WHAT CAUSED THE FUND'S MARKET PRICE TO DROP IN APRIL?
It appears as though the drop can be attributed mainly to two things --
concerns about rising interest rates and a large number of stop-loss sell orders
for the Fund's shares.
In early April, the Department of Labor announced the economy had added
over 300,000 new non-farm jobs during March. In the preceding months, job
creation had been persistently below expectations despite other indications that
economic activity was picking up. The widespread belief was the Federal Reserve
would keep short-term interest rates low until there was sufficient evidence
employment conditions were improving. With the job growth in March, policymakers
began talking about the need to remove current policy accommodation and move
rates gradually back to "normal". A sharp market selloff ensued.
With concerns about rising interest rates, shareholders of income oriented
closed-end funds apparently began selling indiscriminately. Of course, selling
FLC simply due to concerns about rising interest rates seems to ignore the
Fund's hedging strategy. Nonetheless, for the sellers, the decision was sell
first, ask questions later.
Stop-loss orders apparently also contributed to the price decline. It is
impossible to get information on stop-loss orders since the NYSE keeps the data
private. But anecdotal evidence indicates that small bits of selling pressure
triggered stop-loss orders, which in turn led to more selling and more
stop-losses being triggered.
HOW DID PREFERRED SECURITIES PERFORM DURING THE QUARTER?
Concerns about rising interest rates also resulted in weak performance for
most segments of the preferred market. As with closed-end funds, the prices of
NYSE listed hybrid preferred securities were especially hard hit as a result of
stop-loss orders being triggered. By the end of the quarter, preferred prices
had stabilized, but relative to other market sectors were still somewhat below
where they started.
WHAT IS THE IMPACT OF RISING INTEREST RATES ON THE FUND'S INCOME?
Rising rates can affect the income earned in the Fund in different ways.
On the plus side, if we make money on the hedge, we can purchase more
securities and produce more income. This should occur if long-term interest
rates rise. Increases in short-term rates, however, generally result in higher
costs, as the Fund will have to pay higher rates on its shares of Auction Market
Preferred Stock (AMPS).
Over time, changes in the slope of the yield curve (the difference between
long-term and short-term interest rates) will also impact the Fund's income.
When the differential is small (the yield curve is "flat"), the cost of leverage
is relatively high, but the Fund's hedging strategy should be less expensive. In
a steep yield curve environment (as we've seen over recent quarters), the
opposite occurs -- the cost of leverage is low but the cost of the hedge goes
up.
Over the long-run, changes in the cost of leverage and changes in the cost
of hedging should substantially offset one another. This is not by accident; the
Fund's leverage and hedging strategy have been carefully structured to maintain
this balance. In the near term, however, sharp increases in short-term interest
rates may adversely impact the Fund's dividend rate.
4
IN THE STATEMENT OF ASSETS AND LIABILITIES IT APPEARS THAT DISTRIBUTIONS HAVE
EXCEEDED NET INVESTMENT INCOME. DOES THIS MEAN THE FUND IS EARNING LESS THAN THE
CURRENT DIVIDEND RATE?
The short answer is "No". For FLC, the negative number DOES NOT mean the
Fund's income is less than what it is paying in dividends.
The long answer requires an understanding of certain esoteric accounting
concepts, so for those gluttons for punishment we'll try to summarize the rules.
Most companies, including funds such as FLC, are required to maintain
financial records that conform to both accounting and tax rules. Logic would
suggest that the results should be similar, but, over short periods of time,
logic doesn't apply.
The financial statements included in shareholder reports reflect book
accounting rules only. However, when the Fund's Board of Directors determines
the dividend rate, it uses income and expense numbers determined under the rules
of tax accounting. While book and tax accounting differ in many respects, one
big difference is the adjustment for income under a book accounting concept that
goes by the quaint name of "Amortization and Accretion of Premiums and
Discounts." In the case of FLC, due to recent market conditions, the adjustment
has caused the difference between book income and distributions shown in the
financial statements to become negative.
In contrast, under tax accounting rules, the adjustments are only made when
a security is sold (or disposed of in some manner). This means that for FLC, the
income actually available to distribute to shareholders is roughly equal to the
current dividend rate (no surprise here, this is what the tax rules encourage!).
Obviously there are a lot of moving parts when trying to determine the
appropriate dividend rate. The Fund's management continually monitors all of
these factors and strives to recommend to the Board a sustainable long-term
rate. Of course there can be no guarantee that income will remain at its current
level indefinitely.
WILL THERE BE ANOTHER SPECIAL DISTRIBUTION IN DECEMBER?
Special year-end distributions typically occur for two reasons -- the Fund
has earned more investment income than it has paid out in dividends during the
year or has net realized capital gains.
With only half of the fiscal year under our belt, it is simply too early to
predict either number. The Fund's monthly dividend is carefully evaluated to
reflect investment income of the Fund.
The Fund's hedging strategy makes it impossible to predict what the
realized gain or loss situation will be at year-end. Recall that the gain or
loss on the hedge position is assumed to be realized at year-end, while
offsetting gains or losses on the investment portfolio are only realized when a
position is sold. If interest rates rise substantially and portfolio turnover is
low (as occurred last year), the result is net realized gains, even though the
overall portfolio value remains relatively steady.
5
HAVE THERE BEEN RECENT CHANGES IN THE WAY THE FUND IS REGULATED?
In a word, yes. Over the past several quarters a number of meaningful new
regulations have been imposed on the mutual fund industry. As we have discussed
in the past, while every fiduciary breach has occurred in open-end funds, most
of the new rules also apply to closed-end funds, such as FLC. Shareholders
should be aware that, as a result, the Fund's regulatory expenses continue to
increase.
The deadline for implementation of the most recently adopted rules is
October, 2004. The Fund will have a Chief Compliance Officer ("CCO") reporting
directly to the Board of Directors. The CCO will oversee development and
implementation of all aspects of regulatory compliance.
One significant change you will notice will be in the August quarterly
report. Beginning with this report, all of the Fund's quarterly reports will
contain a complete listing of the portfolio's investments. Other changes may not
be as apparent, but we'll do our best to keep you informed about the most
significant ones.
WHAT WAS THE RECENT CHANGE REGARDING INVESTMENTS IN FOREIGN SECURITIES?
The Board of Directors has recently amended the investment policies to
raise the authorized maximum percentage investment in DOLLAR-DENOMINATED
SECURITIES OF FOREIGN ISSUERS in the Fund to 30% of total assets. The change was
approved at the regular Board meeting held on April 23, 2004.
The percentage limitation does not include the portion of the Fund's assets
that can be invested in high quality money market obligations of foreign banks
or foreign branches of U.S. banks, which remains at 25% of total assets.
The change was undertaken in consideration of the significant cumulative
growth in the amount of U.S. dollar-denominated foreign preferred securities
outstanding. In the opinion of the Fund's Adviser the income and return
available from foreign securities often exceeds that of comparably situated U.S.
issuers.
Investments by the Funds in such securities are subject to the same
restrictions on credit quality and diversification that apply to U.S. domestic
debt and preferred securities. The Fund's Adviser has stated that investing a
greater portion of the Fund's assets in non-U.S. securities is not expected to
adversely impact the effectiveness of the Fund's hedging strategies.
Investors are cautioned that, although U.S. dollar-denominated foreign
securities are not subject to currency risk, they may be subject to risks
different from U.S. investments. In particular, the prices of foreign securities
may be affected by political and economic conditions, less stringent regulation,
and higher volatility. In addition, many foreign securities may be less liquid
and more volatile than U.S. securities.
DOES THE FUND USE CREDIT DERIVATIVES?
Not at this time, but the Fund is currently considering the ability to
purchase protection against both an issuer's deteriorating credit quality and
adverse interest rate spread changes through the use of credit derivatives.
6
While we attempt to manage credit risk, primarily through diversification
and the sale of securities holdings before an issuer's credit quality
deteriorates significantly, the Fund is considering from time to time managing
the credit risk of its securities holdings by entering into credit derivative
contracts, such as credit default swaps. At the risk of oversimplification, as a
buyer of such credit protection the Fund would be entitled to receive the par
value of a preferred or debt security from a counterparty in the event of a
default by the issuer, offsetting some or all of the corresponding loss on the
underlying security. In return, the Fund would pay to the counterparty a
periodic stream of payments over the term of the contract, provided that no
event of default has occurred. Of course, if no default occurs, the Fund would
have spent the stream of payments and received no benefit from entering into the
contract.
To protect against an adverse interest rate spread change (such as an
adverse change in the yield spread between preferred securities and a benchmark
Treasury security), the Fund is also considering from time to time purchasing
options on market spread swaps. In the typical market spread swap, two
counterparties agree to exchange payments at future dates based on the yield
spread between a reference rate and a benchmark rate. Options on such swaps,
which are analogous to interest rate swaptions, would give the Fund as the buyer
the right, but not the obligation, to buy or sell the market spread between the
reference and benchmark rate at a fixed price from the seller. At each future
payment date, if the spread between the reference and benchmark rates were above
(or below depending on the contract) the contract spread, the Fund would receive
from the seller the difference between the current spread and the contracted
spread. Of course, if the current spread were below (or above) the contract
spread, the Fund would receive no benefit from entering into the contract for
that payment date.
Because the Fund has paid the option premium for both credit derivative
transactions being considered, the financial risk of the transactions is
initially limited to the amount of the premium paid and to the marked-to-market
value of the option at a future date. In addition to the option expiring
worthless, there are various other ways for financial risk to occur in such
derivatives. Even though major financial and broker/dealer organizations are the
usual counterparties, anyone entering into such agreements must carefully
consider the other party's credit worthiness and its ability to perform its
obligations. In addition, because credit derivatives are highly specialized
investments and are not traded on any securities exchange, market liquidity may
also be a risk at certain times. Further, such derivatives are not regulated by
either the Commodities Futures Trading Commission or the Securities and Exchange
Commission. Nonetheless, the liquidity and transparency of credit derivatives
has increased significantly over the past several years, and we believe that
having the ability to use them is in the best interest of shareholders.
7
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Flaherty & Crumrine/Claymore Total Return Fund Incorporated
FINANCIAL DATA
PER SHARE OF COMMON STOCK
-----------------------------------------------------------
TOTAL DIVIDEND
DIVIDENDS NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE (1)
---------- --------- ------------- ----------
December 31, 2003 Extra .... $0.0400 $24.41 $25.85 $24.56
December 31, 2003 .......... 0.1625 24.41 25.85 24.56
January 31, 2004 ........... 0.1625 24.65 25.80 24.65
February 29, 2004 .......... 0.1625 24.72 25.86 24.72
March 31, 2004 ............. 0.1625 24.84 25.93 24.84
April 30, 2004 ............. 0.1625 24.02 23.24 23.47
May 31, 2004 ............... 0.1625 23.45 23.48 23.45
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(1) Whenever the net asset value per share of the Fund's common stock is less
than or equal to the market price per share on the payment date, new shares
issued will be valued at the higher of net asset value or 95% of the then
current market price. Otherwise, the reinvestment shares of common stock
will be purchased in the open market.
The accompanying notes are an integral part of the financial statements.
8
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Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 2004 (UNAUDITED)
-----------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 1)
------------ ----------
PREFERRED SECURITIES -- 67.7%
ADJUSTABLE RATE PREFERRED SECURITIES -- 2.5%
BANKING-- 2.5%
177,058 J.P. Morgan Chase & Co.,
Adj Rate Pfd. ........................ $ 8,945,856*
------------
FIXED RATE PREFERRED SECURITIES -- 65.2%
BANKING -- 31.8%
ABN AMRO North America, Inc.:
1,000 6.59% Pfd., 144A**** ................. 1,055,625*
28,000 ABN AMRO Capital Fund Trust VII,
6.08% Pfd. ........................... 652,680
$ 4,500,000 Astoria Capital Trust I,
9.75% 11/01/29 Capital Security,
Series B ............................. 5,545,440
Bank of America Corporation:
38,800 BAC Capital Trust I,
7.00% Pfd. ........................... 994,832
10,900 BAC Capital Trust II,
7.00% Pfd. ........................... 277,405
25,000 BAC Capital Trust III,
7.00% Pfd. ........................... 635,750
18,000 Fleet Capital Trust VII,
7.20% Pfd. ........................... 464,220
Bank One Corporation:
4,700 Bank One Capital I,
8.00% Pfd ............................ 119,568
28,000 Bank One Capital Trust VI,
7.20% Pfd ............................ 719,880
$ 2,000,000 First Chicago NBD Capital A,
7.95% 12/01/26 Capital Security,
144A**** ............................. 2,171,760
BNP Paribas,
$ 1,900,000 First Hawaiian Capital I,
8.343% 07/01/27 Capital Security,
Series B ............................. 2,113,655
20,000 Citigroup, Inc.,
6.231% Pfd., Series H ................ 1,016,900*
40,000 Cobank, ACB,
7.00% Pfd., 144A**** ................. 2,127,400*
20,000 Colonial Capital Trust IV,
7.875% Pfd. .......................... 513,300
VALUE
SHARES/$ PAR (NOTE 1)
------------ ----------
Deutsche Bank,
$ 1,000,000 BT Preferred Capital Trust II,
7.875% 02/25/27 Capital Security ..... $ 1,071,860
$ 2,000,000 First Midwest Capital Trust I,
6.95% 12/01/33 Capital Security,
144A**** ............................. 2,018,830
$ 1,500,000 First Tennessee Capital Trust II,
6.30% 04/15/34 Capital Security,
Series B ............................. 1,408,140
2 FT Real Estate Securities Company,
9.50% Pfd., 144A**** ................. 2,725,106
$ 6,000,000 GreenPoint Capital Trust I,
9.10% 06/01/27 Capital Security ...... 6,845,430
$ 8,000,000 HBOS Capital Funding LP,
6.85% 03/23/09 ....................... 7,949,760
HSBC USA, Inc.:
$ 6,820,000 HSBC Capital Funding LP,
10.176% 144A**** ..................... 9,515,707
$ 855,000 HSBC Capital Trust II,
8.38% 05/15/2027 Capital Security,
144A**** ............................. 948,828
$ 1,600,000 Republic New York Capital I,
7.750% 11/15/26 Capital Security ..... 1,711,096
$ 698,000 Republic New York Capital II,
7.53% 12/04/26 Capital Security,
STOPS ................................ 741,660
$ 3,000,000 Haven Capital Trust I,
10.46% 02/01/27 Capital Security ..... 3,526,455
J.P. Morgan Chase & Co.:
6,455 6.625% Pfd., Series H ................ 344,987*
$10,000,000 Chase Capital I,
7.67% 12/01/26 Capital Security ...... 10,606,400
79,300 Chase Capital VII,
7.00% Pfd., Series G ................. 1,968,622
$ 5,000,000 KeyCorp,
Keycorp Institutional Capital,
7.826% 12/01/26 Capital Security,
Series A ............................. 5,378,250
M&T Bank Corporation,
$ 400,000 First Empire Capital Trust I,
8.234% 02/01/27 Capital Security ..... 439,848
The accompanying notes are an integral part of the financial statements.
9
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Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2004 (UNAUDITED)
-----------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 1)
------------ ----------
PREFERRED SECURITIES (CONTINUED)
FIXED RATE PREFERRED SECURITIES (CONTINUED)
BANKING (CONTINUED)
10 Marshall & Ilsley Investment II,
8.875% Pfd., REIT, 144A**** .......... $ 1,065,918
$ 2,500,000 North Fork Capital Trust I,
8.70% 12/15/26 Capital Security ...... 2,791,750
$ 810,000 North Fork Capital Trust II,
8.00% 12/15/27 Capital Security ...... 896,237
2,100 Regions Financial Trust I,
8.00% Pfd. ........................... 55,850
20 Roslyn Real Estate,
8.95% Pfd., Pvt., REIT, Series C,
144A**** ............................. 2,207,124
Royal Bank of Scotland Group PLC:
75,000 5.75% Pfd., Series B ................. 1,654,875**
$ 4,000,000 RBS Capital Trust B,
6.80% 12/29/49 Capital Security ...... 3,963,540**
$ 5,050,000 Union Planters Capital Trust,
8.20% 12/15/26 Capital Security ...... 5,533,714
19,000 U.S. Bancorp,
USB Capital V, 7.25% Pfd. ............ 490,010
Wachovia Corporation:
$ 2,000,000 First Union Institutional Capital II,
7.85% 01/01/27 Capital Security ...... 2,156,710
$ 5,000,000 Wachovia Capital Trust I,
7.64% 01/15/27 Capital Security,
144A**** ............................. 5,315,800
350,000 Wachovia Preferred Funding,
7.25% Pfd., Series A ................. 9,366,000
Wells Fargo & Company:
7,900 Wells Fargo Capital Trust IV,
7.00% Pfd. ........................... 200,739
100,000 Wells Fargo Capital IX,
5.625% Pfd. .......................... 2,189,500
------------
TOTAL BANKING FIXED RATE
PREFERRED SECURITIES ................. 113,497,161
------------
FINANCIAL SERVICES -- 5.0%
Bear Stearns Companies, Inc.:
9,900 5.49% Pfd., Series G ................. 460,795*
160,000 5.72% Pfd., Series F ................. 7,607,200*
VALUE
SHARES/$ PAR (NOTE 1)
------------ ----------
4,200 Household Capital Trust VI,
8.25% Pfd. ........................... $ 111,426
Lehman Brothers Holdings, Inc.:
50,000 5.94% Pfd., Series C ................. 2,441,000*
199,000 6.50% Pfd., Series F ................. 5,143,155*
48,650 Merrill Lynch Capital Trust V,
7.28% Pfd. ........................... 1,265,873
Morgan Stanley:
17,200 Morgan Stanley Capital Trust II,
7.25% Pfd. ........................... 440,492
6,000 Morgan Stanley Capital Trust V,
5.75% Pfd. ........................... 132,870
------------
TOTAL FINANCIAL SERVICES FIXED
RATE PREFERRED SECURITIES ............ 17,602,811
------------
INSURANCE -- 9.2%
15,000 AAG Holding Company, Inc.,
7.25% Pfd ............................ 363,750
177,380 ACE Ltd.,
7.80% Pfd., Series C ................. 4,610,993**
$ 5,920,000 AON Capital Trust A,
8.205% 01/01/27 Capital Security ..... 6,466,179
186,000 Everest Re Capital Trust II,
6.20% Pfd., Series B ................. 4,134,780
36,000 ING Groep NV,
7.05% Pfd. ........................... 905,040
SAFECO Corporation,
$ 1,395,000 Safeco Capital Trust I,
8.072% 07/15/37 Capital Security ..... 1,523,940
The St. Paul Companies, Inc.:
40,000 St. Paul Capital Trust I,
7.60% Pfd. ........................... 1,022,200
$ 4,815,000 USF&G Capital,
8.312% 07/01/46 Capital Security,
144A**** ............................. 5,466,903
Zurich RegCaPS Fund Trust I:
1,525 6.01% Pfd., 144A**** ................. 1,558,184*
6,675 6.58% Pfd., 144A**** ................. 6,752,730*
------------
TOTAL INSURANCE FIXED RATE
PREFERRED SECURITIES ................. 32,804,699
------------
The accompanying notes are an integral part of the financial statements.
10
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2004 (UNAUDITED)
-----------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 1)
------------ ----------
PREFERRED SECURITIES (CONTINUED)
FIXED RATE PREFERRED SECURITIES (CONTINUED)
UTILITIES -- 13.2%
225,000 Alabama Power Company,
5.30% Pfd ............................ $ 5,341,500*
CenterPoint Energy, Inc.,
$ 4,500,000 Houston Light & Power, Capital Trust II,
8.257%, 02/01/37 Capital Security,
Series B ............................. 4,477,500
Constellation Energy Group,
45,700 Baltimore Gas & Electric Company,
6.70% Pfd., Series 1993 .............. 4,788,903*
Duke Energy Corporation:
50,214 7.04% Pfd., Series Y ................. 5,191,877*
15,000 7.85% Pfd., Series S ................. 1,557,525*
47,000 Duquesne Light & Company,
6.50% Pfd. ........................... 2,328,850*
20,000 Energy East Capital Trust I,
8.25% TOPrS .......................... 519,000
758 Entergy Arkansas, Inc.,
7.40% Pfd. ........................... 78,949*
60,000 Florida Progress Corporation Capital I,
7.10% Pfd., QUIPS, Series A .......... 1,474,500
30,445 Indianapolis Power & Light Company,
5.65% Pfd. ........................... 2,620,706*
Interstate Power & Light Company:
90,000 7.10% Pfd. ........................... 2,341,350*
38,600 8.375% Pfd., Series B ................ 1,184,634*
120,000 Mississippi Power Company,
5.25% Pfd. ........................... 2,800,800*
$ 5,000,000 PECO Energy Capital Trust IV,
5.75% 06/15/33 Capital Security ...... 4,447,825
VALUE
SHARES/$ PAR (NOTE 1)
------------ ----------
Public Service Enterprise Group, Inc.:
16,200 PSEG Funding Trust II,
8.75% Pfd. ........................... $ 441,288
30,000 Public Service Electric & Gas,
4.30% Pfd., Series C ................. 2,180,250*
120,000 Southern Union Company,
7.55% Pfd. ........................... 3,165,600*
10,000 Southwest Gas Capital II,
7.70% Pfd. ........................... 256,650
82,717 Wisconsin Power & Light Company,
6.50% Pfd. ........................... 1,970,319*
------------
TOTAL UTILITIES FIXED RATE
PREFERRED SECURITIES ................. 47,168,026
------------
OIL AND GAS -- 0.8%
2,750 EOG Resources, Inc.,
7.195% Pfd., Series B ................ 2,959,495*
------------
MISCELLANEOUS INDUSTRIES -- 5.2%
10,000 AMB Property Corporation,
6.75% Pfd., REIT Series M ............ 230,950
40,000 BRE Properties, Inc.,
6.75% Pfd., REIT, Series C ........... 942,000
38,750 Carramerica Realty Corporation,
7.50% Pfd., REIT, Series E ........... 977,663
65,300 Delphi Trust I,
8.25% Pfd. ........................... 1,653,396
50,000 Duke Realty Corporation,
6.50% Pfd., REIT, Series K ........... 1,166,750
85,000 Equity Residential Properties,
8.29% Pfd., REIT, Series K ........... 4,990,350
100,000 Health Care Property Investment,
7.10% Pfd., REIT, Series F ........... 2,404,500
34,000 Ocean Spray Cranberries, Inc.,
6.25% Pfd., 144A**** ................. 2,626,670*
57,000 PS Business Parks, Inc.,
6.875% Pfd., REIT, Series I .......... 1,282,500
The accompanying notes are an integral part of the financial statements.
11
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2004 (UNAUDITED)
-----------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 1)
------------ ----------
PREFERRED SECURITIES (CONTINUED)
FIXED RATE PREFERRED SECURITIES (CONTINUED)
MISCELLANEOUS INDUSTRIES(CONTINUED)
Public Storage, Inc.:
44,200 7.50% Pfd., REIT, Series V ........... $ 1,122,459
1,400 7.625% Pfd., REIT, Series T .......... 35,616
42,000 8.00% Pfd., REIT, Series R ........... 1,090,740
------------
TOTAL MISCELLANEOUS
INDUSTRIES FIXED RATE
PREFERRED SECURITIES ................. 18,523,594
------------
TOTAL FIXED RATE
PREFERRED SECURITIES ................. 232,555,786
------------
TOTAL PREFERRED SECURITIES
(Cost $243,210,775) .................. 241,501,642
------------
CORPORATE DEBT SECURITIES -- 24.9%
FINANCIAL SERVICES -- 0.3%
45,000 Corporate-Backed Trust Certificates,
Series Goldman Sachs
5.80% Pfd. ........................... 1,042,200
------------
INSURANCE -- 9.2%
20,000 American Financial Group, Inc.,
7.125% 02/03/34, Senior Note ......... 488,000
$ 8,700,000 Oneamerica Financial Partners,
7.00% 10/15/33, 144A**** ............. 8,555,232
$10,300,000 Prudential Holdings LLC,
8.695% 12/18/23, 144A**** ............ 12,559,254
$ 7,000,000 UnumProvident Corporation,
7.25% 03/15/28, Senior Notes ......... 6,359,150
5,385,000 Western & Southern Financial,
5.75% 07/15/33, 144A**** ............. 4,875,848
------------
TOTAL INSURANCE CORPORATE
DEBT SECURITIES ...................... 32,837,484
------------
OIL & GAS -- 2.5%
356,200 Nexen, Inc.,
7.35% Subordinated Notes ............. 9,054,604
------------
UTILITIES -- 10.6%
$ 2,000,000 AEP Texas Central Company,
6.65% 02/15/33, Senior Notes,
Series E ............................. 2,024,160
VALUE
SHARES/$ PAR (NOTE 1)
------------ ----------
Duke Capital Corporation:
27,200 7.875% 02/15/32,
Corp-Backed Trust .................... $ 699,856
$ 5,000,000 8.00% 10/01/19, Senior Notes ......... 5,628,950
$ 4,000,000 Florida Power & Light Company,
5.95% 10/01/33, 1st Mortgage ......... 3,936,880
$ 4,000,000 Indianapolis Power & Light Company,
6.60% 01/01/34, 1st Mortgage,
144A**** ............................. 3,956,100
$ 4,000,000 Interstate Power & Light Company,
6.45% 10/15/33, Senior Notes ......... 4,007,440
$ 6,215,000 Progress Energy, Inc.,
7.75% 03/01/31 ....................... 6,953,653
$ 5,670,000 TXU US Holding Company,
Oncor Electric Delivery Company,
7.25% 01/15/33, Senior Notes ......... 6,286,215
$ 4,000,000 Wisconsin Electric Power Company,
6.875% 12/01/95 ...................... 4,144,260
------------
TOTAL UTILITIES CORPORATE
DEBT SECURITIES ...................... 37,637,514
------------
MISCELLANEOUS -- 2.3%
35,325 Ford Motor Company,
7.50% 06/10/43, Senior Notes ......... 885,774
$ 6,265,000 General Motors Corporation,
8.80% 03/01/21 ....................... 6,785,371
25,300 Maytag Corp,
7.875% 08/01/31 ...................... 650,969
------------
TOTAL MISCELLANEOUS
CORPORATE DEBT SECURITIES ............ 8,322,114
------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $90,291,496) ................... 88,893,916
------------
CONVERTIBLE SECURITIES -- 3.1%
INSURANCE -- 0.7%
50,000 UnumProvident Corporation,
8.25% Pfd. Mandatory
Convertible 05/15/06 ................. 1,536,500
36,000 XL Capital Ltd.,
6.50% Pfd. Mandatory
Convertible 05/15/07 ................. 900,180
------------
TOTAL INSURANCE
CONVERTIBLE SECURITIES ................. 2,436,680
------------
The accompanying notes are an integral part of the financial statements.
12
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2004 (UNAUDITED)
-----------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 1)
------------ ----------
CONVERTIBLE SECURITIES (CONTINUED)
UTILITIES -- 2.4%
FPL Group, Inc.,
161,500 8.50% Pfd. Mandatory Convertible,
Series A 02/16/05 .................... $ 8,834,857
------------
TOTAL CONVERTIBLE SECURITIES
(Cost $11,667,297) ................... 11,271,537
------------
OPTION CONTRACTS-- 2.4% (Cost $11,531,364)
2,535 Put Options on U.S. Treasury Bond,
September Futures,
Expiring 09/27/04 .................... 8,591,016+
------------
MONEY MARKET FUND -- 0.7% (Cost $2,403,279)
2,403,279 BlackRock Provident Institutional
TempFund, 0.91% ...................... 2,403,279
------------
TOTAL INVESTMENTS (Cost $359,104,211***) . 98.8% 352,661,390
OTHER ASSETS AND LIABILITIES (Net) ....... 1.2% 4,120,996
---- ------------
TOTAL NET ASSETS AVAILABLE TO COMMON
STOCK AND PREFERRED STOCK ................ 100.0% $356,782,386
----- ------------
AUCTION MARKET PREFERRED STOCK (AMPS)
REDEMPTION VALUE (128,500,000)
ACCUMULATED UNDECLARED DISTRIBUTIONS TO
AMPS (42,298)
------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK $228,240,088
============
--------------
* Securities eligible for the Dividends Received Deduction and distributing
Qualified Dividend Income.
** Securities distributing Qualified Dividend Income only.
*** Aggregate cost of securities held.
**** Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may by resold in transactions exempt from
registration to qualified institutional buyers.
+ Non-income producing.
++ The percentage shown for each investment category is the total value of
that category as a percentage of net assets available to Common and
Preferred Stock.
ABBREVIATIONS (Note 7):
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
QUIPS -- Quarterly Income Preferred Securities
REIT -- Real Estate Investment Trust
STOPS -- Semi-Annual Trust Originated Pass Through Securities
TOPRS -- Trust Originated Preferred Securities
Capital Securities are treated as debt instruments for financial statement
purposes and the amounts shown in the Shares/$ Par column are dollar amounts of
par value.
The accompanying notes are an integral part of the financial statements.
13
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2004 (UNAUDITED)
-----------------------------------------------------------
ASSETS:
Investments, at value (Cost $359,104,211)
(See accompanying Portfolio of Investments) ............. $352,661,390
Dividends and interest receivable .......................... 5,207,994
Prepaid expenses ........................................... 177,042
------------
Total Assets ....................................... 358,046,426
LIABILITIES:
Payable for securities purchased ........................... $ 530,000
Dividends payable to Common Shareholders ................... 219,688
Offering cost payable ...................................... 160,298
Investment advisory fee payable ............................ 163,485
Administration, Transfer Agent and Custodian fees and
expenses payable ......................................... 65,676
Servicing agent fees payable ............................... 17,451
Professional fees payable .................................. 47,241
Directors' fees payable .................................... 6,476
Accrued expenses and other payables ........................ 53,725
Accumulated undeclared distributions to Auction Market
Preferred Stock Shareholders ............................. 42,298
---------
Total Liabilities .................................. 1,306,338
------------
AUCTION MARKET PREFERRED STOCK (5,140 SHARES OUTSTANDING)
REDEMPTION VALUE ........................................... 128,500,000
------------
NET ASSETS AVAILABLE TO COMMON STOCK .......................... $228,240,088
============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
Distribution in excess of net investment income ............ $ (198,524)
Accumulated net realized gain on investments sold .......... 4,638,280
Unrealized depreciation of investments ..................... (6,442,821)
Par value of Common Stock .................................. 97,319
Paid-in capital in excess of par value of Common Stock ..... 230,145,834
------------
Total Net Assets Available to Common Stock ......... $228,240,088
============
NET ASSET VALUE PER SHARE OF COMMON STOCK:
Common Stock (9,731,928 shares outstanding) .............. $ 23.45
============
The accompanying notes are an integral part of the financial statements.
14
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2004 (UNAUDITED)
-----------------------------------------------------------
INVESTMENT INCOME:
Dividends .............................................................. $ 4,051,777
Interest ............................................................... 6,827,254
------------
Total Investment Income ........................................... 10,879,031
EXPENSES:
Investment advisory fee ................................................ $989,376
Servicing agent fee .................................................... 107,833
Administrator's fee .................................................... 133,175
Auction Market Preferred Stock broker commissions and auction
agent fees .......................................................... 166,072
Professional fees ...................................................... 76,150
Insurance expense ...................................................... 185,495
Shareholder transfer and payment agent fees and expenses ............... 51,882
Directors' fees and expenses ........................................... 37,449
Custodian fees and expenses ............................................ 21,240
Other .................................................................. 89,552
--------
Total Expenses .................................................... 1,858,224
------------
NET INVESTMENT INCOME ....................................................... 9,020,807
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net realized gain on investments sold during the period ................ 6,418,749
Change in unrealized depreciation of investments during the period ..... (13,370,524)
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS ............................. (6,951,775)
------------
DISTRIBUTIONS TO AUCTION MARKET PREFERRED
STOCK SHAREHOLDERS:
From net investment income (including changes in
accumulated undeclared distributions) ............................... (764,049)
------------
NET INCREASE IN NET ASSETS TO COMMON STOCK RESULTING
FROM OPERATIONS .......................................................... $ 1,304,983
============
The accompanying notes are an integral part of the financial statements.
15
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------------------------------
FOR THE PERIOD
SIX MONTHS ENDED FROM AUGUST 29, 2003*
MAY 31, 2004 THROUGH
(UNAUDITED) NOVEMBER 30, 2003
------------ -----------------
OPERATIONS:
Net investment income ..................................................... $ 9,020,807 $ 2,998,358
Net realized gain/(loss) on investments sold during the period ............ 6,418,749 (1,673,594)
Change in net unrealized (depreciation)/appreciation of investments
sold during the period ................................................. (13,370,524) 6,927,703
Distributions to AMPS** Shareholders from net investment income,
including changes in accumulated undeclared distributions .............. (764,049) (126,947)
------------ ------------
Net increase in net assets resulting from operations ...................... 1,304,983 8,125,520
DISTRIBUTIONS:
Dividends paid from net investment income to Common
Stock Shareholders ..................................................... (9,860,698) (1,572,870)
Distributions paid from net realized capital gains to Common
Stock Shareholders ..................................................... -- --
------------ ------------
Total Distributions to Common Stock Shareholders .......................... (9,860,698) (1,572,870)
FUND SHARE TRANSACTIONS:
Increase from Common Stock transactions ................................... 1,297,141 230,990,626
Decrease due to Cost of Common Stock offering ............................. -- (483,750)
Decrease due to Cost of AMPS** Issuance ................................... -- (1,660,881)
------------ ------------
Net increase in net assets available to Common Stock resulting
from Fund share transactions ........................................... 1,297,141 228,845,995
NET (DECREASE)/INCREASE IN NET ASSETS TO
COMMON STOCK FOR THE PERIOD ................................................ (7,258,574) 235,398,645
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ....................................................... 235,498,662 100,017
------------ ------------
End of period (including distributions in excess of net investment
income of ($198,524) and undistributed net investment income of
$1,405,416, respectively) .............................................. $228,240,088 $235,498,662
============ ============
-----------------
* Commencement of operations.
** Auction Market Preferred Stock.
The accompanying notes are an integral part of the financial statements.
16
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
-----------------------------------------------------------
Contained below is per share operating performance data, total investment
returns, ratios to average net assets and other supplemental data. This
information has been derived from information provided in the financial
statements and market price data for the Fund's shares.
SIX MONTHS FOR THE PERIOD FROM
ENDED AUGUST 29, 2003(1)
MAY 31, 2004 THROUGH
(UNAUDITED) NOVEMBER 30, 2003
------------ -------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................................... $ 24.33 $ 23.82(2)
-------- --------
INVESTMENT OPERATIONS:
Net investment income .......................................................... 0.93 0.30
Net realized and unrealized (loss)/gain on investments ......................... (0.72) 0.55
DISTRIBUTIONS TO AMPS* SHAREHOLDERS:
From net investment income ..................................................... (0.08) (0.01)
From net realized capital gains ................................................ -- --
-------- --------
Total from investment operations ............................................... 0.13 0.84
-------- --------
COST OF ISSUANCE OF AMPS* ...................................................... -- (0.17)
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income ..................................................... (1.01) (0.16)
From net realized capital gains ................................................ -- --
-------- --------
Total distributions to Common Shareholders ..................................... (1.01) (0.16)
-------- --------
Net asset value, end of period ................................................. $ 23.45 $ 24.33
======== ========
Market value, end of period .................................................... $ 23.48 $ 25.16
======== ========
Total investment return based on net asset value**** ........................... 0.48%*** 2.82%***(3)
======== ========
Total investment return based on market value**** .............................. (2.71)%*** 1.31%***(3)
======== ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
TO COMMON STOCK SHAREHOLDERS:
Total net assets, end of period (in 000's) ..................................... $228,240 $235,499
Operating expenses ............................................................. 1.57%** 1.34%**
Net Investment Income+ ......................................................... 7.63%** 4.86%**
-----------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate .................................................. 58%*** 56%***
Total net assets available to Common and Preferred Stock,
end of period (in 000's) ............................................... $356,740 $363,999
Ratio of operating expenses to total average net assets available to
Common and Preferred Stock ............................................. 1.02%** 1.11%**
* Auction Market Preferred Stock.
** Annualized.
*** Not annualized.
**** Assumes reinvestment of distributions at the price obtained by the Fund's
Dividend Reinvestment and Cash Purchase Plan.
+ The net investment income ratios reflect income net of operating expenses
and payments to AMPS* Shareholders.
++ Information presented under heading Supplemental Data includes AMPS*.
(1) Commencement of operations.
(2) Net asset value at beginning of period reflects the deduction of the sales
load of $1.125 per share and offering costs of $0.05 per share paid by the
shareholder from the $25.00 offering price.
(3) Total return on net asset value is calculated assuming a purchase at the
offering price of $25.00 less the sales load of $1.125 and offering costs
of $0.05 and the ending net asset value per share. Total return on market
value is calculated assuming a purchase at the offering price of $25.00 on
the inception date of trading (August 29, 2003) and the sale at the
current market price on the last day of the period. Total return on net
asset value and total return on market value are not computed on an
annualized basis.
The accompanying notes are an integral part of the financial statements.
17
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
-----------------------------------------------------------
The table below sets out information with respect to Auction Market
Preferred Stock (AMPS) currently outstanding.
INVOLUNTARY AVERAGE
ASSET LIQUIDATING MARKET
TOTAL SHARES COVERAGE PREFERENCE VALUE
DATE OUTSTANDING (1) PER SHARE (2) PER SHARE PER SHARE (3)
-------- --------------- ------------- ----------- -------------
05/31/04* 5,140 $69,413 $25,000 $25,000
11/30/03 5,140 70,831 25,000 25,000
-------------
(1) See Note 6.
(2) Calculated by subtracting the Fund's total liabilities (excluding the AMPS)
from the Fund's total assets and dividing that amount by the number of AMPS
shares outstanding.
(3) Excludes accumulated undeclared dividends.
* Unaudited.
The accompanying notes are an integral part of the financial statements.
18
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
-----------------------------------------------------------
1. ORGANIZATION
Flaherty & Crumrine/Claymore Total Return Fund Incorporated (the "Fund")
was incorporated as a Maryland corporation on July 18, 2003, and commenced
operations on August 29, 2003 as a diversified, closed-end management investment
company under the Investment Company Act of 1940, as amended. The Fund's primary
investment objective is to provide its common shareholders with high current
income. The Fund's secondary investment objective is capital appreciation.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with accounting principles
generally accepted in the United States of America and requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities in the financial statements and the reported amounts of increases
and decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
PORTFOLIO VALUATION: The net asset value of the Fund's Common Stock is
determined by the Fund's Administrator no less frequently than on the last
business day of each week and month. It is determined by dividing the value of
the Fund's net assets available to Common Stock by the number of shares of
Common Stock outstanding. The value of the Fund's net assets attributable to
Common Stock is deemed to equal the value of the Fund's total assets less (i)
the Fund's liabilities, (ii) the aggregate liquidation value of its Auction
Market Preferred Stock ("AMPS"), and (iii) accumulated and unpaid dividends on
AMPS.
Securities listed on a national securities exchange are valued on the basis
of the last sale on such exchange on the day of valuation, except as described
hereafter. In the absence of sales of listed securities and with respect to (a)
securities for which the most recent sale prices are not deemed to represent
fair market value and (b) unlisted securities (other than money market
instruments), securities are valued at the mean between the closing bid and
asked prices when quoted prices for investments are readily available.
Investments in over-the-counter derivative instruments, such as interest rate
swaps and options thereon ("swaptions"), are valued at the prices obtained from
the broker/dealer or bank that is the counterparty to such instrument, subject
to comparison of such valuation with a valuation obtained from a broker/dealer
or bank that is not a counterparty to the particular derivative instrument.
Investments for which market quotations are not readily available or for which
management determines that the prices are not reflective of current market
conditions are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund, including reference to
valuations of other securities which are comparable in quality, maturity and
type. Investments in money market instruments, which mature in 60 days or less,
are valued at amortized cost. Investments in money market funds are valued at
the net asset value of such funds.
19
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities sold
are recorded on the identified cost basis. Dividend income is recorded on
ex-dividend dates. Interest income is recorded on an accrual basis. The Fund
also amortizes premiums and accretes discounts on those fixed income securities,
including capital securities and bonds, which trade and are quoted on an
"accrued income" basis.
OPTIONS: Upon the purchase of an option by the Fund, the total purchase
price paid is recorded as an investment. The market valuation is determined as
set forth in the preceding portfolio valuation paragraph. When the Fund enters
into a closing sale transaction, the Fund will record a gain or loss depending
on the difference between the purchase and sale price. The risks associated with
purchasing options and the maximum loss the Fund would incur are limited to the
purchase price originally paid.
REPURCHASE AGREEMENTS: The Fund may engage in repurchase agreement
transactions. The Fund's investment adviser reviews and approves the eligibility
of the banks and dealers with which the Fund may enter into repurchase agreement
transactions. The value of the collateral underlying such transactions is at
least equal at all times to the total amount of the repurchase obligations,
including interest. The Fund maintains possession of the collateral through its
custodian and, in the event of counterparty default, the Fund has the right to
use the collateral to offset losses incurred. There is the possibility of loss
to the Fund in the event the Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund expects to declare
dividends on a monthly basis to Shareholders of Common Stock ("Shareholders").
Distributions to Shareholders are recorded on the ex-dividend date. Any net
realized short-term capital gains are distributed to Shareholders at least
annually. Any net realized long-term capital gains may be distributed to
Shareholders at least annually or may be retained by the Fund as determined by
the Fund's Board of Directors. Capital gains retained by the Fund are subject to
tax at the capital gains corporate tax rate. Subject to the Fund qualifying as a
regulated investment company, any taxes paid by the Fund on such net realized
long-term gains may be used by the Fund's Shareholders as a credit against their
own tax liabilities.
FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company by complying with the requirements under subchapter
M of the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and intends to distribute substantially all of its taxable
net investment income to its shareholders. Therefore, no Federal income tax
provision will be required.
Income and capital gain distributions are determined and characterized in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to (1) differing
treatments of income and gains on various investment securities held by the
Fund, including timing differences, (2) the attribution of expenses against
certain components of taxable investment income, and (3) federal regulations
requiring proportionate allocation of income and gains to all classes of
shareholders.
20
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
Distributions from net realized gains for book purposes may include
short-term capital gains, which are included as ordinary income for tax
purposes, and may exclude amortization of premium on "accrued income"
securities, which are not reflected in ordinary income for tax purposes. The tax
character of distributions paid, including changes in accumulated undeclared
distributions to AMPS Shareholders, during 2003 and year-to-date was as follows:
DISTRIBUTIONS PAID IN FISCAL YEAR 2004 DISTRIBUTIONS PAID IN FISCAL YEAR 2003
-------------------------------------- --------------------------------------
ORDINARY INCOME LONG-TERM CAPITAL GAINS ORDINARY INCOME LONG-TERM CAPITAL GAINS
--------------- ----------------------- --------------- -----------------------
Common N/A N/A $1,572,870 --
Preferred N/A N/A $ 126,947 --
As of November 30, 2003, the components of distributable earnings (i.e.,
ordinary income and capital gain/loss) available to Common and Preferred Stock
shareholders, on a tax basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED UNREALIZED
CAPITAL LOSS CARRYFORWARD ORDINARY INCOME LONG-TERM GAIN APPRECIATION/(DEPRECIATION)
------------------------- --------------- -------------- ---------------------------
$(573,838) $2,136,071 $-- $6,120,615
At November 30, 2003, the Fund's accumulated realized capital losses were
$573,838. These losses may be carried forward and offset against any future
capital gains through 2011.
Under current tax laws, certain capital losses realized after October 31
may be deferred and treated as occurring on the first day of the following
fiscal year. For the fiscal period ended November 30, 2003, the Fund elected to
defer losses of $399,543 between November 1, 2003 and November 30, 2003.
EXCISE TAX: The Internal Revenue Code of 1986, as amended, imposes a 4%
nondeductible excise tax on the Fund to the extent the Fund does not distribute
by the end of any calendar year at least (1) 98% of the sum of its net
investment income for that year and its capital gains (both long term and short
term) for its fiscal year and (2) certain undistributed amounts from previous
years. The Fund paid $58,808 of Federal excise taxes attributable to calendar
year 2003 in March of 2004.
3. INVESTMENT ADVISORY FEE, SERVICING AGENT FEE, ADMINISTRATION FEE, CUSTODIAN
FEE, TRANSFER AGENT FEE AND DIRECTORS' FEES
Flaherty & Crumrine Incorporated (the "Adviser") serves as the Fund's
investment adviser. The Fund pays the Adviser a monthly fee at an annual rate of
0.575% of the first $200 million of the Fund's average weekly total managed
assets, 0.50% of the next $300 million of the Fund's average weekly total
managed assets, and 0.45% of the Fund's average weekly total managed assets
above $500 million.
For purposes of calculating such fee and the fees to the Servicing Agent,
the Administrator and the Custodian (described below), the Fund's average weekly
total managed assets means the total assets of the Fund (including assets
attributable to any AMPS outstanding or otherwise attributable to the use of
leverage) minus the sum of accrued liabilities (other than debt representing
financial leverage). For purposes of determining total managed assets, the
liquidation preference of any AMPS issued by the Fund is not treated as a
liability.
21
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
Claymore Securities, Inc. (the "Servicing Agent") serves as the Fund's
Servicing Agent. In this capacity, it acts as Shareholder Servicing Agent to the
Fund. As compensation for its services, the Fund pays the Servicing Agent a fee
computed and paid monthly at the annual rate of 0.025% of the first $200 million
of the Fund's average weekly total managed assets, 0.10% of the next $300
million of the Fund's average weekly total managed assets and 0.15% of the
Fund's average weekly total managed assets above $500 million.
PFPC Inc., a member of the PNC Financial Services Group, Inc. ("PNC
Financial Services"), serves as the Fund's Administrator and Transfer Agent. As
Administrator, PFPC Inc. calculates the net asset value of the Fund's shares
attributable to Common Stock and generally assists in all aspects of the Fund's
administration and operation. As compensation for PFPC Inc.'s services as
Administrator, the Fund pays PFPC Inc. a monthly fee at an annual rate of 0.10%
of the first $200 million of the Fund's average weekly total managed assets,
0.04% of the next $300 million of the Fund's average weekly total managed
assets, 0.03% of the next $500 million of the Fund's average weekly total
managed assets and 0.02% of the Fund's average weekly total managed assets above
$1 billion.
PFPC Inc. also serves as the Fund's Common Stock dividend-paying agent and
registrar and, as compensation for PFPC Inc.'s services as such, the Fund pays
PFPC Inc. a fee at an annual rate of 0.02% of the first $150 million of the
Fund's average weekly net assets attributable to Common Stock, 0.01% of the next
$350 million of the Fund's average weekly net assets attributable to Common
Stock, and 0.005% of the next $500 million of the Fund's average weekly net
assets attributable to the Common Stock and 0.0025% of the Fund's average weekly
net assets attributable to the Common Stock above $1 billion, plus certain
out-of-pocket expenses. For purpose of calculating such fee, the Fund's average
weekly net assets attributable to the Common Stock will be deemed to be the
average weekly value of the Fund's total assets minus the sum of the Fund's
liabilities and accumulated dividends, if any, on AMPS. For this calculation,
the Fund's liabilities are deemed to include the aggregate liquidation
preference of any outstanding Fund preferred shares.
PFPC Trust Company ("PFPC Trust") serves as the Fund's custodian. PFPC
Trust is an indirect subsidiary of PNC Financial Services. As compensation for
PFPC Trust's services as custodian, the Fund pays PFPC Trust a monthly fee at
the annual rate of 0.010% of the first $200 million of the Fund's average weekly
total managed assets, 0.008% of the next $300 million of the Fund's average
weekly total managed assets, 0.006% of the next $500 million of the Fund's
average weekly total managed assets, and 0.005% of the Fund's average weekly
total managed assets above $1 billion.
The Fund currently pays each Director who is not a director, officer or
employee of the Adviser or the Servicing Agent a fee of $9,000 per annum, plus
$500 for each in-person meeting of the Board of Directors or any committee and
$100 for each telephone meeting. The Audit Committee Chairman receives an
additional annual fee of $2,500. The Fund also reimburses all Directors for
travel and out-of-pocket expenses incurred in connection with such meetings.
22
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
4. PURCHASES AND SALES OF SECURITIES
For the six months ended May 31, 2004, the cost of purchases of U.S.
Government and other securities, excluding short-term investments, aggregated
$8,418,688 and $198,042,644, respectively. Proceeds from sales of U.S.
Government and other securities, excluding short-term investments, aggregated
$79,635,906 and $128,022,098, respectively.
At May 31, 2004, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost was $3,175,773 and aggregate
gross unrealized depreciation for all securities in which there is an excess of
tax cost over value was $9,618,594.
5. COMMON STOCK
There are 250,000,000 shares of capital stock authorized of which
240,000,000 are classified as Common Stock, par value $0.01 per share. At May
31, 2004, there were 9,679,198 shares of Common Stock issued and outstanding.
ORGANIZATION EXPENSES AND COSTS OF THE COMMON STOCK OFFERING: Organization
expenses relating to organizing the Fund of $12,000 have been paid by the
Adviser. Costs of the Common Stock offering were estimated to be approximately
$847,347. The Adviser has also agreed to pay offering costs (excluding sales
charges) that exceeded $0.05 per share. Costs of the Common Stock offering up to
$0.05 per share and sales charges were borne by the Fund and its shareholders
and are accounted for as a reduction to paid-in capital. Based on the initial
offering of 9,000,000 shares, and the subsequent offering of 675,000 shares
through exercise of the underwriters' over-allotment option in connection with
the initial offering, $483,750 of the offering costs were borne by the Fund and
$363,597 were borne by the Adviser.
At May 31, 2004, 250,000,000 shares of $0.01 par value Common Stock were
authorized.
Common Stock transactions were as follows:
PERIOD ENDED 11/30/03 (FUND INCEPTION TO DATE)
----------------------------------------------
SHARES GROSS AMOUNT SALES LOAD NET AMOUNT
------ ------------ ---------- ----------
Beginning Capitalization 4,198 $ 100,017 $ 0 $ 100,017
Initial Public Offering
on 08/27/03 9,000,000 225,000,000 10,125,000 214,875,000
Shares offered through
exercise of Underwriters'
over-allotment option
On 09/12/03 400,000 10,000,000 450,000 9,550,000
On 10/14/03 275,000 6,875,000 309,376 6,565,626
--------- ------------ ----------- ------------
Total 9,679,198 $241,975,017 $10,884,376 $231,090,643
23
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
SIX MONTHS ENDED
----------------
05/31/04
--------
SHARES AMOUNT
------ ------
Share issued under the Dividend
Reinvestment and Cash Purchase Plan 52,730 $1,297,141
------ ----------
6. AUCTION MARKET PREFERRED STOCK ("AMPS")
The Fund's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of $0.01 par value preferred stock. The AMPS, which consists
of Series T7 and W28, is senior to the Common Stock and results in the financial
leveraging of the Common Stock. Such leveraging tends to magnify both the risks
and opportunities to Common Stock Shareholders. Dividends on AMPS are
cumulative.
The Fund is required to meet certain asset coverage tests with respect to
the AMPS. If the Fund fails to meet these requirements and does not correct such
failure, the Fund may be required to redeem, in part or in full, AMPS at a
redemption price of $25,000 per share plus an amount equal to the accumulated
and unpaid dividends on such shares in order to meet these requirements.
Additionally, failure to meet the foregoing asset requirements could restrict
the Fund's ability to pay dividends to Common Stock Shareholders and could lead
to sales of portfolio securities at inopportune times.
An auction of the AMPS is generally held every 7 days for Series T7 and
every 28 days for Series W28. Existing Shareholders may submit an order to hold,
bid or sell such shares at par value on each auction date. AMPS Shareholders may
also trade shares in the secondary market between auction dates.
On October 29, 2003, the Fund issued 2,570 shares for each Series T7 and
W28 totaling 5,140 shares of AMPS. The AMPS represent a par value of $64.25
million each for Series T7 and W28 or $128.5 million in total, with an initial
dividend rate equal to 1.35% and 1.30% for Series T7 and W28, respectively.
The underwriters' sales load of 1% of the $128.5 million face value totaled
$1,285,000 and was immediately charged to common equity capital upon completion
of the offering.
Costs of the issue, including legal, printing, registration, rating agency
fees, etc. of $375,881 were charged against common equity capital. The sum of
underwriters' sales load and cost of the issue totaled $1,660,881.
24
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
At May 31, 2004, 2,570 shares for Series T7 and W28 of Auction Market
Preferred Shares were outstanding at the annual rate of 1.35% and 1.30%, for
Series T7 and W28 respectively. The dividend rate, as set by the auction
process, is generally expected to vary with short-term interest rates. These
rates may vary in a manner unrelated to the income received on the Fund's
assets, which could have either a beneficial or detrimental impact on net
investment income and gains available to Common Stock shareholders. While
the Fund expects to structure its portfolio holdings and hedging transactions
to lessen such risks to Common Stock Shareholders, there can be no assurance
that such results will be attained.
7. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY
The Fund invests primarily in a diversified portfolio of preferred and debt
securities. This includes fully taxable ("hybrid") preferred securities and
traditional preferred stocks eligible for the inter-corporate Dividends Received
Deduction ("DRD"). Under normal market conditions, at least 50% of the value of
the Fund's total assets will be invested in preferred securities. A security
will be characterized as a hybrid preferred security if (a) an issuer can defer
payment of income for eighteen months or more without triggering an event of
default and (b) such issue is a junior and fully subordinated liability of an
issuer or its ultimate guarantor. (Certain securities, such as TOPrS, QUIPS,
MIPS, TRUPS, QUIDS, QUICS, CorTS, Trust Preferred Securities, capital
securities, and other similar investments will be considered debt securities to
the extent that, in the opinion of the Fund's Investment Adviser, such
investments are deemed not to have these characteristics.) Under normal market
conditions, the Fund invests at least 25% of its total assets in securities
issued by companies in the utilities industry and at least 25% of its total
assets in securities issued by companies in the banking industry. Because of the
Fund's concentration of investments in the utility industry and in the banking
industry, the ability of the Fund to maintain its dividend and the value of the
Fund's investments could be adversely affected by the possible inability of
companies in these industries to pay dividends and interest on their securities
and the ability of holders of securities of such companies to realize any value
from the assets of the issuer upon liquidation or bankruptcy.
The Fund may invest up to 20% of its total assets in securities rated below
investment grade. These securities must be rated at least either "Ba3" by
Moody's Investors Service, Inc. or "BB-" by Standard & Poor's or judged to be
comparable in quality, in either case, at the time of purchase; however, these
securities must be issued by an issuer having a class of senior debt rated
investment grade outstanding.
The Fund may invest up to 15% of its total assets in common stocks, which
total includes those convertible securities that trade in close relationship to
the underlying common stock of an issuer.
The Fund may invest up to 30% of its total assets in the securities, other
than money market securities, of companies organized or having their principal
place of business outside the United States. All foreign securities held by the
Fund will be denominated in U.S. dollars. The percentage limitation was raised
from 20% by the Fund's Board of Directors at its regular board meeting on April
23, 2004.
25
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
8. SPECIAL INVESTMENT TECHNIQUES
The Fund may employ certain investment techniques in accordance with its
fundamental investment policies. These may include the use of when-issued and
delayed delivery transactions. Securities purchased or sold on a when-issued or
delayed delivery basis may be settled within 45 days after the date of the
transaction. Such transactions may expose the Fund to credit and market
valuation risk greater than that associated with regular trade settlement
procedures. The Fund may also enter into transactions, in accordance with its
fundamental investment policies, involving any or all of the following: lending
of portfolio securities, short sales of securities, futures contracts, interest
rate swaps, options on futures contracts, options on securities and swaptions.
As in the case of when-issued securities, the use of over-the-counter
derivatives, such as interest rate swaps and swaptions, may expose the Fund to
greater credit, operations, and market value risk than is the case with
regulated, exchange traded futures and options. With the exception of purchasing
securities on a when-issued or delayed delivery basis or lending portfolio
securities, these transactions are used for hedging or other appropriate
risk-management purposes or, under certain other circumstances, to increase
income. As of May 31, 2004, the Fund owned put options on U.S. Treasury bond
futures contracts. No assurance can be given that such transactions will achieve
their desired purposes or will result in an overall reduction of risk to the
Fund.
26
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED)
-----------------------------------------------------------
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
a shareholder whose Common Stock is registered in his or her own name will have
all distributions reinvested automatically by PFPC Inc. as agent under the Plan,
unless the shareholder elects to receive cash. Distributions with respect to
shares registered in the name of a broker-dealer or other nominee (that is, in
"street name") may be reinvested by the broker or nominee in additional shares
under the Plan, but only if the service is provided by the broker or nominee,
unless the shareholder elects to receive distributions in cash. A shareholder
who holds Common Stock registered in the name of a broker or other nominee may
not be able to transfer the Common Stock to another broker or nominee and
continue to participate in the Plan. Investors who own Common Stock registered
in street name should consult their broker or nominee for details regarding
reinvestment.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price per share of the Fund's Common Stock is equal to or exceeds the
net asset value per share on the valuation date, participants in the Plan will
be issued new shares valued at the higher of net asset value or 95% of the then
current market value. Otherwise, PFPC Inc. will buy shares of the Fund's Common
Stock in the open market, on the New York Stock Exchange or elsewhere, on or
shortly after the payment date of the dividend or distribution and continuing
until the ex-dividend date of the Fund's next distribution to holders of the
Common Stock or until it has expended for such purchases all of the cash that
would otherwise be payable to the participants. The number of purchased shares
that will then be credited to the participants' accounts will be based on the
average per share purchase price of the shares so purchased, including brokerage
commissions. If PFPC Inc. commences purchases in the open market and the then
current market price of the shares (plus any estimated brokerage commissions)
subsequently exceeds their net asset value most recently determined before the
completion of the purchases, PFPC Inc. will attempt to terminate purchases in
the open market and cause the Fund to issue the remaining dividend or
distribution in shares. In this case, the number of shares received by the
participant will be based on the weighted average of prices paid for shares
purchased in the open market and the price at which the Fund issues the
remaining shares. These remaining shares will be issued by the Fund at the
higher of net asset value or 95% of the then current market value.
Plan participants are not subject to any charge for reinvesting dividends
or capital gains distributions. Each Plan participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to PFPC
Inc.'s open market purchases in connection with the reinvestment of dividends or
capital gains distributions. For the period from inception through May 31, 2004,
$279 in brokerage commissions were incurred.
The automatic reinvestment of dividends and capital gains distributions
will not relieve Plan participants of any income tax that may be payable on the
dividends or capital gains distributions. A
27
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
participant in the Plan will be treated for Federal income tax purposes as
having received, on the dividend payment date, a dividend or distribution in an
amount equal to the cash that the participant could have received instead of
shares.
In addition to acquiring shares of Common Stock through the reinvestment of
cash dividends and distributions, a Shareholder may invest any further amounts
from $100 to $3,000 semi-annually at the then current market price in shares
purchased through the Plan. Such semi-annual investments are subject to any
brokerage commission charges incurred by PFPC Inc. under the Plan.
A Shareholder whose Common Stock is registered in his or her own name may
terminate participation in the Plan at any time by notifying PFPC Inc. in
writing, by completing the form on the back of the Plan account statement and
forwarding it to PFPC Inc. or by calling PFPC Inc. directly. A termination will
be effective immediately if notice is received by PFPC Inc. not less than 10
days before any dividend or distribution record date. Otherwise, the termination
will be effective, and only with respect to any subsequent dividends or
distributions, on the first day after the dividend or distribution has been
credited to the participant's account in additional shares of the Fund. Upon
termination and according to a participant's instructions, PFPC Inc. will either
(a) issue certificates for the whole shares credited to the shareholder's Plan
account and a check representing any fractional shares or (b) sell the shares in
the market. Shareholders who hold common stock registered in the name of a
broker or other nominee should consult their broker or nominee to terminate
participation.
The Plan is described in more detail in the Fund's Plan brochure.
Information concerning the Plan may be obtained from PFPC Inc. at
1-800-331-1710.
ADDITIONAL COMPENSATION AGREEMENT
The Adviser has agreed to compensate Merrill Lynch from its own resources
at an annualized rate of 0.15% of the Fund's total managed assets for certain
services, including after-market support services designed to maintain the
visibility of the Fund.
PROXY VOTING POLICIES
The Fund's proxy voting policies and procedures are available (i) without
charge, upon request, by calling the Fund's transfer agent at 1-800-331-1710,
(ii) on the Fund's website at www.fcclaymore.com and (iii) on the Securities and
Exchange Commission's website at www.sec.gov.
PORTFOLIO MANAGEMENT TEAM
In managing the day-to-day operations of the Fund, the Adviser relies on
the expertise of its team of money management professionals, consisting of
Messrs. Crumrine, Ettinger, Stimes, Stone and Chadwick. The professional
backgrounds of each member of the management team are included in the
"Information about Fund Directors and Officers" section of this report beginning
on page 30.
28
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
MEETING OF SHAREHOLDERS
On April 23, 2004, the Fund held its Annual Meeting of Shareholders (the
"Meeting") to elect six Directors of the Fund ("Proposal 1"). In the election
for directors to represent holders of AMPS, a quorum was not present at the 2004
Annual Meeting of Shareholders. In consequence, under the Fund's Bylaws, Messrs.
Gust and Dalmaso will continue to serve as directors until the Fund's next
regularly scheduled Annual Meeting of Shareholders. The results of the proposal
are as follows:
PROPOSAL 1: ELECTION OF DIRECTORS.
NAME FOR WITHHELD
---- --- --------
COMMON STOCK
Martin Brody .................................. 7,286,185 87,435
Donald F. Crumrine ............................ 7,296,242 77,378
David Gale .................................... 7,295,693 77,927
Robert F. Wulf ................................ 7,293,935 79,685
FOR WITHHELD
--- --------
PREFERRED STOCK
Nicholas Dalmaso .............................. 2,396 6
Morgan Gust ................................... 2,396 6
29
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
INFORMATION ABOUT FUND DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Directors. Information pertaining to the Directors and officers
of the Fund is set forth below.
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
-------------- -------------- -------------- ------------- --------------- -------------------
NON-INTERESTED
DIRECTORS:
----------
MARTIN BRODY Director Class II Director Retired 4 Director, Jaclyn, Inc.
c/o HMK Associates since (luggage and
30 Columbia Turnpike August 2003 accessories). Director
Florham Park, NJ 07932 Emeritus, Smith Barney
Age: 82 Mutual Funds (18 Funds).
Director, Flaherty &
Crumrine Preferred Income
Fund, Flaherty & Crumrine
Preferred Income
Opportunity Fund and
Flaherty & Crumrine
Claymore/Preferred
Securities Income Fund.
DAVID GALE Director Class I Director President & CEO of 4 Director, Golden
Delta Dividend Group, Inc. since Delta Dividend State Vintners, Inc.
220 Montgomery Street August 2003 Group, Inc. (investments). (wine pressing).
Suite 426 Director, Flaherty &
San Francisco, CA 94104 Crumrine Preferred
Age: 54 Income Fund,
Flaherty & Crumrine
Preferred Income
Opportunity Fund and
Flaherty & Crumrine
Claymore/Preferred
Securities Income Fund.
-------------------------
* The Fund's Board of Directors is divided into three classes, each class
having a term of three years. Each year the term of office of one class
expires and the successor or successors elected to such class serve for a
three year term. The initial term for each class expires as follows:
CLASS I DIRECTORS - one year term expires at
the Fund's 2005 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS II DIRECTORS - two year term expires at
the Fund's 2006 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS III DIRECTORS - three year term expires
at the Fund's 2007 Annual Meeting of
Shareholders; directors may continue in office
until their successors are duly elected and
qualified.
30
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
-------------- -------------- -------------- ------------- --------------- -------------------
NON-INTERESTED
DIRECTORS:
----------
MORGAN GUST+ Director Class II Director From March 2002, 4 Director, Flaherty &
Giant Industries, Inc. since President of Giant Crumrine Preferred
23733 N. Scottsdale Road August 2003** Industries, Inc. (petroleum Income Fund,
Scottsdale, AZ 85255 refining and marketing) Flaherty & Crumrine
Age: 57 and, for more than five Preferred Income
years prior thereto, Opportunity Fund and
Executive Vice President, Flaherty & Crumrine
and various other Vice Claymore/Preferred
President positions at Securities Income Fund.
Giant Industries, Inc.
ROBERT F. WULF Director Class III Director Financial Consultant; 4 Director, Flaherty &
3560 Deerfield Drive South since Trustee, University of Crumrine Preferred
Salem, OR 97302 August 2003 Oregon Foundation; Income Fund,
Age: 67 Trustee, San Francisco Flaherty & Crumrine
Theological Seminary. Preferred Income
Opportunity Fund and
Flaherty & Crumrine
Claymore/Preferred
Securities Income Fund.
INTERESTED
DIRECTORS:
----------
DONALD F. CRUMRINE++ Director, Class III Director Chairman of the Board and 4 Director, Flaherty &
301 E. Colorado Boulevard Chairman since Director of Flaherty & Crumrine Preferred
Suite 720 of the Board August 2003 Crumrine Incorporated. Income Fund,
Pasadena, CA 91101 and Chief Flaherty & Crumrine
Age: 56 Executive Officer Preferred Income
Opportunity Fund and
Flaherty & Crumrine
Claymore/Preferred
Securities Income Fund.
-------------------------
* The Fund's Board of Directors is divided into three classes, each class
having a term of three years. Each year the term of office of one class
expires and the successor or successors elected to such class serve for a
three year term. The initial term for each class expires as follows:
CLASS I DIRECTORS - one year term expires at
the Fund's 2005 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS II DIRECTORS - two year term expires at
the Fund's 2006 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS III DIRECTORS - three year term expires
at the Fund's 2007 Annual Meeting of
Shareholders; directors may continue in office
until their successors are duly elected and
qualified.
** Mr. Gust will stand for election at the Fund's 2005 Annual Meeting of
Shareholders.
+ As a Director, represents holders of shares of the Fund's
Auction Market Preferred Stock.
++ "Interested person" of the Fund as defined in the Investment Company Act of
1940. Mr. Crumrine is considered an "interested person" because of his
affiliation with Flaherty & Crumrine Incorporated which acts as the Fund's
investment adviser.
31
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
-------------- -------------- -------------- ------------- --------------- -------------------
INTERESTED
DIRECTORS:
----------
NICHOLAS DALMASO+, ++ Director, Class I Director Senior Managing Director 2 Trustee, Dreman/
210 N. Hale Street Vice President since and General Counsel of Claymore Dividend and
Wheaton, IL 60187 and Assistant August 2003 Claymore Securities, Inc. Income Fund, Advent
Age: 39 Secretary since November, 2001 and Claymore Equity Income
Claymore Advisors, LLC Fund, MBIA Capital/
since October 2003. Claymore Managed
Partner of DBN Group Duration Investment
since April 2001. Associate Grade Municipal Fund,
General Counsel of Western Asset/Claymore
Nuveen Investments from U.S. Treasury Inflation
July 1999 to November 2001. Protection Securities
Prior to that, Associate Funds, TS&W/Claymore
General Counsel of Balanced Income Fund,
Van Kampen Investments. Madison/Claymore
Covered Call Fund and
Director of Flaherty &
Crumrine/Claymore
Preferred Income Fund.
OFFICERS:
---------
ROBERT M. ETTINGER President Since President and Director of 2 Director, Flaherty &
301 E. Colorado Boulevard August 2003 Flaherty & Crumrine Crumrine Preferred
Suite 720 Incorporated. Income Fund and
Pasadena, CA 91101 Flaherty & Crumrine
Age: 45 Preferred Income
Opportunity Fund.
-------------------------
* The Fund's Board of Directors is divided into three classes, each class
having a term of three years. Each year the term of office of one class
expires and the successor or successors elected to such class serve for a
three year term. The initial term for each class expires as follows:
CLASS I DIRECTORS - one year term expires at
the Fund's 2005 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS II DIRECTORS - two year term expires at
the Fund's 2006 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS III DIRECTORS - three year term expires
at the Fund's 2007 Annual Meeting of
Shareholders; directors may continue in office
until their successors are duly elected and
qualified.
+ As a Director, represents holders of shares of the Fund's Auction Market
Preferred Stock.
++ "Interested person" of the Fund as defined in the Investment Company Act of
1940. Mr. Dalmaso is considered an "interested person" because of his
affiliation with Claymore Securities, Inc. which acts as the Fund's
servicing agent.
32
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
-------------- -------------- -------------- ------------- --------------- -------------------
OFFICERS:
---------
PETER C. STIMES Chief Financial Since Vice President of -- --
301 E. Colorado Boulevard Officer, Chief August 2003 Flaherty & Crumrine
Suite 720 Accounting Officer, Incorporated.
Pasadena, CA 91101 Vice President, Treasurer,
Age: 48 and Assistant Secretary
BRADFORD S. STONE Vice President Since Since May 2003, Vice -- --
392 Springfield Avenue and Assistant August 2003 President of Flaherty &
Mezzanine Suite Treasurer Crumrine Incorporated;
Summit, NJ 07901 from June 2001 to April
Age: 44 2003, Director of US
Market Strategy at
Barclays Capital;
from February 1987 to
June 2001, Vice
President of Goldman,
Sachs & Company as
Director of US Interest
Rate Strategy and,
previously, Vice
President of Interest
Rate Product Sales.
R. ERIC CHADWICK Vice President, Since Vice President of -- --
301 E. Colorado Boulevard Secretary and October 2002 Flaherty & Crumrine
Suite 720 Assistant Incorporated since August
Pasadena, CA 91101 Treasurer 2001, and previously
Age: 29 (since January 1999)
portfolio manager of
Flaherty & Crumrine
Incorporated.
33
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[This page intentionally left blank]
DIRECTORS
Martin Brody
Donald F. Crumrine, CFA
Nicholas Dalmaso
David Gale
Morgan Gust
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chairman of the Board
and Chief Executive Officer
Robert M. Ettinger, CFA
President
Peter C. Stimes, CFA
Chief Financial Officer,
Chief Accounting Officer,
Vice President, Treasurer,
and Assistant Secretary
Nicholas Dalmaso
Vice President and
Assistant Secretary
Bradford S. Stone
Vice President and
Assistant Treasurer
R. Eric Chadwick, CFA
Vice President, Secretary and
Assistant Treasurer
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@fin-mail.com
QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY &
CRUMRINE/CLAYMORE TOTAL RETURN FUND?
o If your shares are held in a brokerage
Account, contact your broker.
o If you have physical possession of your shares
in certificate form, contact the Fund's Transfer
Agent & Shareholder Servicing Agent --
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
1-800-331-1710
THIS REPORT IS SENT TO SHAREHOLDERS OF FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN
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.
[GRAPHIC OMMITTED] FLAHERTY & CRUMRINE/CLAYMORE
LIGHTHOUSE ART TOTAL RETURN FUND
SEMI-ANNUAL
REPORT
MAY 31, 2004
web site: www.fcclaymore.com
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
Not yet applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 10. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers
have concluded that the registrant's disclosure controls and procedures
(as defined in Rule 30a-3(c) under the Investment Company Act of 1940,
as amended (the "1940 Act") (17 CFR 270.30a-3(c))) were effective, as
of a date within 90 days of the filing date of this report, based on
their evaluation of these controls and procedures required by Rule
30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b)
or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17
CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d)) that occurred during the registrant's last fiscal
half-year (the registrant's second fiscal half-year in the case of an
annual report) that have materially affected, or are reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
ITEM 11. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act
and Section 906 of the Sarbanes-Oxley Act of 2002 are attached
hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND INCORPORATED
----------------------------------------------------------------
By (Signature and Title)* /S/ DONALD F. CRUMRINE
-------------------------------------------------------
Donald F. Crumrine, Director, Chairman of the Board
and Chief Executive Officer
(principal executive officer)
Date JULY 29, 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/ DONALD F. CRUMRINE
-------------------------------------------------------
Donald F. Crumrine, Director, Chairman of the Board
and Chief Executive Officer
(principal executive officer)
Date JULY 29, 2004
----------------------------------------------------------------------------
By (Signature and Title)* /S/ PETER C. STIMES
-------------------------------------------------------
Peter C. Stimes, Chief Financial and Accounting
Officer, Vice President, Treasurer & Assistant
Secretary
(principal financial officer)
Date JULY 29, 2004
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
I, Donald F. Crumrine, certify that:
1. I have reviewed this report on Form N-CSR of Flaherty &
Crumrine/Claymore Total Return Fund Incorporated;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations, changes in net
assets, and cash flows (if the financial statements are required to
include a statement of cash flows) of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Rule 30a-3(c) under the Investment Company Act of 1940) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) [Omitted]
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of a date within 90 days prior to the filing date
of this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal half-year (the registrant's second
fiscal half-year in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed to
the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize, and report financial information;
and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: JULY 29, 2004 /S/ DONALD F. CRUMRINE
-------------------- ----------------------------------------------
Donald F. Crumrine, Director, Chairman of the
Board and Chief Executive Officer
(principal executive officer)