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
-------------------------
FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND INCORPORATED
-----------------------------------------------------------
(Exact name of registrant as specified in charter)
301 E. Colorado Boulevard, Suite 720
PASADENA, CA 91101
------------------------------------
(Address of principal executive offices) (Zip code)
Donald F. Crumrine
Flaherty & Crumrine Inc.
301 E. Colorado Boulevard, Suite 720
PASADENA, CA 91101
------------------------------------
(Name and address of agent for service)
registrant's telephone number, including area code: 626-795-7300
-------------
Date of fiscal year end: NOVEMBER 30, 2004
------------------
Date of reporting period: NOVEMBER 30, 2004
------------------
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:
In retrospect, Fiscal 2004 was a pretty uneventful year for the Flaherty &
Crumrine/Claymore Total Return Fund ("FLC"). The preferred securities and
corporate bonds in the portfolio produced respectable returns as long-term
interest rates fell modestly and credit spreads generally narrowed. However,
since interest rates moved within a relatively narrow range throughout the year,
the Fund's hedges were a drag on performance. During the fourth fiscal quarter
ended November 30, 2004, the Fund produced +1.4%(1) total return on net asset
value ("NAV"). For the full fiscal year, the total return on NAV was +5.2%(1).
--------------------------------------------------------------------------------------
TOTAL RETURN PER YEAR ON NET ASSET VALUE(1)
FOR PERIODS ENDING NOVEMBER 30, 2004
ONE LIFE OF
YEAR FUND(2)
----- -------
Flaherty & Crumrine/Claymore Total Return Fund ............ 5.2% 6.5%
Lipper Domestic Investment Grade Bond Funds(3) ............ 6.2% 7.6%
----------------
(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) Since inception on August 29, 2003
(3) 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.
--------------------------------------------------------------------------------------
For investors in fixed income securities, the past year has turned out to
be one of the more perplexing periods in recent memory. Signs of a pick-up in
domestic economic activity were tempered by high oil (and other commodity)
prices, the declining value of the U.S. dollar, and the U.S. "twin deficits" (of
the government budget and the trade balance). After 31/2 years of lowering
short-term interest rates, the Federal Reserve reversed course in June and began
raising them. By the end of 2004, the Federal Funds rate (the rate controlled by
the Federal Reserve to set the level of short-term interest rates) stood at
2.25%, up from the low of 1.00%. Despite the rise in short-term rates, long-term
rates actually fell by about 25 basis points in 2004, finishing the year at
4.82%. This marks the first time in more than 30 years that long-term interest
rates fell in the early stages of Fed tightening.
By increasing the Fed Funds rate, the Fed hopes to prevent the economy from
expanding too quickly, which in turn could result in an undesirable increase in
the rate of inflation. At the same time, the Fed does not want to raise rates
too quickly and derail the economy, which in turn would have negative
consequences for corporate credit quality. Because credit quality and inflation
represent the biggest risks to the prices of the long-term fixed income
securities held in the Fund's portfolio, its performance is strongly impacted by
Fed policy.
Although the interest rate environment proved challenging for our hedging
strategy, the markets for preferred securities and corporate bonds continue to
have a favorable tone. We have observed steady improvement in the financial
condition of most U.S. corporations for some time now. As an issuer's quality
improves, the prices for its debt and preferred securities typically outperform
the prices of other benchmark securities, such as U.S. Treasury Bonds. We expect
credit quality will continue to improve in 2005, although we are cautious on the
outlook for corporate yields, which already reflect much of the balance sheet
improvement that companies have achieved.
The composition of the investment portfolio has not changed much during the
past year. The list of top ten holdings (by issuer) looks pretty similar to last
November. The Fund does have a meaningful exposure to the insurance industry
(19.1% as of November 30th). These positions are well diversified, but the
entire industry has been under careful scrutiny since late October when the New
York State Attorney General's office announced it was investigating the
practices of certain companies. The prices of most debt and preferred securities
issued by insurance companies took a beating when the announcement was made,
although they have since recovered a portion of the decline.
We encourage you to read the following Question and Answer section. We go
into greater detail on several topics mentioned above. In addition, please take
advantage of the Fund's website, WWW.FCCLAYMORE.COM. It contains a wide range of
useful and up-to-date information about the Fund.
Sincerely,
/S/ DONALD F. CRUMRINE /S/ ROBERT M. ETTINGER
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
January 21, 2005
2
QUESTIONS & ANSWERS
WHAT IS THE OUTLOOK FOR THE FUND'S DIVIDEND IN 2005?
FLC is not immune to the factors which have led many income oriented funds
to reduce their monthly dividends. If short-term interest rates continue to
rise, the cost of the Fund's leverage will certainly go up, eating into the
Fund's income available for dividends. If long-term interest rates go up, the
Fund's hedges should make money that can be used to buy more income producing
securities. And finally, changes in the difference between long and short-term
rates will affect the cost of the Fund's hedging strategy. It is hard enough to
predict just one of the factors, let alone all three!
WHY DOESN'T THE FUND LOCK-IN THE COST OF ITS LEVERAGE IF SHORT-TERM INTEREST
RATES ARE HEADING UP?
There are a variety of techniques the Fund could employ to lock-in a rate,
but it is not possible to do so at rates as low as the Fund is currently paying.
Each of these alternative strategies is ultimately a bet that the rate the Fund
could lock-in for an extended period would end up being less than the average
rate paid over successive shorter periods.
For example, say the Fund's leverage currently costs 2% (at an annual rate)
but is subject to change every one to four weeks. Alternatively, the Fund could
lock in its leverage cost at 3% for one year. Assuming that the cost of the
leverage goes up steadily over the year, the rate would have to DOUBLE to more
than 4% for the Fund to be better off locking-in the 3% rate at the beginning of
the year. Thus, any attempt to lock-in is simply saying that we think short-term
rates are going to rise faster and higher than the consensus of the market.
When it comes to predicting interest rates, we don't think we have any
competitive advantage over the market. Moreover because we hedge 100% of the
assets in the portfolio, the Fund already has a substantial degree of protection
against higher rates. Finally, there are additional costs entailed in
locking-in. In short, we monitor these opportunities, but to date we don't
believe it has made sense.
HOW DID THE PREFERRED SECURITIES AND CORPORATE BONDS IN THE FUND'S PORTFOLIO
PERFORM?
The Fund's holdings of preferred securities and corporate bonds have
continued to produce very respectable returns. One technique for measuring the
performance is to look at the total return on the investment portfolio before
the impact of expenses, leverage and hedging. In fiscal 2004, this number was
9.0% for FLC. For comparison, an investor in the 30 year U.S. Treasury Bond
would have earned roughly 6.8% for the same period. Recall that total return is
comprised of income and principal change. In 2004, each of these components
contributed about the same amount to the performance differential. FLC is all
about income, so anytime principal change goes our way, it's icing on the cake!
As we mentioned earlier, the costs of the Fund's hedges offset some of this
return, but it's important to remember a basic principle of the Fund: IT IS
BETTER TO HAVE THE HEDGE "INSURANCE" AND NOT NEED IT THAN TO NEED THE HEDGE
"INSURANCE" AND NOT HAVE IT.
WHAT PORTION OF THE 2004 DISTRIBUTIONS WILL BE QUALIFIED DIVIDEND INCOME?
For individual investors in FLC, 26.46% of the distribution made by the
Fund in CALENDAR YEAR 2004 was qualified dividend income (QDI). For corporate
investors, 20.51% was eligible for the inter-corporate
3
dividends received deduction (DRD). Under normal conditions, the Fund will
generally own fully taxable preferred securities and corporate bonds. From time
to time, however, we see opportunities to purchase traditional preferred stocks
paying QDI income at prices that make sense for the Fund. It is important to
remember the composition of the portfolio and the income distributions are
likely to change from one year to the next. Shareholders should not assume that
the QDI or DRD portions of next year's distributions will be the same (or even
similar) to this year's.
HAS THE FUND MADE ANY CHANGES TO ITS INVESTMENT POLICIES?
The Fund regularly updates investment policies to reflect changes in the
market. For example, the Board approved a higher limit on securities of foreign
issuers in April 2004 in response to sizable issuance - at attractive yields -
by those issuers. Similarly, in the Semi-Annual Report to Shareholders, we
indicated that the Fund was considering the ability to purchase credit
protection through the use of credit derivatives. In July, that investment
policy change was approved by the Board, although to date the Fund has not
purchased credit derivatives.
Recently, the Board expanded the Fund's investment policies to allow it to
make use of a wider range of derivative instruments. The new policies give the
investment adviser additional tools to manage the Fund's interest rate hedges
and credit exposure. For readers interested in a more detailed discussion, we
have outlined the specific changes below and summarized the benefits and risks
of these strategies to the Fund.
While these investment policy changes are extensive, none of them represent
a wholesale shift in the way the Fund intends to manage the portfolio. Moreover,
the fact that the policies are in place does not necessarily mean we will use
them right away; we simply want to be prepared to take advantage of
opportunities as they present themselves now or in the future. Viewed in that
light, the changes are a natural evolution of the Fund's investment policies in
response to a changing marketplace.
DO ANY OF THE INVESTMENT POLICY CHANGES AFFECT THE RATING OF THE FUND'S AUCTION
MARKET PREFERRED SHARES (AMPS)?
No. The Funds' AMPS are still rated Aaa by Moody's Investors Service and
AAA by Fitch Ratings. The Fund sought and received approval from its rating
agencies to update its Articles Supplementary, which governs the Fund's AMPS, to
accommodate the adoption of the new investment policies. Following their review,
both rating agencies reconfirmed the AMPS' triple-A ratings.
WHAT ARE THE BENEFITS OF PARTICIPATING IN THE FUND'S DIVIDEND REINVESTMENT PLAN?
We all know the fable of the tortoise and the hare. The tortoise won simply
because he was persistent. For investors who are similarly inclined toward a
steady, reliable approach to building wealth, The Fund offers the Dividend
Reinvestment and Cash Purchase Plan, unglamorously nicknamed the "DRIP".
4
Why invest in the DRIP?
o Disciplined monthly investing in both good and bad markets
o When shares trade below the NAV, the Fund purchases shares in the market
o When shares trade above the NAV, shares are issued at the higher of NAV
or 95% of the current market price
To obtain information on the DRIP, contact your brokerage firm and ask if
they are set up to participate. For investors who hold their shares in
certificate form, contact the DRIP's agent, PFPC Inc., at 1-800-331-1710.
5
INVESTMENT POLICY MODIFICATIONS
SUMMARY OF RISKS AND BENEFITS
The Board approved the use of interest rate swaps, swap futures and
Eurodollar futures contracts for interest rate hedging purposes. The new policy
will allow the Fund to further diversify potential hedging instruments beyond
Treasury-based contracts, potentially improving hedge performance or lowering
cost.
The Board also approved the sale of credit derivatives as an alternative to
buying a corporate security, up to a limit of one-third of Fund assets. This
will allow the Fund to pursue various "synthetic asset" strategies, whereby it
can acquire exposure to particular credits and manage its interest rate exposure
more efficiently than it could dealing only in cash securities. In essence,
there may be times when we can sell credit protection via credit derivatives at
wider spreads (or with better call protection) than where we can purchase a
portfolio security, resulting in higher returns for shareholders. We will not
use credit derivatives to LEVERAGE credit exposure, but rather as an ALTERNATIVE
to buying a security of a particular issuer. The ability to buy and sell
synthetic assets offers another way for active management of the Fund to add
value to shareholders.
Of course, using derivative securities entails risks. There are
counterparty risks on over-the-counter derivatives and exchange-traded futures
contracts. These risks are limited by proper documentation, collateralization,
daily valuation, and the high credit standing of approved swap counterparties
and the futures exchanges, but the Fund is exposed to valuation changes in a
contract between the time the collateral or margin requirement arises and when
it receives such collateral or margin payments. Second, there is basis risk
between the derivative contracts and the Fund's investments. LIBOR-based hedges
may or may not correlate with underlying portfolio assets as well as our current
Treasury-based hedges, possibly resulting in poorer hedge performance. Credit
derivatives may not perform in the same way as cash securities. In particular,
the timing of payments on a credit default swap and the events that trigger
those payments may be materially different than on a cash security, possibly
requiring the Fund to liquidate assets at disadvantageous prices or leaving the
Fund with additional interest rate risk. We intend to monitor and evaluate those
risks on an ongoing basis, but shareholders should be aware that they exist.
The Board approved rules to permit the Fund to buy or sell option spreads,
which may allow the Fund to reduce the cost of hedging or add total return in
periods of high implied volatility. The Fund has always had the ability to sell
options, but the new policy clarifies the special situation of selling options
when much or all of its risk is covered by a long position in another option.
However, the sale of any option may limit the return on an asset (for example,
in the case of a call spread) or reduce the protection from a hedge (for
example, in the case of a put spread), possibly resulting in poorer performance.
Finally, the Board authorized the Fund to engage in securities lending on
up to 15% of total assets. Certain securities held by the portfolio may be lent
profitably by the Fund. Proceeds from any securities loan will be invested in a
fund managed according to SEC guidelines applicable to money market funds.
Essentially, we would borrow money at a rate lower than where we would reinvest
the proceeds. We would not take incremental interest rate risk, as both the
borrowing and reinvestment would be short- term. There are risks to securities
lending, however. There is counterparty risk on the securities lending side of
the transaction. Although risk is limited since the loan is collateralized by
cash, the Fund could suffer losses if the counterparty fails to return
securities that have risen in value. There is also investment risk on the
proceeds from the securities loans: These monies are invested in short-term
investments, and if those investments lose value, the Fund will still owe the
amount borrowed. We intend to mitigate this risk by investing proceeds from
securities lending in a short-term fund managed according to SEC guidelines
applicable to money market funds.
6
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Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OVERVIEW (UNAUDITED)
NOVEMBER 30, 2004
-----------------------------------------------------------
FUND STATISTICS ON 11/30/04
-------------------------------------------
Net Asset Value $ 23.56
Market Price $ 24.15
Premium 2.50%
Yield on Market Price 8.07%
Common Shares
Outstanding 9,753,952
MOODY'S RATINGS % OF PORTFOLIO
------------------------------------------
Aaa 0.6%
Aa 1.8%
A 38.9%
Baa 46.4%
Ba 6.8%
Not Rated 3.5%
-------------------------------------
Below by Investment Grade* 5.8%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND
S&P
INDUSTRY CATEGORIES % OF PORTFOLIO
-----------------------------------------------------
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS IN PRINTED GRAPHIC
Banks ................ 33%
Utilities ............ 26%
Insurance ............ 19%
REITs ................ 7%
Financial Services ... 6%
Other ................ 5%
Oil and Gas .......... 4%
TOP 10 HOLDINGS BY ISSUER % OF
(PARENT COMPANY) PORTFOLIO
------------------------------------------------------
Wachovia Corp 5.3%
J.P. Morgan Chase 4.8%
Lehman Brothers 4.0%
Duke Energy 4.0%
Prudential Holdings 3.7%
Royal Bank of Scotland 3.6%
North Fork Bancorporation 3.3%
Zurich RegCaPS 2.7%
Nexen, Inc. 2.6%
OneAmerica Financial 2.5%
% OF PORTFOLIO**
----------------------------------------------------------------------------------------------------------------------
Holdings Generating Qualified Dividend Income (QDI) for Individuals 16%
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD) 10%
----------------------------------------------------------------------------------------------------------------------
** THIS DOES NOT REFLECT YEAR-END RESULTS OR ACTUAL TAX CATEGORIZATION OF FUND
DISTRIBUTIONS. THESE PERCENTAGES CAN, AND DO, CHANGE, PERHAPS SIGNIFICANTLY,
DEPENDING ON MARKET CONDITIONS. INVESTORS SHOULD CONSULT THEIR TAX ADVISOR
REGARDING THEIR PERSONAL SITUATION. SEE ACCOMPANYING NOTES TO THE FINANCIAL
STATEMENTS FOR THE TAX CHARACTERIZATION OF 2004 DISTRIBUTIONS.
7
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Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 2004
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- 70.5%
BANKING -- 33.4%
---------------------------------------------------------------------------------------------------------------------
28,000 ABN AMRO Capital Fund Trust VII, 6.08% Pfd. ..................................... $ 697,480** (1)
1,000 ABN AMRO North America, Inc., 6.59% Pfd., 144A**** .............................. 1,047,240*
$ 4,500,000 Astoria Capital Trust I, 9.75% 11/01/29 Capital Security, Series B .............. 5,648,670
38,800 BAC Capital Trust I, 7.00% Pfd. ................................................. 1,030,528
25,000 BAC Capital Trust III, 7.00% Pfd. ............................................... 663,250
10,900 BAC Capital Trust V, 7.00% Pfd. ................................................. 287,869
50,900 Bank One Capital Trust VI, 7.20% Pfd. ........................................... 1,350,122
$ 1,000,000 BT Preferred Capital Trust II, 7.875% 02/25/27 Capital Security ................. 1,092,905(1)
$ 10,000,000 Chase Capital I, 7.67% 12/01/26 Capital Security ................................ 10,816,700
14,400 Chase Capital XI, 5.875% Pfd. 06/15/33 .......................................... 351,360
40,000 Cobank, ACB, 7.00% Pfd., 144A**** ............................................... 2,138,200*
20,000 Colonial Capital Trust IV, 7.875% Pfd. .......................................... 539,600
11,000 Comerica (Imperial) Capital Trust I, 7.60% Pfd. ................................. 294,030
$ 2,000,000 First Chicago NBD Capital A, 7.95% 12/01/26 Capital Security, 144A**** ......... 2,190,060
$ 400,000 First Empire Capital Trust I, 8.234% 02/01/27 Capital Security .................. 441,116
$ 1,900,000 First Hawaiian Capital I, 8.343% 07/01/27 Capital Security, Series B ............ 2,119,659(1)
$ 2,000,000 First Midwest Capital Trust I, 6.95% Pfd. 12/01/33, Capital Security ............ 2,133,050
$ 1,500,000 First Tennessee Capital Trust II, 6.30% 04/15/34 Capital Security, Series B ..... 1,500,765
$ 2,000,000 First Union Institutional Capital II, 7.85% 01/01/27 Capital Security ........... 2,191,800
18,000 Fleet Capital Trust VII, 7.20% Pfd. ............................................. 481,050
2 FT Real Estate Securities Company, 9.50% Pfd., 144A**** ......................... 2,754,755
$ 2,795,000 Great Western Finance Trust II, 8.206% 02/01/27 Capital Security, Series A ...... 3,041,226
$ 7,100,000 GreenPoint Capital Trust I, 9.10% 06/01/27 Capital Security ..................... 8,121,051
$ 8,000,000 HBOS Capital Funding LP, 6.85% Pfd. ............................................. 8,215,840(1)
$ 855,000 HSBC Capital Trust II, 8.38% 05/15/2027 Capital Security, 144A**** .............. 946,468(1)
$ 3,000,000 Haven Capital Trust I, 10.46% 02/01/27 Capital Security ......................... 3,484,365
4,200 Household Capital Trust VI, 8.25% Pfd. .......................................... 111,510
$ 1,940,000 J.P. Morgan Capital Trust I, 7.54% 01/15/27 Capital Security .................... 2,116,792
4,455 J.P. Morgan Chase & Co., 6.625% Pfd., Series H .................................. 242,909*
$ 5,000,000 Keycorp Institutional Capital A, 7.826% 12/01/26 Capital Security, Series A ..... 5,438,975
10 Marshall & Ilsley Investment II, 8.875% Pfd., 144A**** .......................... 1,067,540
$ 1,000,000 NB Capital Trust IV, 8.25% Capital Security ..................................... 1,106,730
$ 2,500,000 North Fork Capital Trust I, 8.70% 12/15/26 Capital Security ..................... 2,784,912
$ 810,000 North Fork Capital Trust II, 8.00% 12/15/27 Capital Security .................... 897,934
$ 4,000,000 RBS Capital Trust B, 6.80% Pfd. ................................................. 4,114,160**(1)
2,100 Regions Financial Trust I, 8.00% Pfd. ........................................... 55,828
$ 1,600,000 Republic New York Capital I, 7.75% 11/15/26 Capital Security .................... 1,744,792(1)
$ 716,000 Republic New York Capital II, 7.53% 12/04/26 Capital Security ................... 771,744(1)
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 (CONTINUED)
NOVEMBER 30, 2004
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
BANKING -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
20 Roslyn Real Estate, 8.95% Pfd., Pvt., Series C, 144A**** ........................ $ 2,223,773
Royal Bank of Scotland Group PLC:
20,000 6.40% Pfd., Series M .......................................................... 517,800** (1)
$ 6,820,000 7.648% Pfd. ................................................................... 8,152,662** (1)
$ 5,050,000 Union Planters Capital Trust, 8.20% 12/15/26 Capital Security ................... 5,520,307
19,000 USB Capital V, 7.25% Pfd. ....................................................... 508,725
$ 5,000,000 Wachovia Capital Trust I, 7.64% 01/15/27 Capital Security, 144A**** ............. 5,451,825
$ 1,170,000 Wachovia Capital Trust V, 7.965% 06/01/27 Capital Security, 144A**** ............ 1,288,416
350,000 Wachovia Preferred Funding, 7.25% Pfd., Series A ................................ 9,847,250
7,900 Wells Fargo Capital Trust IV, 7.00% Pfd. ........................................ 206,309
85,000 Wells Fargo Capital Trust IX, 5.625% Pfd. ....................................... 2,036,600
-------------------------------------------------------------------------------------------------------------------
119,786,652
----------------
FINANCIAL SERVICES -- 4.5%
---------------------------------------------------------------------------------------------------------------------
Lehman Brothers Holdings, Inc.:
86,500 5.94% Pfd., Series C .......................................................... 4,321,107*
192,100 6.50% Pfd., Series F .......................................................... 5,068,558*
9,700 Merrill Lynch Capital Trust III, 7.00% Pfd. ..................................... 260,154
168,650 Merrill Lynch Capital Trust V, 7.28% Pfd. ....................................... 4,599,086
17,200 Morgan Stanley Capital Trust II, 7.25% Pfd. ..................................... 456,058
30,000 Morgan Stanley Capital Trust III, 6.25% Pfd. .................................... 752,700
15,000 Morgan Stanley Capital Trust IV, 6.25% Pfd. ..................................... 379,650
6,000 Morgan Stanley Capital Trust V, 5.75% Pfd. ...................................... 143,400
-------------------------------------------------------------------------------------------------------------------
15,980,713
----------------
INSURANCE -- 10.8%
---------------------------------------------------------------------------------------------------------------------
15,000 AAG Holding Company, Inc., 7.25% Pfd. ........................................... 381,300
177,380 ACE Ltd., 7.80% Pfd., Series C .................................................. 4,650,017** (1)
$ 6,420,000 AON Capital Trust A, 8.205% 01/01/27 Capital Security ........................... 6,494,697
189,400 Everest Re Capital Trust II, 6.20% Pfd., Series B ............................... 4,514,349(1)
ING Groep NV:
36,000 7.05% Pfd. .................................................................... 952,560**(1)
125,000 7.20% Pfd. .................................................................... 3,337,500**(1)
30,000 Renaissancere Holdings Ltd., 6.08% Pfd., Series C ............................... 709,050**
40,000 St. Paul Capital Trust I, 7.60% Pfd. ............................................ 1,051,600
$ 500,000 Sun Life Canada, 8.526% Pfd., 144A**** .......................................... 552,118(1)
$ 4,815,000 USF&G Capital, 8.312% 07/01/46 Capital Security, 144A**** ....................... 5,749,880
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)
NOVEMBER 30, 2004
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
30,000 XL Capital Ltd., 7.625% Pfd., Series B .......................................... $ 825,150**(1)
9,175 Zurich RegCaPS Funding Trust, 6.58% Pfd., 144A**** .............................. 9,475,435*
-------------------------------------------------------------------------------------------------------------------
38,693,656
----------------
UTILITIES -- 13.6%
---------------------------------------------------------------------------------------------------------------------
225,000 Alabama Power Company, 5.30% Pfd. ............................................... 5,492,250*
45,700 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ....................... 4,774,508*
$ 2,750,000 COMED Financing II, 8.50% 01/15/27 Capital Security, Series B ................... 3,047,275
$ 2,500,000 Dominion Resources Capital Trust I, 7.83% 12/01/27 Capital Security ............. 2,693,300
Duke Energy Corporation:
50,214 7.04% Pfd., Series Y .......................................................... 5,184,093*
22,934 7.85% Pfd., Series S .......................................................... 2,377,912*
20,000 Energy East Capital Trust I, 8.25% Pfd. ......................................... 533,900
758 Entergy Arkansas, Inc., 7.40% Pfd. .............................................. 78,896*
70,000 FPC Capital I, 7.10% Pfd., Series A ............................................. 1,761,900
$ 4,500,000 Houston Light & Power, Capital Trust II, 8.257%, 02/01/37 Capital Security ...... 4,815,720
30,445 Indianapolis Power & Light Company, 5.65% Pfd. .................................. 2,759,687*
Interstate Power & Light Company:
90,000 7.10% Pfd., Series C .......................................................... 2,425,950*
38,600 8.375% Pfd., Series B ......................................................... 1,260,869*
5,200 Mississippi Power Company, 5.25% Pfd. ........................................... 126,932*
$ 5,000,000 PECO Energy Capital Trust IV, 5.75% 06/15/33 Capital Security ................... 4,716,200
16,200 PSEG Funding Trust II, 8.75% Pfd. ............................................... 450,927
120,000 Southern Union Company, 7.55% Pfd. .............................................. 3,254,400*
10,000 Southwest Gas Capital II, 7.70% Pfd. ............................................ 267,750
5,000 Union Electric Company, $7.64 Pfd. .............................................. 522,150*
82,717 Wisconsin Power & Light Company, 6.50% Pfd. ..................................... 2,105,148*
-------------------------------------------------------------------------------------------------------------------
48,649,767
----------------
OIL AND GAS -- 0.8%
---------------------------------------------------------------------------------------------------------------------
2,750 EOG Resources, Inc., 7.195% Pfd., Series B ...................................... 2,977,453*
-------------------------------------------------------------------------------------------------------------------
2,977,453
----------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 6.6%
---------------------------------------------------------------------------------------------------------------------
16,020 AMB Property Corporation, 6.75% Pfd., REIT, Series M ............................ 402,743
40,000 BRE Properties, Inc., 6.75% Pfd., REIT, Series C ................................ 1,001,400
38,750 Carramerica Realty Corporation, 7.50% Pfd., REIT, Series E ...................... 1,006,531
The accompanying notes are an integral part of the financial statements.
10
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2004
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
REAL ESTATE INVESTMENT TRUST (REIT) -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
Duke Realty Corporation:
50,000 6.50% Pfd., REIT, Series K .................................................... $ 1,253,750
40,000 6.60% Pfd., REIT, Series L .................................................... 996,200
19,549 6.625% Pfd., REIT, Series J ................................................... 500,063
Equity Residential Properties:
18,962 6.48% Pfd., REIT, Series N .................................................... 474,903
85,000 8.29% Pfd., REIT, Series K .................................................... 5,261,925
33,000 Health Care Property Investment, 7.10% Pfd., REIT, Series F ..................... 843,315
PS Business Parks, Inc.:
57,000 6.875% Pfd., REIT, Series I ................................................... 1,404,195
44,500 7.60% Pfd., REIT, Series L .................................................... 1,151,883
45,000 7.95% Pfd., REIT, Series K .................................................... 1,180,575
Public Storage, Inc.:
44,200 7.50% Pfd., REIT, Series V .................................................... 1,186,107
1,400 7.625% Pfd., REIT, Series T ................................................... 37,268
48,600 8.00% Pfd., REIT, Series R .................................................... 1,303,452
125,000 Regency Centers Corporation, 7.25% Pfd., REIT ................................... 3,216,875
95,000 Weingarten Realty Investment, 6.95% Pfd., REIT .................................. 2,572,600
-------------------------------------------------------------------------------------------------------------------
23,793,785
----------------
MISCELLANEOUS INDUSTRIES -- 0.8%
---------------------------------------------------------------------------------------------------------------------
34,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ............................. 2,705,550*
-------------------------------------------------------------------------------------------------------------------
2,705,550
----------------
TOTAL PREFERRED SECURITIES
(Cost $246,142,572) ........................................................... 252,587,576
----------------
CORPORATE DEBT SECURITIES -- 25.0%
FINANCIAL SERVICES -- 1.6%
---------------------------------------------------------------------------------------------------------------------
31,200 Corp-Backed Trust Certificates, 5.80% Pfd., Series Goldman Sachs ................ 780,468
$ 5,000,000 Lehman Brothers, Guaranteed Note, Variable Rate, 12/16/16, 144A**** ............. 5,006,250
-------------------------------------------------------------------------------------------------------------------
5,786,718
----------------
INSURANCE -- 8.1%
---------------------------------------------------------------------------------------------------------------------
20,000 American Financial Group, Inc., 7.125% 02/03/34, Senior Note .................... 509,300
$ 8,700,000 OneAmerica Financial Partners, 7.00% 10/15/33, 144A**** ......................... 8,861,690
$ 10,455,000 Prudential Holdings LLC, 8.695% 12/18/23, 144A**** .............................. 13,053,590
$ 7,000,000 UnumProvident Corporation, 7.25% 03/15/28, Senior Notes ......................... 6,455,085
-------------------------------------------------------------------------------------------------------------------
28,879,665
----------------
The accompanying notes are an integral part of the financial statements.
11
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2004
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
CORPORATE DEBT SECURITIES -- (CONTINUED)
OIL AND GAS -- 2.6%
---------------------------------------------------------------------------------------------------------------------
356,200 Nexen, Inc., 7.35% Subordinated Notes ........................................... $ 9,391,213(1)
-------------------------------------------------------------------------------------------------------------------
9,391,213
----------------
UTILITIES -- 10.5%
---------------------------------------------------------------------------------------------------------------------
$ 2,000,000 AEP Texas Central Company, 6.65% 02/15/33, Senior Notes, Series E ............... 2,141,180
$ 6,100,000 Constellation Energy Group, 7.60% Pfd., 04/01/32, Senior Notes .................. 7,193,821
27,200 Corp-Backed Trust Certificates, 7.875% 02/15/32, Series Duke Capital ............ 734,128
$ 5,000,000 Duke Capital Corporation, 8.00% 10/01/19 Senior Notes ........................... 5,992,275
5,000 Entergy Mississippi, Inc., 7.25% 1st Mortgage .................................. 132,950
75,000 Georgia Power Company, 6.00%, 08/15/44, Senior Notes, FGIC Insured .............. 1,933,125
$ 4,000,000 Indianapolis Power & Light Company, 6.60% 01/01/34, 1st Mortgage, 144A**** ...... 4,213,820
$ 4,000,000 Interstate Power & Light Company, 6.45% 10/15/33, Senior Notes .................. 4,188,360
$ 5,670,000 Oncor Electric Delivery Company, 7.25% 01/15/33, Secured ........................ 6,583,182
$ 4,000,000 Wisconsin Electric Power Company, 6.875% 12/01/95 ............................... 4,433,460
-------------------------------------------------------------------------------------------------------------------
37,546,301
----------------
MISCELLANEOUS -- 2.2%
---------------------------------------------------------------------------------------------------------------------
19,625 Ford Motor Company, 7.50% 06/10/43, Senior Notes ................................ 505,344
$ 6,265,000 General Motors Corporation, 8.80% 03/01/21 ...................................... 6,690,989
25,300 Maytag Corporation, 7.875% 08/01/31 ............................................. 670,070
-------------------------------------------------------------------------------------------------------------------
7,866,403
----------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $87,528,432) ............................................................ 89,470,300
----------------
CONVERTIBLE SECURITIES -- 2.5%
INSURANCE -- 0.2%
---------------------------------------------------------------------------------------------------------------------
36,000 XL Capital Ltd., 6.50% Mandatory Convertible, 05/15/07 .......................... 885,240(1)
-------------------------------------------------------------------------------------------------------------------
885,240
----------------
UTILITIES -- 2.3%
---------------------------------------------------------------------------------------------------------------------
141,500 FPL Group, Inc., 8.50% Mandatory Convertible, Series A 02/16/05 ................. 8,204,878
-------------------------------------------------------------------------------------------------------------------
8,204,878
----------------
TOTAL CONVERTIBLE SECURITIES
(Cost $8,889,998) ............................................................. 9,090,118
----------------
The accompanying notes are an integral part of the financial statements.
12
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2004
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
OPTION CONTRACTS -- 0.9%
2,375 March Put Options on March U.S. Treasury Bond Futures, Expiring 02/19/05 ........ $ 3,302,734+
-------------------------------------------------------------------------------------------------------------------
TOTAL OPTION CONTRACTS
(Cost $2,077,382) ............................................................. 3,302,734
----------------
MONEY MARKET FUND -- 0.1%
203,405 BlackRock Provident Institutional, TempFund ..................................... 203,405
-------------------------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost $203,405) ............................................................... 203,405
----------------
TOTAL INVESTMENTS (Cost $344,841,789***) ........................................... 99.0% 354,654,133
OTHER ASSETS AND LIABILITIES (NET) ................................................. 1.0% 3,650,830
--------- ----------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK AND PREFERRED STOCK ..................... 100.0%++ $ 358,304,963
--------- ----------------
AUCTION MARKET PREFERRED STOCK (AMPS) REDEMPTION VALUE .......................................... (128,500,000)
----------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ...................................................... $ 229,804,963
================
-----------------------------
* 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.
(1) Foreign Issuer
+ 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:
REIT -- Real Estate Investment Trust
PFD. -- Preferred Securities
PVT. -- Private Placement 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
NOVEMBER 30, 2004
-----------------------------------------------------------
ASSETS:
Investments, at value (Cost $344,841,789)
(See accompanying Portfolio of Investments) ................................. $ 354,654,133
Receivable for Investments sold ................................................ 22,499
Dividends and interest receivable .............................................. 5,342,926
Prepaid expenses ............................................................... 72,283
---------------
Total Assets ........................................................... 360,091,841
LIABILITIES:
Payable for securities purchased ............................................... $1,122,671
Dividends payable to Common Shareholders ....................................... 212,893
Investment advisory fee payable ................................................ 160,023
Administration, Transfer Agent and Custodian fees and
expenses payable ............................................................. 47,829
Servicing agent fees payable ................................................... 17,250
Professional fees payable ...................................................... 62,382
Directors' fees payable ........................................................ 1,563
Accrued expenses and other payables ............................................ 42,691
Accumulated undeclared distributions to Auction Market Preferred
Stock Shareholders ........................................................... 119,576
----------
Total Liabilities ...................................................... 1,786,878
---------------
AUCTION MARKET PREFERRED STOCK (5,140 SHARES OUTSTANDING)
REDEMPTION VALUE ............................................................... 128,500,000
---------------
NET ASSETS AVAILABLE TO COMMON STOCK .............................................. $ 229,804,963
===============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
Undistributed net investment income ............................................ $ 565,250
Accumulated net realized loss on investments sold .............................. (11,393,703)
Unrealized appreciation of investments ......................................... 9,812,344
Par value of Common Stock ...................................................... 97,540
Paid-in capital in excess of par value of Common Stock ......................... 230,723,532
---------------
Total Net Assets Available to Common Stock ............................. $ 229,804,963
===============
NET ASSET VALUE PER SHARE OF COMMON STOCK:
Common Stock (9,753,952 shares outstanding) .................................. $ 23.56
===============
The accompanying notes are an integral part of the financial statements.
14
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2004
------------------------------------------------------------
INVESTMENT INCOME:
Dividends++ ............................................................... $ 9,682,882
Interest .................................................................. 12,836,435
--------------
Total Investment Income .............................................. 22,519,317
EXPENSES:
Investment advisory fee ................................................... $ 1,960,955
Servicing agent fee ....................................................... 212,149
Administrator's fee ....................................................... 270,517
Auction Market Preferred broker commissions and auction
agent fees ............................................................. 333,029
Professional fees ......................................................... 138,930
Insurance expense ......................................................... 267,569
Shareholder transfer and payment agent fees and expenses .................. 88,887
Directors' fees and expenses .............................................. 73,294
Custodian fees and expenses ............................................... 41,722
Chief Compliance Officer fees and expenses ................................ 15,477
Other ..................................................................... 116,811
-------------
Total Expenses ....................................................... 3,519,340
--------------
NET INVESTMENT INCOME .......................................................... 18,999,977
--------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net realized loss on investments sold during the year ..................... (8,270,476)
Change in net unrealized appreciation of investments held
during the year ........................................................ 2,884,641
--------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS ................................ (5,385,835)
--------------
DISTRIBUTIONS TO AUCTION MARKET PREFERRED STOCK
SHAREHOLDERS:
From net investment income (including changes in accumulated
undeclared distributions) .............................................. (1,878,375)
--------------
NET INCREASE IN NET ASSETS TO COMMON STOCK
RESULTING FROM OPERATIONS ................................................... $ 11,735,767
==============
---------
++ For Federal income tax purposes, a significant portion of this amount does
not qualify for the Inter-corporate dividends received deduction ("DRD")
or as Qualified Dividend Income ("QDI") for individuals.
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 AVAILABLE TO COMMON STOCK(1)
----------------------------------------------------------------
FOR THE PERIOD
FROM AUGUST 29, 2003*
YEAR ENDED THROUGH
NOVEMBER 30, 2004 NOVEMBER 30, 2003
----------------- -------------------
OPERATIONS:
Net investment income ..................................................... $ 18,999,977 $ 2,998,358
Net realized loss on investments sold during the year ..................... (8,270,476) (1,673,594)
Change in net unrealized appreciation of investments held
during the year ........................................................ 2,884,641 6,927,703
Distributions to AMPS** Shareholders from net investment income,
including changes in accumulated undeclared distributions .............. (1,878,375) (126,947)
-------------- ----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ...................... 11,735,767 8,125,520
DISTRIBUTIONS:
Dividends paid from net investment income to Common
Stock Shareholders(1) .................................................. (19,362,709) (1,572,870)
-------------- ----------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS .......................... (19,362,709) (1,572,870)
FUND SHARE TRANSACTIONS:
Increase from Common Stock transactions ................................... 1,816,648 230,990,626
Decrease due to Cost of Common Stock offering ............................. -- (483,750)
Increase/(Decrease) due to Cost of AMPS** Issuance(2) ..................... 116,595 (1,660,881)
-------------- ----------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING
FROM FUND SHARE TRANSACTIONS ........................................... 1,933,243 228,845,995
NET (DECREASE)/INCREASE IN NET ASSETS AVAILABLE TO -------------- ----------------
COMMON STOCK FOR THE YEAR $ (5,693,699) $ 235,398,645
============== ================
---------------------------------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ....................................................... $ 235,498,662 $ 100,017
Net (decrease)/increase in net assets during the period ................... (5,693,699) 235,398,645
-------------- ----------------
End of period (including undistributed net investment
income of $565,250 and $1,405,416, respectively) ....................... $ 229,804,963 $ 235,498,662
============== ================
----------------------
* Commencement of operations.
** Auction Market Preferred Stock.
(1) Includes income earned, but not paid out, in prior fiscal year.
(2) Reduction to cost of AMPS issuance due to adjustment of cost estimate for the fiscal year ended
November 30, 2004.
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.
FOR THE PERIOD FROM
AUGUST 29, 2003(1)
YEAR ENDED THROUGH
NOVEMBER 30, 2004 NOVEMBER 30, 2003
----------------- -----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .................................................. $ 24.33 $ 23.82(2)
-------- --------
INVESTMENT OPERATIONS:
Net investment income ................................................................. 1.95 0.30
Net realized and unrealized (loss)/gain on investments ................................ (0.55) 0.55
DISTRIBUTIONS TO AMPS* SHAREHOLDERS:
From net investment income ............................................................ (0.19) (0.01)
From net realized capital gains ....................................................... -- --
-------- --------
Total from investment operations ...................................................... 1.21 0.84
-------- --------
COST OF ISSUANCE OF AMPS* ............................................................. 0.01 (0.17)
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income ............................................................ (1.99) (0.16)
From net realized capital gains. ...................................................... -- --
-------- --------
Total distributions to Common Shareholders ............................................ (1.99) (0.16)
-------- --------
Net asset value, end of period ........................................................ $ 23.56 $ 24.33
======== ========
Market value, end of period ........................................................... $ 24.15 $ 25.16
======== ========
Total investment return based on net asset value**** .................................. 5.22% 2.82%***(3)
======== ========
Total investment return based on market value**** ..................................... 4.30% 1.31%***(3)
======== ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
TO COMMON STOCK SHAREHOLDERS:
Total net assets, end of period (in 000's) ....................................... $229,805 $235,499
Operating expenses ............................................................... 1.51% 1.34%**
Net Investment Income + .......................................................... 7.33% 4.86%**
----------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate. ......................................................... 79% 56%***
Total net assets available to Common and Preferred Stock, end of period (in 000's) $358,305 $363,999
Ratio of operating expenses to total average net assets available to
Common and Preferred Stock .................................................... 0.97% 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)
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 23.50
May 31, 2004 ..................................................... 0.1625 23.45 23.48 23.45
June 30, 2004 .................................................... 0.1625 23.22 22.25 22.94
July 31, 2004 .................................................... 0.1625 23.28 22.69 22.89
August 31, 2004 .................................................. 0.1625 23.71 23.46 23.68
September 30, 2004 ............................................... 0.1625 23.95 23.69 23.81
October 31, 2004 ................................................. 0.1625 23.85 24.35 23.85
November 30, 2004 ................................................ 0.1625 23.56 24.15 23.56
December 31, 2004 ................................................ 0.1625 24.08 24.80 24.08
-------------------
(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.
18
--------------------------------------------------------------------------------
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(1)(3)
---------- ---------------- --------------- ------------ -----------------
11/30/04 5,140 $69,732 $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.
The accompanying notes are an integral part of the financial statements.
19
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS
-----------------------------------------------------------
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 "1940 Act").
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 shares is deemed to equal the value of the Fund's total assets less (i)
the Fund's liabilities, and (ii) the aggregate liquidation value of its Auction
Market Preferred Stock (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.
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 the accrual basis. The Fund
20
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------------------------
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 will be 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.
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
21
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------------------------
character of distributions paid, including changes in accumulated undeclared
distributions to AMPS shareholders, during 2004 and 2003 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 $19,362,709 -- $1,572,870 --
Preferred $ 1,878,375 -- $ 126,947 --
As of November 30, 2004, 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 NET UNREALIZED
CAPITAL LOSS CARRYFORWARD ORDINARY INCOME LONG-TERM GAIN APPRECIATION/(DEPRECIATION)
------------------------- --------------- -------------- --------------------------
$(9,103,078) $1,673,950 $-- $7,521,718
At November 30, 2004, the composition of the Fund's $9,103,078 accumulated
realized capital losses was $573,838 and $8,529,240 in 2003 and 2004,
respectively. These losses may be carried forward and offset against any future
capital gains through 2011 and 2012, respectively.
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 is subject to payment of an estimated $40,000 of Federal excise
taxes attributable to calendar year 2004. During the fiscal year ending November
30, 2004, the Fund paid $58,808 of Federal excise taxes attributable to calendar
year 2003.
3. INVESTMENT ADVISORY FEE, SERVICING AGENT FEE, ADMINISTRATION FEE,
TRANSFER AGENT FEE, CUSTODIAN FEE, DIRECTORS' FEES AND CHIEF
COMPLIANCE OFFICER FEE
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.
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
22
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------------------------
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. As Administrator, PFPC
Inc. calculates the net asset value of the Fund's shares attributable to Common
and Preferred 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 (Transfer Agent). As compensation for PFPC Inc.'s services, 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
$150 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.
On July 23, 2004, the Board of Directors designated Peter C. Stimes as
Chief Compliance Officer ("CCO") of the Fund. The Fund currently pays Mr.
Stimes, in his capacity as CCO, $37,500 per annum plus out-of-pocket expenses in
connection with his role as CCO.
23
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------------------------
4. PURCHASES AND SALES OF SECURITIES
For the year ended November 30, 2004, the cost of purchases of U.S.
Government and other securities, excluding short-term investments, aggregated
$8,418,687 and $271,349,669, respectively. Proceeds from sales of U.S.
Government and other securities, excluding short-term investments, aggregated
$83,328,406 and $199,833,815, respectively.
At November 30, 2004, the aggregate cost of securities for federal income
tax purposes was $347,132,414, the aggregate gross unrealized appreciation for
all securities in which there is an excess of value over tax cost was $9,377,879
and aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $1,856,160.
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
November 30, 2004, there were 9,753,952 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 exceed $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 were 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.
24
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------------------------
At November 30, 2004, 240,000,000 shares of $0.01 par value Common Stock
were authorized.
PERIOD ENDED 11/30/03 (FUND INCEPTION 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 6,565,624
---------- ------------ ----------- ------------
Total 9,679,198 $241,975,017 $10,884,376 $231,090,641
YEAR ENDED
---------
11/30/04
--------
SHARES AMOUNT
------ ------
Share issued under the Dividend
Reinvestment and Cash Purchase Plan 74,754 $1,933,243
------ ----------
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.
25
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------------------------
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 $259,286 were charged against common equity capital. The sum of
underwriters' sales load and cost of the issue totaled $1,544,286.
At November 30, 2004, 2,570 shares for Series T7 and W28 of Auction Market
Preferred Stock shares were outstanding at the annual rate of 2.05% and 1.95%,
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 (a) if an issuer can defer
payment of income for eighteen months or more without triggering an event of
default and (b) if such issue is a junior and fully subordinated liability of an
issuer or its ultimate guarantor. Certain of its investments in hybrid, i.e.,
fully taxable, preferred securities will be considered debt securities to the
extent that, in the opinion of the 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
26
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------------------------
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 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.
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
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, swaptions, and certain
credit derivative transactions, including, but not limited to, the purchase and
sale of credit protection. As in the case of when-issued securities, the use of
over-the-counter derivatives, such as interest rate swaps, swaptions, and credit
default swaps, may expose the Fund to greater credit, operations, liquidity, and
valuation risk than is the case with regulated, exchange traded futures and
options. These transactions are used for hedging or other appropriate
risk-management purposes, or, under certain other circumstances, to increase
return. As of November 30, 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.
27
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Flaherty & Crumrine/Claymore Total Return Fund Incorporated:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of the Flaherty & Crumrine/Claymore
Total Return Fund Incorporated, as of November 30, 2004, and the related
statement of operations for the year then ended, and the statements of changes
in net assets and financial highlights for the year then ended and for the
period from August 29, 2003 (commencement of operations) to November 30, 2003.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of November 30, 2004 by correspondence with
the custodian and brokers. As to the securities purchased but not yet received,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Flaherty & Crumrine/Claymore Total Return Fund Incorporated, as of November 30,
2004, the results of its operations, changes in its net assets and financial
highlights for each of the years or periods described above in conformity with
accounting principles generally accepted in the United States of America.
[GRAPHIC OMITTED]
KPMG LOGO
Boston, Massachusetts
January 21, 2005
28
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
SUPPLEMENTARY TAX INFORMATION (UNAUDITED)
-----------------------------------------------------------
For fiscal 2004, the distributions attributable both to Common Stock and
AMPS are characterized as follows for purposes of Federal income taxes: for
individual investors, 26.56% consisted of Qualified Dividend Income ("QDI")
eligible for the maximum 15% personal tax rate while 73.44% consisted of
ordinary income taxable at regular personal tax rates. For corporate investors,
20.62% consisted of income eligible for the inter-corporate Dividends Received
Deduction ("DRD") while 79.38% consisted of ordinary income taxable at regular
corporate rates.
For calendar 2004, the distributions to Common Stock are characterized as
follows for purposes of Federal income taxes: for individual investors, 26.46%
consisted of Qualified Dividend Income ("QDI") eligible for the maximum 15%
personal tax rate while 73.54% consisted of ordinary income taxable at regular
personal tax rates. For corporate investors, 20.51% consisted of income eligible
for the inter-corporate Dividends Received Deduction ("DRD") while 79.49%
consisted of ordinary income taxable at regular corporate rates.
29
--------------------------------------------------------------------------------
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 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 year ended November 30, 2004, $1,312 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 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.
30
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
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.
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 AND PROXY VOTING RECORD ON FORM N-PX
The Fund files Form N-PX with its complete proxy voting record for the 12
months ended June 30th, no later than August 31st of each year. The Fund filed
its initial Form N-PX with the Securities and Exchange Commissions ("SEC") on
August 18, 2004. This filing as well as 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 SEC's website at WWW.SEC.GOV.
PORTFOLIO SCHEDULE ON FORM N-Q
The Fund files a complete schedule of portfolio holdings with the SEC for
the first and third fiscal quarters on Form N-Q, the first of which was recently
filed for the quarter ended August 31, 2004. The Fund's Form N-Q is available on
the SEC website at WWW.SEC.GOV or may be viewed and obtained from the SEC's
Public Reference Room in Washington D.C. Information on the operation of the
Public Reference Room may be obtained by calling 1-800-SEC-0330.
31
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONALINFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
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 33.
CERTIFICATIONS
Donald F. Crumrine, as the Fund's Chief Executive Officer, has certified to
the New York Stock Exchange that, as of May 20, 2004, he was not aware of any
violation by the Fund of applicable NYSE corporate governance listing standards.
The Fund's reports to the SEC on Forms N-CSR and N-CSRS contain certifications
by the Fund's principal executive officer and principal financial officer that
relate to the Fund's disclosure in such reports and that are required by rule
30a-2(a) under the 1940 Act.
32
--------------------------------------------------------------------------------
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: 83 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: 55 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.
33
--------------------------------------------------------------------------------
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: 57 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.
34
--------------------------------------------------------------------------------
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 Securities
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.
35
--------------------------------------------------------------------------------
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:
----------
R. ERIC CHADWICK Chief Financial Since Vice President of -- --
301 E. Colorado Boulevard Officer, Vice August 2003 Flaherty & Crumrine
Suite 720 President, Treasurer Incorporated since
Pasadena, CA 91101 and Secretary August 2001, and previously
Age: 29 (since January 1999) portfolio
manager of Flaherty &
Crumrine Incorporated.
PETER C. STIMES Chief Compliance Since Vice President of -- --
301 E. Colorado Boulevard Officer and August 2003 Flaherty & Crumrine
Suite 720 Vice President Incorporated.
Pasadena, CA 91101
Age: 49
BRADFORD S. STONE Vice President Since Since May 2003, Vice -- --
392 Springfield Avenue and Assistant August 2003 President of Flaherty &
Mezzanine Suite Treasurer Crumrine; from June 2001
Summit, NJ 07901 to April 2003, Director of
Age: 45 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.
LAURIE C. LODOLO Assistant Since Since August 2004, -- --
301 E. Colorado Boulevard Compliance July 2004 Assistant Compliance
Suite 720 Officer, Assistant Officer of Flaherty &
Pasadena, CA 91101 Treasurer and Crumrine Incorporated;
Age: 41 Assistant Secretary since February 2004,
Secretary of Flaherty &
Crumrine Incorporated;
Account Administrator of
Flaherty & Crumrine
Incorporated.
36
[This page intentionally left blank]
[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
R. Eric Chadwick, CFA
Chief Financial Officer,
Vice President, Treasurer
and Secretary
Peter C. Stimes, CFA
Chief Compliance
Officer and Vice President
Nicholas Dalmaso
Vice President
Bradford S. Stone
Vice President
Laurie Lodolo
Assistant Compliance Officer,
Assistant Treasurer and
Assistant Secretary
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@pfdincome.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 INCORPORATED 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 OMITTED]
LIGHTHOUSE ART
FLAHERTY & CRUMRINE/CLAYMORE
============================
TOTAL RETURN FUND
ANNUAL
REPORT
NOVEMBER 30, 2004
web site: www.fcclaymore.com
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party.
(c) There have been no amendments, during the period covered by this
report, to a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are employed
by the registrant or a third party, and that relates to any element of
the code of ethics description.
(d) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are employed
by the registrant or a third party, that relates to one or more of the
items set forth in paragraph (b) of this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the registrant's board of
directors has determined that David Gale and Robert F. Wulf are each qualified
to serve as an audit committee financial expert serving on its audit committee
and that they both are "independent," as defined by the Securities and Exchange
Commission.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
(a) The aggregate fees billed for each of the last two fiscal years for
professional services rendered by the principal accountant for the
audit of the registrant's annual financial statements or services that
are normally provided by the accountant in connection with statutory
and regulatory filings or engagements for those fiscal years are
$38,500 for 2004 and $36,500 for 2004.
AUDIT-RELATED FEES
(b) The aggregate fees billed in each of the last two fiscal years for
assurance and related services by the principal accountant that are
reasonably related to the performance of the audit of the registrant's
financial statements and are not reported under paragraph (a) of this
Item are $0 for 2004 and $0 for 2003.
TAX FEES
(c) The aggregate fees billed in each of the last two fiscal years for
professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning are $6,400 for 2004 and $6,000
for 2003.
ALL OTHER FEES
(d) The aggregate fees billed in each of the last two fiscal years for
products and services provided by the principal accountant, other than
the services reported in paragraphs (a) through (c) of this Item are
$14,000 for 2004 and $12,800 for 2003.
(e)(1) The Fund's Audit Committee Charter states that the Audit Committee
shall have the duty and power to pre-approve all audit and
non-audit services to be provided by the auditors to the Fund, and
all non-audit services to be provided by the auditors to the
Fund's investment adviser and any service providers controlling,
controlled by or under common control with the Fund's investment
adviser that provide ongoing services to the Fund, if the
engagement relates directly to the operations and financial
reporting of the Fund.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) of this Item that were approved by the audit committee
pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X
are as follows:
(b) 100%
(c) 100%
(d) 100%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent employees
was 0%.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by,
or under common control with the adviser that provides ongoing services
to the registrant for each of the last two fiscal years of the
registrant was $0 for 2004 and $0 for 2003.
(h) The registrant's audit committee of the board of directors has
considered whether the provision of non-audit services that were
rendered to the registrant's investment adviser (not including any
sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser), and any
entity controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal
accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The registrant has a separately designated audit committee consisting of
all the independent directors of the registrant. The members of the audit
committee are: Martin Brody, David Gale, Morgan Gust, and Robert F. Wulf.
ITEM 6. SCHEDULE OF INVESTMENTS
Schedule of Investments in securities of unaffiliated issuers as of the close of
the reporting period is included as part of the report to shareholders filed
under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
FLAHERTY & CRUMRINE INCORPORATED (THE "ADVISER")
POLICIES AND PROCEDURES FOR VOTING PROXIES FOR CLIENTS
(The definition of clients includes Flaherty & Crumrine Preferred Income Fund
Incorporated, Flaherty & Crumrine Preferred Income
Opportunity Fund Incorporated, Flaherty & Crumrine/Claymore
Preferred Securities Income Fund Incorporated,
and Flaherty & Crumrine/Claymore Total Return Fund Incorporated
- collectively, the "Funds")
PURPOSE
These Policies and Procedures are designed to satisfy the Adviser's
duties of care and loyalty to its clients with respect to monitoring corporate
events and exercising proxy authority in the best interests of such clients.
In connection with this objective, these Policies and Procedures are
designed to deal with potential complexities which may arise in cases where the
Adviser's interests conflict or appear to conflict with the interests of its
clients.
These Policies and Procedures are also designed to communicate with
clients the methods and rationale whereby the Adviser exercises proxy authority.
This document is available to any client or Fund shareholder upon
request and the Adviser will make available to such clients and Fund
shareholders the record of the Adviser's votes promptly upon request and to the
extent required by Federal law and regulations.1
FUNDAMENTAL STANDARD
The Adviser will be guided by the principle that, in those cases where
it has discretion, it is bound to vote proxies and take such other corporate
actions consistent with the interest of its clients with regard to the objective
of wealth maximization.
GENERAL
The Adviser has divided its discussion in this document into two major
categories: voting with respect to common stock and voting with respect to
senior equity, e.g., preferred stock and similar securities. In those events
where the Adviser may have to take action with respect to debt, such as in the
case of amendments of covenants or in the case of default, bankruptcy,
reorganization, etc., the Adviser will apply the same principles as would apply
to common or preferred stock, MUTATIS MUTANDIS.
1
--------
1 This will include Fund web site reporting of proxy votes on Form N-PX no later
than 8/31/2004 for the twelve month period ended 6/30/2004.
These Policies and Procedures apply only where the client has granted
discretionary authority with respect to proxy voting of an issuer. Where the
Adviser does not have authority, it will keep appropriate written records
evidencing that such discretionary authority has not been granted.
The Adviser may choose not to keep written copies of proxy materials
that are subject to SEC regulation and maintained in the SEC's EDGAR database.
In other instances, the Adviser will keep appropriate written records in its
files or in reasonably accessible storage.
Similarly, the Adviser will keep in its files, or reasonably accessible
storage, work papers and other materials that were significant to the Adviser in
making a decision how to vote.
For purposes of decision making, the Adviser will assume that each
ballot for which it casts votes is the only security of an issuer held by the
client. Thus, when casting votes where the Adviser may have discretionary
authority with regard to several different securities of the same issuer, it may
vote securities "in favor" for those securities or classes where the Adviser has
determined the matter in question to be beneficial while, at the same time,
voting "against" for those securities or classes where the Adviser has
determined the matter to be adverse. Such cases occasionally arise, for example,
in those instances where a vote is required by both common and preferred
shareholders, voting as separate classes, for a change in the terms regarding
preferred stock issuance.
The Adviser will reach its voting decisions independently, after
appropriate investigation. It does not generally intend to delegate its decision
making or to rely on the recommendations of any third party, although it may
take such recommendations into consideration. The Adviser may consult with such
other experts, such as CPA's, investment bankers, attorneys, etc., as it regards
necessary to help it reach informed decisions.
Absent good reason to the contrary, the Adviser will generally give
substantial weight to management recommendations regarding voting. This is based
on the view that management is usually in the best position to know which
corporate actions are in the best interests of common shareholders as a whole.
With regard to those shareholder-originated proposals which are
typically described as "social, environmental, and corporate responsibility"
matters, the Adviser will typically give weight to management's recommendations
and vote against such shareholder proposals, particularly if the adoption of
such proposals would bring about burdens or costs not borne by those of the
issuer's competitors.
In cases where the voting of proxies would not justify the time and
costs involved, the Adviser may refrain from voting. From the individual
client's perspective, this would most typically come about in the case of small
holdings, such as might arise in
2
connection with spin-offs or other corporate reorganizations. From the
perspective of the Adviser's institutional clients, this envisions cases (1) as
more fully described below where preferred and common shareholders vote together
as a class or (2) other similar or analogous instances.
Ultimately, all voting decisions are made on a case-by-case basis,
taking relevant considerations into account.
VOTING OF COMMON STOCK PROXIES
The Adviser categorizes matters as either routine or non-routine, which
definition may or may not precisely conform to the definitions set forth by
securities exchanges or other bodies categorizing such matters. Routine matters
would include such things as the voting for directors and the ratification of
auditors and most shareholder proposals regarding social, environmental, and
corporate responsibility matters. Absent good reason to the contrary, the
Adviser normally will vote in favor of management's recommendations on these
routine matters.
Non-routine matters might include, without limitation, such things as
(1) amendments to management incentive plans, (2) the authorization of
additional common or preferred stock, (3) initiation or termination of barriers
to takeover or acquisition, (4) mergers or acquisitions, (5) changes in the
state of incorporation, (6) corporate reorganizations, and (7) "contested"
director slates. In non-routine matters, the Adviser, as a matter of policy,
will attempt to be generally familiar with the questions at issue. This will
include, without limitation, studying news in the popular press, regulatory
filings, and competing proxy solicitation materials, if any. Non-routine matters
will be voted on a case-by-case basis, given the complexity of many of these
issues.
VOTING OF PREFERRED STOCK PROXIES
Preferred stock, which is defined to include any form of equity senior
to common stock, generally has voting rights only in the event that the issuer
has not made timely payments of income and principal to shareholders or in the
event that a corporation desires to effectuate some change in its articles of
incorporation which might modify the rights of preferred stockholders. These are
non-routine in both form and substance.
In the case of non-routine matters having to do with the modification
of the rights or protections accorded preferred stock shareholders, the Adviser
will attempt, wherever possible, to quantify the costs and benefits of such
modifications and will vote in favor of such modifications only if they are in
the bests interests of preferred shareholders or if the issuer has offered
sufficient compensation to preferred stock shareholders to offset the reasonably
foreseeable adverse consequences of such modifications. A similar type of
analysis would be made in the case where preferred shares, as a class, are
entitled to vote on a merger or other substantial transaction.
In the case of the election of directors when timely payments to
preferred shareholders have not been made ("contingent voting"), the Adviser
will cast its votes on a case-by-case basis after investigation of the
qualifications and independence of the persons standing for election.
3
Routine matters regarding preferred stock are the exception, rather
than the rule, and typically arise when the preferred and common shareholders
vote together as a class on such matters as election of directors. The Adviser
will vote on a case-by-case basis, reflecting the principles set forth elsewhere
in this document. However, in those instances where the common shares of an
issuer are held by a holding company and where, because of that, the election
outcome is not in doubt, the Adviser does not intend to vote such proxies since
the time and costs would outweigh the benefits.
ACTUAL AND APPARENT CONFLICTS OF INTEREST
Potential conflicts of interest between the Adviser and the Adviser's
clients may arise when the Adviser's relationships with an issuer or with a
related third party conflict or appear to conflict with the best interests of
the Adviser's clients.
The Adviser will indicate in its voting records available to clients
whether or not a material conflict exists or appears to exist. In addition, the
Adviser will communicate with the client (which shall mean the independent
Directors or Director(s) they may so designate in the case of the Funds) in
instances when a material conflict of interest may be apparent. The Adviser
shall describe the conflict to the client and state the Adviser's voting
recommendation and the basis therefor. If the client considers there to be a
reasonable basis for the proposed vote notwithstanding the conflict or, in the
case of the Funds, that the recommendation was not affected by the conflict
(without considering the merits of the proposal), the Adviser shall vote in
accordance with the recommendation it had made to the client.
In all such instances, the Adviser will keep reasonable documentation
supporting its voting decisions and/or recommendations to clients.
AMENDMENT OF THE POLICIES AND PROCEDURES
These Policies and Procedures may be modified at any time by action of
the Board of Directors of the Adviser but will not become effective, in the case
of the Funds, unless they are approved by majority vote of the non-interested
Directors of the Funds. Any such modifications will be made to the Adviser's
clients by mail and/or other electronic means in a timely manner. These Policies
and Procedures, and any amendments thereto, will be posted on the Funds' webs
sites and will be disclosed in reports to shareholders as required by law.
Dated: 7/24/2003
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not yet applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR
240.14a-101), or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial
officers, or persons performing similar functions, 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))) are effective,
as of a date within 90 days of the filing date of the report that
includes the disclosure required by this paragraph, 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
second fiscal quarter of the period covered by this report that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(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(a) 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 JANUARY 27, 2005
----------------------------------------------------------------------------
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 JANUARY 27, 2005
----------------------------------------------------------------------------
By (Signature and Title)* /S/ R. ERIC CHADWICK
-------------------------------------------------------
R. Eric Chadwick, Chief Financial Officer, Treasurer,
Vice President and Secretary
(principal financial officer)
Date JANUARY 27, 2005
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.