UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21380
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FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND INCORPORATED
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(Exact name of registrant as specified in charter)
301 E. Colorado Boulevard, Suite 720
PASADENA, CA 91101
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(Address of principal executive offices) (Zip code)
Donald F. Crumrine
Flaherty & Crumrine Inc.
301 E. Colorado Boulevard, Suite 720
PASADENA, CA 91101
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(Name and address of agent for service)
registrant's telephone number, including area code: 626-795-7300
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Date of fiscal year end: NOVEMBER 30
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Date of reporting period: MAY 31, 2005
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
[GRAPHIC OMITTED]
LIGHTHOUSE
FLAHERTY & CRUMRINE/CLAYMORE
============================
TOTAL RETURN FUND
SEMI-ANNUAL
REPORT
MAY 31, 2005
web site: www.fcclaymore.com
FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND
Dear Shareholder:
During the first half of fiscal 2005, the Flaherty & Crumrine/Claymore
Total Return Fund performed well under challenging conditions for investing. For
the first two fiscal quarters of 2005, the Fund produced a total return on net
asset value ("NAV") of +4.8%(1). In the three month period ending May 31, 2005,
the total return on NAV for the Fund was -0.5%(1). As can be seen from the table
below, over the longer term, the Fund has outpaced the return on the Lipper
Domestic Investment Grade Bond Funds.
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TOTAL RETURN PER YEAR ON NET ASSET VALUE(1)
FOR PERIODS ENDING MAY 31, 2005
ONE LIFE OF
YEAR FUND(2)
---- -------
Flaherty & Crumrine/Claymore Total Return Fund ....... 9.7% 7.4%
Lipper Domestic Investment Grade Bond Funds(3) ....... 8.1% 7.1%
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(1) Based on monthly data provided by Lipper Inc. Distributions are assumed to
be reinvested at NAV in accordance with Lipper's practice, which differs
from the procedures used elsewhere in this report.
(2) 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.
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Along with Federal Reserve Chairman Alan Greenspan, we share some
confusion about the "conundrum" of falling LONG-TERM interest rates in the face
of steady increases in SHORT-TERM rates. In the twelve month period ending May
31, 2005, short-term rates have climbed almost 200 basis points. During the same
period, long-term rates have FALLEN over 100 basis points. We discuss some
reasons for the flattening yield curve in the Question and Answer ("Q&A")
section that follows, but, suffice it to say, these yield curve shifts are
without precedent for this phase of an economic cycle. (For an even more
in-depth analysis, we invite you to read the 2ND QUARTER REVIEW OF ECONOMIC
CONDITIONS on the Fund's website.)
The flattening yield curve has impacted the Fund in different ways. As
we've discussed in the past, rising short-term interest rates have the direct
and immediate effect of increasing the rate (cost) the Fund must pay on its
Auction Market Preferred Stock ("AMPS") leverage. Falling long-term interest
rates contribute to appreciation in the investment portfolio, but also increase
the likelihood that some of the higher-yielding securities in the portfolio will
be redeemed by the issuer, forcing us to replace them with lower-yielding new
issues. These were the main factors behind the dividend reduction in April.
Market conditions will always have a big impact on the dividend rate, and
the dividend rate on the Fund can change from time to time. What makes the Fund
unusual, however, is the use of strategies which are expected to result in the
Fund's income increasing as long-term interest rates rise
significantly, while being relatively resistant to declines in long-term
interest rates. Nevertheless, it is important to be realistic about the
dividend. When long-term interest rates are hovering around 4%, as they
presently are, the portfolio cannot produce the same level of income as when
these rates are at 5 or 6%.
We resolutely avoid predicting interest rates, but it is difficult for us
to believe that long-term interest rates can remain this low if the U.S. economy
continues to grow at the current pace. If rates do increase, the Fund's hedges
should appreciate in value and a portion of those gains could be reinvested in
additional income-producing securities. In addition, issuers would be less
inclined to call some of their higher-yielding issues, since the cost of
refinancing presumably also would go up.
Of course, our investment approach will remain the same regardless of the
direction of long-term interest rates. We'll identify companies with stable or
improving fundamental credit quality, and invest in the most attractive
securities we can find at the best prices obtainable (more on this in the Q&A).
For one of the few times in recent memory, the size of the preferred
market is growing by a meaningful amount (more on this in the Q&A). We're still
assessing the implications, but one thing is certain -- over the long run, this
is a very good thing. In our experience, new supply has stimulated preferred
market activity and enhanced our ability to add value to the performance of the
Fund.
It is basic economic theory that prices will fall to absorb new supply,
unless demand also increases. During the past quarter, new supply seemed to
outstrip demand by a bit, as, broadly speaking, preferred prices underperformed
most other fixed-income market segments. The Fund's preferred holdings, however,
bucked the trend and made money during the quarter. Our returns still lagged the
performance of long-term U.S. Treasury bonds, but, thanks to the "safety-net"
hedging strategy, the loss on our hedges was contained and the overall
performance was very respectable.
There are a number of interesting developments in the Fund and the
preferred market. We've addressed these in greater detail in the following Q&A.
We also encourage you to 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. Finally, if you'd like to learn more about specific
preferred issues, visit WWW.PREFERREDSTOCKGUIDE.COM, a site created by the
Fund's manager, Flaherty & Crumrine.
Sincerely,
/s/ Donald F. Crumrine /s/ Robert M. Ettinger
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
July 12, 2005
2
QUESTIONS & ANSWERS
1. HOW DID THE FUND'S PREFERRED SECURITIES PERFORM DURING THE QUARTER?
Broadly speaking, the Fund's preferred portfolio performed satisfactorily,
although to some extent the answer depends on which measure we use for comparing
performance. The total return (principal change plus income) on this portion of
the Fund was +1.6% during the quarter(1). This compares to +5.4% for long-term
U.S. Treasury Bonds(2), +1.2% for intermediate-term corporate bonds(3) and -0.6%
for the S&P 500.
The Fund's preferred portfolio also outperformed the Merrill Lynch Index
of DRD Eligible Preferred Stock and the Merrill Lynch Index of Hybrid Preferred
Securities. The total returns on these indices were -0.3% and -1.4%,
respectively.
As the numbers indicate, it is important to own the right preferreds. The
three key components of our investment decision-making process are credit
quality, issue terms, and price. We spend most of our time thinking about all
three, and then fine-tuning the portfolio to reflect our best judgment.
2. WHAT CAUSED THE OVERALL PREFERRED MARKET TO WEAKEN DURING THE QUARTER?
The market for preferred securities has been experiencing some growing
pains recently. In contrast to the past few years when the size of the preferred
market changed very little, during the past few months there has been a steady
supply of new issues brought to market. For the market to absorb this supply,
yields on preferred securities have risen in relation to other fixed-income
investments, and, as a result, the broader market of preferred securities
underperformed other segments of the fixed-income market.
3. WHAT FACTORS ARE DRIVING THE GROWTH IN THE PREFERRED MARKET?
One obvious reason is that issuers find the current low interest rate
environment attractive. In addition, Moody's Investors Service ("Moody's") has
made changes which could induce some companies to issue preferred stock. In the
esoteric world of credit rating, the treatment of preferred stock has been
somewhat inconsistent. Moody's has attempted to clarify their ratings approach,
and several issuers have already responded.
One important aspect of the new approach at Moody's is to treat an
issuer's dividend-paying preferred stock (with certain characteristics) less
like debt and more like equity than in the past. As a result, some companies may
find that substituting debt with preferred can improve the "quality" of their
balance sheet and thus lower overall financing costs. Others may issue preferred
stock and use the proceeds for a common stock buyback program; substituting
preferred stock for common stock, which means the company's income and market
value are split among fewer common shares. Preferred stock is also likely to be
used more prominently in merger and acquisition financing packages.
We expect the supply of new issues to continue at a steady, manageable
rate over the next few quarters, and possibly much longer. Many companies will
now be inclined to issue preferred securities as a bigger part of their overall
financing strategy.
----------
(1) The return here differs from those in the Shareholder letter primarily
because it excludes the impact of the Fund's hedging instruments.
(2) Lehman Bros. Long U.S. Treasury Index
(3) Lehman Bros. Intermediate U.S. Credit Index
3
4. HOW DID THE FUND'S HEDGE PERFORM DURING THE QUARTER?
The hedge produced a drag on overall performance during the quarter;
however, the put option strategy helped contain the extent of the loss. The
yield on long-term U.S. Treasury bonds declined 40 basis points during the
period, from 4.72% to 4.32%. The Fund's "safety-net" hedging strategy is
designed to mitigate the impact from a move of this magnitude, and during the
period the strategy worked as expected.
We are asked from time to time why we continue hedging when interest rates
are falling. In hindsight, this seems like a reasonable question, but actually
the future direction of interest rates is always a mystery. Consequently, the
Fund always employs a hedge against substantial increases in long-term interest
rates. This is a core component of the Fund's overall investment strategy and we
have no intention of changing it.
5. HOW DOES THE FUND'S MANAGER SELECT THE HOLDINGS IN THE PORTFOLIO?
Owning the best issues at the best prices sounds a lot like favoring
motherhood and apple pie. To us, however, it means much more. We begin with
credit quality. Our analysts dissect the balance sheet and income statements of
every company we invest in. As investors in the preferred and debt securities of
a company, we think more as lenders than as owners; we're more concerned about
stability than growth.
The next step for us is to understand the nuances of each particular
security we buy. If we drew a continuum of ways to invest in a company, common
stock would be at one end and senior borrowing (e.g. corporate bonds) would be
at the other. The area in the middle is occupied by the various types of
"hybrid" securities the Fund may invest in. The terms and covenants for these
issues can vary quite a bit, and these variances affect the value of the
security.
The final step is valuation. We take apart all of the pieces and use a
combination of experience and analytic tools to value each part, and then we add
them all up. With this price in hand, we simply try to be a good neighbor -- if
someone wants to sell below our price or buy above our price, we'll make every
effort to accommodate them!
6. WHAT IS THE OUTLOOK FOR THE FUND'S DIVIDEND RATE FOR THE REMAINDER OF THE
FISCAL YEAR?
When the Fund reduced the monthly dividend in April, we anticipated that
the new rate would be sustainable throughout the fiscal year. While we can make
no guarantees, based on our current projections, the Fund is expected to produce
sufficient income to continue the dividend at the present rate for the remainder
of the fiscal year ending November 30th.
7. WHAT IS THE BREAKDOWN BETWEEN DIVIDENDS AND INTEREST THIS YEAR?
Recall that dividends may be taxed at lower rates than other types of
income for individual and corporate investors (approximately 15% and 10.5%,
respectively). Producing preferentially-taxed dividend income is not an
objective of the Fund, but such dividends comprised a meaningful portion of the
distributions in 2004 (26% for individual investors and 21% for corporate).
Since some investors may benefit from lower tax rates on dividend income,
we realize this is a very important question; unfortunately, the composition of
distributions made by the Fund cannot be determined until the end of the fiscal
year on November 30th. Once the books are closed, we add up dividends and
interest earned, short and long-term realized gains (or losses), and subtract
the expenses incurred by the Fund. Only then are we able to compute the exact
breakdown between qualified dividend income (eligible for lower tax treatment)
and other income.
4
A review of the portfolio holdings in this report shows that as of May
31st, 24% of the portfolio's value was in issues that pay qualified dividends.
THIS IS NOT THE PERCENTAGE OF INCOME THAT IS QUALIFIED DIVIDENDS. The amount of
dividend-paying securities held in the portfolio correlates well with the
composition of the portfolio's income, but there are a number of additional
things (such as realized gains and losses) that factor into the breakdown. Of
course, the composition of the portfolio's holdings is sure to change over the
balance of the year.
8. WHAT IS THE OUTLOOK FOR THE FUND'S DIVIDEND RATE OVER THE LONGER TERM?
The further we look into the future, the hazier our crystal ball becomes.
Forecasting the dividend beyond periods of six to twelve months is tricky
because the projections must be based on assumptions that become increasingly
less reliable.
An alternative approach is to remember the primary factors that influence
the dividend:
o The income earned on the Fund's investment portfolio;
o The rate the Fund must pay on its leverage; and,
o The cost of the Fund's hedging strategy.
The income earned on the Fund's investment portfolio will be determined
primarily by two things -- the level of long-term interest rates (typically
measured by the yield on 30 year U.S. Treasury bonds), and the relationship of
yields on preferred securities to the yield on 30 year U.S. Treasury bonds.
Recently, the yield on the 30 year U.S. Treasury bond has been hovering around
historically low levels, AND yields on preferred securities also appear low by
historical standards. If these conditions persist for long, we'll start to feel
the pinch on our investment income, as issuers accelerate the redemption of our
higher-yielding securities.
The rate the Fund pays on its shares of AMPS (the securities used to
leverage the Fund) is closely correlated to short-term rates. The much
publicized increases in short-term interest rates orchestrated by the Federal
Reserve have materially increased the Fund's cost of leverage. In the months
leading up to the Fed's policy change last year, the Fund was paying roughly 1%
on its leverage. Recently, the rate has been closer to 3%!
The cost of the Fund's hedging strategy is the third major item
influencing the dividend rate. We like to use the analogy of an insurance policy
-- the fund pays premiums to buy "insurance", and we collect if long-term
interest rates rise significantly. The cost of the insurance is determined by
many things, but a key item is the differential between short- and long-term
interest rates. As a general rule, when this differential is large, the cost of
hedging is high. Since short-term rates have been rising and long-term rates
have been falling, the cost of the Fund's hedges has been falling.
Put it all together and we have a three-legged dividend stool, and each
leg can move up or down for different reasons. Trying to forecast changes in one
leg is difficult enough, let alone all three. Having said that, we can make some
general observations about how the legs of the stool relate to one another. We
have already noted that falling long-term interest rates and rising short-term
interest rates tend to lower income. At the same time, a flatter yield curve
(i.e. a smaller difference between long and short rates) lowers the cost of
hedging, potentially improving returns going forward. Although far from perfect,
over the long run there is some degree of balance among the three legs of the
stool.
5
As mentioned in the letter, the dividend rate on the Fund does change from
time to time. The Fund's hedging strategy is intended to make the increases
larger and more frequent, but cuts will be made occasionally. Market conditions
have a big impact on the dividend rate, but over time we believe the Fund's
strategy (and our ability to execute it) should deliver more income for our
investors.
9. HOW DOES THE FUND SET THE DIVIDEND?
The Fund's Board of Directors must declare each and every dividend
distribution. The distribution amounts are based upon projections provided to
the Board by management, and are based on considerations like those discussed
above.
Early in the life of the Fund, the Board adopted the procedure of a
"Standing Dividend Resolution", declaring a continuing monthly dividend at a
specified rate. Unless the Board acts to change the Standing Dividend
Resolution, the Fund will continue to pay the dividend at the prevailing rate.
If and when conditions warrant, management will request a meeting of the Board
and recommend a different rate, and a new Standing Dividend Resolution may be
adopted.
10. WHY HAVE LONG AND SHORT RATES MOVED IN OPPOSITE DIRECTIONS AND WILL THIS
PATTERN PERSIST GOING FORWARD?
Normally during periods of Federal Reserve tightening, the yield curve
"flattens" as short rates rise more than long rates. However, in this period of
Fed tightening the yield curve has flattened dramatically because long rates
have fallen even as short rates have increased -- an unprecedented development.
There are a number of reasons why long rates have fallen during this
period. Analysts have cited foreign trade policy, shifts in global savings
patterns, subdued inflation, and increased demand for long-duration assets. More
recently, concerns over slowing economic growth outside the U.S. have pushed
global yields lower, particularly in Europe. Finally, technical factors probably
contributed to lower yields as well: many investors correctly anticipated Fed
tightening, but not the decline in long rates, causing some to cover shorts in
long-term bonds at higher prices and lower yields.
The second part of the question, will this pattern persist going forward,
is more difficult to answer, but we believe the answer is no. Put simply, if the
Fed keeps tightening and bonds keep rallying, soon investors would earn higher
yields on less volatile short-term instruments than on more volatile long-term
bonds. Foreign investors in particular then might shift investments to
short-term instruments as their yields rise above those of current
longer-duration holdings. In addition, business investment remains sturdy while
corporate profit growth has slowed, suggesting that corporate demand for
borrowing and hence bond issuance may increase in coming quarters.
There are many, many pieces to the yield-curve puzzle, but putting it all
together, we expect that short-term and long-term rates will move more closely
together - and in the same direction! - going forward, which should benefit
either our cost of leverage if rates fall or our hedges if rates increase.
6
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Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OVERVIEW
MAY 31, 2005 (UNAUDITED)
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FUND STATISTICS ON 05/31/05
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Net Asset Value $ 23.72
Market Price $ 21.88
Discount 7.76%
Yield on Market Price 8.12%
Common Shares
Outstanding 9,776,333
INDUSTRY CATEGORIES % OF PORTFOLIO
--------------------------------------------------------------------------------
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
Banks 36%
Utilities 26%
Insurance 17%
REITs 8%
Financial Services 5%
Other 4%
Oil and Gas 4%
MOODY'S RATINGS % OF PORTFOLIO
--------------------------------------------------------------------------------
AAA 0.1%
AA 1.5%
A 33.0%
BBB 47.3%
BB 10.2%
Not Rated 6.4%
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Below Investment Grade* 9.9%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO
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Wachovia Corp 5.3%
J.P. Morgan Chase 4.8%
Duke Energy 4.0%
Royal Bank of Scotland 3.7%
North Fork Bancorporation 3.2%
Lehman Brothers 3.1%
OneAmerica Financial 2.8%
Zurich RegCaPS 2.7%
Nexen, Inc. 2.6%
Constellation Energy 2.5%
% OF PORTFOLIO**
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Holdings Generating Qualified Dividend Income (QDI) for Individuals 24%
Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD) 17%
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** 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.
7
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Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 2005 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ --------
PREFERRED SECURITIES -- 74.5%
BANKING -- 36.2%
---------------------------------------------------------------------------------------------------------------------
1,000 ABN AMRO North America, Inc., 6.59% Pfd., 144A**** ............................. $ 1,049,600*
$ 4,750,000 Astoria Capital Trust I, 9.75% 11/01/29 Capital Security, Series B ............. 5,919,402
25,000 BAC Capital Trust III, 7.00% Pfd. .............................................. 658,250
10,900 BAC Capital Trust V, 7.00% Pfd. ................................................ 284,653
50,900 Bank One Capital Trust VI, 7.20% Pfd. .......................................... 1,324,927
$ 1,000,000 BT Preferred Capital Trust II, 7.875% 02/25/27 Capital Security ................ 1,085,605(1)
$ 10,000,000 Chase Capital I, 7.67% 12/01/26 Capital Security ............................... 10,721,600
40,000 Cobank, ACB, 7.00% Pfd., 144A**** .............................................. 2,302,000*
20,000 Colonial Capital Trust IV, 7.875% Pfd. ......................................... 528,000
11,000 Comerica (Imperial) Capital Trust I, 7.60% Pfd. ................................ 287,540
$ 2,000,000 First Chicago NBD Capital A, 7.95% 12/01/26 Capital Security, 144A**** ......... 2,159,340
$ 400,000 First Empire Capital Trust I, 8.234% 02/01/27 Capital Security ................. 438,202
$ 1,900,000 First Hawaiian Capital I, 8.343% 07/01/27 Capital Security, Series B ........... 2,112,173(1)
$ 2,000,000 First Midwest Capital Trust I, 6.95% Pfd. 12/01/33, Capital Security ........... 2,268,390
160,000 First Republic Bank, 6.25% Pfd. ................................................ 4,182,400*
$ 1,500,000 First Tennessee Capital Trust II, 6.30% 04/15/34 Capital Security, Series B .... 1,526,002
$ 2,000,000 First Union Institutional Capital II, 7.85% 01/01/27 Capital Security .......... 2,172,380
$ 1,000,000 Fleet Capital Trust II, 7.92% 12/11/26 Capital Security ........................ 1,085,665
18,000 Fleet Capital Trust VII, 7.20% Pfd. ............................................ 471,600
2 FT Real Estate Securities Company, 9.50% Pfd., 144A**** ........................ 2,908,050
$ 7,100,000 GreenPoint Capital Trust I, 9.10% 06/01/27 Capital Security .................... 7,994,352
$ 8,000,000 HBOS Capital Funding LP, 6.85% Pfd. ............................................ 8,181,200(1)
$ 855,000 HSBC Capital Trust II, 8.38% 05/15/27 Capital Security, 144A**** ............... 943,210(1)
$ 3,000,000 Haven Capital Trust I, 10.46% 02/01/27 Capital Security ........................ 3,405,765
4,200 Household Capital Trust VI, 8.25% Pfd. ......................................... 108,654
$ 2,944,000 J.P. Morgan Capital Trust I, 7.54% 01/15/27 Capital Security ................... 3,158,927
$ 6,000,000 Keycorp Institutional Capital A, 7.826% 12/01/26 Capital Security, Series A .... 6,476,520
10 Marshall & Ilsley Investment II, 8.875% Pfd., 144A**** ......................... 1,072,852
$ 1,000,000 NB Capital Trust IV, 8.25% Capital Security .................................... 1,104,040
$ 2,500,000 North Fork Capital Trust I, 8.70% 12/15/26 Capital Security .................... 2,753,738
$ 810,000 North Fork Capital Trust II, 8.00% 12/15/27 Capital Security ................... 901,627
145,000 PFGI Capital Corporation, 7.75% Pfd. ........................................... 3,969,375
$ 4,000,000 RBS Capital Trust B, 6.80% Pfd. ................................................ 4,076,380**(1)
2,100 Regions Financial Trust I, 8.00% Pfd. .......................................... 54,537
$ 1,600,000 Republic New York Capital I, 7.75% 11/15/26 Capital Security ................... 1,725,624(1)
$ 716,000 Republic New York Capital II, 7.53% 12/04/26 Capital Security .................. 770,803(1)
Roslyn Real Estate:
25 8.95% Pfd., Pvt., Series C, 144A**** ......................................... 2,790,103
10 Adj. Rate Pfd., Series D, 144A**** ........................................... 1,017,500
The accompanying notes are an integral part of the financial statements.
8
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Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIOOFINVESTMENTS (CONTINUED)
MAY 31, 2005 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ --------
PREFERRED SECURITIES -- (CONTINUED)
BANKING -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
Royal Bank of Scotland Group PLC:
20,000 6.35% Pfd., Series N ......................................................... $ 505,400**(1)
$ 6,820,000 7.648% Pfd. .................................................................. 8,646,805**(1)
$ 5,050,000 Union Planters Capital Trust, 8.20% 12/15/26 Capital Security .................. 5,501,723
19,000 USB Capital V, 7.25% Pfd. ...................................................... 499,795
$ 5,000,000 Wachovia Capital Trust I, 7.64% 01/15/27 Capital Security, 144A**** ............ 5,414,900
$ 1,170,000 Wachovia Capital Trust V, 7.965% 06/01/27 Capital Security, 144A**** ........... 1,289,463
350,000 Wachovia Preferred Funding, 7.25% Pfd., Series A ............................... 10,127,250
$ 4,000,000 Webster Capital Trust I, 9.36% 01/29/27 Capital Security ....................... 4,446,120
7,900 Wells Fargo Capital Trust IV, 7.00% Pfd. ....................................... 203,386
-------------------------------------------------------------------------------------------------------------------
130,625,828
----------------
FINANCIAL SERVICES -- 3.3%
---------------------------------------------------------------------------------------------------------------------
232,100 Lehman Brothers Holdings, Inc., 6.50% Pfd., Series F ........................... 6,079,859*
9,700 Merrill Lynch Capital Trust III, 7.00% Pfd. .................................... 257,826
168,650 Merrill Lynch Capital Trust V, 7.28% Pfd. ...................................... 4,545,961(2)
17,200 Morgan Stanley Capital Trust II, 7.25% Pfd. .................................... 442,900
15,000 Morgan Stanley Capital Trust IV, 6.25% Pfd. .................................... 375,750
6,000 Morgan Stanley Capital Trust V, 5.75% Pfd. ..................................... 142,740
-------------------------------------------------------------------------------------------------------------------
11,845,036
----------------
INSURANCE -- 11.4%
---------------------------------------------------------------------------------------------------------------------
15,000 AAG Holding Company, Inc., 7.25% Pfd. .......................................... 375,900
177,380 ACE Ltd., 7.80% Pfd., Series C ................................................. 4,710,326**(1)
40,000 Aegon NV, 6.375% Pfd. .......................................................... 1,001,200**(1)
$ 6,420,000 AON Capital Trust A, 8.205% 01/01/27 Capital Security .......................... 7,521,993
191,700 Everest Re Capital Trust II, 6.20% Pfd., Series B .............................. 4,576,838(1)
ING Groep NV:
36,000 7.05% Pfd. ..................................................................... 941,580**(1)
85,000 7.20% Pfd. ..................................................................... 2,240,175**(1)
26,500 PartnerRe Ltd., 6.50% Pfd., Series D ........................................... 658,260**(1)
30,000 Renaissancere Holdings Ltd., 6.08% Pfd., Series C .............................. 713,550**(1)
40,000 St. Paul Capital Trust I, 7.60% Pfd. ........................................... 1,043,600
$ 500,000 Sun Life Canada, 8.526% Pfd., 144A**** ......................................... 553,808(1)
$ 4,815,000 USF&G Capital, 8.312% 07/01/46 Capital Security, 144A**** ...................... 6,220,474
30,000 XL Capital Ltd., 7.625% Pfd., Series B ......................................... 799,800**(1)
9,175 Zurich RegCaPS Funding Trust, 6.58% Pfd., 144A**** ............................. 9,681,781*
-------------------------------------------------------------------------------------------------------------------
41,039,285
----------------
The accompanying notes are an integral part of the financial statements.
9
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2005 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- 14.4%
---------------------------------------------------------------------------------------------------------------------
122,700 Alabama Power Company, 5.30% Pfd. .............................................. $ 3,176,089*
45,700 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ...................... 4,771,994*
$ 2,750,000 COMED Financing II, 8.50% 01/15/27 Capital Security, Series B .................. 3,046,381
$ 2,500,000 Dominion Resources Capital Trust I, 7.83% 12/01/27 Capital Security ........... 2,759,113
Duke Energy Corporation:
50,214 7.04% Pfd., Series Y ......................................................... 5,181,583*
22,934 7.85% Pfd., Series S ......................................................... 2,376,765*
20,000 Duquesne Light Company, 6.50% Pfd. ............................................. 1,078,000*
20,000 Energy East Capital Trust I, 8.25% Pfd. ........................................ 523,400
758 Entergy Arkansas, Inc., 7.40% Pfd. ............................................. 78,851*
70,000 FPC Capital I, 7.10% Pfd., Series A ............................................ 1,762,600
$ 4,500,000 Houston Light & Power, Capital Trust II, 8.257%, 02/01/37 Capital Security ..... 4,927,050
30,445 Indianapolis Power & Light Company, 5.65% Pfd. ................................. 2,956,362*
Interstate Power & Light Company:
90,000 7.10% Pfd., Series C ......................................................... 2,531,700*
38,600 8.375% Pfd., Series B ........................................................ 1,301,399*
$ 5,000,000 PECO Energy Capital Trust IV, 5.75% 06/15/33 Capital Security .................. 5,024,225
16,200 PSEG Funding Trust II, 8.75% Pfd. .............................................. 443,151
$ 1,800,000 Puget Capital Trust, 8.231% 06/01/27 Capital Security, Series B ................ 1,982,142
14,100 Puget Sound Energy Capital Trust, 8.40% 06/30/41 ............................... 369,843
151,100 Southern Union Company, 7.55% Pfd. ............................................. 4,200,580*
10,000 Southwest Gas Capital II, 7.70% Pfd. ........................................... 266,900
5,000 Union Electric Company, $7.64 Pfd. ............................................. 521,875*
18,000 Vectren Utility Holdings, 7.25% Pfd. 10/15/31 .................................. 466,200
85,137 Wisconsin Power & Light Company, 6.50% Pfd. .................................... 2,125,871*
-------------------------------------------------------------------------------------------------------------------
51,872,074
----------------
OIL AND GAS -- 0.8%
---------------------------------------------------------------------------------------------------------------------
2,750 EOG Resources, Inc., 7.195% Pfd., Series B ..................................... 2,982,031*
-------------------------------------------------------------------------------------------------------------------
2,982,031
----------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 7.5%
---------------------------------------------------------------------------------------------------------------------
BRE Properties, Inc.:
20,000 6.75% Pfd., REIT, Series C ................................................... 507,300
40,000 6.75% Pfd., REIT, Series D ................................................... 1,011,000
38,750 Carramerica Realty Corporation, 7.50% Pfd., REIT, Series E ..................... 1,003,819
The accompanying notes are an integral part of the financial statements.
10
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIOOFINVESTMENTS (CONTINUED)
MAY 31, 2005 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
REAL ESTATE INVESTMENT TRUST (REIT) -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
Duke Realty Corporation:
50,000 6.50% Pfd., REIT, Series K ................................................... $ 1,233,750
10,000 6.60% Pfd., REIT, Series L ................................................... 249,150
19,549 6.625% Pfd., REIT, Series J .................................................. 490,387
85,000 Equity Residential Properties, 8.29% Pfd., REIT, Series K ...................... 5,391,550
PS Business Parks, Inc.:
57,000 6.875% Pfd., REIT, Series I .................................................. 1,387,665
16,900 7.00% Pfd., REIT, Series H ................................................... 416,162
174,500 7.20% Pfd., REIT, Series M ................................................... 4,344,177
44,500 7.60% Pfd., REIT, Series L ................................................... 1,136,752
45,000 7.95% Pfd., REIT, Series K ................................................... 1,167,975
Public Storage, Inc.:
25,100 6.18% Pfd., REIT, Series D ................................................... 596,251
44,200 7.50% Pfd., REIT, Series V ................................................... 1,165,333
1,400 7.625% Pfd., REIT, Series T .................................................. 36,512
48,600 8.00% Pfd., REIT, Series R ................................................... 1,272,348
125,000 Regency Centers Corporation, 7.25% Pfd., REIT .................................. 3,186,875
86,000 Weingarten Realty Investment, 6.95% Pfd., REIT ................................. 2,275,560
-------------------------------------------------------------------------------------------------------------------
26,872,566
----------------
MISCELLANEOUS INDUSTRIES -- 0.9%
---------------------------------------------------------------------------------------------------------------------
34,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ............................ 3,188,350*
-------------------------------------------------------------------------------------------------------------------
3,188,350
----------------
TOTAL PREFERRED SECURITIES
(Cost $257,701,441) .......................................................... 268,425,170
----------------
CORPORATE DEBT SECURITIES -- 23.6%
FINANCIAL SERVICES -- 1.4%
---------------------------------------------------------------------------------------------------------------------
$ 4,993,500 Lehman Brothers, Guaranteed Note, Variable Rate, 12/16/16, 144A**** ............ 5,087,128
-------------------------------------------------------------------------------------------------------------------
5,087,128
----------------
INSURANCE -- 5.0%
---------------------------------------------------------------------------------------------------------------------
20,000 American Financial Group, Inc., 7.125% 02/03/34, Senior Note ................... 505,900
$ 500,000 Liberty Mutual Group, 6.50% 03/15/35, 144A**** ................................. 495,063
$ 8,700,000 OneAmerica Financial Partners, 7.00% 10/15/33, 144A**** ........................ 10,042,758
$ 7,000,000 UnumProvident Corporation, 7.25% 03/15/28, Senior Notes ........................ 6,891,780
-------------------------------------------------------------------------------------------------------------------
17,935,501
----------------
The accompanying notes are an integral part of the financial statements.
11
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2005 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
CORPORATE DEBT SECURITIES -- (CONTINUED)
OIL AND GAS -- 2.6%
---------------------------------------------------------------------------------------------------------------------
356,200 Nexen, Inc., 7.35% Subordinated Notes .......................................... $ 9,473,139(1)
-------------------------------------------------------------------------------------------------------------------
9,473,139
----------------
UTILITIES -- 11.5%
---------------------------------------------------------------------------------------------------------------------
$ 7,100,000 Constellation Energy Group, 7.60% 04/01/32, Senior Notes ....................... 8,907,234
27,200 Corp-Backed Trust Certificates, 7.875% 02/15/32, Series Duke Capital ........... 726,104
$ 5,000,000 Duke Capital Corporation, 8.00% 10/01/19 Senior Notes .......................... 6,187,575
5,000 Entergy Mississippi, Inc., 7.25%, 1st Mortgage ................................. 131,125
$ 4,000,000 Indianapolis Power & Light Company, 6.60% 01/01/34, 1st Mortgage, 144A**** ..... 4,665,500
$ 4,000,000 Interstate Power & Light Company, 6.45% 10/15/33, Senior Notes ................. 4,577,140
$ 5,670,000 Oncor Electric Delivery Company, 7.25% 01/15/33, Secured ....................... 6,953,546
$ 2,800,000 Progress Energy, Inc., 7.75% 03/01/31 .......................................... 3,476,732
$ 1,200,000 TXU Corporation, 6.50% 11/15/24, 144A**** ...................................... 1,161,420
$ 4,000,000 Wisconsin Electric Power Company, 6.875% 12/01/95 .............................. 4,926,300
-------------------------------------------------------------------------------------------------------------------
41,712,676
----------------
MISCELLANEOUS -- 3.1%
---------------------------------------------------------------------------------------------------------------------
19,625 Ford Motor Company, 7.50% 06/10/43, Senior Notes ............................... 408,102
$ 6,265,000 General Motors Corporation, 8.80% 03/01/21 ..................................... 5,097,361
42,300 Maytag Corporation, 7.875% 08/01/31 ............................................ 960,844
$ 3,550,000 Pulte Homes, Inc., 6.375% 05/15/33, Senior Notes ............................... 3,549,840
$ 950,000 Verizon Maryland, 7.15% 05/01/23 ............................................... 1,072,232
-------------------------------------------------------------------------------------------------------------------
11,088,379
----------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $81,060,750) 85,296,823
----------------
COMMON STOCK AND CONVERTIBLE SECURITY -- 0.5%
INSURANCE -- 0.2%
---------------------------------------------------------------------------------------------------------------------
36,000 XL Capital Ltd., 6.50% Mandatory Convertible, 05/15/07 ......................... 862,020(1)
-------------------------------------------------------------------------------------------------------------------
862,020
----------------
UTILITIES -- 0.3%
---------------------------------------------------------------------------------------------------------------------
25,000 FPL Group, Inc. ................................................................ 1,020,625*
-------------------------------------------------------------------------------------------------------------------
1,020,625
----------------
TOTAL COMMON STOCK AND CONVERTIBLE SECURITY
(Cost $1,784,734) 1,882,645
----------------
The accompanying notes are an integral part of the financial statements.
12
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2005 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
OPTION CONTRACTS -- 0.5%
345 September Call Options on September U.S. Treasury Bond Futures,
Expiring 08/26/05 ............................................................ $ 889,453+
2,300 September Put Options on September U.S. Treasury Bond Futures,
Expiring 08/26/05 ............................................................ 808,203+
-------------------------------------------------------------------------------------------------------------------
TOTAL OPTION CONTRACTS
(Cost $2,142,427) ............................................................ 1,697,656
----------------
MONEY MARKET FUND -- 0.1%
259,852 BlackRock Provident Institutional, TempFund .................................... 259,852
-------------------------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost $259,852) .............................................................. 259,852
----------------
TOTAL INVESTMENTS (Cost $342,949,204***) ....................................... 99.2% 357,562,146
OTHER ASSETS AND LIABILITIES (Net) ............................................. 0.8% 2,802,214
------- ----------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK AND PREFERRED STOCK ................. 100.0%++ $ 360,364,360
------- ----------------
AUCTION MARKET PREFERRED STOCK (AMPS) REDEMPTION VALUE ......................................... (128,500,000)
----------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ..................................................... $ 231,864,360
================
----------
* 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 be resold in transactions exempt from
registration to qualified institutional buyers.
(1) Foreign Issuer
(2) All or a portion of this security has been pledged as collateral for
written option positions.
+ 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
OPEN OPTION CONTRACTS WRITTEN
CONTRACTS CONTRACT DESCRIPTION VALUE
--------- -------------------- -------
345 September Call Options on September U.S. Treasury Bond Futures,
Expiring 8/26/2005, Strike Price: 112 .......................................... $ (1,967,578)
-------------------------------------------------------------------------------------------------------------------
TOTAL OPEN OPTION CONTRACTS WRITTEN (premiums received: $645,236) ............ (1,967,578)
----------------
The accompanying notes are an integral part of the financial statements.
13
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2005 (UNAUDITED)
-----------------------------------------------------------
ASSETS:
Investments, at value (Cost $342,949,204)
(See accompanying Portfolio of Investments) ....................... $ 357,562,146
Receivable for Investments sold ...................................... 1,009,958
Dividends and interest receivable .................................... 5,124,974
Prepaid expenses ..................................................... 185,062
-------------
Total Assets ................................................. 363,882,140
LIABILITIES:
Payable for securities purchased ..................................... $1,000,000
Dividends payable to Common Shareholders ............................. 153,107
Investment advisory fee payable ...................................... 165,061
Administration, Transfer Agent and Custodian fees and
expenses payable ................................................... 37,999
Servicing agent fees payable ......................................... 17,725
Professional fees payable ............................................ 33,660
Directors' fees payable .............................................. 4,695
Accrued expenses and other payables .................................. 28,712
Accumulated undeclared distributions to Auction Market Preferred
Stock Shareholders ................................................. 109,243
Outstanding options written, at value (premiums received $645,236) ... 1,967,578
----------
Total Liabilities ............................................ 3,517,780
-------------
AUCTION MARKET PREFERRED STOCK (5,140 SHARES OUTSTANDING)
REDEMPTION VALUE ..................................................... 128,500,000
-------------
NET ASSETS AVAILABLE TO COMMON STOCK .................................... $ 231,864,360
=============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
Distributions in excess of net investment income ..................... $ (755,808)
Accumulated net realized loss on investments sold .................... (12,028,388)
Unrealized appreciation of investments ............................... 13,290,600
Par value of Common Stock ............................................ 97,763
Paid-in capital in excess of par value of Common Stock ............... 231,260,193
-------------
Total Net Assets Available to Common Stock ................... $ 231,864,360
=============
NET ASSET VALUE PER SHARE OF COMMON STOCK:
Common Stock (9,776,333 shares outstanding) ........................ $ 23.72
=============
The accompanying notes are an integral part of the financial statements.
14
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2005 (UNAUDITED)
-----------------------------------------------------------
INVESTMENT INCOME:
Dividends++ ........................................................ $ 5,187,307
Interest ........................................................... 6,163,145
--------------
Total Investment Income ....................................... 11,350,452
EXPENSES:
Investment advisory fee ............................................ $979,061
Servicing agent fee ................................................ 106,059
Administrator's fee ................................................ 134,925
Auction Market Preferred broker commissions and auction
agent fees ...................................................... 162,409
Professional fees .................................................. 67,413
Insurance expense .................................................. 78,715
Transfer agent fees and expenses ................................... 41,581
Directors' fees and expenses ....................................... 39,130
Custodian fees and expenses ........................................ 21,426
Chief Compliance Officer fees and expenses ......................... 19,694
Other .............................................................. 59,183
Total Expenses ................................................ 1,709,596
--------------
NET INVESTMENT INCOME ................................................... 9,640,856
--------------
REALIZED AND UNREALIZED (LOSS)/GAIN ON INVESTMENTS:
Net realized loss on investments sold during the period ............ (634,685)
Change in net unrealized appreciation of investments held
during the period ............................................... 3,478,256
--------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ......................... 2,843,571
--------------
DISTRIBUTIONS TO AUCTION MARKET PREFERRED STOCK
SHAREHOLDERS:
From net investment income (including changes in accumulated
undeclared distributions) ....................................... (1,716,482)
--------------
NET INCREASE IN NET ASSETS TO COMMON STOCK RESULTING
FROM OPERATIONS ...................................................... $ 10,767,945
==============
++ 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)
--------------------------------------------------------------------------------
SIX MONTHS ENDED
MAY 31, 2005 YEAR ENDED
(UNAUDITED) NOVEMBER 30, 2004
---------------- -----------------
OPERATIONS:
Net investment income ......................................................... $ 9,640,856 $ 18,999,977
Net realized loss on investments sold during the period ....................... (634,685) (8,270,476)
Change in net unrealized appreciation of investments held
during the period .......................................................... 3,478,256 2,884,641
Distributions to AMPS* Shareholders from net investment income,
including changes in accumulated undeclared distributions .................. (1,716,482) (1,878,375)
------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .......................... 10,767,945 11,735,767
DISTRIBUTIONS:
Dividends paid from net investment income to Common
Stock Shareholders(1) ...................................................... (9,245,432) (19,362,709)
------------- -------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS .............................. (9,245,432) (19,362,709)
FUND SHARE TRANSACTIONS:
Increase from Common Stock transactions ....................................... 536,884 1,816,648
Increase due to Cost of AMPS* Issuance(2) ..................................... -- 116,595
------------- -------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING
FROM FUND SHARE TRANSACTIONS ............................................... 536,884 1,933,243
NET INCREASE/(DECREASE) IN NET ASSETS AVAILABLE TO ------------- -------------
COMMON STOCK FOR THE PERIOD .................................................... $ 2,059,397 $ (5,693,699)
============= =============
--------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ........................................................... $ 229,804,963 $ 235,498,662
Net increase/(decrease) in net assets during the period ....................... 2,059,397 (5,693,699)
------------- -------------
End of period (including distributions in excess of net investment
income of ($755,808) and undistributed net investment income of
$565,250, respectively) .................................................... $ 231,864,360 $ 229,804,963
============= =============
----------
* 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.
SIX MONTHS YEAR FOR THE PERIOD FROM
ENDED ENDED AUGUST 29, 2003(1)
MAY 31, 2005 NOVEMBER 30, THROUGH
(UNAUDITED) 2004 NOVEMBER 30, 2003
------------ ----------- ------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................................. $ 23.56 $ 24.33 $ 23.82(2)
--------- --------- ---------
INVESTMENT OPERATIONS:
Net investment income ................................................ 0.99 1.95 0.30
Net realized and unrealized gain/(loss) on investments ............... 0.30 (0.55) 0.55
DISTRIBUTIONS TO AMPS* SHAREHOLDERS:
From net investment income ........................................... (0.18) (0.19) (0.01)
From net realized capital gains ...................................... -- -- --
--------- --------- ---------
Total from investment operations ..................................... 1.11 1.21 0.84
--------- --------- ---------
COST OF ISSUANCE OF AMPS* ............................................ -- 0.01 (0.17)
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income ........................................... (0.95) (1.99) (0.16)
From net realized capital gains ...................................... -- -- --
--------- --------- ---------
Total distributions to Common Shareholders ........................... (0.95) (1.99) (0.16)
--------- --------- ---------
Net asset value, end of period ....................................... $ 23.72 $ 23.56 $ 24.33
========= ========= =========
Market value, end of period .......................................... $ 21.88 $ 24.15 $ 25.16
========= ========= =========
Total investment return based on net asset value**** ................. 4.90%*** 5.22% 2.82%***(3)
========= ========= =========
Total investment return based on market value **** ................... (5.60%)*** 4.30% 1.31%***(3)
========= ========= =========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
TO COMMON STOCK SHAREHOLDERS:
Total net assets, end of period (in 000's) ...................... $ 231,864 $ 229,805 $ 235,499
Operating expenses .............................................. 1.46%** 1.51% 1.34%**
Net investment income + ......................................... 6.77%** 7.33% 4.86%**
=======================================================
SUPPLEMENTAL DATA:++
Portfolio turnover rate ......................................... 16%*** 79% 56%***
Total net assets available to Common and Preferred Stock,
end of period (in 000's) ...................................... $ 360,364 $ 358,305 $ 363,999
Ratio of operating expenses to total average net assets
available to Common and Preferred Stock ....................... 0.94%** 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 (UNAUDITED)
-----------------------------------------------------------
TOTAL DIVIDEND
DIVIDENDS NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE (1)
--------- --------- ------------- ------------
December 31, 2004 ............... $0.1625 $ 24.08 $ 24.80 $ 24.08
January 31, 2005 ................ 0.1625 24.33 24.28 24.50
February 28, 2005 ............... 0.1625 24.31 23.55 23.87
March 31, 2005 .................. 0.1625 23.68 21.48 21.86
April 30, 2005 .................. 0.1480 23.61 21.55 21.59
May 31, 2005 .................... 0.1480 23.72 21.88 21.95
----------
(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)
--------- --------------- ------------- --------- ---------------
05/31/05* 5,140 $70,131 $25,000 $25,000
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.
* Unaudited.
The accompanying notes are an integral part of the financial statements.
19
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
-----------------------------------------------------------
1. ORGANIZATION
Flaherty & Crumrine/Claymore Total Return Fund Incorporated (the "Fund")
was incorporated as a Maryland corporation on July 18, 2003, and commenced
operations on August 29, 2003 as a diversified, closed-end management investment
company under the Investment Company Act of 1940, as amended (the "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 (UNAUDITED) (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: Purchases of options are recorded as an investment, the value of
which is marked-to-market at each valuation date. 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.
When the Fund writes an option, an amount equal to the premium received by
the Fund is recorded as a liability, the value of which is marked-to-market at
each valuation date. When a written option expires, the Fund realizes a gain
equal to the amount of the premium originally received. When the Fund enters
into a closing purchase transaction, the Fund realizes a gain (or loss if the
cost of the closing purchase transaction exceeds the premium received when the
option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a call option is exercised, the Fund realizes a gain or loss from the sale
of the underlying security and the proceeds from such sale are increased by the
amount of the premium originally received. When a put option is exercised, the
amount of the premium originally received will reduce the cost of the security
which the Fund purchased upon exercise.
The risk in writing a call option is that the Fund may forego the
opportunity for profit if the market price of the underlying security increases
and the option is exercised. The risk in writing a put option is that the Fund
may incur a loss if the market price of the underlying security decreases and
the option is exercised.
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").
The Shareholders of AMPS are entitled to receive cumulative cash dividends at
the applicable rate for such series as declared by the Fund's Board of
Directors. 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.
21
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
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
character of distributions paid, including changes in accumulated undeclared
distributions to AMPS Shareholders, during 2005 and 2004 was as follows:
DISTRIBUTIONS PAID IN FISCAL YEAR 2005 DISTRIBUTIONS PAID IN FISCAL YEAR 2004
-------------------------------------- --------------------------------------
ORDINARY INCOME LONG-TERM CAPITAL GAINS ORDINARY INCOME LONG-TERM CAPITAL GAINS
--------------- ----------------------- --------------- -----------------------
Common N/A N/A $19,362,709 $0
Preferred N/A N/A $ 1,878,375 $0
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 $0 $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 paid $35,198 of Federal excise taxes attributable to calendar
year 2004 in March 2005.
22
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
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 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.
23
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
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 and reimburses out-of-pocket
expenses in connection with his role as CCO.
4. PURCHASES AND SALES OF SECURITIES
For the six months ended May 31, 2005, the cost of purchases and proceeds
from sales of securities excluding short-term investments, aggregated
$55,571,922 and $60,227,606, respectively.
At May 31, 2005, the aggregate cost of securities for federal income tax
purposes was $340,658,579, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $20,466,014
and the aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $3,562,447.
5. COMMON STOCK
At May 31, 2005, 240,000,000 shares of $0.01 par value Common Stock were
authorized.
SIX MONTHS ENDED YEAR ENDED
5/31/05 11/30/04
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Shares issued under the Dividend
Reinvestment and Cash Purchase Plan 22,381 $536,884 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 consist of
Series T7 and W28, are senior to the Common Stock and result 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.
24
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
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.
At May 31, 2005, 2,570 shares for each Series T7 and W28 of Auction Market
Preferred Shares were outstanding at the annualized rate of 2.95% and 3.12% 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 &
25
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
Poor's or judged to be comparable in quality, in either case, at the time of
purchase. However, these securities must be issued by an issuer having a class
of senior debt rated investment grade outstanding.
The Fund may invest up to 15% of its total assets in common stocks, which
total includes those convertible securities that trade in close relationship to
the underlying common stock of an issuer.
In addition to foreign money market securities, the Fund may invest up to
30% of its total assets in the securities of companies organized outside the
United States. All foreign securities held by the Fund will be denominated in
U.S. dollars.
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. No assurance can be given that such transactions will achieve their
desired purposes or will result in an overall reduction of risk to the Fund.
26
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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 six months ended May 31, 2005, $793 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.
27
--------------------------------------------------------------------------------
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 Commission ("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 latest of which was filed
for the quarter ended February 28, 2005. The Fund's Form N-Q is available on the
SEC's 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
sReference Section may be obtained by calling 1-800-SEC-0330.
28
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Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (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 30.
CERTIFICATIONS
Donald F. Crumrine, as the Fund's Chief Executive Officer, has certified
to the New York Stock Exchange that, as of May 18, 2005, 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-Q 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.
MEETING OF SHAREHOLDERS
On April 21, 2005, the Fund held its Annual Meeting of Shareholders (the
"Meeting") for the following purposes: election of directors of the Fund
("Proposal 1"), and approval of an amendment to the Fund's Articles
Supplementary Establishing and Fixing the Rights and Preferences of Auction
Market Preferred Stock ("Articles Supplementary") relating to the term of office
of certain Directors ("Proposal 2"). Both proposals were approved by
shareholders and the results of the proposals are as follows:
PROPOSAL 1: ELECTION OF DIRECTORS.
NAME FOR WITHHELD
---- --- --------
PREFERRED STOCK
David Gale ......................................... 3,129 4
Morgan Gust ........................................ 3,129 4
Martin Brody, Donald F. Crumrine, and Robert F. Wulf continue to serve in
their capacities as Directors of the Fund.
PROPOSAL 2: AMENDMENT TO THE ARTICLES SUPPLEMENTARY RELATING TO THE TERM OF
OFFICE OF CERTAIN DIRECTORS.
FOR AGAINST WITHHELD
--- ------- --------
COMMON STOCK ......................... 7,554,885 63,287 138,873
PREFERRED STOCK ...................... 3,128 5 --
29
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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 2 Director, Jaclyn, Inc.
c/o HMK Associates since (luggage and
30 Columbia Turnpike January 2003 accessories). Director,
Florham Park, NJ 07932 Emeritus, Smith Barney
Age: 83 Mutual Funds (18 Funds);
Director, Flaherty &
Crumrine/Claymore
Preferred Securities Income
Fund.
DAVID GALE+ Director Class I Director President & CEO of 4 Director, Metromedia
Delta Dividend Group, Inc. since Delta Dividend International Group, Inc.
220 Montgomery Street January 2003 Group, Inc. (investments). (telecommunications);
Suite 426 Director, Flaherty &
San Francisco, CA 94104 Crumrine Preferred
Age: 56 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 2008 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.
30
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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 Since March 2002, 4 Director, Flaherty &
Giant Industries, Inc. since President of Giant Crumrine Preferred
23733 N. Scottsdale Road January 2003 Industries, Inc. (petroleum Income Fund,
Scottsdale, AZ 85255 refining and marketing) Flaherty & Crumrine
Age: 58 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
Giant Industries, Inc. Fund.
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 January 2003 Oregon Foundation; Income Fund,
Age: 68 Trustee, San Francisco Flaherty & Crumrine
Theological Seminary. Preferred Income
Opportunity Fund and
Flaherty & Crumrine/
Claymore Preferred
Securities Income
Fund.
INTERESTED
DIRECTOR:
DONALD F. CRUMRINE++ Director, Class III Director Chairman of the Board 4 Director, Flaherty &
301 E. Colorado Boulevard Chairman since and Director of Flaherty & Crumrine Preferred
Suite 720 of the Board January 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 2008 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. Crumrine is considered an "interested
person" because of his affiliation with Flaherty & Crumrine Incorporated, which acts as the Fund's investment adviser.
31
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Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
PRINCIPAL
TERM OF OFFICE OCCUPATION(S)
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST
AND AGE HELD WITH FUND TIME SERVED FIVE YEARS
------- -------------- ----------- ----------
OFFICERS:
ROBERT M. ETTINGER President Since President and Director of
301 E. Colorado Boulevard January 2003 Flaherty & Crumrine
Suite 720 Incorporated.
Pasadena, CA 91101
Age: 46
R. ERIC CHADWICK Chief Financial Since Vice President of
301 E. Colorado Boulevard Officer, Vice January 2003 Flaherty & Crumrine
Suite 720 President, Incorporated since
Pasadena, CA 91101 Treasurer and August 2001, and
Age: 30 Secretary portfolio manager of
Flaherty & Crumrine
Incorporated.
PETER C. STIMES Chief Compliance Since Vice President of
301 E. Colorado Boulevard Officer and January 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 July 2003 President of Flaherty &
Mezzanine Suite Treasurer Crumrine Incorporated; from
Summit, NJ 07901 June 2001 to April 2003,
Age: 45 Director of US Market Strategy
at Barclays Capital; from
February 1987 to June 2001,
Vice President of Goldman,
Sachs & Company as
Director of US Interest Rate
Strategy and, previously,
Vice President of Interest
Rate Product Sales.
NICHOLAS DALMASO Vice President Since Director of Claymore
2455 Corporate West Drive and Assistant January 2003 Group, LLC since
Lisle, IL 60532 Secretary January 2002. Senior
Age: 40 Managing Director
and General Counsel of
Claymore Securities, Inc.
since November, 2001 and
Claymore Advisors, LLC since
October 2003. Partner of DBN
Group since April 2001.
Associate General Counsel
of Nuveen Investments from
July 1999 to November 2001.
32
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
PRINCIPAL
TERM OF OFFICE OCCUPATION(S)
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST
AND AGE HELD WITH FUND TIME SERVED FIVE YEARS
------- -------------- ----------- ----------
OFFICERS:
CHRISTOPHER D. RYAN Vice President Since April Since February 2004, Vice
301 E. Colorado Boulevard 2005 President of Flaherty &
Suite 720 Crumrine Incorporated;
Pasadena, CA 91101 October 2002 to February
Age: 37 2004, Product Analyst of
Flaherty & Crumrine
Incorporated.
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.
33
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF CONTINUANCE OF INVESTMENT
ADVISORY AGREEMENT
During the six month period ended May 31, 2005, the Board of Directors of
the Fund approved the continuation of the investment advisory agreement with the
Adviser (the "Agreement"). The following paragraphs summarize the material
information and factors considered by the Board, including the Independent
Directors, as well as their conclusions relative to such factors.
NATURE, EXTENT AND QUALITY OF SERVICES
The Board members reviewed in detail the nature and extent of the services
provided by the Adviser and the quality of those services over the past year and
since inception. The Board members noted that these services included managing
the Fund's investment program, as well as providing significant administrative
services beyond what the Agreement required. The Board members noted that the
Adviser also provided, generally at its expense: office facilities for use by
the Fund; personnel responsible for supervising the performance of
administrative, accounting and related services; and investment compliance
monitoring. The Board also considered the Adviser's sound financial condition
and the Adviser's commitment to its business as evidenced by its hiring of
additional personnel as the business has grown. The Board members evaluated the
Adviser's provision of services based on their direct experience over many years
as Fund Directors of funds advised by the Adviser and focused on (i) the
Adviser's knowledge of the preferred stock market generally and the
sophisticated hedging strategies the Fund employs and (ii) its culture of
compliance. The Board members reviewed the personnel responsible for providing
services to the Fund and observed, based on their experience and interaction
with the Adviser, that (1) the Adviser's personnel exhibited a high level of
diligence and attention to detail in carrying out their responsibilities under
the Agreement, (2) the Adviser was responsive to requests of the Board and its
personnel were available between Board meetings to answer Board member
questions, and (3) the Adviser had kept the Board apprised of developments
relating to the Fund. The Board members concluded that the nature and extent of
the services provided were reasonable and appropriate in relation to the Fund's
investment goals and strategies, the corporate and regulatory environment in
which the Fund operates, the level of services provided by the Adviser, and the
quality of service, which continued to be high.
INVESTMENT PERFORMANCE
The Board members considered the Fund's performance from inception and
most recently to determine whether the Fund had met its investment objective.
The Board determined that the Fund had done so. In so doing, the Board members
reviewed performance compared to relevant indices and funds thought generally to
be comparable to the Fund, considered the costs and benefits of the Fund's
hedging strategy and examined the differences between the Fund and certain funds
in the comparison group, including the significant positions a number of
preferred stock funds had in common equities. The Board members noted the Fund's
longer-term performance and specifically recognized that the Fund had been in
existence a relatively short time and that recent relative underperformance was
attributable largely to the Fund's stated hedging strategies, which over time
are expected to benefit the Fund, and the Fund's adherence to its respective
investment mandate.
34
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
PROFITABILITY
The Board members considered the Adviser's methodology for determining its
profitability with respect to the Fund and the Adviser's profit margin on an
after-tax basis attributable to managing the Fund. The Board concluded that the
profitability to the Adviser was not excessive based on the considerable
services it provides to the Fund, the Fund's relative performance over time, its
success in meeting the Fund's investment objective and the Fund's relatively low
expense ratio. The Board members also considered the Adviser's provision, at a
lower cost, of services to separate account clients and determined that the
difference was justified in light of the additional services and costs
associated with managing registered investment companies, such as the Fund. The
Board accepted the Adviser's statement that it did not realize material indirect
benefits from its relationship with the Fund and did not obtain soft dollar
credits from securities trading.
ECONOMIES OF SCALE
The Board members noted that the Fund, as a closed-end investment company,
was not expected to increase materially in size; thus, the Adviser would not
benefit from economies of scale. The Board members considered whether economies
of scale could be realized because the Adviser advises other similar funds, and,
based on their experience, accepted the Adviser's explanation that significant
economies of scale would not be realized because of the nature of the preferred
securities market in which the Fund invests. Nonetheless, the Board members
noted that the Fund's advisory fee schedule declines as assets increase beyond a
certain level (commonly known as a "breakpoint") and that breakpoints provide
for a sharing with shareholders of benefits derived as a result of economies of
scale arising from increased assets. Accordingly, the Board determined that the
existing advisory fee levels reflect possible economies of scale.
Based on their discussions and considerations as described above, the
Board made the following conclusions and determinations as to the Fund:
o The Board concluded that the nature, extent and quality of the
services provided by the Adviser are adequate and appropriate.
o The Board was satisfied with the Fund's overall performance.
o The Board concluded that the fee paid to the Adviser was reasonable
in light of comparative performance and expense and advisory fee
information, costs of the services provided and profits to be
realized and benefits derived or to be derived by the Adviser from
the relationship with the Fund.
o The Board determined that there were not at this time significant
economies of scale to be realized by the Adviser in managing the
Fund's assets and that the fee was structured to provide for a
sharing of the benefits of economies of scale.
o The Board members considered these factors, conclusions and
determinations in their totality and, without any one being
dispositive, the Board determined that approval of the Agreement was
in the best interests of the Fund and its shareholders.
35
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
AMENDMENTS TO CHARTER AND BYLAWS
In addition to the changes to the Fund's Charter that were approved by
Shareholders at the April 21, 2005 Annual Meeting of Shareholders, the Board of
Directors approved Articles Supplementary to the Fund's Charter and Amended and
Restated Bylaws ("Bylaws") at its April 21, 2005 meeting. Among the changes
reflected in the Fund's Bylaws are a bylaw amendment and related Articles
Supplementary reflecting the Board's determination to opt in to certain
provisions of the Maryland Unsolicited Takeover Act. Such action provides that
(1) the number of directors can be fixed only by the Board and (2) a director
elected by the Board to fill a Board vacancy holds office until the end of the
term of the class to which the director has been elected (rather than until the
next annual meeting).
The Board also approved an amendment to the Bylaws to clarify certain
aspects of the calling of a Special Meeting of Shareholders. Specifically, such
bylaw amendment clarifies that if a Shareholder or group of Shareholders has
requested and paid for a Special Meeting of Shareholders, another Shareholder
cannot add an additional proposal to the proxy statement for that meeting. The
Board determined that the changes to the Bylaws and related Articles
Supplementary provide the Fund with certain additional protections in the case
of a hostile takeover bid to gain control of the Fund and change the objective
to the detriment of long-term shareholders. However, the Board is aware of no
such hostile takeover bid at the present time.
36
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DIRECTORS
Martin Brody
Donald F. Crumrine, CFA
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 and
Assistant Treasurer
Christopher D. Ryan, CFA
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.
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
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.
Not applicable.
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) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND INCORPORATED
--------------------------------------------------------------------
By (Signature and Title)* /S/ DONALD F. CRUMRINE
-------------------------------------------------------
Donald F. Crumrine, Director, Chairman of the Board
and Chief Executive Officer
(principal executive officer)
Date JULY 18, 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 JULY 18, 2005
----------------------------------------------------------------------------
By (Signature and Title)* /S/ R. ERIC CHADWICK
-------------------------------------------------------
R. Eric Chadwick, Chief Financial Officer, Treasurer,
Vice President and Secretary
(principal financial officer)
Date JULY 18, 2005
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.