FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND
To the Shareholders of Flaherty & Crumrine/Claymore Total Return Fund:
Stating the obvious, we are facing extraordinary and unprecedented times in
the financial markets. The events that ultimately culminated in the government's
massive financial rescue plan have impacted the market for preferred securities
particularly hard. As a result, for the quarter ended August 31, 2008, the
Fund's common shareholders experienced a total return on net asset value of
-11.0%, subsequent to the quarter-end and through the date of this letter, the
net asset value has continued to decline significantly.
Prices on long-term US Treasury bonds rose during the quarter, as investors
sought the safety of government bonds despite historically low yields. On the
flip side, there were few buyers and abundant sellers of most preferred
securities and corporate bonds. A downward cycle for prices ensued, as selling
pressure pushed prices lower which in turn led to more selling pressure.
This pattern of selling begetting selling is an effect of severe bear
market psychology. In addition, investors and lenders, seeking the safety and
security of cash, withhold capital from borrowers. Since the free flow of
capital is essential to our economy, and economic growth is a key factor in
security valuation, concerns about price declines become self-fulfilling. The
bears clearly were in control both during and subsequent to the quarter.
The root cause of the current financial problems remains
unresolved-residential real estate markets have yet to stabilize. The
speculative component of residential housing has resulted in "bubble and crash"
cycles in the past, but the current adjustment is unlike any we can recall. Far
too many people wanted to buy homes under the "greater fool" plan and lenders
were far too willing to help. The real estate market will eventually return to
equilibrium and the dramatic measures taken by the government will help calm the
markets. In the meantime we must deal with circumstances at hand.
Since the end of our fiscal quarter events have transpired at a
breathtaking pace - particularly relating to the Fund's use of leverage and its
dividend. Our website allows for much more frequent communication than our
quarterly letters. We have posted updates throughout this financial crisis and
we encourage you to continue visiting us at www.fcclaymore.com.
In addition to managing your Fund, we are also shareholders. We understand
your concerns about recent events and we are doing our best to respond to them.
Nonetheless, our goals remain constant - conduct exhaustive research and
construct an investment portfolio that is designed to deliver high current
income consistent with the objectives and guidelines of the Fund.
Sincerely,
/s/ Donald F. Crumrine /s/ Robert M. Ettinger
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
October 16, 2008
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OVERVIEW
AUGUST 31, 2008 (UNAUDITED)
FUND STATISTICS ON 8/31/08
--------------------------
Net Asset Value $ 14.84
Market Price $ 13.15
Discount 11.39%
Yield on Market Price 12.46%
Common Stock Shares Outstanding 9,776,333
MOODY'S RATINGS % OF PORTFOLIO
--------------- --------------
AA 5.6%
A 19.2%
BBB 52.0%
BB 17.4%
Below "BB" 0.1%
Not Rated 3.3%
----
Below Investment Grade* 12.4%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.
(PIE CHART)
INDUSTRY CATEGORIES % OF PORTFOLIO
------------------- --------------
Banking 33%
Utilities 26%
Insurance 21%
Financial Services 7%
Energy 5%
REITs 3%
Other 5%
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO
------------------------- --------------
Midamerican Energy 6.5%
Liberty Mutual Group 4.6%
Banco Santander 4.6%
AON Corp 3.5%
Wachovia Corp 2.8%
Sovereign Bancorp 2.7%
Dominion Resources 2.6%
Merrill Lynch 2.5%
Unum Group 2.5%
Astoria Financial 2.3%
% OF PORTFOLIO**
----------------
Holdings Generating Qualified
Dividend Income (QDI) for Individuals 30%
Holdings Generating Income Eligible for
the Corporate Dividend Received
Deduction (DRD) 24%
----------
** 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.
2
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS
AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- 88.6%
BANKING -- 32.6%
$ 5,750,000 Astoria Capital Trust I, 9.75% 11/01/29, Series B ........... $ 5,788,525
Banco Santander:
366,000 6.50% Pfd. ............................................... 7,331,456**(1)(2)
196,620 6.80% Pfd. ............................................... 4,215,041**(1)(2)
$ 7,500,000 Capital One Capital III, 7.686% 08/15/36 .................... 5,568,000(1)
$ 10,000,000 CBG Florida REIT Corporation, 7.114%, 144A**** .............. 3,128,000
Citigroup, Inc.:
56,975 8.125% Pfd., Series AA ................................... 1,121,695*(1)
202,800 8.50% Pfd., Series F ..................................... 4,364,256*(1)
40,000 Citizens Funding Trust I, 7.50% Pfd. 09/15/66 ............... 502,500(1)
40,000 Cobank, ACB, 7.00% Pfd., 144A**** ........................... 1,314,400*(1)
7,200 Colonial Capital Trust IV, 7.875% Pfd. 10/01/33 ............. 117,720
$ 7,000,000 Comerica Capital Trust II, 6.576% 02/20/37 .................. 3,984,400(1)
7,000 FBOP Corporation, Adj. Rate Pfd., 144A**** .................. 3,850,000*
$ 400,000 First Empire Capital Trust I, 8.234% 02/01/27 ............... 371,186(1)
$ 1,900,000 First Hawaiian Capital I, 8.343% 07/01/27, Series B ......... 1,834,640(1)(2)
$ 100,000 First Tennessee Capital I, 8.07% 01/06/27, Series A ......... 63,900(1)
$ 600,000 First Union Capital II, 7.95% 11/15/29 ...................... 559,774(1)
2 FT Real Estate Securities Company, 9.50% Pfd., 144A**** ..... 1,847,783
$ 1,000,000 HBOS PLC, 6.657%, 144A**** .................................. 628,700**(1)(2)
$ 855,000 HSBC USA Capital Trust II, 8.38% 05/15/27, 144A**** ......... 839,501(1)(2)
143,750 HSBC USA, Inc., 6.50% Pfd., Series H ........................ 3,249,109*(1)
$ 4,000,000 JPMorgan Chase & Co., 7.90%, Series I ....................... 3,645,200*(1)
82,000 Keycorp Capital IX, 6.75% Pfd. 12/15/66 ..................... 1,235,125(1)
54,995 National City Corporation, 9.875% Pfd. ...................... 1,082,302*(1)
$ 2,500,000 National City Preferred Capital Trust I, 12.00% ............. 1,554,250(1)
151,059 PFGI Capital Corporation, 7.75% Pfd. ........................ 2,382,200(1)
$ 3,500,000 PNC Preferred Funding Trust III, 8.70%, 144A**** ............ 3,355,800(1)
$ 1,000,000 Regions Financing Trust II, 6.625% 05/15/47 ................. 528,800(1)
93,100 Sovereign Bancorp, 7.30% Pfd., Series C ..................... 1,492,514*(1)
191,525 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36 .............. 3,503,471
2,000 Sovereign REIT, 12.00% Pfd., Series A, 144A**** ............. 1,907,720
U.S. Bancorp, Auction Pass-Through Trust, Cl. B:
15 Series 2006-5, Variable Rate Pfd., 144A**** .............. 375*+
15 Series 2006-6, Variable Rate Pfd., 144A**** .............. 375*+
3
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
BANKING -- (CONTINUED)
Wachovia Corporation:
$ 2,000,000 7.98% .................................................... $ 1,526,600*(1)
195,000 8.00% Pfd., Series J ..................................... 3,634,800*(1)
84,900 Wachovia Preferred Funding, 7.25% Pfd., Series A ............ 1,439,267(1)
$ 2,800,000 Webster Capital Trust IV, 7.65% 06/15/37 .................... 1,806,840
$ 2,000,000 Wells Fargo Capital XIII, 7.70% ............................. 1,917,800(1)
30,000 Wells Fargo Capital XIV, 8.625% Pfd. 09/14/68 ............... 773,400
------------
82,467,425
------------
FINANCIAL SERVICES -- 5.8%
CIT Group, Inc.:
13,900 5.189% Pfd., Series B .................................... 640,512*(1)
$ 3,250,000 6.10% 03/15/67 ........................................... 1,322,425(1)
68,800 6.35% Pfd., Series A ..................................... 966,124*(1)
23,898 First Republic Bank, 7.25% Pfd. ............................. 479,454(1)
2,000 First Republic Preferred Capital Corporation,
10.50% Pfd., 144A****..................................... 2,114,440(1)
Goldman Sachs:
29,100 Adj. Rate Pfd., Series D ................................. 452,869*
28,000 Cabco Trust Capital I, Adj. Rate Pfd. 02/15/34 ........... 393,190(1)
1,500 STRIPES Custodial Receipts, Pvt .......................... 15*+
$ 3,000,000 Gulf Stream-Compass 2005 Composite Notes, 144A**** .......... 2,203,080
Lehman Brothers Holdings, Inc.:
20,000 5.67% Pfd., Series D ..................................... 549,200*(1)
85,000 7.95% Pfd. ............................................... 1,322,600*(1)
Merrill Lynch:
160,000 6.25% Pfd. ............................................... 2,849,600*(1)
80,000 Adj. Rate Pfd., Series 5 ................................. 945,000*(1)
20,000 Fixed Income Pass-Through 2007-A, Cl. B, Adj
Rate Pfd., 144A**** ................................... 200*+
3,000 Series II STRIPES Custodial Receipts, Pvt ................ 30*+
11,000 SLM Corporation, Adj. Rate Pfd., Series B ................... 444,125*(1)
------------
14,682,864
------------
INSURANCE -- 15.5%
$ 2,305,000 AMBAC Financial Group, Inc., 6.15% 02/15/37 ................. 814,356
$ 9,511,000 AON Capital Trust A, 8.205% 01/01/27 ........................ 8,906,414(1)
Arch Capital Group Ltd.:
28,650 7.875% Pfd., Series B .................................... 663,428**(1)(2)
47,100 8.00% Pfd., Series A ..................................... 1,080,356**(1)(2)
4
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
Axis Capital Holdings:
23,030 7.25% Pfd., Series A ..................................... $ 508,099**(1)(2)
66,600 7.50% Pfd., Series B ..................................... 5,210,118(1)(2)
160,000 Delphi Financial Group, 7.376% Pfd. 05/15/37 ................ 2,805,008(1)
$ 5,500,000 Everest Re Holdings, 6.60% 05/15/37 ......................... 3,641,000(1)
$ 845,000 Great West Life & Annuity Insurance, 7.153% 05/16/46,
144A**** ................................................. 701,519
Liberty Mutual Group:
$ 6,500,000 7.80% 03/15/37, 144A**** ................................. 4,852,250
$ 1,000,000 10.75% 06/15/58, 144A**** ................................ 911,200
$ 1,000,000 MetLife Capital Trust X, 9.25% 04/08/38, 144A**** ........... 1,014,900(1)
114,000 MetLife, Inc., 6.50% Pfd., Series B ......................... 2,394,285*
$ 300,000 PartnerRe Finance II, 6.44% 12/01/66 ........................ 231,660(1)(2)
109,000 Scottish Re Group Ltd., 7.25% Pfd. .......................... 231,625**(2)+
$ 3,615,000 USF&G Capital, 8.312% 07/01/46, 144A**** .................... 3,888,493(1)
$ 1,500,000 ZFS Finance USA Trust V, 6.50% 05/09/37, 144A**** ........... 1,294,253(1)
------------
39,148,964
------------
UTILITIES -- 26.4%
33,700 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ... 3,325,179*
365,000 Calenergy Capital Trust III, 6.50% Pfd. 09/01/27 ............ 16,366,600(1)
$ 2,375,000 COMED Financing III, 6.35% 03/15/33 ......................... 1,930,637
115,000 Constellation Energy Group, Inc., 8.625% Pfd. 06/15/63,
Series A ................................................. 2,884,200(1)
$ 4,500,000 Dominion Resources Capital Trust I, 7.83% 12/01/27 .......... 4,506,709(1)
$ 2,250,000 Dominion Resources, Inc., 7.50% ............................. 2,041,425(1)
145,000 Entergy Arkansas, Inc., 6.45% Pfd. .......................... 3,581,500*
50,000 Entergy Louisiana, Inc., 6.95% Pfd. ......................... 4,981,000*
91,200 FPC Capital I, 7.10% Pfd., Series A ......................... 2,137,500(1)
FPL Group Capital, Inc.:
$ 750,000 6.35% 10/01/66 ........................................... 636,085(1)
$ 350,000 6.65% 06/15/67 ........................................... 299,996(1)
$ 1,000,000 7.30% 09/01/67, Series D ................................. 920,366(1)
2,500 Georgia Power Company, 6.50% Pfd., Series 07-A .............. 247,850*(1)
30,445 Indianapolis Power & Light Company, 5.65% Pfd. .............. 2,632,275*
Interstate Power & Light Company:
85,100 7.10% Pfd., Series C ..................................... 2,124,947*(1)
38,600 8.375% Pfd., Series B .................................... 1,043,744*(1)
$ 5,000,000 PECO Energy Capital Trust IV, 5.75% 06/15/33 ................ 4,047,000(1)
$ 4,250,000 Puget Sound Energy, Inc., 6.974% 06/01/67 ................... 3,563,625
15,000 Southern California Edison, 6.00% Pfd., Series C ............ 1,374,000*(1)
5
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
$ 1,500,000 Southern Union Company, 7.20% 11/01/66 ...................... $ 1,198,050
5,000 Union Electric Company, $7.64 Pfd. .......................... 488,300*
5,000 Virginia Electric & Power Company, $6.98 Pfd. .............. 495,500*(1)
$ 4,500,000 Wisconsin Energy Corporation, 6.25% 05/15/67 ................ 3,730,635(1)
85,137 Wisconsin Power & Light Company, 6.50% Pfd. ................. 2,112,462*(1)
------------
66,669,585
------------
ENERGY -- 3.1%
$ 4,900,000 Enbridge Energy Partners LP, 8.05% 10/01/37 ................. 4,367,659
$ 4,000,000 Enterprise Products Partners, 7.034% 01/15/68 ............... 3,474,812
------------
7,842,471
------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 3.2%
125,000 Duke Realty Corporation, 8.375% Pfd., Series O .............. 2,955,000(1)
PS Business Parks, Inc.:
45,400 6.70% Pfd., Series P ..................................... 845,575
5,700 6.875% Pfd., Series I .................................... 108,300(1)
4,500 7.00% Pfd., Series H ..................................... 88,031(1)
58,120 7.20% Pfd., Series M ..................................... 1,167,852(1)
26,938 7.375% Pfd., Series O .................................... 542,127(1)
57,900 7.60% Pfd., Series L ..................................... 1,190,569(1)
Public Storage, Inc.:
22,100 6.75% Pfd., Series E ..................................... 463,410(1)
30,000 6.85% Pfd., Series Y ..................................... 630,600
------------
7,991,464
------------
MISCELLANEOUS INDUSTRIES -- 2.0%
1,395 Centaur Funding Corporation, 9.08% Pfd. 04/21/20, 144A**** .. 1,351,727
40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ......... 3,610,800*
------------
4,962,527
------------
TOTAL PREFERRED SECURITIES
(Cost $277,910,830) ...................................... 223,765,300
------------
6
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
CORPORATE DEBT SECURITIES -- 9.1%
BANKING -- 0.1%
15,600 Colonial Bancgroup, Inc., 8.875% Pfd. 03/15/38 .............. $ 285,792
------------
285,792
------------
FINANCIAL SERVICES -- 1.4%
$ 4,726,012 Lehman Brothers, Guaranteed Note, Variable Rate,
12/16/16, 144A**** ....................................... 3,575,228
------------
3,575,228
------------
INSURANCE -- 5.0%
15,000 AAG Holding Company, Inc., 7.25% Pfd. ....................... 304,500(1)
$ 7,577,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** ......... 5,967,645(1)
$ 7,000,000 UnumProvident Corporation, 7.25% 03/15/28, Senior Notes ..... 6,313,300(1)
------------
12,585,445
------------
ENERGY -- 1.5%
$ 4,000,000 Noble Energy, Inc., 7.25% 08/01/97 .......................... 3,758,788(1)
------------
3,758,788
------------
MISCELLANEOUS INDUSTRIES -- 1.1%
16,500 Corp-Backed Trust Certificates, 7.00% 11/15/28,
Series Sprint ............................................ 277,365(1)
9,625 Ford Motor Company, 7.50% 06/10/43, Senior Notes ............ 114,177
Pulte Homes, Inc.:
25,844 7.375% 06/01/46 .......................................... 493,460
$ 2,160,000 7.875% 06/15/32 .......................................... 1,853,712
------------
2,738,714
------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $27,527,701) ....................................... 22,943,967
------------
OPTION CONTRACTS -- 0.2%
263 December Put Options on December U.S. Treasury Bond
Futures, Expiring 11/21/08 ............................... 410,938+
------------
TOTAL OPTION CONTRACTS
(Cost $459,219) .......................................... 410,938
------------
7
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
MONEY MARKET FUND -- 1.0%
2,551,540 BlackRock Provident Institutional, TempFund ................. $ 2,551,540
------------
TOTAL MONEY MARKET FUND
(Cost $2,551,540) ........................................ 2,551,540
------------
TOTAL INVESTMENTS (Cost $308,449,290***) ................................... 98.9% 249,671,745
OTHER ASSETS AND LIABILITIES (Net) ......................................... 1.1% 2,874,786
----- ------------
TOTAL NET INVESTMENTS ...................................................... 100.0%++ $252,546,531
----- ------------
LOAN PRINCIPAL BALANCE ..................................................... (68,000,000)
------------
AUCTION MARKET PREFERRED STOCK (AMPS) REDEMPTION VALUE ..................... (39,500,000)
------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ................................. $145,046,531
============
* 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. These securities have been
determined to be liquid under the guidelines established by the Board of
Directors.
(1) All or a portion of this security is pledged as collateral for the Fund's
loan. The total value of such securities was $156,337,129 at August 31,
2008.
(2) Foreign Issuer.
+ Non-income producing.
++ The percentage shown for each investment category is the total value of
that category as a percentage of total net investments.
ABBREVIATIONS:
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
8
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
FOR THE PERIOD FROM DECEMBER 1, 2007 THROUGH AUGUST 31, 2008 (UNAUDITED)
VALUE
------------
OPERATIONS:
Net investment income ............................................................... $ 14,706,468
Net realized gain/(loss) on investments sold during the period ...................... (10,007,108)
Change in net unrealized appreciation/depreciation of investments ................... (37,027,800)
Distributions to AMPS* Shareholders from net investment income, including changes in
accumulated undeclared distributions ............................................. (3,796,470)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ................................ (36,124,910)
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders(2) ........... (11,565,402)
------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS .................................... (11,565,402)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment
and Cash Purchase Plan ........................................................... --
------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK
RESULTING FROM FUND SHARE TRANSACTIONS ........................................... --
------------
NET DECREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD .................... $(47,690,312)
============
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ................................................................. $192,736,843
Net decrease in net assets during the period ........................................ (47,690,312)
------------
End of period ....................................................................... $145,046,531
============
----------
* Auction Market Preferred Stock.
(1) These tables summarize the nine months ended August 31, 2008 and should be
read in conjunction with the Fund's audited financial statements, including
footnotes, in its Annual Report dated November 30, 2007.
(2) May include income earned, but not paid out, in prior fiscal year.
9
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
FINANCIAL HIGHLIGHTS(1)
FOR THE PERIOD FROM DECEMBER 1, 2007 THROUGH AUGUST 31, 2008 (UNAUDITED)
FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT THE PERIOD.
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................................................ $ 19.71
------------
INVESTMENT OPERATIONS:
Net investment income ............................................................... 1.50
Net realized and unrealized gain/(loss) on investments .............................. (4.80)
DISTRIBUTIONS TO AMPS* SHAREHOLDERS:
From net investment income .......................................................... (0.39
------------
Total from investment operations .................................................... (3.69)
------------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income .......................................................... (1.18)
------------
Total distributions to Common Stock Shareholders .................................... (1.18)
------------
Net asset value, end of period ...................................................... $ 14.84
============
Market value, end of period ......................................................... $ 13.15
============
Common Stock shares outstanding, end of period ...................................... 9,776,333
============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income+ .............................................................. 8.57%**
Operating expenses(2) ............................................................... 2.38%**
SUPPLEMENTAL DATA:++
Portfolio turnover rate ............................................................. 39%***
Total net investments, end of period (in 000's) ..................................... $ 252,547
Ratio of operating expenses(2) to total net investments ............................. 1.37%**
(1) These tables summarize the nine months ended August 31, 2008 and should be
read in conjunction with the Fund's audited financial statements, including
footnotes, in its Annual Report dated November 30, 2007.
(2) Includes interest expense.
* Auction Market Preferred Stock.
** Annualized.
*** Not annualized.
+ The net investment income ratios reflect income net of operating expenses,
including interest expense, and payments to AMPS Shareholders.
++ Information presented under heading Supplemental Data includes AMPS and
loan principal balance.
10
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, 2007 ......... $0.1300 $18.98 $16.88 $16.96
January 31, 2008 .......... 0.1300 19.35 17.97 18.09
February 29, 2008 ......... 0.1300 18.92 17.50 17.52
March 31, 2008 ............ 0.1300 17.21 15.69 15.84
April 30, 2008 ............ 0.1300 17.47 15.94 16.10
May 31, 2008 .............. 0.1300 17.12 15.99 15.88
June 30, 2008 ............. 0.1300 16.10 14.98 14.59
July 31, 2008 ............. 0.1365 14.94 13.24 13.27
August 31, 2008 ........... 0.1365 14.84 13.15 13.28
----------
(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 reinvestment 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.
11
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. AGGREGATE INFORMATION FOR FEDERAL INCOME TAX PURPOSES
At August 31, 2008 the aggregate cost of securities for federal income tax
purposes was $309,296,824, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $2,230,921 and
the aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $61,856,000.
2. ADDITIONAL ACCOUNTING STANDARDS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 157 "FAIR VALUE
MEASUREMENTS" ("SFAS 157")
In September 2006, the Financial Accounting Standards Board issued SFAS 157
effective for fiscal years beginning after November 15, 2007. This standard
clarifies the definition of fair value for financial reporting, establishes a
framework for measuring fair value and requires additional disclosures about the
use of fair value measurements. The Fund has adopted SFAS 157 as of December 1,
2007. The three levels of the fair value hierarchy under SFAS 157 are described
below:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speeds, credit
risk, etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily
an indication of the risk associated with investing in those securities. A
summary of the inputs used to value the Fund's net assets as of August 31, 2008
is as follows:
OTHER FINANCIAL
INSTRUMENTS
INVESTMENTS (UNREALIZED
IN SECURITIES APPRECIATION/
VALUATION INPUTS (MARKET VALUE) DEPRECIATION)*
---------------- -------------- ---------------
Level 1 - Quoted Prices - Investments .............. $ 59,224,235 $--
Level 2 - Other Significant Observable Inputs ...... 184,669,202 --
Level 3 - Significant Unobservable Inputs .......... 5,778,308 --
------------ ---
TOTAL .............................................. $249,671,745 $--
* Other financial instruments are derivative instruments not reflected in the
Schedule of Investments, such as futures, forwards and swaps which are
valued at the unrealized appreciation/depreciation on the investment. As of
August 31, 2008 the Fund does not have any other financial instruments.
12
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Following is a reconciliation of Level 3 investments for which significant
unobservable inputs were used to determine fair value:
OTHER FINANCIAL
INSTRUMENTS
INVESTMENTS (UNREALIZED
IN SECURITIES APPRECIATION/
(MARKET VALUE) DEPRECIATION)
-------------- ---------------
BALANCE AS OF 11/30/07 ............................. $ 6,945,554 $--
Accrued discounts/premiums ......................... -- --
Realized gain/(loss) ............................... -- --
Change in unrealized appreciation/(depreciation) ... (1,167,246) --
Net purchases/(sales) .............................. -- --
Transfers in and/or out of Level 3 ................. -- --
----------- ---
BALANCE AS OF 8/31/08 .............................. $ 5,778,308 $--
3. SUBSEQUENT EVENTS
On September 15, 2008, Lehman Brothers Holdings Inc. filed for bankruptcy.
As a result, the Fund may not be able to recover the principal invested in
securities issued by this entity, and also does not expect to receive income
payments on these securities going forward. The value of securities issued by
this entity, which were held by the Fund, has been adversely impacted and may
decline further. The decline since August 31, 2008 is not reflected in this
report.
Subsequent to the reporting period, the market values of certain
investments of the Fund have declined significantly and may decline further as a
result of the ongoing financial crisis. The market value of the Fund's
investments is reflected in the weekly net asset values reported by the Fund.
The Funds are subject to several different asset coverage requirements that
arise from the use of leverage by the Fund. The decline in asset values has
resulted in the Fund not meeting these asset coverage requirements at various
points in time since the end of the fiscal quarter. According to these
requirements, the Fund may not declare, set aside, or pay a common stock
dividend unless the asset coverage requirements are met. As a result, the Fund
delayed the payment of the September common stock dividend until October 6, 2008
when the asset coverage requirements could be met. To meet the requirements and
pay the delayed dividend and future dividends, the Fund has been selling assets
to raise cash, and has applied much of the proceeds to the reduction of leverage
or invested in higher quality short-term securities in anticipation of future
reductions in leverage. As of October 16, 2008, the outstanding leverage balance
consisted of $39.5 million in auction market preferred stock and $39.5 million
in borrowings under the committed financing agreement, a reduction in total
leverage balance of $28.5 million since the end of the 3rd fiscal quarter and a
reduction of $49.5 million since the end of the 2nd fiscal quarter. The Fund may
be adversely impacted by the reduction in leverage. Updated information on the
status of these requirements may be found on the Fund website at
www.fcclaymore.com.
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(FLAHERTY & CRUMRINE/CLAYMORE LOGO)
TOTAL RETURN FUND
Quarterly Report
August 31, 2008
www.fcclaymore.com
DIRECTORS
Donald F. Crumrine, CFA
Chairman of the Board
David Gale
Morgan Gust
Karen H. Hogan
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chief Executive Officer
Robert M. Ettinger, CFA
President
R. Eric Chadwick, CFA
Chief Financial Officer,
Vice President and Treasurer
Chad C. Conwell
Chief Compliance Officer,
Vice President and Secretary
Bradford S. Stone
Vice President and
Assistant Treasurer
Laurie C. Lodolo
Assistant Compliance Officer,
Assistant Treasurer and
Assistant Secretary
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@pfdincome.com
SERVICING AGENT
Claymore Securities, Inc.
1-866-233-4001
QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN
FUND?
- If your shares are held in a Brokerage Account, contact your Broker.
- If you have physical possession of your shares in certificate form,
contact the Fund's Transfer Agent --
PNC Global Investment Servicing
(U.S.) Inc. 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.