UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21380
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
(Exact name of registrant as specified in charter)
301 E. Colorado Boulevard, Suite 720
Pasadena, CA 91101
(Address of principal executive offices) (Zip code)
Donald F. Crumrine
Flaherty & Crumrine Incorporated
301 E. Colorado Boulevard, Suite 720
Pasadena, CA 91101
(Name and address of agent for service)
registrant's telephone number, including area code: 626-795-7300
Date of fiscal year end: November 30
Date of reporting period: May 31, 2010
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, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND
To the Shareholders of Flaherty & Crumrine/Claymore Total Return Fund:
After several quarters of extreme volatility, the Fund's second fiscal
quarter performance was relatively tame. During the three month period ending
May 31, 2010, the total return on net asset value of the Fund was +1.9%. Over
the same period, the total return based on the market price of the Fund's shares
was +2.8%. The following table presents the Fund's performance over longer time
periods as well as the returns on two broad investment measures, one for common
stocks and one for corporate bonds.
TOTAL RETURN ON NET ASSET VALUE
FOR PERIODS ENDED MAY 31, 2010
ACTUAL RETURNS AVERAGE ANNUALIZED RETURNS
---------------------- --------------------------
THREE SIX ONE THREE FIVE LIFE OF
MONTHS MONTHS YEAR YEARS YEARS FUND(1)
------ ------ ---- ------ ------- -------
Flaherty & Crumrine/Claymore Total
Return Fund ............................. 1.9% 13.0% 65.1% -0.7% 1.7% 3.1%
Barclays Capital U.S. Aggregate Index(2) ... 1.8% 2.1% 8.4% 6.9% 5.3% 5.4%
S&P 500 Index(3) ........................... -0.9% 0.4% 21.0% -8.7% 0.3% 3.4%
----------
(1) Since inception on August 26, 2003.
(2) The Barclays Capital U.S. Aggregate Index represents securities that are
SEC-registered, taxable, and dollar denominated. The index covers the U.S.
investment grade fixed rate bond market, with index components for
government and corporate securities, mortgage pass-through securities, and
asset-backed securities. It is generally considered to be representative of
the domestic, investment-grade, fixed-rate, taxable bond market. Unless
otherwise noted, index returns reflect the reinvestment of dividends and
capital gains, if any, but do not reflect fees, brokerage commissions or
other expenses of investing. This index was formerly known as the Lehman
Brothers U.S. Aggregate Index.
(3) The S&P 500 is a capitalization-weighted index of 500 stocks. The index is
designed to measure performance of the broad domestic economy through
changes in the aggregate market value of 500 stocks representing all major
industries.
Conditions in the market for preferred securities have largely stabilized
in recent months, though to varying degrees for different market sectors. Issues
of companies in industries other than financial services (primarily utilities)
have performed consistently well, with far less price volatility than witnessed
in prior quarters. Prices on financial issues (primarily banks and insurance
companies) bounced around a bit more, but in light of the continued effects of
the financial crisis, this is to be expected.
When markets seem calm on the surface, there is usually something to be
wary of lurking below. At present, we don't need to look too far. The items we
consider most relevant to the Fund are discussed in greater detail in the
discussion section below. These include the overhaul of financial regulation,
changes to standards for capital, and turmoil in the Euro-zone. We continue to
believe that the Fund is well positioned to weather each.
As managers of your Fund, our job revolves around evaluating risk.
Investment decisions, like most decisions, essentially boil down to evaluating
risk and then determining what risk is worth.(1) When it comes to preferred
securities, we think we have an edge in both; the preferred market is our
primary focus and has been for a very long time.
The financial crisis pulled back the curtain on the national system of
money and banking, and exposed a number of problems. In our view, the most
fundamental cause of the crisis was a severe imbalance between risk and
opportunity. More specifically, an asymmetry existed between those bearing risk
and those reaping rewards. As a result, a lot of really bad decisions were made,
and when the proverbial chickens came home to roost, the entire financial system
laid an egg.
Many of these ill-fated decisions involved inappropriate use of leverage.
The poster child for debt-run-amok was, of course, the residential real estate
market. However, abuse of leverage wasn't limited to residential real
estate--easy access to cheap money fueled a widespread borrowing binge, with
individuals, corporations and governments spending too much time at the "cheap
money" punchbowl.
Leverage is an important component of the Fund's investment strategy as
well, so we understand the challenges of operating a business funded in part
with borrowed money. Fortunately, the Fund is designed to use leverage
prudently, with limitations on the amount of debt employed at any point in time.
Because of these restrictions, the Fund avoided many of the severe problems
faced by other borrowers. That's not to say it hasn't been challenging. When
asset prices fell, the Fund was required to reduce leverage proportionately by
selling securities at prices that were severely depressed; conversely, as prices
recovered, we have been able to borrow additional sums for the purpose of buying
additional preferred securities at attractive prices.
The bottom line for shareholders is that the Fund is working as intended-a
steady improvement in the Fund's investment portfolio over the past few
quarters, along with effective use of relatively inexpensive leverage, enabled
the Fund to raise the monthly distribution to shareholders to $0.125 from
$0.116, an increase of 7.8%. This is in addition to the dividend increase last
December of 5.5%.
More information is always available on the Fund's website at
www.fcclaymore.com.
Sincerely,
/s/ Donald F. Crumrine /s/ Robert M. Ettinger
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
July 14, 2010
----------
(1) Readers interested in the subject may want to read "Against the Gods, the
Remarkable Story of Risk" by Peter L. Bernstein, an excellent discussion of
the history of risk and risk analysis.
2
DISCUSSION TOPICS
THE FUND'S PORTFOLIO RESULTS AND COMPONENTS OF TOTAL RETURN ON NAV
The table below reflects the performance of each investment technique
available for use by the Fund to achieve its objective, namely: (a) investing in
a portfolio of securities; (b) possibly hedging that portfolio against
significant increases in long-term interest rates (although no hedge positions
were in place during the six months ended May 31st); and (c) utilizing leverage
to enhance returns to shareholders. Next, we compute the impact of the Fund's
operating expenses. All of the parts are summed to determine the total return on
the Fund's NAV.
COMPONENTS OF FLC'S TOTAL RETURN ON NAV
FOR THE SIX MONTHS ENDED MAY 31, 2010
SIX MONTHS*
-----------
Total Return on Unleveraged Securities Portfolio (including
principal and income) ..................................... +9.4%
Return from Interest Rate Hedging Strategy ................... 0.0%
Impact of Leverage (including leverage expense) .............. +4.3%
Expenses (excluding leverage expense) ........................ -0.7%
-----
TOTAL RETURN ON NAV ....................................... +13.0%
* Actual, not annualized.
The recovery in preferred security valuations continued over the Fund's
fiscal year-to-date, but at a slower pace than during 2009. However, over this
recent six month period the Fund's investment portfolio outperformed all sectors
of the preferred securities market, as can be seen by comparing total return on
the Fund's portfolio (the first row of the above table) to the results of
various Bank of America Merrill Lynch preferred indices in the following table.
TOTAL RETURNS OF BANK OF AMERICA MERRILL LYNCH PREFERRED SECURITIES INDICES*
FOR THE SIX MONTHS ENDED MAY 31, 2010
SIX MONTHS
----------
BofA Merrill Lynch 8% Capped DRD Preferred Stock Index(SM) ...... +8.1%
BofA Merrill Lynch 8% Capped Hybrid Preferred Securities
Index(SM) .................................................... +7.3%
BofA Merrill Lynch 8% Capped Corporate U.S. Capital Securities
Index(SM) .................................................... +8.0%
BofA Merrill Lynch Adjustable Preferred Stock, 7% Constrained
Index(SM) .................................................... +2.5%
* The Bank of America Merrill Lynch 8% Capped DRD Preferred Stock Index(SM)
includes investment grade preferred securities issued by both corporations
and government agencies that qualify for the corporate dividend received
deduction with issuer concentration capped at a maximum of 8%. The Bank of
America Merrill Lynch 8% Capped Hybrid Preferred Securities Index(SM)
includes taxable, fixed-rate, U.S. dollar-denominated investment-grade,
preferred securities listed on a U.S. exchange with issuer concentration
capped at 8%. The Bank of America Merrill Lynch 8% Capped Corporate U.S.
Capital Securities Index(SM) includes investment grade fixed rate or
fixed-to-floating rate $1,000 par securities that receive some degree of
equity credit from the rating agencies or their regulators with issuer
concentration capped at a maximum of 8%. The Bank of America Merrill Lynch
Adjustable Preferred Stock, 7% Constrained Index(SM) includes adjustable
rate preferred securities issued by U.S. corporations and government
agencies with issuer concentration capped at a maximum of 7%. All index
returns include interest and dividend income and, unlike the Fund's
returns, are unmanaged and do not reflect any expenses.
3
The Fund's NAV performance (bottom line of the first table) demonstrates
continued success of the strategy of using a moderate amount of leverage to
enhance return on the Fund's portfolio sufficiently to cover its expenses and
permit the NAV of the Fund to still outperform the unleveraged preferred market
indices.
TOTAL RETURN ON MARKET PRICE OF FUND SHARES
While our focus is primarily on managing the Fund's investment portfolio,
an investor's actual return is comprised of monthly dividend payments plus
changes in the market price of Fund shares. Even following very strong results
during the prior fiscal year, the market price continued to recover during the
current fiscal year-to-date, producing a total return of +27.0% on the market
price of Fund shares over the past six months.
In a perfect world, the market price of Fund shares would closely track the
Fund's net asset value. As can be seen from the graph below, this often is not
the case. Since the Fund's inception, its market price has generally been
moderately below its NAV (in market parlance, "trading at a discount"), and
dropped well below the underlying value of each Fund share during the depths of
the financial crisis 1 1/2 years ago. However, more recently the market price
has traded much more in line with the underlying value of its shares, and as of
June 30, 2010 traded at a premium to NAV.
FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND (FLC)
PREMIUM/DISCOUNT OF MARKET PRICE TO NAV THROUGH 06/30/2010
(PERFORMANCE GRAPH)
8/29/03 0.0491
9/5/03 0.0477
9/12/03 0.0408
9/19/03 0.0362
9/26/03 0.0249
10/3/03 0.0275
10/10/03 0.0305
10/17/03 0.0428
10/24/03 0.0377
10/31/03 0.0466
11/7/03 0.0678
11/14/03 0.0453
11/21/03 0.0482
11/28/03 0.0341
12/5/03 0.036
12/12/03 0.0365
12/19/03 0.0287
12/26/03 0.0477
1/2/04 0.0444
1/9/04 0.0373
1/16/04 0.064
1/23/04 0.0465
1/30/04 0.0467
2/6/04 0.0647
2/13/04 0.0581
2/20/04 0.0597
2/27/04 0.0461
3/5/04 0.0312
3/12/04 0.0487
3/19/04 0.0486
3/26/04 0.0444
4/2/04 0.066
4/9/04 0.0363
4/16/04 0.0107
4/23/04 0.0017
4/30/04 -0.0325
5/7/04 -0.0729
5/14/04 -0.033
5/21/04 -0.0305
5/28/04 0.0017
6/4/04 0.0034
6/11/04 -0.0056
6/18/04 0.006
6/25/04 -0.031
7/2/04 0.0039
7/9/04 0.0009
7/16/04 -0.0191
7/23/04 -0.027
7/30/04 -0.0253
8/6/04 0.0077
8/13/04 -0.0072
8/20/04 -0.006
8/27/04 -0.0085
9/3/04 0.0115
9/10/04 -0.0021
9/17/04 0.0188
9/24/04 -0.0195
10/1/04 -0.0063
10/8/04 -0.0117
10/15/04 -0.0004
10/22/04 0.0198
10/29/04 0.021
11/5/04 0.0244
11/12/04 0.0055
11/19/04 0.0147
11/26/04 0.0214
12/3/04 0.0228
12/10/04 0.0163
12/17/04 0.0266
12/24/04 0.0197
12/31/04 0.0299
1/7/05 0.025
1/14/05 0.0145
1/21/05 0.0066
1/28/05 0.0004
2/4/05 0.0053
2/11/05 -0.0037
2/18/05 -0.0353
2/25/05 -0.028
3/4/05 -0.0291
3/11/05 -0.0379
3/18/05 -0.071
3/25/05 -0.0939
4/1/05 -0.0907
4/8/05 -0.0967
4/15/05 -0.0987
4/22/05 -0.0953
4/29/05 -0.0873
5/6/05 -0.0793
5/13/05 -0.0827
5/20/05 -0.0736
5/27/05 -0.0716
6/3/05 -0.0771
6/10/05 -0.0655
6/17/05 -0.0603
6/24/05 -0.0781
7/1/05 -0.0642
7/8/05 -0.0601
7/15/05 -0.0559
7/22/05 -0.0757
7/29/05 -0.0632
8/5/05 -0.0678
8/12/05 -0.0767
8/19/05 -0.0696
8/26/05 -0.0712
9/2/05 -0.0618
9/9/05 -0.0463
9/16/05 -0.0531
9/23/05 -0.0571
9/30/05 -0.0983
10/7/05 -0.0971
10/14/05 -0.1032
10/21/05 -0.098
10/28/05 -0.0873
11/4/05 -0.0888
11/11/05 -0.0945
11/18/05 -0.1144
11/25/05 -0.1089
12/2/05 -0.1157
12/9/05 -0.1334
12/16/05 -0.1596
12/23/05 -0.1469
12/30/05 -0.1518
1/6/06 -0.1196
1/13/06 -0.1079
1/20/06 -0.0947
1/27/06 -0.0955
2/3/06 -0.0971
2/10/06 -0.0855
2/17/06 -0.0899
2/24/06 -0.0885
3/3/06 -0.0764
3/10/06 -0.1242
3/17/06 -0.1178
3/24/06 -0.101
3/31/06 -0.116
4/7/06 -0.1166
4/14/06 -0.1465
4/21/06 -0.128
4/28/06 -0.1231
5/5/06 -0.1334
5/12/06 -0.1309
5/19/06 -0.133
5/26/06 -0.1255
6/2/06 -0.1116
6/9/06 -0.1114
6/16/06 -0.105
6/23/06 -0.1089
6/30/06 -0.1281
7/7/06 -0.1323
7/14/06 -0.1218
7/21/06 -0.1132
7/28/06 -0.1023
8/4/06 -0.0895
8/11/06 -0.0695
8/18/06 -0.0806
8/25/06 -0.0899
9/1/06 -0.086
9/8/06 -0.0885
9/15/06 -0.0804
9/22/06 -0.1009
9/29/06 -0.1069
10/6/06 -0.0895
10/13/06 -0.0844
10/20/06 -0.0833
10/27/06 -0.078
11/3/06 -0.0929
11/10/06 -0.0871
11/17/06 -0.0843
11/24/06 -0.0719
12/1/06 -0.0567
12/8/06 -0.0522
12/15/06 -0.0437
12/22/06 -0.0543
12/29/06 -0.0657
1/5/07 -0.0532
1/12/07 -0.0521
1/19/07 -0.0564
1/26/07 -0.0533
2/2/07 -0.0555
2/9/07 -0.0533
2/16/07 -0.0716
2/23/07 -0.0693
3/2/07 -0.0747
3/9/07 -0.0692
3/16/07 -0.0684
3/23/07 -0.0231
3/30/07 -0.0227
4/5/07 -0.0206
4/13/07 -0.0224
4/20/07 -0.0429
4/27/07 -0.0521
5/4/07 -0.0587
5/11/07 -0.0623
5/18/07 -0.0527
5/25/07 -0.0786
6/1/07 -0.0664
6/8/07 -0.0754
6/15/07 -0.0802
6/22/07 -0.095
6/29/07 -0.0832
7/6/07 -0.0876
7/13/07 -0.0852
7/20/07 -0.0971
7/27/07 -0.0937
8/3/07 -0.1017
8/10/07 -0.1121
8/17/07 -0.136
8/24/07 -0.1229
8/31/07 -0.113
9/7/07 -0.1049
9/14/07 -0.0859
9/21/07 -0.097
9/28/07 -0.1197
10/5/07 -0.1154
10/12/07 -0.1296
10/19/07 -0.1425
10/26/07 -0.1238
11/2/07 -0.1273
11/9/07 -0.1368
11/16/07 -0.1477
11/23/07 -0.1539
11/30/07 -0.1375
12/7/07 -0.1195
12/14/07 -0.1185
12/21/07 -0.1169
12/28/07 -0.1122
1/4/08 -0.1142
1/11/08 -0.0879
1/18/08 -0.094
1/25/08 -0.0648
2/1/08 -0.0759
2/8/08 -0.0619
2/15/08 -0.0726
2/22/08 -0.0705
2/29/08 -0.0751
3/7/08 -0.0458
3/14/08 -0.0714
3/20/08 -0.0873
3/28/08 -0.0914
4/4/08 -0.1074
4/11/08 -0.1037
4/18/08 -0.0941
4/25/08 -0.061
5/2/08 -0.0851
5/9/08 -0.0867
5/16/08 -0.0727
5/23/08 -0.0717
5/30/08 -0.066
6/6/08 -0.0767
6/13/08 -0.0598
6/20/08 -0.0816
6/27/08 -0.0842
6/30/08 -0.0696
7/3/08 -0.1145
7/11/08 -0.0909
7/18/08 -0.0841
7/25/08 -0.1027
8/1/08 -0.1127
8/8/08 -0.1128
8/15/08 -0.1061
8/22/08 -0.1044
8/29/08 -0.1139
9/5/08 -0.1186
9/12/08 -0.0953
9/19/08 -0.1644
9/26/08 -0.2156
10/3/08 -0.2808
10/10/08 -0.5297
10/17/08 -0.2229
10/24/08 -0.2394
10/31/08 -0.0733
11/7/08 -0.1705
11/14/08 -0.2197
11/21/08 -0.3503
11/28/08 -0.1911
12/5/08 -0.2959
12/12/08 -0.2721
12/19/08 -0.2035
12/26/08 -0.1712
12/31/08 -0.1544
1/2/09 -0.0972
1/9/09 -0.1273
1/16/09 -0.143
1/23/09 -0.0941
1/30/09 -0.0615
2/6/09 -0.0658
2/13/09 -0.0867
2/20/09 -0.1449
2/27/09 -0.1158
3/6/09 -0.2896
3/13/09 -0.1444
3/20/09 -0.2222
3/27/09 -0.1461
3/31/09 -0.1646
4/3/09 -0.1241
4/9/09 -0.1212
4/17/09 -0.0824
4/24/09 -0.1102
5/1/09 -0.0956
5/8/09 -0.1166
5/15/09 -0.1328
5/22/09 -0.0954
5/29/09 -0.128
6/5/09 -0.0766
6/12/09 -0.0618
6/19/09 -0.0847
6/26/09 -0.0794
6/30/09 -0.0633
7/2/09 -0.0824
7/10/09 -0.0962
7/17/09 -0.008
7/24/09 -0.0351
7/31/09 -0.0955
8/7/09 -0.0424
8/14/09 -0.0579
8/21/09 -0.0495
8/28/09 -0.0984
8/31/09 -0.0926
9/4/09 -0.0762
9/11/09 -0.0755
9/18/09 -0.039
9/25/09 -0.0711
9/30/09 -0.0556
10/2/09 -0.0663
10/9/09 -0.0392
10/16/09 -0.0538
10/23/09 -0.0674
10/30/09 -0.1024
11/6/09 -0.0744
11/13/09 -0.0792
11/20/09 -0.0973
11/27/09 -0.0849
11/30/09 -0.089
12/4/09 -0.0752
12/11/09 -0.0565
12/18/09 -0.0474
12/24/09 -0.0156
12/31/09 -0.0301
1/8/10 -0.0333
1/15/10 -0.0385
1/22/10 -0.0266
1/29/10 -0.0419
2/5/10 -0.0252
2/12/10 -0.0292
2/19/10 0.0091
2/26/10 0.0154
3/5/10 0.016
3/12/10 0.0088
3/19/10 0.0181
3/26/10 0.0037
3/31/10 -0.0105
4/1/10 0.0031
4/9/10 -0.0091
4/16/10 -0.0409
4/23/10 -0.018
4/30/10 0.0217
5/7/10 -0.0482
5/14/10 0.0087
5/21/10 0.0051
5/28/10 0.0245
6/4/10 0.0128
6/11/10 0.0586
6/18/10 0.0629
6/25/10 0.0537
6/30/10 0.0538
Based on a closing price of $16.64 on June 30th, the current distribution
rate on market price of the Fund's shares (assuming the current monthly
distribution of $0.125 does not change) is 9.0%. In our opinion, this
distribution rate is very competitive with comparable alternative investment
opportunities.
PREFERRED MARKET CONDITIONS
Conditions in the preferred securities market have improved markedly since
the depth of the financial crisis in March 2009. And despite the uncertainties
discussed elsewhere in this report, the preferred market is alive and well.
Along the path to improvement, however, there have been some bone-rattling
bumps. The preferred market began and ended this past quarter in pretty good
shape, but in-between we experienced (and survived!)
4
a pretty significant jolt. We expect that this pattern of generally rising
preferred prices, punctuated by sharp setbacks and above-average volatility,
will be the hallmark of the preferred market in 2010.
We judge the health of the market by two primary measures: relative price
performance (compared to other segments of the credit markets), and overall
liquidity (how easy is it to buy and sell securities without impacting prices).
In our opinion, preferred securities continue to offer investors attractive
levels of income and potential for price appreciation when compared to other
types of fixed-income investments. During the darkest days of the market
collapse (late 2008 to early 2009) preferred prices were weaker than every other
fixed-income product except junk bonds. The gap has narrowed appreciably over
the past year, but preferred securities still offer good relative value to
investors.
Not only do preferreds look attractive versus broader credit markets, but
the broader credit markets also appear undervalued versus other types of
investments. Measures of cash flows into and out of mutual funds indicate demand
for higher yielding fixed-income products is strong. This is no surprise. With
high levels of volatility and uncertainty about the stock market, huge deficits
faced by state and local municipalities, and money-market fund yields hovering
around zero, many investors have turned to corporate bonds and preferred
securities.
Liquidity, the other measure of market health, is also relatively good at
present, but some explanation is required. The preferred securities market is
never highly liquid, at least by the standards of most other securities markets.
A large-cap, exchange-traded common stock may trade hundreds or thousands of
times each day, with tiny bid-offer spreads; in the preferred universe, most
trades require greater effort. But relative to historical measures of liquidity,
the preferred market has been reasonably active recently.
Things were not quite as rosy during the first couple weeks of May.
Preferred securities traded down significantly, as fears over the potential for
a European debt crisis intensified. Prices fell despite surprisingly strong
economic data in the United States, where the bulk of preferred issuers are
domiciled. As discussed below, the European Union took dramatic steps to stem
the crisis, and the market heaved a sigh of relief. Debt burdens remain high
throughout developed markets, however, leaving conditions ripe for renewed
market turbulence at some point down the road.
Preferred market participants are also scratching their collective heads as
legislators and regulators address the role of certain types of preferred
securities in the capital structure of financial institutions. The outcome could
have far-reaching implications for the market, and our thoughts are discussed
more fully below. Despite the uncertainty, we view the range of outcomes to be
mostly positive for investors in preferred securities. Just be prepared for more
bumps in the road.
FINANCIAL REGULATION
The Senate is poised to vote on financial regulatory reform legislation,
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).
While the vote in the Senate is likely to be very close, the House has already
approved it and we expect that Dodd-Frank will be enacted. The legislation will
make significant changes to both the operations and capitalization of financial
companies. Below we discuss the key features and implications of the bill for
preferred investors.
First, Dodd-Frank will set capital standards for financial institutions.
The bill largely leaves decisions about capital up to the relevant regulators,
with the important constraint that capital requirements be set NO LOWER than
they are today. In addition, capital requirements will apply to average rather
than period-end
5
assets. At most financial institutions, average assets tend to be higher than
end-of-period assets. Thus, Dodd-Frank will raise effective capital requirements
for most financial companies and make it more difficult to lower them in the
future. For preferred investors, this is good news.
Second, Dodd-Frank contains a provision that will make trust preferred
securities (TruPS) ineligible as Tier 1 capital. (Tier 1 capital is one of the
primary measures of capital for a financial company; it includes common equity,
retained earnings, qualifying preferred capital, and certain regulatory assets.)
For banks with less than $15 billion in assets as of December 31, 2009, TruPS
issued before May 19, 2010 will retain Tier 1 capital eligibility permanently.
For banks over that size, their TruPS will remain Tier 1 eligible until January
1, 2013; Tier 1 eligibility will phase out over the following three years
(presumably, 75% eligibility in 2013, 50% in 2014, and 25% in 2015), with no
Tier 1 credit by January 1, 2016. All TruPS issued on or after May 19, 2010 will
not receive Tier 1 capital treatment, regardless of the size of the issuing
bank. (There has been no public issuance of TruPS since that date.) This is
mixed news for preferred investors. Banks are more likely to call TruPS that are
no longer eligible as Tier 1 capital, and most TruPS allow issuers to call them
at par if they no longer qualify as Tier 1 capital. That's potentially good news
for TruPS that trade below par, but it's bad news for the small number of issues
that trade at a premium. The provision may also be negative for traditional
non-cumulative preferred stock, which will continue to count as Tier 1 capital,
since supply might increase substantially if financial companies decide to
replace TruPS with traditional preferreds.
Third, Dodd-Frank will restrict the activities of financial institutions in
a number of ways. For preferred investors, two of the most important are (1) the
"Volker Rule" limiting proprietary trading and investments in hedge funds and
private equity and (2) the requirements for derivatives activities. Without
getting into specifics, we see these provisions as reducing both the risks that
financial institutions can take and the profits they can generate. The former is
good for preferred investors, while the latter could be negative if it cuts
deeply enough into profitability - since preferred investors ultimately are paid
out of earnings. At this point, it appears that the bill takes moderate ground
on both of these provisions, although we can't say definitively until regulators
write the rules enforcing the provisions. On balance, we think these limitations
on bank activities will benefit preferred investors.
Overall, we think Dodd-Frank will force banks to hold more capital, take
less risk, or both. When we combine that with regulators' desire for banks to
hold a higher proportion of high-quality capital (i.e., common equity), we see
it as decidedly good news for preferred investors. We may need to reassess that
conclusion when regulators turn the legislation into final rules. However, for
now we are cautiously optimistic about the impact of Dodd-Frank on preferreds.
CHANGES TO CAPITAL STANDARDS
While the U.S. Congress is moving to pass Dodd-Frank, regulators here and
abroad are formulating new capital standards for banks. These new rules, Basel
III, will replace current Basel II guidelines that, in retrospect, permitted
banks to operate with inadequate capital as markets became stressed. While the
new rules are still being negotiated, two things are clear. First, banks will
need to hold higher levels of capital than under Basel II, partly because
certain asset classes will carry higher "risk weights" and partly because
required capital ratios have increased or will increase.
Second, the "quality" of capital will improve, with a particular emphasis
on the strongest form of capital, common equity. As preferred investors, we have
always paid a great deal of attention to the composition of capital at the
companies in which we invest, and we are happy to see regulators do the same.
Over time, this should result in banks with higher common equity ratios and less
reliance on preferred and hybrid securities
6
(in percentage terms). That no doubt will prompt changes to the preferred
market, with shrinkage in some areas, expansion in others, and eventually
emergence of some new forms of hybrid capital. While these changes may generate
some volatility in the preferred market, we expect they will offer plenty of
opportunities as well.
EUROZONE DEBT PROBLEMS
One of the major challenges facing credit markets today is the sovereign
debt situation in Europe. The global recession caused government budget deficits
to swell almost everywhere. Portugal, Ireland, Italy, Greece, and Spain (the
so-called PIIGS countries) each ran high budget deficits in 2009 (over 9% of
GDP, except for Italy, which posted a deficit of 5.3% of GDP), with the prospect
of still-sizable deficits for years to come. Markets became worried about these
countries' ability to repay their debt, resulting in sharply higher long-term
interest rates in those countries (especially Greece), which only intensified
the problems they face in bringing their debt under control.
Normally, a country has three "levers" it can pull to help address its
fiscal imbalance: the exchange rate, monetary policy, and fiscal policy. As
members of the European Monetary Union (EMU), however, individual countries
don't control the first two. That leaves fiscal policy as the only real tool for
reestablishing fiscal balance - and markets came to doubt that the PIIGS could
move quickly enough to right the ship.
With Greece on the verge of a liquidity crisis - it had debt coming due
without the cash to repay it or market access to refinance it - the EMU and
International Monetary Fund (IMF) combined to offer a E110 billion
assistance package to Greece in exchange for commitments from Greece to sharply
reduce its deficit. This averted an immediate crisis, but markets quickly turned
on the other high-deficit countries. Within days, European officials launched a
more comprehensive set of proposals to address the widening crisis. In addition
to the E110 billion assistance package for Greece, officials announced a
massive increase in the debt stabilization fund for EU nations. The E750
billion plan consists of E440 billion in loans from Euro-zone governments,
E60 billion from an EU emergency fund, and E250 billion from the IMF.
In addition, the European Central Bank has begun purchasing EU government debt
in order to provide liquidity to the markets, and the U.S. Federal Reserve
reinstated foreign exchange swap lines to give foreign central banks access to
U.S. dollars.
All of these concerns about Europe have weighed on the preferred securities
market for two broad reasons. First, investors worry about the direct exposure
that companies may have to these countries. On that score, the Fund has no
direct exposure to foreign sovereign debt, and we cannot identify any
investments with material exposure to Greece, the weakest of the EMU sovereigns.
However, some of the companies in the Fund's portfolio do have material exposure
to Spain, Italy, and (to a lesser extent) Portugal - although we still would
characterize the Fund's exposure to those issuers as modest.
The second broad concern facing investors is the possibility that sovereign
debt problems could lead to a breakup of the EMU and the Euro. Given the
interconnectedness of the global financial system, breakup of the EMU would be
highly disruptive to say the least, and there is no doubt it would negatively
affect the preferred market. While we think this is an extremely low probability
scenario, until markets have concluded it's a "no chance" scenario, we have to
keep our eye on it. The creation of the debt stabilization fund and renewed
budget restraint in high-deficit countries gives us comfort that sovereign risks
are moving in the right direction.
7
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OVERVIEW
MAY 31, 2010 (UNAUDITED)
FUND STATISTICS
---------------------
Net Asset Value $ 15.53
Market Price $ 15.91
Premium 2.45%
Yield on Market Price 9.43%
Common Stock Shares
Outstanding 9,784,099
MOODY'S RATINGS % OF NET ASSETS+
------------------------ ----------------
A 6.4%
BBB 68.5%
BB 19.7%
Below "BB" 2.0%
Not Rated* 1.3%
Below Investment Grade** 17.9%
* Does not include net other assets and liabilities of 2.1%.
** Below investment grade by both Moody's and S&P.
(PIE CHART)
INDUSTRY CATEGORIES % OF NET ASSETS+
------------------- ----------------
Banking 38%
Utilities 26%
Insurance 25%
Energy 5%
Financial Services 1%
Other 5%
TOP 10 HOLDINGS BY ISSUER % OF NET ASSETS+
------------------------- ----------------
Liberty Mutual Group 5.6%
Banco Santander 4.9%
Capital One Financial 4.2%
PNC Financial Services 3.8%
Comerica 3.5%
Dominion Resources 3.4%
Unum Group 3.0%
Axis Capital 2.6%
Enbridge Energy Partners 2.5%
Wells Fargo 2.4%
% OF NET ASSETS***+
-------------------
Holdings Generating Qualified Dividend Income (QDI) for
Individuals 25%
Holdings Generating Income Eligible for the Corporate
Dividends Received Deduction (DRD) 16%
*** 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.
+ Net Assets includes assets attributable to the use of leverage.
8
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 2010 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- 91.7%
BANKING -- 38.3%
$ 4,850,000 Astoria Capital Trust I, 9.75% 11/01/29, Series B ................................ $ 5,039,863(1)
444,755 Banco Santander, 10.50% Pfd., Series 10 .......................................... 11,386,840**(1)(2)
Barclays Bank PLC:
$ 3,600,000 6.278% ........................................................................ 2,718,000**(1)(2)
65,000 6.625% Pfd., Series 2 ......................................................... 1,307,800**(1)(2)
10,000 7.75% Pfd., Series 4 .......................................................... 233,200**(2)
50,000 8.125% Pfd., Series 5 ......................................................... 1,212,500**(1)(2)
10,000 BB&T Capital Trust V, 8.95% Pfd. ................................................. 268,825
131,500 BB&T Capital Trust VI, 9.60% Pfd. ................................................ 3,653,070(1)
7,500 BB&T Capital Trust VII, 8.10% Pfd. ............................................... 195,075
$ 7,000,000 Capital One Capital III, 7.686% 08/15/36 ......................................... 6,475,000(1)
$ 1,500,000 Capital One Capital V, 10.25% 08/15/39 ........................................... 1,621,875(1)
$ 1,643,000 Capital One Capital VI, 8.875% 05/15/40 .......................................... 1,706,025
$ 10,000,000 Colonial BancGroup, 7.114%, 144A**** ............................................. 362,500++
$ 9,670,000 Comerica Capital Trust II, 6.576% 02/20/37 ....................................... 8,122,800(1)
7,000 FBOP Corporation, Adj. Rate Pfd., 144A**** ....................................... 45,220*+
$ 1,200,000 Fifth Third Capital Trust IV, 6.50% 04/15/37 ..................................... 969,000
21,200 Fifth Third Capital Trust VII, 8.875% Pfd., 05/15/68 ............................. 535,989
2,000 First Republic Preferred Capital Corporation, 10.50% Pfd., 144A**** .............. 1,860,000(1)
3,900 First Tennessee Bank, Adj. Rate Pfd., 144A**** ................................... 2,439,938*
$ 500,000 First Tennessee Capital I, 8.07% 01/06/27, Series A .............................. 440,941(1)
$ 600,000 First Union Capital II, 7.95% 11/15/29 ........................................... 646,870(1)
$ 1,000,000 First Union Institutional Capital I, 8.04% 12/01/26 .............................. 1,006,628
$ 500,000 Fleet Capital Trust II, 7.92% 12/11/26 ........................................... 486,250
2 FT Real Estate Securities Company, 9.50% Pfd., 144A**** .......................... 1,610,000
Goldman Sachs:
$ 5,200,000 Capital II, 5.793% ............................................................ 4,004,000(1)
1,500 STRIPES Custodial Receipts, Pvt. .............................................. 420,000*
$ 1,000,000 HSBC USA Capital Trust II, 8.38% 05/15/27, 144A**** .............................. 971,737(1)
HSBC USA, Inc.:
132,000 Adj. Rate Pfd., Series D ...................................................... 2,880,570*(1)
75,000 6.50% Pfd., Series H .......................................................... 1,680,938*(1)
$ 1,200,000 JPMorgan Chase Capital XXVII, 7.00% 11/01/39, Series AA .......................... 1,178,340(1)
67,400 Keycorp Capital X, 8.00% Pfd. .................................................... 1,656,018(1)
$ 1,000,000 Lloyds Banking Group PLC, 6.657%, 144A**** ....................................... 535,000**(2)+
25,000 Morgan Stanley Capital Trust VIII, 6.45% Pfd. 04/15/67 ........................... 536,750
$ 2,500,000 National City Preferred Capital Trust I, 12.00% .................................. 2,683,115(1)
$ 800,000 NB Capital Trust IV, 8.25% 04/15/27 .............................................. 782,000
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, 2010 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
BANKING -- (CONTINUED)
151,059 PFGI Capital Corporation, 7.75% Pfd. ............................................. $ 3,748,151(1)
54,995 PNC Financial Services, 9.875% Pfd., Series F .................................... 1,502,051*(1)
$ 1,000,000 PNC Preferred Funding Trust III, 8.70%, 144A**** ................................. 1,018,954(1)
96,800 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36 ................................... 2,215,026(1)
3,000 Sovereign REIT, 12.00% Pfd., Series A, 144A**** .................................. 3,187,500
$ 1,500,000 Wachovia Capital Trust III, 5.80% ................................................ 1,200,000(1)
75,637 Wachovia Preferred Funding, 7.25% Pfd., Series A ................................. 1,736,058
$ 2,800,000 Webster Capital Trust IV, 7.65% 06/15/37 ......................................... 1,960,000
$ 1,000,000 Wells Fargo Capital XV, 9.75% .................................................... 1,075,000
------------
89,315,417
------------
FINANCIAL SERVICES -- 1.1%
$ 250,000 Ameriprise Financial, Inc., 7.518% 06/01/66 ...................................... 241,875
$ 3,000,000 Gulf Stream-Compass 2005 Composite Notes, 144A**** ............................... 1,023,570
15,000 Heller Financial, Inc., 6.687% Pfd., Series C .................................... 1,410,000*
Lehman Brothers Holdings, Inc.:
20,000 5.67% Pfd., Series D .......................................................... 6,000*++
85,000 7.95% Pfd. .................................................................... 1,870*++
------------
2,683,315
------------
INSURANCE -- 20.0%
$ 1,550,000 Ace Capital Trust II, 9.70% 04/01/30 ............................................. 1,842,082(1)(2)
$ 1,775,000 AON Corporation, 8.205% 01/01/27 ................................................. 1,907,589(1)
Arch Capital Group Ltd.:
25,750 7.875% Pfd., Series B ......................................................... 653,599**(1)(2)
21,100 8.00% Pfd., Series A .......................................................... 530,296**(1)(2)
$ 1,550,000 AXA SA, 6.463%, 144A**** ......................................................... 1,224,500**(1)(2)
66,600 Axis Capital Holdings, 7.50% Pfd., Series B ...................................... 6,039,787(1)(2)
160,000 Delphi Financial Group, 7.376% Pfd. 05/15/37 ..................................... 3,211,600(1)
$ 5,645,000 Everest Re Holdings, 6.60% 05/15/37 .............................................. 4,713,575(1)
Liberty Mutual Group:
$ 2,500,000 7.80% 03/15/37, 144A**** ...................................................... 2,100,000(1)
$ 7,300,000 10.75% 06/15/58, 144A**** ..................................................... 7,884,000
$ 4,750,000 MetLife Capital Trust X, 9.25% 04/08/38, 144A**** ................................ 5,201,250(1)
Principal Financial Group:
99,800 6.518% Pfd., Series B ......................................................... 2,201,837*(1)
19,750 5.563% Pfd., Series A ......................................................... 1,625,056*
The accompanying notes are an integral part of the financial statements.
10
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2010 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
109,000 Scottish Re Group Ltd., 7.25% Pfd. ............................................... $ 764,363**(2)+
$ 1,750,000 Stancorp Financial Group, 6.90% 06/01/67 ......................................... 1,442,738(1)
$ 3,615,000 USF&G Capital, 8.312% 07/01/46, 144A**** ......................................... 3,922,239(1)
$ 1,800,000 XL Capital Ltd., 6.50%, Series E ................................................. 1,278,000(1)(2)
------------
46,542,511
------------
UTILITIES -- 25.8%
33,700 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ........................ 3,362,630*(1)
105,000 Calenergy Capital Trust III, 6.50% Pfd. 09/01/27 ................................. 4,751,250(1)
$ 3,700,000 COMED Financing III, 6.35% 03/15/33 .............................................. 3,075,126(1)
66,170 Constellation Energy Group, 8.625% Pfd. 06/15/63, Series A ....................... 1,738,286(1)
$ 2,500,000 Dominion Resources Capital Trust I, 7.83% 12/01/27 ............................... 2,592,777(1)
Dominion Resources, Inc.:
$ 3,500,000 7.50% ......................................................................... 3,399,063(1)
66,000 8.375% Pfd., Series A ......................................................... 1,838,100(1)
83,000 Entergy Arkansas, Inc., 6.45% Pfd. ............................................... 1,979,035*(1)
55,000 Entergy Louisiana, Inc., 6.95% Pfd. .............................................. 5,522,346*(1)
39,623 FPC Capital I, 7.10% Pfd., Series A .............................................. 996,618(1)
FPL Group Capital, Inc.:
$ 2,500,000 6.65% 06/15/67 ................................................................ 2,290,612(1)
$ 1,975,000 7.30% 09/01/67, Series D ...................................................... 1,948,069(1)
55,000 Georgia Power Company, 6.50% Pfd., Series 2007A .................................. 5,494,847*(1)
30,445 Indianapolis Power & Light Company, 5.65% Pfd. ................................... 2,717,216*(1)
$ 4,000,000 PECO Energy Capital Trust IV, 5.75% 06/15/33 ..................................... 3,353,444(1)
$ 6,000,000 Puget Sound Energy, Inc., 6.974% 06/01/67 ........................................ 5,501,184(1)
Southern California Edison:
7,000 6.00% Pfd., Series C .......................................................... 644,000*(1)
10,000 6.125% Pfd. ................................................................... 934,063*
$ 4,850,000 Southern Union Company, 7.20% 11/01/66 ........................................... 4,389,250(1)
5,000 Union Electric Company, $7.64 Pfd. ............................................... 505,938*
$ 3,405,000 Wisconsin Energy Corporation, 6.25% 05/15/67 ..................................... 3,102,779(1)
------------
60,136,633
------------
ENERGY -- 4.8%
$ 6,000,000 Enbridge Energy Partners LP, 8.05% 10/01/37 ...................................... 5,933,238(1)
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, 2010 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
ENERGY -- (CONTINUED)
Enterprise Products Partners:
$ 650,000 7.00% 06/01/67 ................................................................ $ 570,519
$ 4,750,000 8.375% 08/01/66, Series A ..................................................... 4,684,279(1)
------------
11,188,036
------------
MISCELLANEOUS INDUSTRIES -- 1.7%
40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** .............................. 2,970,000*(1)
$ 1,000,000 Stanley Works, 5.902% 12/01/45 ................................................... 944,213(1)
------------
3,914,213
------------
TOTAL PREFERRED SECURITIES
(Cost $225,589,128) .......................................................... 213,780,125
------------
CORPORATE DEBT SECURITIES -- 6.1%
FINANCIAL SERVICES -- 0.4%
15,000 Ameriprise Financial, Inc., 7.75% 06/15/39 ....................................... 390,638
$ 4,726,012 Lehman Brothers, Guaranteed Note, Variable Rate, 12/16/16, 144A**** .............. 598,313++
------------
988,951
------------
INSURANCE -- 4.3%
$ 3,400,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** .............................. 3,009,439(1)
$ 7,000,000 UnumProvident Corporation, 7.25% 03/15/28, Senior Notes .......................... 6,932,072(1)
------------
9,941,511
------------
MISCELLANEOUS INDUSTRIES -- 1.2%
16,500 Corp-Backed Trust Certificates, 7.00% 11/15/28, Series Sprint .................... 337,920(1)
Pulte Homes, Inc.:
25,844 7.375% 06/01/46 ............................................................... 531,417
$ 2,160,000 7.875% 06/15/32 ............................................................... 1,933,200(1)
------------
2,802,537
------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 0.2%
$ 500,000 Duke Realty LP, 8.25% 08/15/19 ................................................... 570,863
------------
570,863
------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $18,647,164) ........................................................... 14,303,862
------------
The accompanying notes are an integral part of the financial statements.
12
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2010 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
COMMON STOCK -- 0.2%
BANKING -- 0.2%
13,500 CIT,Group, Inc. .................................................................. $ 496,665*+
------------
TOTAL COMMON STOCK
(Cost $2,533,093) ............................................................. 496,665
------------
MONEY MARKET FUND -- 0.1%
203,220 BlackRock Provident Institutional, T-Fund ........................................ 203,220
------------
TOTAL MONEY MARKET FUND
(Cost $203,220) ............................................................... 203,220
------------
TOTAL INVESTMENTS (Cost $246,972,605***) ............................................ 98.1% 228,783,872
OTHER ASSETS AND LIABILITIES (Net) .................................................. 1.9% 4,490,298
----- ------------
NET ASSETS BEFORE LOAN .............................................................. 100.0%+++ $233,274,170
----- ------------
LOAN PRINCIPAL BALANCE .......................................................................... (81,300,000)
------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ...................................................... $151,974,170
============
----------
* 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. At May 31, 2010, these
securities amounted to $39,964,160 or 17.1% of net assets before the
loan. 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 $175,727,581 at May 31, 2010.
(2) Foreign Issuer.
+ Non-income producing.
++ The issuer has filed for bankruptcy protection. As a result, the Fund may
not be able to recover the principal invested and also does not expect to
receive income on this security going forward.
+++ The percentage shown for each investment category is the total value of
that category as a percentage of total net assets before the loan.
ABBREVIATIONS:
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
REIT -- Real Estate Investment Trust
STRIPES -- Structured Residual Interest Preferred Enhanced Securities
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, 2010 (UNAUDITED)
ASSETS:
Investments, at value (Cost $246,972,605) ....................... $228,783,872
Receivable for investments sold ................................. 1,095,542
Dividends and interest receivable ............................... 3,580,228
Prepaid expenses ................................................ 91,529
------------
Total Assets ................................................. 233,551,171
LIABILITIES:
Loan Payable .................................................... $81,300,000
Dividends payable to Common Stock Shareholders .................. 51,823
Investment advisory fees payable ................................ 112,977
Administration, Transfer Agent and Custodian fees payable ....... 32,437
Servicing agent fees payable .................................... 7,308
Professional fees payable ....................................... 57,077
Directors' fees payable ......................................... 1,176
Accrued expenses and other payables ............................. 14,203
-----------
Total Liabilities ............................................ 81,577,001
------------
NET ASSETS AVAILABLE TO COMMON STOCK ............................... $151,974,170
============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
Undistributed net investment income ............................. $ 847,148
Accumulated net realized loss on investments sold ............... (61,388,369)
Unrealized depreciation of investments .......................... (18,188,733)
Par value of Common Stock ....................................... 97,841
Paid-in capital in excess of par value of Common Stock .......... 230,606,283
------------
Total Net Assets Available to Common Stock ................... $151,974,170
============
NET ASSET VALUE PER SHARE OF COMMON STOCK:
Common Stock (9,784,099 shares outstanding) ..................... $ 15.53
============
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, 2010 (UNAUDITED)
INVESTMENT INCOME:
Dividends+ ..................................................... $ 3,894,579
Interest ........................................................ 5,401,994
-----------
Total Investment Income ...................................... 9,296,573
EXPENSES:
Investment advisory fees ........................................ $642,988
Servicing agent fees ............................................ 38,844
Administrator's fees ............................................ 108,021
Professional fees ............................................... 63,007
Insurance expenses .............................................. 78,047
Transfer Agent fees ............................................. 23,594
Directors' fees ................................................. 36,500
Custodian fees .................................................. 15,628
Compliance fees ................................................. 19,694
Interest expense ................................................ 521,170
Other ........................................................... 54,143
--------
Total Expenses ............................................... 1,601,636
-----------
NET INVESTMENT INCOME .............................................. 7,694,937
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net realized loss on investments sold during the period ......... (177,016)
Change in net unrealized appreciation/depreciation of
investments .................................................. 10,636,240
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS .................... 10,459,224
-----------
NET INCREASE IN NET ASSETS TO COMMON STOCK RESULTING FROM
OPERATIONS ...................................................... $18,154,161
===========
----------
+ For Federal income tax purposes, a significant portion of this amount may
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
SIX MONTHS ENDED
MAY 31, 2010 YEAR ENDED
(UNAUDITED) NOVEMBER 30, 2009
---------------- -----------------
OPERATIONS:
Net investment income ....................................................... $ 7,694,937 $ 14,024,618
Net realized loss on investments sold during the period ..................... (177,016) (19,056,785)
Change in net unrealized appreciation/depreciation of investments ........... 10,636,240 71,135,096
Distributions to AMPS* Shareholders from net investment income, including
changes in accumulated undeclared distributions .......................... -- (611,215)
------------ ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................ 18,154,161 65,491,714
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders(1) ... (6,894,225) (12,904,760)
------------ ------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ............................ (6,894,225) (12,904,760)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment and Cash
Purchase Plan ............................................................ 124,829 --
------------ ------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING FROM FUND
SHARE TRANSACTIONS ....................................................... 124,829 --
------------ ------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD ............ $ 11,384,765 $ 52,586,954
============ ============
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ......................................................... $140,589,405 $ 88,002,451
Net increase in net assets during the period ................................ 11,384,765 52,586,954
------------ ------------
End of period (including undistributed net investment income of $847,148
and $46,436, respectively) ............................................... $151,974,170 $140,589,405
============ ============
----------
* Auction Market Preferred Stock.
(1) May include income earned, but not paid out, in prior fiscal year.
The accompanying notes are an integral part of the financial statements.
16
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 2010 (UNAUDITED)
INCREASE/(DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations ..................... $ 18,154,161
ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
TO NET CASH USED IN OPERATING ACTIVITIES:
Purchase of investment securities ........................................ (35,545,280)
Proceeds from disposition of investment securities ....................... 21,420,423
Sale of short-term investment securities, net ............................ 2,328,632
Cash received from litigation claim ...................................... 42,970
Increase in dividends and interest receivable ............................ (198,992)
Increase in receivable for investments sold .............................. (1,095,542)
Increase in prepaid expenses ............................................. (28,633)
Net amortization/(accretion) of premium/(discount) ....................... (259,052)
Decrease in accrued expenses and other liabilities ....................... (539)
Unrealized appreciation/depreciation on securities ....................... (10,636,240)
Net realized loss from investments sold .................................. 177,016
------------
Net cash used by operating activities ................................. (5,641,076)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan ....................................................... 12,400,000
Proceeds from shares reinvested .......................................... 124,829
Increase in dividend payable to common stock shareholders ................ 10,472
Distributions to common stock shareholders from net investment income .... (6,894,225)
------------
Net cash provided in financing activities ............................. 5,641,076
------------
Net increase/(decrease) in cash ....................................... --
CASH:
Beginning of the period .................................................. --
------------
End of the period ........................................................ $ --
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period .......................................... 515,903
------------
The accompanying notes are an integral part of the financial statements.
17
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
FINANCIAL HIGHLIGHTS
FOR A COMMON STOCK 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
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 2010 --------------------------------------------------
(UNAUDITED) 2009 2008 2007 2006 2005
------------ -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..................... $ 14.38 $ 9.00 $ 19.71 $ 23.29 $ 22.40 $ 23.56
-------- -------- -------- -------- -------- --------
INVESTMENT OPERATIONS:
Net investment income .................................... 0.79 1.43 1.91 2.24 2.04 1.94
Net realized and unrealized gain/(loss) on investments ... 1.07 5.33 (10.62) (3.59) 1.06 (0.86)
DISTRIBUTIONS TO AMPS* SHAREHOLDERS:
From net investment income ............................... -- (0.06) (0.44) (0.70) (0.64) (0.41)
-------- -------- -------- -------- -------- --------
Total from investment operations ......................... 1.86 6.70 (9.15) (2.05) 2.46 0.67
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income ............................... (0.71) (1.32) (1.53) (1.53) (1.57) (1.83)
From return of capital ................................... -- -- (0.03) -- -- --
-------- -------- -------- -------- -------- --------
Total distributions to Common Stock Shareholders ......... (0.71) (1.32) (1.56) (1.53) (1.57) (1.83)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ........................... $ 15.53 $ 14.38 $ 9.00 $ 19.71 $ 23.29 $ 22.40
======== ======== ======== ======== ======== ========
Market value, end of period .............................. $ 15.91 $ 13.10 $ 7.28 $ 17.00 $ 22.08 $ 19.70
Total investment return based on net asset value** ....... 12.99%**** 83.69% (48.17%) (8.71%) 12.30% 3.27%
Total investment return based on market value** .......... 27.06%**** 106.87% (51.39%) (16.95%) 21.06% (11.41%)
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK
SHAREHOLDERS:
Total net assets, end of period (in 000's) ............ $151,974 $140,589 $ 88,002 $192,737 $227,678 $219,015
Operating expenses including interest expense(1) ...... 2.10%*** 2.92% 2.67% -- -- --
Operating expenses excluding interest expense ......... 1.42%*** 1.70% 1.91% 1.51% 1.50% 1.47%
Net investment income + ............................... 10.08%*** 13.34% -- -- -- --
Net investment income, including payments to AMPS
Shareholders + ..................................... -- 12.76% 9.37% 6.94% 6.28% 6.51%
SUPPLEMENTAL DATA: ++
Portfolio turnover rate ............................... 10%**** 37% 46% 57% 68% 38%
Net assets before loan, end of period (in 000's) ...... $233,274 $209,489 $157,002 $321,237 $356,178 347,515
Ratio of operating expenses including interest
expense(1)(2) to net assets before loan and AMPS ... 1.41%*** 1.83% 1.54% -- -- --
Ratio of operating expenses excluding interest
expense(2) to net assets before loan and AMPS ...... 0.95%*** 1.07% 1.10% 0.95% 0.94% 0.94%
* Auction Market Preferred Stock.
** Assumes reinvestment of distributions at the price obtained by the Fund's
Dividend Reinvestment and Cash Purchase Plan.
*** Annualized.
**** Not Annualized.
+ The net investment income ratios reflect income net of operating expenses,
including interest expense.
++ Information presented under heading Supplemental Data includes AMPS and
loan principal balance.
(1) See Note 7.
(2) Does not include distributions to AMPS Shareholders.
The accompanying notes are an integral part of the financial statements.
18
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, 2009........ $0.1160 $14.97 $14.52 $14.64
January 29, 2010......... 0.1160 15.52 14.87 14.98
February 26, 2010........ 0.1160 15.58 15.82 15.58
March 31, 2010........... 0.1160 16.17 16.00 16.17
April 30, 2010........... 0.1160 16.57 16.93 16.57
May 28, 2010............. 0.1250 15.53 15.91 15.53
----------
(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.
The accompanying notes are an integral part of the financial statements.
19
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
SENIOR SECURITIES
INVOLUNTARY
ASSET LIQUIDATION TOTAL DEBT ASSET
COVERAGE PREFERENCE OUTSTANDING COVERAGE PER
TOTAL AMPS* SHARES PER AMPS PER AMPS END OF PERIOD $1,000 OF
DATE OUTSTANDING (1) SHARE (2) SHARE (3) (000S) (4) DEBT (5)
-------- ------------------ --------- ------------ ------------- ------------
05/31/10** -- N/A N/A $81,300 $2,869
11/30/09 -- N/A N/A 68,900 3,040
11/30/08 1,580 $80,704 $25,000 N/A N/A
11/30/07 5,140 62,506 25,000 N/A N/A
11/30/06 5,140 69,301 25,000 N/A N/A
11/30/05 5,140 67,650 25,000 N/A N/A
----------
(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.
(4) See note 7.
(5) Calculated by subtracting the Fund's total liabilities (excluding the loan)
from the Fund's total assets and dividing that amount by the loan
outstanding in 000's.
* Auction Market Preferred Stock.
** Unaudited.
The accompanying notes are an integral part of the financial statements.
20
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 the financial statements is in conformity with U.S. generally
accepted accounting principles ("US GAAP") 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 in accordance with the policies and
procedures approved by the Board of Directors of the Fund. 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
available to Common Stock 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 any outstanding preferred stock.
The Fund's preferred and debt securities are valued on the basis of current
market quotations provided by independent pricing services or dealers approved
by the Board of Directors of the Fund. Each quotation is based on the mean of
the bid and asked prices of a security. In determining the value of a particular
preferred or debt security, a pricing service or dealer may use information with
respect to transactions in such investments, quotations, market transactions in
comparable investments, various relationships observed in the market between
investments, and/or calculated yield measures based on valuation technology
commonly employed in the market for such investments. Common stocks that are
traded on stock exchanges are valued at the last sale price or official close
price on the exchange, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available mean price. Futures
contracts and option contracts on futures contracts are valued on the basis of
the settlement price for such contracts on the primary exchange on which they
trade. Investments in over-the-counter derivative instruments, such as interest
rate swaps and options thereon ("swaptions"), are valued using prices supplied
by a pricing service, or if such prices are unavailable, prices provided by a
single broker or dealer that is not the counterparty or, if no such prices are
available, at a price at which the counterparty to the contract would repurchase
the instrument or terminate the contract. 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.
21
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Investments in money market instruments and all debt and preferred
securities 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.
FAIR VALUE MEASUREMENT: The inputs and valuation techniques used to measure
fair value of the Fund's investments are summarized into three levels as
described in the hierarchy 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 investments as of May 31, 2010 is
as follows:
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
MAY 31, 2010 PRICE INPUTS INPUTS
------------ ----------- ------------ ------------
Preferred Securities
Banking $ 89,315,417 $49,215,950 $ 40,054,247 $ 45,220
Financial Services 2,683,315 -- 1,659,745 1,023,570
Insurance 46,542,511 12,562,945 33,979,566 --
Utilities 60,136,633 7,972,067 52,164,566 --
Energy 11,188,036 -- 11,188,036 --
Miscellaneous Industries 3,914,213 -- 3,914,213 --
Corporate Debt Securities 14,303,862 1,259,975 12,445,574 598,313
Common Stock
Banking 496,665 496,665 -- --
Money Market Fund 203,220 203,220 -- --
------------ ----------- ------------ ----------
Total Investments $228,783,872 $71,710,822 $155,405,947 $1,667,103
============ =========== ============ ==========
22
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The following is a reconciliation of Level 3 investments for which
significant unobservable inputs were used to determine fair value:
PREFERRED SECURITIES
--------------------
FINANCIAL CORPORATE DEBT
TOTAL INVESTMENTS BANKING SERVICES SECURITIES
----------------- ------- ---------- --------------
BALANCE AS OF 11/30/09 $1,237,309 $38,500 $ 703,050 $495,759
Accrued discounts/premiums -- -- -- --
Realized gain/(loss) -- -- -- --
Change in unrealized appreciation/
(depreciation) 429,794 6,720 320,520 102,554
Net purchases/(sales) -- -- -- --
Transfers in and/or out of Level 3 -- -- -- --
---------- ------- ---------- --------
BALANCE AS OF 05/31/10 $1,667,103 $45,220 $1,023,570 $598,313
As of May 31, 2010, total change in unrealized gain/(loss) on Level 3
securities still held at period-end and included in the change in net assets was
$429,794. Total unrealized gain/(loss) for all securities (including Level 1 and
Level 2) can be found on the accompanying Statement of Operations.
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 specific identified cost basis. Dividend income is recorded
on ex-dividend dates. Interest income is recorded on the accrual basis. The Fund
also amortizes premiums and accretes discounts on fixed income securities using
the effective yield method.
OPTIONS: In the normal course of pursuing its investment objectives, the
Fund is subject to interest rate risk and may purchase or write options to hedge
against this risk. 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.
23
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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. There were no purchased or written options for the six
months ended May 31, 2010.
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.
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 is required.
Management has analyzed the Fund's tax positions taken on Federal income
tax returns for all open tax years (November 30, 2009, 2008, 2007 and 2006), and
has concluded that no provision for federal income tax is required in the Fund's
financial statements. The Fund's major tax jurisdictions are federal and
California. The Fund's federal and state income and federal excise tax returns
for tax years for which the applicable statutes of limitations have not expired
are subject to examination by the Internal Revenue Service and state departments
of revenue.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund expects to declare
dividends on a monthly basis to shareholders of Common Stock ("Shareholders").
Distributions to Shareholders are recorded on the ex-dividend date. Any net
realized short-term capital gains will be distributed to Shareholders at least
annually. Any net realized long-term capital gains may be distributed to
Shareholders at least annually or may be retained by the Fund as determined by
the Fund's Board of Directors. Capital gains retained by the Fund are subject to
tax at the capital gains corporate tax rate. Subject to the Fund qualifying as a
regulated investment company, any taxes paid by the Fund on such net realized
long-term capital gains may be used by the Fund's Shareholders as a credit
against their own tax liabilities. The Fund may pay distributions in excess of
the Fund's net investment company taxable income and this excess would be a
tax-free return of capital distributed from the Fund's assets.
Income and capital gain distributions are determined and characterized in
accordance with income tax regulations which may differ from US GAAP. 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.
24
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Distributions from net realized gains for book purposes may include
short-term capital gains, which are included as ordinary income for tax purposes
and may exclude amortization of premium on certain fixed 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 2010 and 2009 were as follows:
DISTRIBUTIONS PAID IN FISCAL YEAR 2010 DISTRIBUTIONS PAID IN FISCAL YEAR 2009
-------------------------------------- --------------------------------------
ORDINARY LONG-TERM ORDINARY LONG-TERM
INCOME CAPITAL GAINS INCOME CAPITAL GAINS
-------- ------------- ----------- -------------
Common N/A N/A $12,904,760 $0
Preferred N/A N/A $ 611,215 $0
As of November 30, 2009, 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)
--------------------------- --------------- -------------- ---------------------------
$(60,781,458) $534,075 $0 $(29,384,112)
At November 30, 2009, the composition of the Fund's $60,781,458 accumulated
realized capital losses was $573,838, $8,529,240, $943,555, $1,648,329,
$3,780,448, $26,133,604 and $19,172,444 incurred in 2003, 2004, 2005, 2006,
2007, 2008 and 2009, respectively. These losses may be carried forward and
offset against any future capital gains through 2011, 2012, 2013, 2014, 2015,
2016 and 2017, 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 $25,543 of Federal excise taxes attributable to calendar
year 2009 in March 2010.
ADDITIONAL ACCOUNTING STANDARDS: In January 2010, the Financial Accounting
Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2010-06,
"Improving Disclosures about Fair Value Measurements". ASU No. 2010-06 amends
FASB Accounting Standards Codification Topic 820, Fair Value Measurements and
Disclosures, to require additional disclosures regarding fair value
measurements. Certain disclosures required by ASU No. 2010-06 are effective for
interim and annual reporting periods beginning after December 15, 2009, and
other required disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. Management
is currently evaluating the impact ASU No. 2010-06 will have on its financial
statement disclosures.
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.
25
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
For purposes of calculating the fees payable to the Adviser, Servicing
Agent, Administrator and Custodian, the Fund's average weekly total managed
assets means the total assets of the Fund (including any assets attributable to
any Fund auction market preferred stock that may be outstanding or otherwise
attributable to the use of leverage) minus the sum of accrued liabilities (other
than debt, if any, representing financial leverage). For purposes of determining
total managed assets, the liquidation preference of any outstanding preferred
shares issued by the Fund is not treated as a liability.
Claymore Securities, Inc. (the "Servicing Agent") serves as the Fund's
shareholder servicing agent. 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.
PNC Global Investment Servicing (U.S.) Inc. ("PNC") serves as the Fund's
Administrator. As Administrator, PNC calculates the net asset value of the
Fund's shares attributable to Common Stock and generally assists in all aspects
of the Fund's administration and operation. As compensation for PNC's services
as Administrator, the Fund pays PNC 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.
PNC also serves as the Fund's Common Stock dividend-paying agent and
registrar (Transfer Agent). As compensation for PNC's services, the Fund pays
PNC 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, 0.0075% of the next $350
million of the Fund's average weekly net assets attributable to Common Stock,
and 0.0025% of the Fund's average weekly net assets attributable to Common Stock
above $500 million, plus certain out-of-pocket expenses. For purposes of
calculating such fee, the Fund's average weekly net assets attributable to the
Common Stock are deemed to be the average weekly value of the Fund's total
assets minus the sum of the Fund's liabilities. For this calculation, the Fund's
liabilities are deemed to include the aggregate liquidation preference of any
outstanding preferred shares and the loan principal balance.
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 0.01% 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 a fee of $9,000 per annum, plus $750 for each in-person
meeting of the Board of Directors or Audit Committee, $500 for each in-person
meeting of the Nominating Committee, and $250 for each telephone meeting. The
Audit Committee Chairman receives an additional annual fee of $3,000. The Fund
also reimburses all Directors for travel and out-of-pocket expenses incurred in
connection with such meetings.
26
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The Fund currently pays the Adviser a fee of $37,500 per annum for Chief
Compliance Officer services and reimburses out-of-pocket expenses incurred in
connection with providing services in this role.
4. PURCHASES AND SALES OF SECURITIES
For the six months ended May 31, 2010 the cost of purchases and proceeds
from sales of securities excluding short-term investments, aggregated
$35,545,280 and $21,420,423, respectively.
At May 31, 2010, the aggregate cost of securities for federal income tax
purposes was $247,531,744, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $18,318,473
and the aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $37,066,345.
5. COMMON STOCK
At May 31, 2010, 240,000,000 shares of $0.01 par value Common Stock were
authorized.
Common Stock transactions were as follows:
SIX MONTHS ENDED
05/31/10
-----------------
SHARES AMOUNT
------ --------
Shares issued under the Dividend Reinvestment
and Cash Purchase Plan ................... 7,766 $124,829
----- --------
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. Prior to July 9, 2009, the
Fund had preferred stock issued in the form of AMPS. The AMPS was senior to the
Common Stock and resulted in the financial leveraging of the Common Stock. As of
July 9, 2009, the Fund redeemed and cancelled the last remaining shares of AMPS
and does not currently have any issued and outstanding shares of preferred
stock.
The Fund redeemed AMPS shares as detailed in the table below. Shares were
redeemed at a redemption price equal to the liquidation preference of $25,000
per share, plus the amount of accumulated but unpaid dividends for each
redemption date, respectively. After these redemptions, borrowings from its debt
facility were the Fund's sole source of leverage.
REDEMPTION DATE $ AMOUNT OF AMPS
--------------- ----------------
May 21, 2008 $44,500,000
June 12, 2008 44,500,000
April 15, 2009 5,250,000
27
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
REDEMPTION DATE $ AMOUNT OF AMPS
--------------- ----------------
April 16, 2009 5,250,000
June 24, 2009 14,500,000
July 9, 2009 14,500,000
7. COMMITTED FINANCING AGREEMENT
The Fund entered into a committed financing agreement ("Financing
Agreement") on May 1, 2008 which allowed the Fund to borrow up to an initial
limit of $91 million on a secured basis. The primary use of the initial proceeds
was to redeem a portion of the outstanding shares of AMPS (See Note 6), although
the Fund will use the borrowing facility in the normal course of business as
financial leverage. Such leveraging tends to magnify both the risks and
opportunities to Shareholders. On August 28, 2009, the Financing Agreement was
amended to allow for changes in the committed amount. As of May 31, 2010, the
committed amount, and amount borrowed, under the Financing Agreement was $81.3
million.
Under the original terms of the Financing Agreement, the lender charged an
annualized rate of 0.60% on the undrawn (committed) balance ("Commitment Fee"),
and the Overnight London Interbank Offered Rate ("Overnight LIBOR") plus 0.70%
on the drawn (borrowed) balance. The terms of the Financing Agreement were
subsequently renegotiated and became effective as of October 20, 2008. Under the
new terms of the Financing Agreement, the lender charges an annualized rate of
1.00% on the undrawn (committed) balance, and Three-Month London Interbank
Offered Rate - reset every three months - plus 1.10% on the drawn (borrowed)
balance. For the six months ended May 31, 2010, the daily weighted average
annualized interest rate on the drawn balance was 1.371% and the average daily
loan balance was $75,157,692. In addition, the Fund paid the lender an
arrangement fee (at the origination of the facility on May 1, 2008) equal to
0.25% of the committed amount of $91 million. The arrangement fee was amortized
to expense over a period of six months. LIBOR 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
Shareholders.
The Fund is required to meet certain asset coverage requirements under the
Financing Agreement and under the 1940 Act. In accordance with the asset
coverage requirements, at least two-thirds of the Fund's assets are expected to
be pledged as collateral assuming the full committed amount is drawn. Securities
pledged as collateral are identified in the portfolio of investments. If the
Fund fails to meet these requirements, or maintain other financial covenants
required under the Financing Agreement, the Fund may be required to repay
immediately, in part or in full, the amount borrowed under the Financing
Agreement. Additionally, failure to meet the foregoing requirements or covenants
could restrict the Fund's ability to pay dividends to Shareholders and could
necessitate sales of portfolio securities at inopportune times. The Financing
Agreement has no stated maturity, but may be terminated by either party without
cause with six months' advance notice.
28
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY
The Fund invests primarily in a diversified portfolio of preferred and debt
securities. This includes fully taxable 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. Also, 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. The Fund's
portfolio may therefore be subject to greater risk and market fluctuation than a
portfolio of securities representing a broader range of investment alternatives.
The Fund may invest up to 25% of its assets at the time of purchase in
securities rated below investment grade. These securities must be rated at least
either "Ba3" by Moody's Investors Service, Inc. or "BB-" by Standard & Poor's
or, if unrated, judged to be comparable in quality by the Adviser, in any 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. 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 to
be debt-like in key characteristics. Typically, a security will not be
considered debt-like (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.
In addition to foreign money market securities, the Fund may invest up to
30% of its total assets in the securities of companies organized or having their
principal place of business outside the United States. All foreign securities
held by the Fund will be denominated in U.S. dollars.
9. 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: short sales of
securities, purchases of securities on margin, futures contracts, interest rate
swaps, swap futures, 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
29
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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.
10. SECURITIES LENDING
The Fund may lend up to 15% of its total assets (including the value of the
loan collateral) to certain qualified brokers in order to earn additional
income. The Fund receives compensation in the form of fees or interest earned on
the investment of any cash collateral received. The Fund also continues to
receive interest and dividends on the securities loaned. The Fund receives
collateral in the form of cash or securities with a market value at least equal
to the market value of the securities on loan, including accrued interest. In
the event of default or bankruptcy by the borrower, the Fund could experience
delays and costs in recovering the loaned securities or in gaining access to the
collateral. The Fund has the right under the lending agreement to recover the
securities from the borrower on demand. As of May 31, 2010 there were no
securities on loan by the Fund.
11. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund
through the date the financial statements were issued, and has determined that
there was the following subsequent event:
On July 1, 2010, The PNC Financial Services Group, Inc. sold the
outstanding stock of PNC Global Investment Servicing Inc. to The Bank of New
York Mellon Corporation. At the closing of the sale, PNC Global Investment
Servicing (U.S.) Inc. changed its name to BNY Mellon Investment Servicing (US)
Inc. PFPC Trust Company will not change its name until a later date to be
announced.
30
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED)
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
a shareholder whose Common Stock is registered in his or her own name will have
all distributions reinvested automatically by PNC 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, PNC will buy shares of the Fund's Common Stock
in the open market, on the New York Stock Exchange ("NYSE") 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 PNC 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, PNC 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 PNC's open
market purchases in connection with the reinvestment of dividends or capital
gains distributions. For the six months ended May 31, 2010, $319 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.
31
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 PNC in writing, by
completing the form on the back of the Plan account statement and forwarding it
to PNC, or by calling PNC directly. A termination will be effective immediately
if notice is received by PNC 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, PNC 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 PNC 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 latest Form N-PX with the Securities and Exchange Commission ("SEC") on
August 21, 2009. 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 and (ii) on the SEC's website at www.sec.gov.
In addition, the Fund's proxy voting policies and procedures are available on
the Fund's website at www.fcclaymore.com.
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, 2010. 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
Reference Section may be obtained by calling 1-800-SEC-0330.
32
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, 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.
MEETING TO SHAREHOLDERS
On April 22, 2010, the Fund held its Annual Meeting of Shareholders (the
"Annual Meeting") for the following purpose: Election of Directors of the Fund
(the "Proposal"). The Proposal was approved by shareholders and the results of
the voting are as follows:
PROPOSAL 1: ELECTION OF DIRECTORS.
NAME FOR WITHHELD
---- --------- --------
Donald F. Crumrine.. 7,680,567 576,145
Robert F. Wulf ..... 7,663,376 593,336
David Gale, Morgan Gust and Karen H. Hogan continue to serve in their
capacities as Directors of the Fund.
33
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.
NUMBER OF
FUNDS
IN FUND
PRINCIPAL COMPLEX
TERM OF OFFICE OCCUPATION(S) OVERSEEN
POSITION(S) AND LENGTH OF DURING PAST BY OTHER DIRECTORSHIPS
NAME, ADDRESS, AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS DIRECTOR HELD BY DIRECTOR**
---------------------- -------------- ----------------- ----------------------- --------- ---------------------
NON-INTERESTED DIRECTORS:
DAVID GALE Director Class I Director President of Delta 4
Delta Dividend Group, Inc. since Dividend Group, Inc.
220 Montgomery Street August 2003 (investments)
Suite 426
San Francisco, CA 94104
Age: 61
MORGAN GUST Director Class II Director Owner and operator of 4 CoBiz Financial, Inc.
301 E. Colorado Boulevard since various entities (financial services)
Suite 720 August 2003 engaged in agriculture
Pasadena, CA 91101 and real estate; Former
Age: 63 President of Giant
Industries, Inc.
(petroleum refining and
marketing) from March
2002 through June 2007
KAREN H. HOGAN+ Director Class II Director Active Committee Member 4
301 E. Colorado Boulevard since and Volunteer to
Suite 720 July 2005 several non-profit
Pasadena, CA 91101 organizations; from
Age: 49 September 1985 to
January 1997, Senior
Vice President of
Preferred Stock
Origination at Lehman
Brothers and
previously, Vice
President of New
Product Development
----------
* 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 three year term for each class expires as follows:
CLASS I DIRECTOR - three year term expires at the Fund's 2011 Annual
Meeting of Shareholders; director may continue in office until his
successor is duly elected and qualified.
CLASS II DIRECTORS - three year term expires at the Fund's 2012 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 2013
Annual Meeting of Shareholders; directors may continue in office until
their successors are duly elected and qualified.
** Each Director also serves as a Director for Flaherty & Crumrine Preferred
Income Fund, Flaherty & Crumrine Preferred Income Opportunity Fund, and
Flaherty & Crumrine/Claymore Preferred Securities Income Fund.
+ As a Director, until July 9, 2009, represented holders of shares of the
Fund's Auction Market Preferred Stock.
34
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
NUMBER OF
FUNDS
IN FUND
PRINCIPAL COMPLEX
TERM OF OFFICE OCCUPATION(S) OVERSEEN
POSITION(S) AND LENGTH OF DURING PAST BY OTHER DIRECTORSHIPS
NAME, ADDRESS, AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS DIRECTOR HELD BY DIRECTOR**
---------------------- -------------- ----------------- ----------------------- --------- ---------------------
NON-INTERESTED DIRECTORS:
ROBERT F.WULF Director Class III Financial Consultant; 4
P.O. Box 753 and Audit Director Trustee, University
Neskowin, OR 97149 Committee since of Oregon Foundation;
Age: 73 Chairman August 2003 Trustee, San Francisco
Theological Seminary
INTERESTED DIRECTOR:
DONALD F. CRUMRINE+ Director, Class III Chairman of the 4
301 E. Colorado Boulevard Chairman of Director Board and Director of
Suite 720 the Board and since Flaherty & Crumrine
Pasadena, CA 91101 Chief August 2003 Incorporated
Age: 62 Executive
Officer
----------
* 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 three year term for each class expires as follows:
CLASS I DIRECTOR - three year term expires at the Fund's 2011 Annual
Meeting of Shareholders; director may continue in office until his
successor is duly elected and qualified.
CLASS II DIRECTORS - three year term expires at the Fund's 2012 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 2013
Annual Meeting of Shareholders; directors may continue in office until
their successors are duly elected and qualified.
** Each Director also serves as a Director for Flaherty & Crumrine Preferred
Income Fund; Flaherty & Crumrine Preferred Income Opportunity Fund, and
Flaherty & Crumrine/Claymore Preferred Securities Income Fund.
+ "Interested person" of the Fund as defined in the 1940 Act. Mr. Crumrine is
considered an "interested person" because of his affiliation with Flaherty
& Crumrine Incorporated, which acts as the Fund's investment adviser.
35
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
PRINCIPAL
TERM OF OFFICE OCCUPATION(S)
POSITION(S) AND LENGTH OF DURING PAST
NAME, ADDRESS, AND AGE HELD WITH FUND TIME SERVED FIVE YEARS
---------------------- ------------------- -------------- --------------------------
OFFICERS:
ROBERT M. ETTINGER President Since President and Director of
301 E. Colorado Boulevard August 2003 Flaherty & Crumrine
Suite 720 Incorporated
Pasadena, CA 91101
Age: 51
R. ERIC CHADWICK Chief Financial Since Director of Flaherty &
301 E. Colorado Boulevard Officer, Vice July 2004 Crumrine Incorporated
Suite 720 President and since June 2006; Vice
Pasadena, CA 91101 Treasurer President of Flaherty &
Age: 35 Crumrine Incorporated
CHAD C. CONWELL Chief Compliance Since Chief Compliance Officer
301 E. Colorado Boulevard Officer, Vice July 2005 of Flaherty & Crumrine
Suite 720 President and Incorporated since
Pasadena, CA 91101 Secretary September 2005; Vice
Age: 37 President of Flaherty &
Crumrine Incorporated
since July 2005; Attorney
with Paul, Hastings,
Janofsky & Walker LLP from
September 1998 to June 2005
BRADFORD S. STONE Vice President Since Director of Flaherty &
47 Maple Street and Assistant August 2003 Crumrine Incorporated
Suite 403 Treasurer since June 2006; Vice
Summit, NJ 07901 President of Flaherty &
Age: 50 Crumrine Incorporated
LAURIE C. LODOLO Assistant Since Assistant Compliance
301 E. Colorado Boulevard Compliance July 2004 Officer and Secretary of
Suite 720 Officer, Assistant Flaherty & Crumrine
Pasadena, CA 91101 Treasurer and Incorporated
Age: 46 Assistant Secretary
36
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
BOARD CONSIDERATION AND APPROVAL OF CONTINUANCE OF INVESTMENT ADVISORY AGREEMENT
On January 26, 2010, the Board of Directors of the Fund approved the
continuation of the existing investment advisory agreement with the Adviser (the
"Investment Advisory Agreement"). The following paragraphs summarize the
material information and factors considered by the Board, including the
Non-Interested Directors, as well as their conclusions relative to such factors.
In considering whether to approve the Fund's Investment Advisory Agreement,
the Board members considered and discussed a substantial amount of information
and analysis provided, at the Board's request, by the Adviser. The Board members
also considered detailed information regarding performance and expenses of other
investment companies thought to be generally comparable to the Fund. The Board
members discussed with management this and other information relating to the
Agreement during the Special Meeting held on January 14, 2010 for that specific
purpose. On January 26, 2010, the Board members approved the continuance of the
Investment Advisory Agreement. In reaching their determinations relating to
continuance of the Investment Advisory Agreement, the Board members considered
these discussions and all other factors they believed relevant, including the
factors discussed below. In their deliberations, the Board members did not
identify any particular information that was all-important or controlling, and
Board members may have attributed different weights to the various factors. The
Board members evaluated this information, and all other information available to
them, for the Fund, and their determinations were made separately in respect of
each other fund advised by the Adviser. In particular, the Board members focused
on the following with respect to the Fund.
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 Investment Advisory 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 members also considered the Adviser's sound
financial condition and the Adviser's commitment to its business, in part
evidenced by the Adviser maintaining its staff despite lower revenues due to the
recent difficult financial period. The Board members evaluated the Adviser's
services based on their direct experience serving as Directors for many years,
focusing on (i) the Adviser's knowledge of the preferred securities market
generally and the sophisticated hedging strategies the Fund had employed until
recently, the reasons why that strategy has been ineffective during the current
market dislocation, why the Adviser has suspended its customary hedging
strategy, and its focus on, and internal resources dedicated to, identifying
opportunities to add additional value through hedging and other sophisticated
financial transactions, and (ii) the Adviser's culture of compliance. The Board
members reviewed the personnel responsible for providing services to the Fund
and observed that, based on their experience and interaction with the Adviser:
(1) the Adviser's personnel exhibited a high level of personal integrity,
diligence and attention to detail in carrying out
37
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
their responsibilities under the Investment Advisory Agreement; (2) the Adviser
was responsive to requests of the Board and its personnel were available between
Board meetings to answer questions from Board members; and (3) the Adviser had
kept the Board apprised of developments relating to the Fund. The Board members
also considered the continued efforts undertaken by the Adviser to maintain an
effective compliance program. 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, and the level of services provided by
the Adviser, and that the quality of the Adviser's service continues to be high.
INVESTMENT PERFORMANCE
The Board members took note of the extraordinary market conditions
prevailing over almost the past two years and at present, the sharp recovery in
the market for the Fund's securities and the Fund's superior recent performance,
which evidenced the Adviser's continued adherence to its investment discipline.
The Board members considered the Fund's relative performance since inception,
including its performance in recent fiscal periods, including its disappointing
absolute performance over certain periods that preceded the recent period of
excellent performance. The Board members reviewed the Fund's performance
compared to relevant indices and funds thought to be generally comparable to the
Fund and examined the differences between the Fund and certain funds in the
comparison group. The Board members considered their expectation at the time of
last year's review, which had been realized, that the Fund's absolute
performance would improve as markets normalized as the Adviser continued to
follow its investment approach.
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 members noted in
recent years, including the last, that declining assets under management, when
compared to historic highs, has led to declining Adviser profitability, but
noted with approval the Adviser's continued commitment to maintain existing
personnel and service levels. The Board members also considered that the Adviser
provided, at a lower cost, 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 members 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 and, based on recent adverse
market conditions and related deleveraging, the Fund's size had declined
significantly from historic highs. Thus, in both these circumstances, the
Adviser would not benefit from economies of scale, especially where personnel
and other Adviser costs of providing services did not decline commensurately.
The Board members considered whether economies of scale could be realized
because the Adviser advises other similar funds. Based on their experience, the
Board members accepted the Adviser's explanation that significant economies of
scale would not be realized because of the
38
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
complexity of managing preferred securities for separate funds and other
portfolios. 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 members determined that the existing advisory fee
levels reflect possible economies of scale, and possibly at levels more
favorable to the Fund than might have been negotiated had the substantial
volatility of the Fund's asset levels been anticipated at the time the
breakpoints had been agreed upon.
In light of their discussions and considerations as described above, the
Board members made the following determinations as to the Fund:
- the nature and extent and quality of the services provided by the
Adviser are reasonable and appropriate and the quality of the services
is high;
- the Fund's overall performance over time has been satisfactory and its
performance for recent periods of absolute underperformance was
reflective of market conditions, given the Fund's investment policies
and strategies and the Adviser's adherence to them, which is
responsible for the recent superior performance as markets stabilized;
- the fee paid to the Adviser was reasonable in light of (i) comparative
performance and expense and advisory fee information, considered over
relevant time periods, (ii) the cost of the services provided and
profits to be realized, and (iii) the benefits derived or to be
derived by the Adviser from its relationship with the Fund; and
- there were not at this time significant economies of scale to be
realized by the Adviser in managing the Fund's assets, and the fee was
structured to provide for a sharing of the benefits of economies of
scale.
Based on these conclusions, the Board members determined that approval of
the Investment Advisory Agreement was in the best interests of the Fund and its
shareholders.
39
(FLAHERTY & CRUMRINE/CLAYMORE LOGO)
TOTAL RETURN FUND
Semi-Annual Report
May 31, 2010
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 --
BNY Mellon Investment Servicing (US) 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.
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. INVESTMENTS.
(a) 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.
(b) Not applicable.
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.
There has been no change, as of the date of this filing, in any of the portfolio
managers identified in response to paragraph (a)(1) of this Item in the
registrant's most recently filed annual report on Form N-CSR.
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 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) 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 27, 2010
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 27, 2010
By (Signature and Title)* /s/ R. Eric Chadwick
------------------------------------------------------
R. Eric Chadwick, Chief Financial Officer,
Treasurer and Vice President
(principal financial officer)
Date July 27, 2010
* Print the name and title of each signing officer under his or her
signature.