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, 2009
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. ss. 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:
As can be seen in the table below, the net asset value of the Fund rose
substantially during the most recent fiscal quarter. A variety of factors
contributed to the strength and, despite a dramatic recovery in the prices of
preferred securities, we believe the sector remains undervalued relative to
other market segments.
TOTAL RETURN ON NET ASSET VALUE(1)
FOR PERIODS ENDED MAY 31, 2009
ACTUAL RETURNS AVERAGE ANNUALIZED RETURNS
----------------------- --------------------------
THREE SIX ONE THREE FIVE LIFE OF
MONTHS MONTHS YEAR YEARS YEARS FUND(2)
------ ------ ----- ----- ------ -------
Flaherty & Crumrine/Claymore Total Return Fund .. 37.4% 24.7% -30.2% -14.5% -7.2% -5.8%
Lipper Domestic Investment Grade Funds(3) ....... 10.9% 13.5% -5.9% 1.1% 2.6% 3.3%
----------
(1) Based on monthly data provided by Lipper Inc. in each calendar month during
the relevant period. Distributions are assumed to be reinvested at NAV in
accordance with Lipper's practice, which differs from the methodology used
in the footnotes to the financial statements.
(2) Since inception on August 26, 2003.
(3) Reflects the equally-weighted average performance returns of all closed-end
funds in Lipper's Domestic Investment-Grade funds category in each month
during the period. The category currently includes closed-end funds in the
U.S. Mortgage and Corporate Debt BBB Rated sub-categories and has included
other sub-categories in prior periods. Although the investment strategies
used by the Fund differ significantly from the strategies used by these
other fixed-income funds, the Fund seeks to accomplish a similar objective.
After several quarters of sharply declining prices, the preferred market
was poised for a rebound. But even with eye-popping appreciation over the past
few months, prices on the vast majority of preferred securities remain well
below the highs of last year.
The state of the market appeared to hit rock bottom in early March, when
the financial system was rumored to be on the brink of collapse. Since that time
cooler heads have prevailed and the rumors appear to have been greatly
exaggerated. Many financial companies have taken steps to strengthen their
balance sheets and a few have already returned funds received from the
government for emergency assistance.
We have recently watched with fascination the stunning reversal of a
long-term trend. Over the past decade, large and mid-sized financial companies
in need of new capital often chose to issue preferred and hybrid securities
rather than sell common stock. This strategy seemed to satisfy both their common
shareholders and regulators; investors, including FLC, became quite comfortable
purchasing these securities. Hundreds of billions of dollars of this "senior
equity" has been issued. Recently (and dramatically), the emphasis has
flip-flopped, and many financial companies have been taking steps to replace
preferred securities with common stock, or have simply sold additional common
stock.
These steps are very beneficial to owners of preferred securities and have
been the main driver of the recent recovery in preferred prices. Prices have
improved as issuers typically pay above-market levels in order to exchange a
sufficient amount of preferred securities for common stock. The credit quality
of preferred securities that remain outstanding improves because common stock
ranks junior to preferred securities, so the more common stock a company has
outstanding (relative to preferred), the greater the protection against
adversity. This trend is important to the Fund, so we've posted a more detailed
discussion in the "Discussion Topics" below.
The Fund's holdings in financial issuers (mostly banks and insurance
companies) were responsible for much of its poor performance over the past year,
and they were the primary contributors to its positive performance over this
past quarter. The extraordinary steps taken by the various federal government
entities appear to be helping, but the ultimate recovery of the financial sector
will hinge on a broad economic recovery. We discuss the economic outlook on the
Fund's website, WWW.FCCLAYMORE.COM.
We don't want to neglect the non-financial portion of the portfolio, but
for most of these holdings things have been blissfully uneventful for some time.
The Fund is required to maintain at least 25% of the portfolio in the utility
industry, but since the industry comprises only 5% of the entire preferred
universe, we tend to have greater concentrations in certain credits. By
overweighting utilities, the Fund outperformed the broader preferred market when
financials were collapsing, but it also meant the Fund underperformed during the
past quarter. All things considered, however, utilities have been a good thing
to own.
Unfortunately, the Fund does have a few investments in companies that have
stopped making dividend or interest payments on their securities. These
positions are identified in the portfolio listing as "non-income producing". The
prices of these securities have declined to reflect the market consensus on the
outlook for the issuers, and thus are fully reflected in the net asset value of
the Fund. In addition, as discussed below, we take these situations into
consideration when determining the amount of the Fund's monthly distribution to
shareholders.
In an important development, the Fund announced recently the redemption of
all remaining shares of its auction market preferred stock (AMPS), the final
step in conversion of preferred stock leverage to bank debt. As discussed in the
past, we have been moving in this direction for some time, but before we could
redeem 100% of the AMPS, some obstacles had to be overcome. In recent days, the
last of these were addressed and the new debt terms have been finalized.
Replacing AMPS with bank debt should benefit the Fund in several ways.
Initially, and we expect over the long run, the bank loan will be less expensive
than the AMPS. This will especially be true if (and when) short term interest
rates increase. In addition, we should have greater flexibility managing assets
of the Fund, and while we don't envision doing anything differently from the way
we do things now, there are likely to be instances when the additional
flexibility will be important.
2
More information is always available on the Fund's website, including
discussion of many of the topics in this letter. This calendar year, we have
written about preferred securities valuations, the Citicorp exchange offer, the
U.S. government's Capital Assistance Plan, the results of the "stress tests" of
key financial institutions and, most recently, our interest rate hedging
strategy. We encourage you to visit the 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 20, 2009
3
DISCUSSION TOPICS
THE FUND'S PORTFOLIO RESULTS AND COMPONENTS OF TOTAL RETURN ON NAV
As the table below demonstrates, the preferred market performed very well
during the first six months of the Fund's fiscal year ending May 31st, although
the recovery didn't actually begin until early March. While no index
comprehensively reflects the preferred market, Merrill Lynch publishes four
different indices which attempt to measure performance of some sectors of the
investment-grade preferred securities market: the Merrill Lynch 8% Capped DRD
Preferred Stock Index (which includes traditional tax-advantaged preferred
stocks); the Merrill Lynch 8% Capped Hybrid Preferred Securities Index (which
includes fully-taxable, exchange-traded preferred securities); the Merrill Lynch
8% Capped Corporate U.S. Capital Securities Index (which includes fully-taxable
capital securities); and the Merrill Lynch Adjustable Preferred Stock, 7%
Constrained Index (which includes both tax-advantaged and taxable preferred
securities with adjustable dividends). Set forth below are the six month total
returns for these indices:
TOTAL RETURNS OF MERRILL LYNCH PREFERRED SECURITIES INDICES*
FOR THE SIX MONTHS ENDED MAY 31, 2009
Merrill Lynch 8% Capped DRD Preferred Stock Index(SM)................ +3.8%
Merrill Lynch 8% Capped Hybrid Preferred Securities Index(SM)........ +12.3%
Merrill Lynch 8% Capped Corporate U.S. Capital Securities Index(SM).. +17.7%
Merrill Lynch Adjustable Preferred Stock, 7% Constrained Index(SM)... +31.3%
----------
* The 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 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
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 Merrill Lynch Adjustable Preferred Stock, 7% Constrained
Index(SM) includes adjustable rate preferred securities issued by US
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.
As the following table demonstrates, the Fund's total return on its
securities portfolio (before leverage) outperformed these indices, with the
exception of the Merrill index measuring adjustable rate preferreds. However,
adjustable rate preferred securities constitute only approximately 3% of the
entire preferred market, about the same weighting as these securities are held
in the Fund. In contrast to the experience last year, the strategy of using
leverage to increase current income has magnified the positive returns over the
Fund's fiscal year-to-date, and, even net of its expenses, caused the NAV of the
Fund to outperform these unleveraged indices (except for adjustable rate
preferreds).
The following table reflects performance of each investment tool used by
the Fund to achieve its objective, namely: (a) investing in a portfolio of
securities; (b) hedging that portfolio of securities against significant
increases in long-term interest rates (although no hedges were in place over the
Fund's fiscal year-to-date (see the following discussion on interest rate
hedging)); and (c) issuing auction-rate preferred stock or utilizing debt to
leverage and enhance returns to Common Stock shareholders. The table then
adjusts for
4
the impact of the Fund's operating expenses excluding the cost of leverage to
arrive at a total return on NAV (which factors in all of these items).
COMPONENTS OF FLC'S TOTAL RETURN ON NAV
FOR THE SIX MONTHS ENDED MAY 31, 2009
Total Return on Unleveraged Securities Portfolio (including principal and income).. +16.4%
Return from Interest Rate Hedging Strategy ........................................ 0.0%
Impact of Leverage ................................................................ +9.3%
Expenses .......................................................................... -1.0%
-----
TOTAL RETURN ON NAV ............................................................ +24.7%
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 Fund's market price. The improvement in investor psychology
impacting valuation of the Fund's securities has also favorably affected the
relationship between the intrinsic value of the Fund (its NAV) and its market
price. Over the Fund's fiscal year-to-date through May 31st, the excellent
return on NAV plus the narrowing of the Fund's market price discount to NAV
combined to produce a total return on MARKET VALUE of +35.5%. During the 2nd
fiscal quarter alone, total return on MARKET VALUE was +35.9%.
Flaherty & Crumrine/Claymore Total Return Fund (FLC)
Premium/Discount of Market Price to NAV through 6/30/2009
(PERFORMANCE GRAPH)
Date Prem/Disc
---------- -----------
8/29/2003 0.049097776
9/5/2003 0.047698745
9/12/2003 0.040782355
9/19/2003 0.036213992
9/26/2003 0.024867509
10/3/2003 0.027526705
10/10/2003 0.030502885
10/17/2003 0.042833608
10/24/2003 0.037689472
10/31/2003 0.04657873
11/7/2003 0.067839196
11/14/2003 0.045324622
11/21/2003 0.048242028
11/28/2003 0.034114262
12/5/2003 0.035977105
12/12/2003 0.036460467
12/19/2003 0.028710069
12/26/2003 0.047735618
1/2/2004 0.044407895
1/9/2004 0.037277147
1/16/2004 0.063958166
1/23/2004 0.046539862
1/30/2004 0.046653144
2/6/2004 0.064713065
2/13/2004 0.058059277
2/20/2004 0.059738134
2/27/2004 0.046116505
3/5/2004 0.03122498
3/12/2004 0.04874151
3/19/2004 0.048644338
3/26/2004 0.044444444
4/2/2004 0.065960912
4/9/2004 0.03631171
4/16/2004 0.010682005
4/23/2004 0.00166251
4/30/2004 -0.032472939
5/7/2004 -0.072890026
5/14/2004 -0.03304721
5/21/2004 -0.030485187
5/28/2004 0.001705757
6/4/2004 0.003411514
6/11/2004 -0.005560308
6/18/2004 0.005993151
6/25/2004 -0.031007752
7/2/2004 0.003870968
7/9/2004 0.000858001
7/16/2004 -0.01910828
7/23/2004 -0.027038627
7/30/2004 -0.025343643
8/6/2004 0.007662835
8/13/2004 -0.007212558
8/20/2004 -0.005977797
8/27/2004 -0.008510638
9/3/2004 -0.011504048
9/10/2004 -0.002108815
9/17/2004 -0.018820577
9/24/2004 -0.019485904
10/1/2004 -0.006291946
10/8/2004 -0.011686144
10/15/2004 -0.000415628
10/22/2004 -0.0197562
10/29/2004 -0.020964361
11/5/2004 -0.024421053
11/12/2004 -0.005464481
11/19/2004 -0.01473064
11/26/2004 -0.021437579
12/3/2004 -0.02278481
12/10/2004 -0.01625
12/17/2004 -0.026611227
12/24/2004 -0.019681742
12/31/2004 -0.029900332
1/7/2005 -0.025041736
1/14/2005 -0.014474773
1/21/2005 -0.006619777
1/28/2005 -0.000412541
2/4/2005 -0.005282406
2/11/2005 -0.003665988
2/18/2005 -0.035337124
2/25/2005 -0.027972028
3/4/2005 -0.029134181
3/11/2005 -0.037906881
3/18/2005 -0.071042792
3/25/2005 -0.093908629
4/1/2005 -0.0907173
4/8/2005 -0.096706081
4/15/2005 -0.098686997
4/22/2005 -0.095338983
4/29/2005 -0.087251165
5/6/2005 -0.079250107
5/13/2005 0.082697201
5/20/2005 0.073585708
5/27/2005 0.071640526
6/3/2005 0.077051926
6/10/2005 0.065546218
6/17/2005 0.060261273
6/24/2005 0.078118438
7/1/2005 0.064162094
7/8/2005 0.060118544
7/15/2005 0.055861193
7/22/2005 0.075680272
7/29/2005 0.063189143
8/5/2005 0.067803838
8/12/2005 0.076727427
8/19/2005 0.069639066
8/26/2005 0.071245734
9/2/2005 0.061780997
9/9/2005 0.046292327
9/16/2005 0.053062985
9/23/2005 0.057055749
9/30/2005 0.098296943
10/7/2005 0.097070398
10/14/2005 0.103220115
10/21/2005 0.097960993
10/28/2005 0.087266251
11/4/2005 0.08882015
11/11/2005 0.094522968
11/18/2005 0.114361702
11/25/2005 0.108879964
12/2/2005 0.115676641
12/9/2005 0.133422579
12/16/2005 0.159626501
12/23/2005 0.146915224
12/30/2005 0.151837096
1/6/2006 0.119574845
1/13/2006 0.107869142
1/20/2006 0.094708759
1/27/2006 0.095513105
2/3/2006 0.097130243
2/10/2006 0.085462555
2/17/2006 0.089902569
2/24/2006 0.088495575
3/3/2006 0.076376554
3/10/2006 0.124168514
3/17/2006 0.117803366
3/24/2006 0.101023587
3/31/2006 0.116019634
4/7/2006 0.116591928
4/14/2006 0.146505376
4/21/2006 0.128043282
4/28/2006 0.123083859
5/5/2006 0.133363269
5/12/2006 0.130904184
5/19/2006 0.133004926
5/26/2006 0.125451264
6/2/2006 0.111611161
6/9/2006 0.111411818
6/16/2006 0.104952294
6/23/2006 0.108924485
6/30/2006 0.128134975
7/7/2006 0.132332879
7/14/2006 0.121774559
7/21/2006 0.113233288
7/28/2006 0.102272727
8/4/2006 0.089511754
8/11/2006 0.069513857
8/18/2006 0.080609046
8/25/2006 0.08988764
9/1/2006 0.086045475
9/8/2006 0.08847185
9/15/2006 0.080357143
9/22/2006 0.100884956
9/29/2006 0.106937693
10/6/2006 0.089499335
10/13/2006 0.084369449
10/20/2006 0.083333333
10/27/2006 -0.078001753
11/3/2006 -0.092860272
11/10/2006 -0.087088388
11/17/2006 -0.084269663
11/24/2006 -0.071923744
12/1/2006 -0.056652361
12/8/2006 -0.052200173
12/15/2006 -0.043704024
12/22/2006 -0.054324207
12/29/2006 -0.065680731
1/5/2007 -0.053223713
1/12/2007 -0.052128584
1/19/2007 -0.056399132
1/26/2007 -0.053344993
2/2/2007 -0.055531453
2/9/2007 -0.053344993
2/16/2007 -0.07161346
2/23/2007 -0.069336779
3/2/2007 -0.074722459
3/9/2007 -0.069217541
3/16/2007 -0.068357696
3/23/2007 -0.023063534
3/30/2007 -0.02273721
4/5/2007 -0.020595968
4/13/2007 -0.02238806
4/20/2007 -0.042850896
4/27/2007 -0.052101576
5/4/2007 -0.058746736
5/11/2007 -0.062309368
5/18/2007 -0.052724077
5/25/2007 -0.078631719
6/1/2007 -0.06636971
6/8/2007 -0.07540395
6/15/2007 -0.080233079
6/22/2007 -0.095045045
6/29/2007 -0.083183453
7/6/2007 -0.08762421
7/13/2007 -0.085173502
7/20/2007 -0.097096189
7/27/2007 -0.093676815
8/3/2007 -0.101726552
8/10/2007 -0.112056738
8/17/2007 -0.136034732
8/24/2007 -0.1229077
8/31/2007 -0.112956811
9/7/2007 -0.104941176
9/14/2007 -0.085851319
9/21/2007 -0.096975516
9/28/2007 -0.119734974
10/5/2007 -0.11536643
10/12/2007 -0.129638328
10/19/2007 -0.142459397
10/26/2007 -0.123764706
11/2/2007 -0.127315914
11/9/2007 -0.13683178
11/16/2007 -0.147670961
11/23/2007 -0.153884965
11/30/2007 -0.137493658
12/7/2007 -0.119503363
12/14/2007 -0.118545838
12/21/2007 -0.11692472
12/28/2007 -0.112174375
1/4/2008 -0.114152893
1/11/2008 -0.087855297
1/18/2008 -0.093977155
1/25/2008 -0.064819655
2/1/2008 -0.075936378
2/8/2008 -0.061882475
2/15/2008 -0.072602014
2/22/2008 -0.070512821
2/29/2008 -0.075052854
3/7/2008 -0.045831033
3/14/2008 -0.071388102
3/20/2008 -0.087283237
3/28/2008 -0.091438556
4/4/2008 -0.107447413
4/11/2008 -0.103741497
4/18/2008 -0.094124358
4/25/2008 -0.061032864
5/2/2008 -0.085094232
5/9/2008 -0.086685552
5/16/2008 -0.072727273
5/23/2008 -0.071676301
5/30/2008 -0.066004673
6/6/2008 -0.076742824
6/13/2008 -0.059818731
6/20/2008 -0.081645181
6/27/2008 -0.084158416
6/30/2008 -0.069565217
7/3/2008 -0.114518148
7/11/2008 -0.090909091
7/18/2008 -0.08412483
7/25/2008 -0.102651258
8/1/2008 -0.112666667
8/8/2008 -0.112806901
8/15/2008 -0.106100796
8/22/2008 -0.10443686
8/29/2008 -0.113881402
9/5/2008 -0.118553248
9/12/2008 -0.09530901
9/19/2008 -0.164361269
9/26/2008 -0.215635739
10/3/2008 -0.280765725
10/10/2008 -0.529718457
10/17/2008 -0.222868217
10/24/2008 -0.239382239
10/31/2008 -0.073319756
11/7/2008 -0.170511535
11/14/2008 -0.219735504
11/21/2008 -0.350348028
11/28/2008 -0.191111111
12/5/2008 -0.295929593
12/12/2008 -0.272123894
12/19/2008 -0.203501094
12/26/2008 -0.171180932
12/31/2008 -0.154411765
1/2/2009 -0.097178683
1/9/2009 -0.127272727
1/16/2009 -0.143004115
1/23/2009 -0.094104308
1/30/2009 -0.061521253
2/6/2009 -0.065819861
2/13/2009 -0.086659065
2/20/2009 -0.144853875
2/27/2009 -0.115776081
3/6/2009 -0.289580514
3/13/2009 -0.14439946
3/20/2009 -0.222222222
3/27/2009 -0.146124524
3/31/2009 -0.164588529
4/3/2009 -0.124069479
4/9/2009 -0.121212121
4/17/2009 -0.082366589
4/24/2009 -0.110199297
5/1/2009 -0.095571096
5/8/2009 -0.11663067
5/15/2009 -0.132771338
5/22/2009 -0.095435685
5/29/2009 -0.1280077
6/5/2009 -0.076635514
6/12/2009 -0.061818182
6/19/2009 -0.084699454
6/26/2009 -0.079393399
6/30/2009 -0.063336307
Even following the recovery over the past several months in both the Fund's
NAV and market price, as of June 30th the Fund still returns a high current
yield based on market price of 12.6%.
5
MONTHLY DISTRIBUTIONS TO FUND SHAREHOLDERS
The monthly distribution paid to shareholders is intended to reflect
current market conditions, but we also must make assumptions about the future.
We begin with an estimate of the sustainable income generated from the
investment portfolio, and end with a forecast of expenses. While it sounds
simple, in periods of rapid change, forecasting income and expenses becomes more
art than science. There are always a lot of moving parts when the Fund sets the
monthly distribution, and the present is no different.
With regard to income earned by the Fund, the financial crisis has claimed
many victims and there are now a few holdings in the Fund's portfolio that are
not presently making dividend or interest payments. These are identified as
"non-income producing" in the portfolio listing that follows. If these companies
are not able to resolve their present difficulties, they are unlikely to resume
making distributions. We are monitoring these situations very closely and will
make adjustments as necessary. Because these non-income producing holdings have
already fallen in price to nominal values, the risk to NAV from holding them is
minimal.
In addition, some distributions received by the Fund may be classified as
"return of capital". This is an accounting concept that results when an issuer
has sufficient funds to make dividend payments, but its retained earnings
balance is less than the amount distributed. In such instances, the Fund
receives payment, but it must be treated differently from other distributions by
both the Fund and Fund shareholders.
On the plus side, we expect the steps being taken to replace the remaining
auction market preferred stock with a bank loan will reduce the expense incurred
by the Fund on its leverage. Following is a discussion of the Fund's leverage.
Terms of the bank loan are described in footnote 7 of the financial statements.
THE FUND'S LEVERAGE
As we've discussed in prior reports, collapse of the auction preferred
stock market in February 2008 caused the Fund's outstanding auction market
preferred stock (AMPS) to reset at relatively high "maximum rates." As a result,
the Fund has since sought reasonable alternatives to its use of auction market
preferred stock for leverage. While the Fund was able to replace the majority of
its AMPS with debt about a year ago, it still sourced a portion of its leverage
from AMPS. Only recently has the Fund been able to overcome two significant
hurdles to refinancing all its remaining AMPS.
The Investment Company Act of 1940 presented the first hurdle for the Fund.
The Investment Company Act only requires the Fund to have 200% asset coverage
for its outstanding preferred stock. In other words, the Fund must have $2 in
assets for every $1 of AMPS outstanding. For much of the Fund's history, it
comfortably had preferred asset coverage well in excess of 200%. For debt,
however, the Fund must have 300% asset coverage - $3 in assets for every $1
borrowed.
Unprecedented market conditions in the past year made it very difficult to
maintain even 200% asset coverage, let alone the 300% for borrowed money. As a
result, in October 2008, the Fund applied for exemptive relief from the
Securities and Exchange Commission to allow it to use debt to refinance its
then-outstanding AMPS that would only be subject to a 200% asset coverage
requirement. After several revisions to the Fund's application, on June 1st the
Fund finally received SEC exemptive relief that allows 200% asset coverage on
this refinancing debt. Importantly, though, this relief only lasts until October
31, 2010. By that date, the Fund must have 300% asset coverage whenever it
borrows money.
6
The other hurdle, of course, came from finding a loan on terms sufficiently
reasonable to make sense for the Fund's common stock shareholders. Like any
other borrower during the financial crisis, it took a little bit of time to
obtain this financing. Happily, with the exemptive relief now in hand, on June
8th, the Fund was able to announce that it had secured this funding and that it
could now redeem all outstanding AMPS.
The recent recovery in the Fund's portfolio has helped the Fund
significantly improve its asset coverage. As of June 30th, the Fund's leverage
(both preferred and debt) had asset coverage of 289%. It is important to note
that refinancing the Fund's source of leverage does not affect the dollar amount
of leverage used by the Fund. In other words, leverage will continue to provide
a similar impact (whether positive or negative) to the Fund's common
shareholders as it has in prior periods.
PREFERRED MARKET CONDITIONS
The preferred securities market has recovered significantly over the past
several months, as the financial market's concern about broad nationalization of
the U.S. banking system has abated and the pace of economic deterioration has
moderated. With preferred securities priced in early March for a much worse
experience than existed during the Great Depression, even a difficult recession
looked pretty good.
A critical factor in the preferred market's improvement has been a
meaningful shift in the role of preferred stock and hybrid securities in the
capital structure of banks and financial companies. We anticipate these changes
will have a long-term positive impact on the preferred market, even though we
may encounter further uncertainty before it all plays out.
Falling between debt and equity on a company's balance sheet, preferred
securities have long been used as an effective way for companies to get some of
the benefits of common equity without diluting the interests of their common
stock shareholders. In the years leading up to the financial crisis, the portion
of overall capital comprised of preferred securities increased substantially,
often as a means to finance common stock repurchases. Compared to ten years ago,
the balance sheet of a typical bank, insurance or finance company has become
more skewed toward preferred securities and less toward common stock. This
emphasis on preferred over common was supported by regulators and rating
agencies alike. Preferred capital increased still further when the federal
government decided to inject capital into troubled banks and insurance
companies. (Although, while it did so through investment in preferred
securities, these securities rank at a level JUNIOR to existing taxable
preferreds and PARI PASSU (or equal to) existing traditional preferred stocks.)
As we have discussed in recent letters, three factors - excess supply,
deleveraging and credit deterioration - were primarily responsible for the steep
drop in prices of preferred securities. But many preferred prices became so
distressed that companies realized if they issued common stock and used the
proceeds to PURCHASE their own preferred securities at deep discounts to par,
they could simultaneously reduce their dividend expense and increase their
common equity ratio.
Some companies executed this recapitalization formally via public offers to
exchange preferred shares into common stock, which directly adds to common
equity. Other companies simply purchased preferred shares in the open market;
the discount to par is booked as a gain, which adds to earnings and thus to
common equity. In either event, these efforts were done at substantial premiums
to the previously existing market prices for their preferreds, giving a major
boost to the preferred market. In addition, by adding to common equity and
reducing preferreds on the balance sheet, these companies improved the
creditworthiness of their remaining preferred securities, which has aided
investor confidence tremendously. As confidence has re-emerged, other investors
have waded back in, reinforcing these higher preferred prices.
7
In another sign of life in the preferred market, a few new issues have been
brought to market in recent weeks. The new deals have been structured to attract
non-institutional investors ($25 par value and listed on the NYSE), and have
been met with healthy demand.
We still expect some bumps in the road. The economy remains weak and there
are plenty of troubled loans to work out. In addition, although the preferred
exchanges and buybacks have been beneficial for the market, virtually all of
them have been done at discounts to par value. However, we think the crisis
phase of the market has passed, and investors should begin to refocus on
individual credits rather than worry about the solvency of the financial system
as a whole.
IMPACT ON THE FUND OF RATING AGENCY DOWNGRADES OF PREFERRED SECURITIES
As the financial crisis intensified, the three primary credit rating
agencies - Moody's Investors Service, Standard and Poor's, and Fitch Ratings -
downgraded many preferred securities, with some falling from investment grade to
below investment grade. Not surprisingly, these downgrades have been
concentrated among financial issuers, but utilities and other industries also
have seen downgrades. Upgrades have been few and far between. In most cases, we
agreed with the direction of the rating actions early in the crisis. Financial
institutions faced unprecedented risks as the financial crisis unfolded, and
those risks needed to be reflected in issuers' ratings, although we think
preferred ratings were sometimes reduced to levels that were inconsistent with
their senior and subordinated debt ratings. We have been more baffled by some
recent downgrades, however, given brightening economic prospects, much improved
money and credit markets, and strengthened capital positions at many (though not
all) financial institutions.
Regardless of our own views, the rating agencies still matter in the
management of the Fund, so it's worth taking a moment to understand how these
rating actions affect it. First, and perhaps most obviously, the price of a
preferred tends to fall, if only temporarily, when it is downgraded. This
affects NAV, of course, but it also affects the Fund's leverage ratio. If many
of the Fund's holdings decline in value, the Fund may (and at several points
over the past nine months, did) need to sell securities in order to reduce
leverage, typically resulting in a loss. Even if preferred prices subsequently
recover, lower leverage means that NAV will not recover to the same extent.
Second, the Fund is required to meet certain asset coverage tests, and
ratings determine how much of a security's market value may be used to cover
fund liabilities. If a security is downgraded, especially if it is downgraded
from investment grade to below investment grade, its coverage value generally
decreases (even if its price does not). At a minimum, this reduces the "excess"
coverage of the Fund. If enough securities are downgraded, the Fund may have to
reduce borrowings, or sell lower-rated securities and buy higher-rated ones;
both probably mean lower levels of income for the Fund. Of course, we try to
manage the Fund to avoid that outcome, but downgrades definitely make it more
difficult.
Finally, the Fund has an investment policy that limits holdings of
securities without an investment grade rating by at least one agency to 20% of
total assets. The Fund is not required to sell assets if downgrades push
holdings above the limit, but it cannot add to such holdings until they are
again below the limit. Historically, this has not been a significant constraint
on the management of the Fund. Our focus is on investment-grade issuers, and
most preferreds from these issuers were rated investment grade. Recent ratings
actions have pushed many preferreds below investment grade at one or more rating
agencies, even when the issuer's senior debt remains solidly investment grade.
For example, Moody's rates Wells Fargo senior unsecured debt A1 but its
preferred stock only Ba3, fully 8 notches lower. (This is one of those
8
situations where we think the ratings are inconsistent: either Ba3 is too low
for the preferreds or A1 is too high for the senior debt.) If the rating
agencies continue to downgrade preferreds, the limit on below investment grade
holdings could prevent the Fund from buying securities that it believes are
attractive, which could reduce income or total return going forward.
Although ratings actions have been overwhelmingly negative in recent
quarters - and overdone in our view for many preferreds - we think the outlook
is starting to improve, especially for financial institutions. As noted
elsewhere in this letter, banks and insurance companies have raised a
substantial amount of common equity capital over the past several months, both
from common stock offerings and through preferred-to-common stock exchanges.
Looking ahead, banks are going to hold thicker common equity cushions than they
have historically. All of these things are positive for preferreds longer-term.
While the Fund has a bit less maneuvering room than normal due to rating agency
downgrades, we do not think those actions will have a substantial impact on the
ability of the Fund to meet its objectives.
9
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OVERVIEW
MAY 31, 2009 (UNAUDITED)
FUND STATISTICS ON 5/31/09
--------------------------
Net Asset Value $ 10.39
Market Price $ 9.06
Discount 12.80%
Yield on Market Price 14.57%
Common Stock Shares
Outstanding 9,776,333
MOODY'S RATINGS % OF PORTFOLIO
--------------- --------------
AA 5.6%
A 8.8%
BBB 50.5%
BB 22.9%
Below "BB" 5.3%
Not Rated 2.6%
----
Below Investment Grade 21.7%
----------
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.
(PIE CHART)
Industry Categories % OF PORTFOLIO
------------------- --------------
Banking 38%
Utilities 26%
Insurance 23%
Energy 6%
Financial Services 1%
Other 6%
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO
------------------------- --------------
Banco Santander 5.6%
Liberty Mutual Group 5.1%
PNC Financial Services 4.0%
Sovereign Bancorp 3.6%
Capital One Financial 3.5%
Astoria Financial 3.4%
Axis Capital 3.1%
Bank of America 2.9%
Georgia Power 2.9%
Entergy Louisiana 2.8%
% OF PORTFOLIO**
----------------
Holdings Generating Qualified Dividend Income (QDI) for
Individuals 28%
Holdings Generating Income Eligible for the Corporate
Dividends Received Deduction (DRD) 20%
----------
** 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.
10
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 2009 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- 86.5%
BANKING -- 37.8%
$ 5,750,000 Astoria Capital Trust I, 9.75% 11/01/29, Series B .................... $ 5,442,800(1)
Banco Santander:
23,000 Adj. Rate Pfd. .................................................... 272,838**(2)
348,092 6.50% Pfd. ........................................................ 6,116,847**(1)(2)
152,070 6.80% Pfd. ........................................................ 2,596,215**(1)(2)
Bank of America Corporation:
80,000 Adj. Rate Pfd., Series 5 .......................................... 1,196,000*(1)
20,000 Fixed Income Pass-Through 2007-A, Cl. B, Adj. Rate Pfd., 144A**** . 200*+
3,000 Series II STRIPES Custodial Receipts, Pvt. ........................ 7,530*+
160,000 6.25% Pfd. ........................................................ 2,427,200*(1)
$ 8,218,000 Capital One Capital III, 7.686% 08/15/36 ............................. 5,521,239(1)
$10,000,000 CBG Florida REIT Corporation, 7.114%, 144A**** ....................... 1,503,100
CIT Group, Inc.:
33,900 5.189% Pfd., Series B ............................................. 855,975*(1)
$ 3,375,000 6.10% 03/15/67 .................................................... 1,431,304
13,850 6.35% Pfd., Series A .............................................. 121,361*
40,000 Citizens Funding Trust I, 7.50% Pfd. 09/15/66 ........................ 450,900(1)
40,000 Cobank, ACB, 7.00% Pfd., 144A**** .................................... 1,022,280*(1)
6,700 Colonial Capital Trust IV, 7.875% Pfd. 10/01/33 ...................... 61,305
$ 7,000,000 Comerica Capital Trust II, 6.576% 02/20/37 ........................... 3,843,630
7,000 FBOP Corporation, Adj. Rate Pfd., 144A**** ........................... 2,100,000*
$ 400,000 First Empire Capital Trust I, 8.234% 02/01/27 ........................ 263,644(1)
2,000 First Republic Preferred Capital Corporation, 10.50% Pfd., 144A****... 1,044,000(1)
1,000 First Tennessee Bank, Adj. Rate Pfd., 144A**** ....................... 337,500*
$ 100,000 First Tennessee Capital I, 8.07% 01/06/27, Series A .................. 64,825(1)
$ 600,000 First Union Capital II, 7.95% 11/15/29 ............................... 484,597(1)
2 FT Real Estate Securities Company, 9.50% Pfd., 144A**** .............. 860,000
Goldman Sachs:
$ 1,500,000 Capital II, 5.793% ................................................ 870,756
1,500 STRIPES Custodial Receipts, Pvt. .................................. 15*
$ 855,000 HSBC USA Capital Trust II, 8.38% 05/15/27, 144A**** .................. 523,557(1)(2)
164,000 HSBC USA, Inc., Adj. Rate Pfd., Series D ............................. 2,573,570*
82,000 Keycorp Capital IX, 6.75% Pfd. 12/15/66 .............................. 1,432,745(1)
$ 1,000,000 Lloyds Banking Group PLC, 6.657%, 144A**** ........................... 395,604**(2)
$ 2500,000 National City Preferred Capital Trust I, 12.00% ...................... 2,480,570
151,059 PFGI Capital Corporation, 7.75% Pfd. ................................. 2,591,613(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, 2009 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
BANKING -- (CONTINUED)
54,995 PNC Financial Services, 9.875% Pfd., Series F ........................ $ 1,369,376*(1)
$1,000,000 Regions Financing Trust II, 6.625% 05/15/47 .......................... 694,684
191,525 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36 ....................... 3,901,843
2,750 Sovereign REIT, 12.00% Pfd., Series A, 144A**** ...................... 1,794,375
U.S. Bancorp, Auction Pass-Through Trust, Cl. B:
15 Series 2006-5, Variable Rate Pfd., 144A**** ....................... 375*+
15 Series 2006-6, Variable Rate Pfd., 144A**** ....................... 375*+
$ 850,000 Wachovia Capital Trust III, 5.80% .................................... 518,685
75,637 Wachovia Preferred Funding, 7.25% Pfd., Series A ..................... 1,382,077
$2,800,000 Webster Capital Trust IV, 7.65% 06/15/37 ............................. 1,822,374
------------
60,377,884
------------
FINANCIAL SERVICES -- 0.1%
$3,000,000 Gulf Stream-Compass 2005 Composite Notes, 144A**** ................... 156,510
Lehman Brothers Holdings, Inc.:
20,000 5.67% Pfd., Series D .............................................. 8,000*++
85,000 7.95% Pfd. ........................................................ 5,950*++
------------
170,460
------------
INSURANCE -- 16.9%
$4,161,000 AON Capital Trust A, 8.205% 01/01/27 ................................. 3,757,450(1)
Arch Capital Group Ltd.:
27,150 7.875% Pfd., Series B ............................................. 562,344**(1)(2)
42,900 8.00% Pfd., Series A .............................................. 950,771**(1)(2)
AXA SA:
$1,000,000 6.379%, 144A**** .................................................. 621,500**(2)
$1,150,000 6.463%, 144A**** .................................................. 692,691**(2)
Axis Capital Holdings:
19,433 7.25% Pfd., Series A .............................................. 365,583**(1)(2)
66,600 7.50% Pfd., Series B .............................................. 4,630,784(1)(2)
160,000 Delphi Financial Group, 7.376% Pfd. 05/15/37 ......................... 2,050,000(1)
$5,500,000 Everest Re Holdings, 6.60% 05/15/37 .................................. 2,808,542(1)
Liberty Mutual Group:
$6,200,000 7.80% 03/15/37, 144A**** .......................................... 3,042,867
$1,000,000 10.75% 06/15/58, 144A**** ......................................... 620 900
$3,000,000 MetLife Capital Trust X, 9.25% 04/08/38, 144A**** .................... 2,555,658(1)
The accompanying notes are an integral part of the financial statements.
12
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2009 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
109,000 Scottish Re Group Ltd., 7.25% Pfd. ................................... $ 252,063**(2)
$3,615,000 USF&G Capital, 8.312% 07/01/46, 144A**** ............................. 3,079,279(1)
$1,500,000 ZFS Finance USA Trust V, 6.50% 05/09/37, 144A**** .................... 1,020,000(1)
------------
27,010,432
------------
UTILITIES -- 25.6%
33,700 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ............ 3,119,356*
105,000 Calenergy Capital Trust III, 6.50% Pfd. 09/01/27 ..................... 4,226,250(1)
$2,375,000 COMED Financing III, 6.35% 03/15/33 .................................. 1,404,356
66,170 Constellation Energy Group, Inc., 8.625% Pfd. 06/15/63, Series A...... 1,466,327(1)
$2,000,000 Dominion Resources Capital Trust I, 7.83% 12/01/27 ................... 1,796,456(1)
$2,250,000 Dominion Resources, Inc., 7.50% ...................................... 1,560,040(1)
83,000 Entergy Arkansas, Inc., 6.45% Pfd. ................................... 1,722,250*
50,000 Entergy Louisiana, Inc., 6.95% Pfd. .................................. 4,403,125*
39,623 FPC Capital I, 7.10% Pfd., Series A .................................. 957,391(1)
55,000 Georgia Power Company, 6.50% Pfd., Series 07-A ....................... 4,559,846*(1)
30,445 Indianapolis Power & Light Company, 5.65% Pfd. ....................... 2,046,476*
$5,000,000 PECO Energy Capital Trust IV, 5.75% 06/15/33 ......................... 3,445,850(1)
$6,050,000 Puget Sound Energy, Inc., 6.974% 06/01/67 ............................ 4,114,000
15,000 Southern California Edison, 6.00% Pfd., Series C ..................... 1,172,345*(1)
$1,400,000 Southern Union Company, 7.20% 11/01/66 ............................... 854,000
5,000 Union Electric Company, $7.64 Pfd. ................................... 491,407*
$5,000,000 Wisconsin Energy Corporation, 6.25% 05/15/67 ......................... 3,605,150(1)
------------
40,944,625
------------
ENERGY -- 4.1%
$5,600,000 Enbridge Energy Partners LP, 8.05% 10/01/37 .......................... 3,672,822(1)
$4,000,000 Enterprise Products Partners, 7.034% 01/15/68 ........................ 2,804,052(1)
------------
6,476,874
------------
MISCELLANEOUS INDUSTRIES -- 2.0%
40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** .................. 2,566,252*
$1,000,000 Stanley Works, 5.902% 12/01/45 ....................................... 561,343
------------
3,127,595
------------
TOTAL PREFERRED SECURITIES
(Cost $204,486,804) .................................................. 138,107,870
------------
The accompanying notes are an integral part of the financial statements.
13
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2009 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
CORPORATE DEBT SECURITIES -- 9.1%
FINANCIAL SERVICES -- 0.3%
$4,726,012 Lehman Brothers, Guaranteed Note, Variable Rate, 12/16/16, 144A**** .. $ 427,231++
------------
427,231
------------
INSURANCE -- 5.6%
15,000 AAG Holding Company, Inc., 7.25% Pfd. ................................ 250,650(1)
$7,577,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** .................. 4,465,520
$7,000,000 UnumProvident Corporation, 7.25% 03/15/28, Senior Notes .............. 4,174,177
------------
8,890,347
------------
ENERGY -- 1.8%
$4,000,000 Noble Energy, Inc., 7.25% 08/01/97 ................................... 2,957,140(1)
------------
2,957,140
------------
MISCELLANEOUS INDUSTRIES -- 1.4%
16,500 Corp-Backed Trust Certificates, 7.00% 11/15/28, Series Sprint ........ 225,555(1)
Pulte Homes, Inc.:
25,844 7.375% 06/01/46 ................................................... 393,152
$2,160,000 7.875% 06/15/32 ................................................... 1,609,200
------------
2,227,907
------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $26,959,687) ................................................... 14,502,625
------------
MONEY MARKET FUND -- 2.7%
4,236,729 BlackRock Provident Institutional, T-Fund ............................ 4,236,729
------------
TOTAL MONEY MARKET FUND
(Cost $4,236,729) .................................................... 4,236,729
------------
The accompanying notes are an integral part of the financial statements.
14
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2009 (UNAUDITED)
VALUE
------------
TOTAL INVESTMENTS (Cost $235,683,220***) ................................... 98.3% $156,847,224
OTHER ASSETS AND LIABILITIES (Net) ......................................... 1.7% 2,740,273
----- ------------
NET ASSETS BEFORE LOAN AND AMPS ............................................ 100.0%++ $159,587,497
----- ------------
LOAN PRINCIPAL BALANCE .............................................................. (29,000,000)
------------
AUCTION MARKET PREFERRED STOCK (AMPS) REDEMPTION VALUE .............................. (29,000,000)
------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK .......................................... $101,587,497
============
----------
* 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, 2009, these
securities amounted to $28,829,774 or 18.1% of net assets before the loan
and AMPS. 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 $79,600,024 at May 31, 2009.
(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 and AMPS.
ABBREVIATIONS:
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
STRIPES -- Structured Residual Interest Preferred Enhanced Securities
The accompanying notes are an integral part of the financial statements.
15
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2009 (UNAUDITED)
ASSETS:
Investments, at value (Cost $235,683,220) ............... $156,847,224
Receivable for investments sold ......................... 32,699
Dividends and interest receivable ....................... 2,852,110
Prepaid expenses ........................................ 152,236
------------
Total Assets ...................................... 159,884,269
LIABILITIES:
Loan Payable ............................................ $29,000,000
Dividends payable to Common Stock Shareholders .......... 41,833
Investment advisory fee payable ......................... 73,559
Administration, Transfer Agent and Custodian fees payable 35,112
Servicing agent fees payable ............................ 3,198
Professional fees payable ............................... 69,411
Directors' fees payable ................................. 6,892
Accrued expenses and other payables ..................... 40,852
Accumulated undeclared distributions to Auction Market
Preferred Stock Shareholders ......................... 25,915
-----------
Total Liabilities ................................. 29,296,772
------------
AUCTION MARKET PREFERRED STOCK (1,160 SHARES OUTSTANDING)
REDEMPTION VALUE 29,000,000
------------
NET ASSETS AVAILABLE TO COMMON STOCK ....................... $101,587,497
============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
Distributions in excess of net investment income ........ $ (304,573)
Accumulated net realized loss on investments sold ....... (50,160,390)
Unrealized depreciation of investments .................. (78,835,996)
Par value of Common Stock ............................... 97,763
Paid-in capital in excess of par value of Common Stock .. 230,790,693
------------
Total Net Assets Available to Common Stock ........ $101,587,497
============
NET ASSET VALUE PER SHARE OF COMMON STOCK:
Common Stock (9,776,333 shares outstanding) .......... $ 10.39
============
The accompanying notes are an integral part of the financial statements.
16
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2009 (UNAUDITED)
INVESTMENT INCOME:
Dividends + .................................................. $ 3,729,646
Interest ..................................................... 5,011,139
-----------
Total Investment Income ................................... 8,740,785
EXPENSES:
Investment advisory fee ...................................... $425,460
Servicing agent fee .......................................... 18,498
Administrator's fee .......................................... 76,549
Auction Market Preferred Stock broker commissions and
auction agent fees ........................................ 48,469
Professional fees ............................................ 93,953
Insurance expense ............................................ 66,318
Transfer Agent fees .......................................... 22,614
Directors' fees .............................................. 39,130
Custodian fees ............................................... 12,139
Compliance fees .............................................. 19,694
Interest expense ............................................. 744,611
Other ........................................................ 47,884
--------
Total Expenses ............................................ 1,615,319
-----------
NET INVESTMENT INCOME ........................................... 7,125,466
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net realized loss on investments sold during the period ...... (7,669,209)
Change in unrealized appreciation/depreciation of
investments ............................................... 21,124,073
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ................. 13,454,864
----------
DISTRIBUTIONS TO AUCTION MARKET PREFERRED STOCK SHAREHOLDERS:
From net investment income (including changes in accumulated
undeclared distributions) ................................. (542,904)
-----------
NET INCREASE IN NET ASSETS TO COMMON STOCK RESULTING FROM
OPERATIONS ................................................... $20,037,426
===========
----------
+ 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.
17
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
SIX MONTHS ENDED
MAY 31, 2009 YEAR ENDED
(UNAUDITED) NOVEMBER 30, 2008
---------------- -----------------
OPERATIONS:
Net investment income ....................................................... $ 7,125,466 $ 18,665,369
Net realized loss on investments sold during the period ..................... (7,669,209) (25,629,724)
Change in net unrealized appreciation/depreciation of investments ........... 21,124,073 (78,210,324)
Distributions to AMPS* Shareholders from net investment income,
including changes in accumulated undeclared distributions ................ (542,904) (4,264,640)
------------ -------------
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............. 20,037,426 (89,439,319)
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders((1)).. (6,452,380) (15,043,583)
Tax return of capital to Common Stock Shareholders .......................... -- (251,490)
------------ -------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ............................ (6,452,380) (15,295,073)
------------ -------------
NET INCREASE/(DECREASE) IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD.. $ 13,585,046 $(104,734,392)
============ =============
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ......................................................... $ 88,002,451 $ 192,736,843
Net increase/(decrease) in net assets during the period ..................... 13,585,046 (104,734,392)
------------ -------------
End of period (including distributions in excess of net investment income
of $(304,573) and of $(434,755), respectively) ........................... $101,587,497 $ 88,002,451
============ =============
----------
* 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.
18
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 2009 (UNAUDITED)
INCREASE/(DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations .................. $ 20,037,426
ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS TO NET CASH USED IN OPERATING ACTIVITIES:
Purchase of investment securities ..................................... (12,597,169)
Proceeds from disposition of investment securities .................... 18,914,399
Purchase of short-term investment securities, net ..................... (1,523,735)
Return of capital received from investments in preferred stocks ....... 177,853
Decrease in dividends and interest receivable ......................... 259,938
Decrease in receivable for investments sold ........................... 5,839,301
Increase in Prepaid expenses .......................................... (80,453)
Net amortization/(accretion) of premium/(discount) .................... (175,823)
Decrease in accrued expenses and other liabilities .................... (1,899)
Unrealized appreciation/depreciation on securities .................... (21,124,073)
Net realized loss from investments .................................... 7,669,209
------------
Net cash provided in operating activities .......................... 17,394,974
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in Loan payable .............................................. (500,000)
Decrease in Auction Market Preferred Stock (AMPS) ..................... (10,500,000)
Increase in payable for AMPS .......................................... 15,804
Increase in dividend payable to common stock shareholders ............. 41,602
Distributions to common stock shareholders from net investment income.. (6,452,380)
------------
Net cash used by financing activities .............................. (17,394,974)
------------
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 ....................................... 760,377
------------
The accompanying notes are an integral part of the financial statements.
19
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 31,2009 ----------------------------------------------------
(UNAUDITED) 2008 2007 2006 2005 2004
----------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ....................... $ 9.00 $ 19.71 $ 23.29 $ 22.40 $ 23.56 $ 24.33
-------- -------- -------- -------- ------- --------
INVESTMENT OPERATIONS:
Net investment income ...................................... 0.73 1.91 2.24 2.04 1.94 1.95
Net realized and unrealized gain/(loss) on investments ..... 1.38 (10.62) (3.59) 1.06 (0.86) (0.55)
DISTRIBUTIONS TO AMPS* SHAREHOLDERS:
From net investment income ................................. (0.06) (0.44) (0.70) (0.64) (0.41) (0.19)
-------- -------- -------- -------- ------- --------
Total from investment operations ........................... 2.05 (9.15) (2.05) 2.46 0.67 1.21
-------- -------- -------- -------- ------- --------
COST OF ISSUANCE OF AMPS* .................................. -- -- -- -- 0.01
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income ................................. (0.66) (1.53) (1.53) (1.57) (1.83) (1.99)
From return of capital ..................................... -- (0.03) -- -- -- --
-------- -------- -------- -------- ------- --------
Total distributions to Common Stock Shareholders ........... (0.66) (1.56) (1.53) (1.57) (1.83) (1.99)
-------- -------- -------- -------- ------- --------
Net asset value, end of period ............................. $ 10.39 $ 9.00 $ 19.71 $ 23.29 $ 22.40 $ 23.56
======== ======== ======== ======== ======= ========
Market value, end of period ................................ $ 9.06 $ 7.28 $ 17.00 $ 22.08 $ 19.70 $ 24.15
Total investment return based on net asset value** ......... 25.70%**** (48.17%) (8.71%) 12.30% 3.27% 5.22%
Total investment return based on market value** ........... 35.50%**** (51.39%) (16.95%) 21.06% (11.41%) 4.30%
RATIOS TO AVERAGE NET ASSETS AVAILABLE
TO COMMON STOCK SHAREHOLDERS:
Total net assets, end of period (in 000's) .......... $101,587 $ 88,002 $192,737 $227,678 $219,015 $229,805
Operating expenses including interest expense(1) ..... 3.77%*** 2.67% -- -- -- --
Operating expenses excluding interest expense ........ 2.03%*** 1.91% 1.51% 1.50% 1.47% 1.51%
Net investment income + ............................. 15.37%*** 9.37% 6.94% 6.28% 6.51% 7.33%
SUPPLEMENTAL DATA:++
Portfolio turnover rate .............................. 9%**** 46% 57% 68% 38% 79%
Total net investments, end of period (in 000's) ...... $159,587 $157,002 $321,237 $356,178 347,515 $358,305
Ratio of operating expenses including interest
expense(1)(2) to net assets before loan and AMPS .. 2.17%*** 1.54% -- -- -- --
Ratio of operating expenses excluding interest expense
to net assets before loan and AMPS ................ 1.17%*** 1.10% 0.95% 0.94% 0.94% 0.97%
----------
* 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, and payments to AMPS Shareholders.
++ 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.
20
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, 2008 .. $0.11 $ 9.52 $8.05 $8.44
January 30, 2009 ... 0.11 8.94 8.39 8.27
February 27, 2009 .. 0.11 7.86 6.95 6.35
March 31, 2009 ..... 0.11 8.02 6.70 6.80
April 30, 2009 ..... 0.11 8.57 7.65 7.72
May 29, 2009 ....... 0.11 10.39 9.06 9.46
----------
(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.
21
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
The table below sets out information with respect to Auction Market
Preferred Stock (AMPS) currently outstanding.
INVOLUNTARY
LIQUIDATION
TOTAL SHARES ASSET COVERAGE PREFERENCE
DATE OUTSTANDING (1) PER SHARE (2) PER SHARE (3)
-------- --------------- -------------- -------------
05/31/09* 1,160 $112,598 $25,000
11/30/08 1,580 80,704 25,000
11/30/07 5,140 62,506 25,000
11/30/06 5,140 69,301 25,000
11/30/05 5,140 67,650 25,000
11/30/04 5,140 69,732 25,000
----------
(1) See note 6.
(2) Calculated by subtracting the Fund's total liabilities (excluding the AMPS)
from the Fund's total assets and dividing that amount by the number of AMPS
shares outstanding.
(3) Excludes accumulated undeclared dividends.
* Unaudited.
The accompanying notes are an integral part of the financial statements.
22
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 its Auction Market Preferred Stock ("AMPS").
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.
23
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.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157 "Fair Value Measurements"
("SFAS 157") effective for fiscal years beginning after November 15, 2007. This
standard clarifies the definition of fair value for financial reporting,
establishes a framework for measuring fair value and requires additional
disclosures about the use of fair value measurements. The Fund has adopted SFAS
157 as of December 1, 2007. The three levels of the fair value hierarchy under
SFAS 157 are described below:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speeds, credit
risk, etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily
an indication of the risk associated with investing in those securities. A
summary of the inputs used to value the Fund's net assets as of May 31, 2009 is
as follows:
OTHER FINANCIAL
INSTRUMENTS
INVESTMENTS IN (UNREALIZED
SECURITIES APPRECIATION/
VALUATION INPUTS (MARKET VALUE) DEPRECIATION)*
------------------------------------------------- -------------- ---------------
Level 1 - Quoted Prices ......................... $ 35,635,286 --
Level 2 - Other Significant Observable Inputs ... 120,628,197 --
Level 3 - Significant Unobservable Inputs ....... 583,741 --
------------ ---
TOTAL ........................................... $156,847,224 $--
----------
* Other financial instruments are derivative instruments not reflected in the
Portfolio of Investments, such as futures, forwards and swaps which are
valued at the unrealized appreciation/depreciation on the investment. As of
May 31, 2009, the Fund does not have any other financial instruments.
24
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Following is a reconciliation of Level 3 investments for which significant
unobservable inputs were used to determine fair value:
OTHER FINANCIAL
INSTRUMENTS
INVESTMENTS (UNREALIZED
IN SECURITIES APPRECIATION/
(MARKET VALUE) DEPRECIATION)
-------------- ---------------
BALANCE AS OF 11/30/08 ............................ $1,295,944 $--
Accrued discounts/premiums ........................ -- --
Realized gain (loss) .............................. -- --
Change in unrealized appreciation (depreciation) .. (712,203) --
Net purchases (sales) ............................. -- --
Transfers in and/or out of Level 3 ................ -- --
---------- ---
BALANCE AS OF 5/31/09 ............................. $ 583,741 $--
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.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 161: In March 2008, the
FASB issued Statement of Financial Accounting Standards No. 161, "Disclosures
about Derivative Instruments and Hedging Activities" ("SFAS 161"). SFAS 161 is
effective for fiscal years and interim periods beginning after November 15,
2008. SFAS 161 requires enhanced disclosures about the Fund's derivative and
hedging activities. The Fund has adopted SFAS 161 as of December 1, 2008. For
the six months ended May 31, 2009, the Fund did not hold or transact in any
derivatives.
OPTIONS: Purchases of options are recorded as an investment, the value of
which is marked-to-market at each valuation date. When the Fund enters into a
closing sale transaction, the Fund will record a gain or loss depending on the
difference between the purchase and sale price. The risks associated with
purchasing options and the maximum loss the Fund would incur are limited to the
purchase price originally paid.
When the Fund writes an option, an amount equal to the premium received by
the Fund is recorded as a liability, the value of which is marked-to-market at
each valuation date. When a written option expires, the Fund realizes a gain
equal to the amount of the premium originally received. When the Fund enters
into a closing purchase transaction, the Fund realizes a gain (or loss if the
cost of the closing purchase transaction exceeds the premium received when the
option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a call option is exercised, the Fund realizes a gain or loss from the sale
of the underlying security and the proceeds from such sale are increased by the
amount of the premium originally received. When a put option is exercised, the
amount of the premium originally received will reduce the cost of the security
which the Fund purchased upon exercise.
25
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.
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 will be required.
In June 2006, the FASB issued FASB Interpretation 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes." This standard defines the
threshold for recognizing the benefits of tax-return positions in the financial
statements as "more-likely-than-not" to be sustained upon challenge by the
taxing authority and requires measurement of a tax position meeting the
more-likely-than-not criterion, based on the largest benefit that is more than
50 percent likely to be realized. FIN 48 became effective as of the beginning of
the first fiscal year beginning after December 15, 2006, with early application
permitted if no interim financial statements have been issued. At adoption,
companies must adjust their financial statements to reflect only those tax
positions that are more-likely-than-not to be sustained as of the adoption date.
The tax periods open to examination by the Internal Revenue Service include the
fiscal years ended November 30, 2008, 2007, 2006 and 2005. The Fund's major tax
jurisdictions are federal and California. As of May 31, 2009, the Fund has
evaluated the adoption of FIN 48 and determined that there is no material impact
on the financial statements.
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.
26
FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND INCORPORATED
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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.
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 2009 and 2008 was as follows:
DISTRIBUTIONS PAID IN FISCAL YEAR 2009 DISTRIBUTIONS PAID IN FISCAL YEAR 2008
-------------------------------------- ---------------------------------------
ORDINARY LONG-TERM ORDINARY LONG-TERM RETURN OF
INCOME CAPITAL GAINS INCOME CAPITAL GAINS CAPITAL
-------- ------------- ----------- ------------- ---------
Common N/A N/A $15,043,583 $0 $251,490
Preferred N/A N/A $ 4,264,640 $0 $ 0
As of November 30, 2008 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)
--------------------------- --------------- -------------- ---------------------------
($41,609,014) $0 $0 ($100,842,236)
At November 30, 2008, the composition of the Fund's $41,609,014 accumulated
realized capital losses was $573,838, $8,529,240, $943,555, $1,648,329,
$3,780,448 and $26,133,604 incurred in 2003, 2004, 2005, 2006, 2007 and 2008,
respectively. These losses may be carried forward and offset against any future
capital gains through 2011, 2012, 2013, 2014, 2015 and 2016, 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.
ADDITIONAL ACCOUNTING STANDARDS: In April 2009, the FASB issued Staff
Position No. 157-4 "Determining Fair Value when the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly" ("FSP 157-4"). FSP 157-4 clarifies the
process for measuring the fair value of financial instruments when the markets
become inactive and quoted prices may reflect distressed transactions. FSP 157-4
provides a non-exclusive list of factors a reporting entity should consider when
determining whether there has been a significant decrease in the volume and
level of activity for an asset or liability when compared with normal market
activity. Under FSP 157-4, if a reporting entity concludes there has been a
significant decrease in volume and level of activity for the asset or liability
(or similar assets or liabilities), transactions or quoted
27
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
prices may not be determinative of fair value. Further analysis of the
transactions or quoted prices is needed, and an adjustment to the transactions
or quoted prices may be necessary to estimate fair value in accordance with FASB
Statement No. 157 - Fair Value Measurements. FSP 157-4 is effective for interim
and annual reporting periods ending after June 15, 2009, and must be applied
prospectively. Early adoption is permitted for periods ending after March 15,
2009. Earlier adoption for periods ending before March 15, 2009 is not
permitted. Management is currently evaluating the impact the adoption of FSP
157-4 will have on the Fund's financial statement disclosures.
In May 2009, the FASB issued Statement of Financial Accounting Standards No
.. 165, "Subsequent Events" ("SFAS 165"). SFAS 165 is effective for interim or
annual financial periods ending after June 15, 2009. One of the primary
objectives of this new Statement is to introduce the concept of the financial
statements being available to be issued as a measurement date for evaluating
subsequent events. This concept would pertain more to private companies.
Entities that have an expectation of widely distributing their financial
statements to shareholders, including public entities (such as the Fund), are
required to evaluate subsequent events through the date that the financial
statements are issued.
3. INVESTMENT ADVISORY FEE, SERVICING AGENT FEE, ADMINISTRATION FEE, TRANSFER
AGENT FEE, CUSTODIAN FEE, DIRECTORS' FEES AND CHIEF COMPLIANCE OFFICER FEE
Flaherty & Crumrine Incorporated (the "Adviser") serves as the Fund's
investment adviser. The Fund pays the Adviser a monthly fee at an annual rate of
0.575% of the first $200 million of the Fund's average weekly total managed
assets, 0.50% of the next $300 million of the Fund's average weekly total
managed assets, and 0.45% of the Fund's average weekly total managed assets
above $500 million.
For purposes of calculating 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 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
28
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 Fund 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 0.010% of the first $200 million of the Fund's average weekly
total managed assets, 0.008% of the next $300 million of the Fund's average
weekly total managed assets, 0.006% of the next $500 million of the Fund's
average weekly total managed assets, and 0.005% of the Fund's average weekly
total managed assets above $1 billion.
The Fund currently pays each Director who is not a director, officer or
employee of the Adviser or the Servicing Agent a fee of $9,000 per annum, plus
$500 for each in-person meeting of the Board of Directors or any committee and
$150 for each telephone meeting. The Audit Committee Chairman receives an
additional annual fee of $2,500. The Fund also reimburses all Directors for
travel and out-of-pocket expenses incurred in connection with such meetings.
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, 2009 the cost of purchases and proceeds
from sales of securities excluding short-term investments, aggregated
$12,597,169 and $18,914,399, respectively.
At May 31, 2009, the aggregate cost of securities for federal income tax
purposes was $236,565,387, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $3,536,085 and
the aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $83,254,248.
5. COMMON STOCK
At May 31, 2009, 240,000,000 shares of $0.01 par value Common Stock were
authorized.
29
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. AUCTION MARKET PREFERRED STOCK (AMPS)
The Fund's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of $0.01 par value preferred stock. The AMPS, which consists
of Series T7 and W28, are senior to the Common Stock and result in the financial
leveraging of the Common Stock. Such leveraging tends to magnify both the risks
and opportunities to Common Stock Shareholders. Dividends on shares of AMPS are
cumulative.
The Fund is required to meet certain asset coverage tests with respect to
the AMPS. If the Fund fails to meet these requirements and does not correct such
failure, the Fund may be required to redeem, in part or in full, AMPS at a
redemption price of $25,000 per share plus an amount equal to the accumulated
and unpaid dividends on such shares in order to meet these requirements.
Additionally, failure to meet the foregoing asset requirements could restrict
the Fund's ability to pay dividends to Common Stock Shareholders and could lead
to sales of portfolio securities at inopportune times.
An auction of the AMPS is generally held every 7 days for Series T7 and
every 28 days for Series W28. Existing AMPS Shareholders may submit an order to
hold, bid or sell such shares at par value on each auction date. AMPS
Shareholders may also trade shares in the secondary market, if any, between
auction dates. Since mid-February 2008, the normal functioning of the market for
auction market preferred stock of U.S. closed-end funds, including the Fund, has
been disrupted, and the Fund's AMPS holders have not been able to sell their
shares through the auction process.
The Fund has announced redemptions of each series of its outstanding AMPS
at a redemption price equal to the liquidation preference of $25,000 per share,
plus the amount of accumulated but unpaid dividends. Redemptions of 210 shares
for each of Series T7 and W28, announced on March 27, 2009, were completed on
April 15, 2009 and April 16, 2009, respectively. Total consideration for the
liquidation preference of the redemptions was $10.5 million.
Redemptions of 580 shares for each of Series T7 and W28, announced on June
8, 2009 (subsequent to the reporting period), were completed on June 24, 2009
and July 9, 2009, respectively. Total consideration for the liquidation
preference of the redemptions was approximately $29 million. The Fund utilized
proceeds from its existing debt facility to finance these redemptions. After
these redemptions, borrowings from its debt facility will be the Fund's sole
source of leverage (See Note 7).
At May 31, 2009, 580 shares of Series T7 and 580 shares of Series W28 of
AMPS were outstanding at the annualized rate of 2.68% and 2.83% for each of
Series T7 and W28, respectively. The dividend rate, as set by the auction
process, is generally expected to vary with short-term interest rates. As a
result of ongoing disruptions in the auction market, the Fund is paying a
dividend rate equal to the maximum rate, as defined in the Fund's Articles
Supplementary. The maximum rate is equal to the greater of (i) 175% of the
reference rate and (ii) 2.50% plus the reference rate. "Reference Rate" means
the applicable "AA" Financial Composite Commercial Paper Rate. These rates may
vary in a manner unrelated to the income received on the Fund's assets, which
could have either a beneficial or detrimental impact on net investment income
and gains available to Common Stock Shareholders. While the Fund expects to
structure its portfolio holdings and hedging transactions to lessen such risks
to Common Stock Shareholders, there can be no assurance that such results will
be attained.
30
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. COMMITTED FINANCING AGREEMENT
The Fund entered into a committed financing agreement ("Financing
Agreement") on May 1, 2008 which allows the Fund to borrow up to $91 million on
a secured basis. The primary use of the proceeds was to redeem a portion of the
outstanding shares of AMPS (See Note 6), although the balance may be utilized by
the Fund in the normal course of business as financial leverage. As of May 31,
2009, the amount borrowed under the Financing Agreement was $29 million. As of
June 26, 2009 (subsequent to the reporting period), the committed amount under
the Financing Agreement was reduced to $58 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. The renegotiation of the terms of the Financing Agreement was
necessitated by the violation of a net asset value covenant in the Financing
Agreement by the Fund as a result of the substantial decline in the value of the
Fund's assets. The renegotiation resulted in these limits being reset to
then-current market levels, changes in financing rates noted above, and the
establishment of a new six-month rolling term to the Financing Agreement. None
of the other financial covenants or asset coverage requirements changed
materially.
For the six months ended May 31, 2009, the daily weighted average
annualized interest rate on the drawn balance was 2.975% and the average daily
loan balance was $26,708,791. 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
Common Stock 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 Common Stock 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.
31
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 20% of its total assets in securities rated below
investment grade. These securities must be rated at least either "Ba3" by
Moody's Investors Service, Inc. or "BB-" by Standard & Poor's or, 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 futures and options. These transactions are used for
hedging or
32
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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, 2009, there were no
securities on loan by the fund.
11. SECTION 19 NOTICES
Section 19 of the Investment Company Act of 1940 requires registered
investment companies to include a notice with the payment of a dividend if a
portion of that dividend may come from sources other than undistributed net
income (other sources could include realized gains from the sale of securities
and non-taxable return of capital). Copies of the Section 19 notices for the
Fund are available on the website at WWW.FCCLAYMORE.COM.
The amounts and sources of distributions reported below are only estimates
and are not being provided for tax reporting purposes. Form 1099-DIV will be
sent to shareholders in January 2010 reporting the amount and tax
characterization of distributions for the 2009 calendar year.
SOURCE OF DISTRIBUTIONS AS OF 5/31/09
------------------------------------------------
NET NET RETURN TOTAL PER
INVESTMENT REALIZED OF COMMON
INCOME CAPITAL GAINS CAPITAL SHARE
---------- ------------- ------- ---------
Calendar 2009 Distributions ........ $0.539 $0.00 $0.011 $0.550
Percentage of Total Distributions .. 98.0% 0.0% 2.0% --
33
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, 2009, $956 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.
34
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 7, 2008. 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, 2009. 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.
35
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.
CERTIFICATIONS
Included in the Annual Written Affirmation submitted to the NYSE, Donald F.
Crumrine, as the Fund's Chief Executive Officer, has certified that, as of May
16, 2009, he was not aware of any violation by the Fund of applicable NYSE
corporate governance listing standards. The Fund's reports to the SEC on Forms
N-CSR and N-Q contain certifications by the Fund's principal executive officer
and principal financial officer that relate to the Fund's disclosure in such
reports and that are required by Rule 30a-2(a) under the 1940 Act.
MEETING OF SHAREHOLDERS
On April 21, 2009, the Fund held its Annual Meeting of Shareholders for the
following purpose: election of Directors of the Fund ("Proposal 1").The proposal
was approved by the shareholders and the results of the voting are as follows:
PROPOSAL 1: ELECTION OF DIRECTORS.
NAME FOR WITHHELD
------------------------------------------------------------------- --------- --------
COMMON STOCK AND PREFERRED STOCK, VOTING TOGETHER AS A SINGLE CLASS
Morgan Gust .................................................... 6,963,219 569,366
PREFERRED STOCK, VOTING AS A SEPARATE CLASS
Karen H. Hogan ................................................. 800 5
Donald F. Crumrine, David Gale and Robert F. Wulf continue to serve in
their capacities as Directors of the Fund.
36
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
INFORMATION ABOUT FUND DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Directors. Information pertaining to the Directors and officers
of the Fund is set forth below.
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR**
-------------------------- -------------- ----------------- ------------------------ --------------- ---------------------
NON-INTERESTED
DIRECTORS:
--------------
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 1920
San Francisco, CA 94104
Age: 60
MORGAN GUST Director Class II Director Owner and operator of 4 CoBiz Financial, Inc.
301 E. Colorado Boulevard since various entities engaged (financial services)
Suite 720 August 2003 in agriculture and real
Pasadena, CA 91101 estate; Former President
Age: 62 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 several
Suite 720 July 2005 non-profit
Pasadena, CA 91101 organizations; from
Age: 48 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 2010
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.
37
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR**
-------------------------- -------------- ----------------- ------------------------ --------------- ---------------------
NON-INTERESTED
DIRECTORS:
--------------
ROBERT F.WULF Director Class III Financial Consultant; 4
P.O. Box 753 and Audit Director since Trustee, University of
Neskowin, OR 97149 Committee August 2003 Oregon Foundation;
Age: 72 Chairman Trustee, San Francisco
Theological Seminary
INTERESTED
DIRECTOR:
----------
DONALD F. CRUMRINE+, ++ Director, Class III Chairman of the Board
301 E. Colorado Boulevard Chairman of Director since and Director of Flaherty 4
Suite 720 Pasadena, the Board and August 2003 & Crumrine Incorporated
CA 91101 Chief
Age: 61 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 2010
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.
++ "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.
38
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
PRINCIPAL
TERM OF OFFICE OCCUPATION(S)
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS
-------------------------- -------------- ----------------- --------------------------------
OFFICERS:
---------
ROBERT M. ETTINGER President Since August President and Director of
301 E. Colorado Boulevard 2003 Flaherty & Crumrine Incorporated
Suite 720
Pasadena, CA 91101
Age: 50
R. ERIC CHADWICK Chief Since July Director of Flaherty &
301 E. Colorado Boulevard Financial 2004 Crumrine Incorporated since
Suite 720 Officer, Vice June 2006; Vice President of
Pasadena, CA91101 President and Flaherty & Crumrine
Age: 34 Treasurer Incorporated
CHAD C. CONWELL Chief Since July Chief Compliance Officer of
301 E. Colorado Boulevard Compliance 2005 Flaherty & Crumrine Incorporated
Suite 720 Officer, Vice since September 2005; Vice
Pasadena, CA91101 President and President of Flaherty & Crumrine
Age: 36 Secretary Incorporated since July 2005;
Attorney with Paul, Hastings,
Janofsky & Walker LLP from
September 1998 to June 2005
BRADFORD S. STONE Vice President Since August Director of Flaherty &
392 Springfield Avenue and Assistant 2003 Crumrine Incorporated since
Mezzanine Suite Treasurer June 2006; Vice President of
Summit, NJ 07901 Flaherty & Crumrine
Age: 49 Incorporated
LAURIE C. LODOLO Assistant Since July Assistant Compliance Officer of
301 E. Colorado Boulevard Compliance 2004 Flaherty & Crumrine Incorporated
Suite 720 Officer, since August 2004; Secretary of
Pasadena, CA91101 Assistant Flaherty & Crumrine Incorporated
Age: 45 Treasurer and
Assistant
Secretary
39
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
BOARD CONSIDERATION AND APPROVAL OF CONTINUANCE OF INVESTMENT ADVISORY AGREEMENT
During the six month period ended May 31, 2009, the Board of Directors of
the Fund approved, on January 27, 2009, 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 Directors considered and discussed a substantial amount of information and
analysis provided, at the Board's request, by the Adviser. The Directors also
considered detailed information regarding performance and expenses of other
investment companies thought to be generally comparable to the Fund. The
Directors discussed with management this and other information relating to the
Investment Advisory Agreement during the Special Meeting held on January 16,
2009 for that specific purpose and requested additional information about
comparative expenses and performance, among other matters. On January 27, 2009,
the Directors approved the continuance of the Investment Advisory Agreement. In
reaching their determinations relating to continuance of the Investment Advisory
Agreement, the Directors considered these discussions and all other factors they
believed relevant, including the factors discussed below. In their
deliberations, the Directors did not identify any particular information that
was all-important or controlling, and Directors may have attributed different
weights to the various factors. The Directors 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 Directors focused on the following with respect to the Fund.
NATURE, EXTENT AND QUALITY OF SERVICES.
The Directors 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 Directors 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 Directors
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 Directors also considered the Adviser's sound
financial condition and the Adviser's commitment to its business. The Directors
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, and why the Adviser has
suspended its customary hedging strategy, and (ii) the Adviser's culture of
compliance. The Directors 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
40
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
in carrying out 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 Directors; and (3) the
Adviser had kept the Board apprised of developments relating to the Fund. The
Directors also considered the continued efforts undertaken by the Adviser to
maintain an effective compliance program. The Directors 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 Directors took note of the extraordinary market conditions prevailing
over almost the past two years and at present, and expressed their confidence in
the Adviser's investment strategies despite recent disappointing absolute
performance during this period of continued unprecedented and frequently frantic
behavior of market participants. The Directors considered the Fund's relative
performance since inception, including its performance in recent fiscal periods.
The Directors 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
Directors were assured of the Fund's adherence to its respective investment
mandate and, based on their understanding of the Adviser's investment approach
and market conditions, expressed their belief that the Adviser's absolute
performance would improve as markets normalized.
PROFITABILITY.
The Directors 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 Directors noted that
declining assets under management has led to declining Adviser profitability,
but noted with approval the Adviser's continued commitment to maintain existing
personnel and service levels. The Directors 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
Directors 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 Directors 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.
Thus, in both these circumstances, the Adviser would not benefit from economies
of scale. The Directors considered whether economies of scale could be realized
because the Adviser advises other similar funds. Based on their experience, the
Directors accepted the Adviser's explanation that significant economies of scale
would not be realized because of the complexity of managing preferred securities
for separate funds and other portfolios. Nonetheless,
41
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
the Directors 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
Directors determined that the existing advisory fee levels reflect possible
economies of scale.
In light of their discussions and considerations as described above, the
Directors 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 the recent period is reflective of market conditions,
given the Adviser's portfolio management strategy;
- 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 the 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 Directors determined that approval of the
Investment Advisory Agreement was in the best interests of the Fund and its
shareholders.
42
DIRECTORS
Donald F. Crumrine, CFA
Chairman of the Board
David Gale
Morgan Gust
Karen H. Hogan
Robert F. WULF, CFA
OFFICERS
Donald F. Crumrine, CFA
Chief Executive Officer
Robert M. Ettinger, CFA
President
R. Eric Chadwick, CFA
Chief Financial Officer,
Vice President and Treasurer
Chad C. Conwell
Chief Compliance Officer,
Vice President and Secretary
Bradford S. Stone
Vice President and
Assistant Treasurer
Laurie C. Lodolo
Assistant Compliance Officer,
Assistant Treasurer and
Assistant Secretary
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@pfdincome.com
SERVICING AGENT
Claymore Securities, Inc.
1-866-233-4001
QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN
FUND?
- If your shares are held in a Brokerage Account, contact your Broker.
- If you have physical possession of your shares in certificate form,
contact the Fund's Transfer Agent --
PNC Global Investment Servicing (U.S.) Inc.
1-800-331-1710
THIS REPORT IS SENT TO SHAREHOLDERS OF FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN
FUND INCORPORATED FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR
REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR
OF ANY SECURITIES MENTIONED IN THIS REPORT.
(FLAHERTY & CRUMRINE/CLAYMORE LOGO)
TOTAL RETURN FUND
Semi-Annual Report
May 31, 2009
www.fcclaymore.com
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. 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 28, 2009
----------------------------------------------------------------------------
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 28, 2009
----------------------------------------------------------------------------
By (Signature and Title)* /S/ R. ERIC CHADWICK
-----------------------------------------------------
R. Eric Chadwick, Chief Financial Officer, Treasurer,
and Vice President
(principal financial officer)
Date JULY 28, 2009
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.