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: November 30, 2008
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND
To the Shareholders of Flaherty & Crumrine/Claymore Total Return Fund:
There can be no mincing words. The preferred market had an awful year. As
the table demonstrates, the environment has been extremely difficult for FLC,
which must invest most of its assets in preferred securities and which utilizes
leverage to achieve its goal of producing a high level of current income. The
most positive thing we can say about these numbers stems from our fervent belief
that, at present, preferred securities prices have simply fallen too much, and,
over time, will recover.
TOTAL RETURN ON NET ASSET VALUE(1)
FOR PERIODS ENDED NOVEMBER 30, 2008
AVERAGE ANNUALIZED
ACTUAL RETURNS RETURNS
----------------------- -----------------------
THREE SIX ONE THREE FIVE LIFE OF
MONTHS MONTHS YEAR YEARS YEARS FUND(2)
------ ------ ----- ----- ----- -------
Flaherty & Crumrine/Claymore Total
Return Fund ................... -37.1% -44.0% -49.2% -19.9% -11.1% -10.1%
Lipper Domestic Investment Grade
Funds(3) ...................... -15.2% -17.1% -17.6% -2.8% 0.2% 0.8%
----------
(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
elsewhere in this report.
(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.accomplish a similar objective.
We encourage you to read the "Discussion Topics" that follow for a more
thorough analysis of the Fund's investment performance. We've also included the
performance of several preferred market indices for further comparison.
Once more we struggle to find appropriate words to describe events in the
financial markets. Although evidence of market troubles first appeared in
mid-2007, there can be little doubt that in recent months we have witnessed the
worst fallout from the financial crisis. Over a ten day period in September, the
government placed Fannie Mae and Freddie Mac into conservatorship, Lehman
Brothers filed for bankruptcy and AIG required the first of two massive doses of
government assistance. Like a financial earthquake, these events sent tremors
throughout the financial system, with the preferred market situated near the
epicenter.
In response, the Federal Reserve has flooded the system with liquidity, and
numerous new government programs designed to stabilize the financial system have
been created. The critical objective of each program is to restore confidence in
the system, and to that end no amount of effort (or money) has been spared. Many
of these efforts appear to be taking hold, and while we are clearly in the midst
of a severe economic slowdown, the foundation for recovery is being established.
Of these government programs, the Capital Purchase Program ("CPP") launched
in mid-October had the greatest significance for the Fund. Through this program,
the government injected almost $350 billion of capital into qualifying banks and
finance companies by purchasing newly issued preferred securities. The preferred
market got a boost when it was disclosed that existing preferred securities of
companies that participate in the program will typically RANK EQUAL or senior to
those held by the government.
Most of the new government programs are aimed at shoring up the financial
industry (commercial banks, investment banks and insurance companies). Despite
having disproportionately less exposure to financials when compared to the
overall preferred universe(1), the Fund's performance has been hurt badly by the
industry downturn. At their lowest levels, prices on some financial issues had
fallen by over 75%. Once the lifeline of government aid reaches a particular
company, prices on its securities tend to rebound, but they remain well below
earlier levels. Of the 23 bank and finance companies owned in the Fund, 17 have
received government assistance or have been acquired by stronger institutions.
Much of the price decline can be attributed to concerns about credit
quality, but as we've discussed in the past, technical factors like the ongoing
massive, economy-wide deleveraging and a dramatic decline in market liquidity
have hurt valuations as well. Issues of utility and energy companies, which
comprise most of the non-financial portion of the portfolio, also experienced
substantial price declines during the period. While concerns about credit
quality may have contributed to these price declines, technical factors have
played a major role.
Market conditions have made it necessary to reduce the amount of leverage
employed by the Fund. As the value of the Fund's investment portfolio declined,
the ratio of assets to liabilities fell below required levels. The only remedy
has been to redeem a portion of the leverage. To date the Fund has redeemed
46.3%, or $59.5 million, of the leverage in place at the beginning of the year.
Leverage is critical for enabling the Fund to achieve its goal of providing high
current income - we encourage you to carefully read the discussion topics that
follow.
An unavoidable consequence of deleveraging has been a reduction in the
amount of income available to shareholders in the form of monthly dividends.
Simply put, the Fund sold assets in order to redeem leverage, and fewer assets
mean less income generated. Since the beginning of fiscal 2008, market
conditions have required us to reduce the monthly dividend several times, for a
total reduction of 13.7%. Again, this important topic is addressed more fully in
the discussion topics.
The unprecedented turbulence in financial markets also prompted the Fund to
modify its interest-rate hedging strategy this year. As the credit crisis
intensified in 2008, the normal relationship between the prices of preferred
securities and the Fund's interest rate hedge positions (primarily options on
Treasury bond futures and interest rate swaps) weakened or even reversed, so
that the hedge could not be used effectively to help stabilize the Fund's NAV.
At the same time, the yield curve steepened and option prices rose, increasing
the cost of hedging. As these conditions developed, the Fund scaled back its
interest rate hedge positions, removing them entirely by the end of 2008. We
continue to review the effectiveness of the Fund's hedging strategies, and we
anticipate using some hedging instruments when we believe it can accomplish its
goals. For the most part, that means markets returning to more normal
relationships. We don't know when that day will come, but we remain confident
that it will.
----------
(1) According to the Flaherty & Crumrine website, www.preferredstockguide.com,
preferred securities issued by financial companies comprise 85% of the face
value of the overall preferred market. As of November 30, 2008, 58% of the
market value of FLC's portfolio was in financials.
2
Where do we go from here? Just about any fixed-income investment that
doesn't have "US Treasury" in its name has likely declined substantially in
price over recent months, but the market for preferred securities has been
particularly hard hit. Price declines of 50-75% on investment grade preferreds
have not been unusual. We believe the preferred market is significantly
undervalued at this time and that long-term investors will be rewarded
handsomely for their patience. This conclusion is based upon our analysis
described in the discussion topics and on the Fund's website.
Finally, we know this has been an extremely difficult year for
shareholders, and while we might like to say we have been here before, we can't
because we haven't. We believe that our fundamental approach to portfolio
management has helped us avoid most of the credit casualties (the biggest
exception being our exposure to Lehman Brothers Holdings). We also believe the
current portfolio is comprised of survivors. The steps taken by the Fed and
Treasury are starting to gain traction and will help. Economic downturns are
always followed by recoveries and the incoming administration has indicated that
stabilizing the economy is its highest priority. Although we cannot say exactly
when the preferred market will recover, we look forward to a much happier 2009!
Sincerely,
/s/ Donald F. Crumrine /s/ Robert M. Ettinger
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
January 13, 2009
3
DISCUSSION TOPICS
THE FUND'S PREFERRED SECURITIES PORTFOLIO AND COMPONENTS OF TOTAL RETURN ON NAV
It's pretty safe to say the preferred securities market suffered its worst
year in history in 2008. 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 and twelve month total returns of these
indices:
TOTAL RETURNS OF MERRILL LYNCH PREFERRED SECURITIES INDICES*
FOR PERIODS ENDED NOVEMBER 30, 2008
SIX MONTHS ONE YEAR
---------- --------
Merrill Lynch 8% Capped DRD Preferred Stock Index(SM) ................ -41.5% -41.9%
Merrill Lynch 8% Capped Hybrid Preferred Securities Index(SM) ........ -25.7% -21.9%
Merrill Lynch 8% Capped Corporate U.S. Capital Securities Index(SM) .. -32.2% -35.9%
Merrill Lynch Adjustable Preferred Stock, 7% Constrained Index(SM) ... -51.4% -54.4%
* The Merrill Lynch 8% Capped DRD Preferred Index(SM) includes investment
grade preferred securities issued by both corporations and government
agencies that qualify for the corporate dividends received deduction with
issuer concentration capped at a maximum of 8%. The Merrill Lynch 8% Capped
Hybrid Preferred 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 7% Capped Adjustable Rate Preferred Securities 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.
While we realize it's only small consolation, as set forth in the table
below, the Fund's total return on its securities portfolio before leverage
exceeded most of these indices. Unfortunately, the Fund's strategy of using
leverage to increase current income amplified its negative returns, and coupled
with its expenses and hedging strategy, caused the NAV of the Fund to
underperform most of the unleveraged indices.
The table below 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; and (c) issuing an auction-rate preferred
stock or debt to leverage and enhance returns to Common Stock shareholders. The
table then adjusts for the impact of the Fund's operating expenses excluding the
cost of debt leverage to arrive at a total return on NAV (which factors in all
of these items).
4
COMPONENTS OF FLC'S TOTAL RETURN ON NAV
FOR PERIODS ENDED NOVEMBER 30, 2008
SIX MONTHS ONE YEAR
---------- --------
Total Return on Unleveraged Securities Portfolio
(including principal and income) ............. -26.3% -29.3%
Return from Interest Rate Hedging Strategy ...... -0.5% -0.4%
Impact of Leverage .............................. -16.4% -17.7%
Expenses ........................................ -0.8% -1.8%
----- -----
TOTAL RETURN ON NAV .......................... -44.0% -49.2%
TOTAL RETURN ON MARKET PRICE OF FUND SHARES
While our focus is primarily on managing the Fund's portfolio, an
investor's actual return is comprised of monthly dividend payments plus changes
in the Fund's market price. The loss-of-confidence factors that hurt prices of
securities in the Fund's portfolio also caused selling of shares of the Fund
itself that widened the Fund's market-price discount to NAV. This double
negative resulted in a total return on market value for the year ended November
30, 2008 of -51.4%. During the fourth fiscal quarter alone, total return on
MARKET VALUE was -41.8%.
Of course, the factors impacting prices of securities in the Fund's
portfolio also drove down the price of the Fund. The market price hit a low of
$4.51 on October 10th. As of December 31st, subsequent to the Fund's fiscal year
end the price had recovered some, closing the calendar year at $8.05.
As can be seen from the chart below, the gap between the price of the Fund
and the intrinsic value of the Fund (NAV) reached its widest level ever during
October. No surprise, the record discount coincided with share price closing
lows.
FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND (FLC)
PREMIUM/DISCOUNT OF MARKET PRICE TO NAV THROUGH 1/9/2009
(PERFORMANCE GRAPH)
8/29/03 0.0491
9/5/03 0.0477
9/12/03 0.0408
9/19/03 0.0362
9/26/03 0.0249
10/3/03 0.0275
10/10/03 0.0305
10/17/03 0.0428
10/24/03 0.0377
10/31/03 0.0466
11/7/03 0.0678
11/14/03 0.0453
11/21/03 0.0482
11/28/03 0.0341
12/5/03 0.036
12/12/03 0.0365
12/19/03 0.0287
12/26/03 0.0477
1/2/04 0.0444
1/9/04 0.0373
1/16/04 0.064
1/23/04 0.0465
1/30/04 0.0467
2/6/04 0.0647
2/13/04 0.0581
2/20/04 0.0597
2/27/04 0.0461
3/5/04 0.0312
3/12/04 0.0487
3/19/04 0.0486
3/26/04 0.0444
4/2/04 0.066
4/9/04 0.0363
4/16/04 0.0107
4/23/04 0.0017
4/30/04 -0.0325
5/7/04 -0.0729
5/14/04 -0.033
5/21/04 -0.0305
5/28/04 0.0017
6/4/04 0.0034
6/11/04 -0.0056
6/18/04 0.006
6/25/04 -0.031
7/2/04 0.0039
7/9/04 0.0009
7/16/04 -0.0191
7/23/04 -0.027
7/30/04 -0.0253
8/6/04 0.0077
8/13/04 -0.0072
8/20/04 -0.006
8/27/04 -0.0085
9/3/04 0.0115
9/10/04 -0.0021
9/17/04 0.0188
9/24/04 -0.0195
10/1/04 -0.0063
10/8/04 -0.0117
10/15/04 -0.0004
10/22/04 0.0198
10/29/04 0.021
11/5/04 0.0244
11/12/04 0.0055
11/19/04 0.0147
11/26/04 0.0214
12/3/04 0.0228
12/10/04 0.0163
12/17/04 0.0266
12/24/04 0.0197
12/31/04 0.0299
1/7/05 0.025
1/14/05 0.0145
1/21/05 0.0066
1/28/05 0.0004
2/4/05 0.0053
2/11/05 -0.0037
2/18/05 -0.0353
2/25/05 -0.028
3/4/05 -0.0291
3/11/05 -0.0379
3/18/05 -0.071
3/25/05 -0.0939
4/1/05 -0.0907
4/8/05 -0.0967
4/15/05 -0.0987
4/22/05 -0.0953
4/29/05 -0.0873
5/6/05 -0.0793
5/13/05 -0.0827
5/20/05 -0.0736
5/27/05 -0.0716
6/3/05 -0.0771
6/10/05 -0.0655
6/17/05 -0.0603
6/24/05 -0.0781
7/1/05 -0.0642
7/8/05 -0.0601
7/15/05 -0.0559
7/22/05 -0.0757
7/29/05 -0.0632
8/5/05 -0.0678
8/12/05 -0.0767
8/19/05 -0.0696
8/26/05 -0.0712
9/2/05 -0.0618
9/9/05 -0.0463
9/16/05 -0.0531
9/23/05 -0.0571
9/30/05 -0.0983
10/7/05 -0.0971
10/14/05 -0.1032
10/21/05 -0.098
10/28/05 -0.0873
11/4/05 -0.0888
11/11/05 -0.0945
11/18/05 -0.1144
11/25/05 -0.1089
12/2/05 -0.1157
12/9/05 -0.1334
12/16/05 -0.1596
12/23/05 -0.1469
12/30/05 -0.1518
1/6/06 -0.1196
1/13/06 -0.1079
1/20/06 -0.0947
1/27/06 -0.0955
2/3/06 -0.0971
2/10/06 -0.0855
2/17/06 -0.0899
2/24/06 -0.0885
3/3/06 -0.0764
3/10/06 -0.1242
3/17/06 -0.1178
3/24/06 -0.101
3/31/06 -0.116
4/7/06 -0.1166
4/14/06 -0.1465
4/21/06 -0.128
4/28/06 -0.1231
5/5/06 -0.1334
5/12/06 -0.1309
5/19/06 -0.133
5/26/06 -0.1255
6/2/06 -0.1116
6/9/06 -0.1114
6/16/06 -0.105
6/23/06 -0.1089
6/30/06 -0.1281
7/7/06 -0.1323
7/14/06 -0.1218
7/21/06 -0.1132
7/28/06 -0.1023
8/4/06 -0.0895
8/11/06 -0.0695
8/18/06 -0.0806
8/25/06 -0.0899
9/1/06 -0.086
9/8/06 -0.0885
9/15/06 -0.0804
9/22/06 -0.1009
9/29/06 -0.1069
10/6/06 -0.0895
10/13/06 -0.0844
10/20/06 -0.0833
10/27/06 -0.078
11/3/06 -0.0929
11/10/06 -0.0871
11/17/06 -0.0843
11/24/06 -0.0719
12/1/06 -0.0567
12/8/06 -0.0522
12/15/06 -0.0437
12/22/06 -0.0543
12/29/06 -0.0657
1/5/07 -0.0532
1/12/07 -0.0521
1/19/07 -0.0564
1/26/07 -0.0533
2/2/07 -0.0555
2/9/07 -0.0533
2/16/07 -0.0716
2/23/07 -0.0693
3/2/07 -0.0747
3/9/07 -0.0692
3/16/07 -0.0684
3/23/07 -0.0231
3/30/07 -0.0227
4/5/07 -0.0206
4/13/07 -0.0224
4/20/07 -0.0429
4/27/07 -0.0521
5/4/07 -0.0587
5/11/07 -0.0623
5/18/07 -0.0527
5/25/07 -0.0786
6/1/07 -0.0664
6/8/07 -0.0754
6/15/07 -0.0802
6/22/07 -0.095
6/29/07 -0.0832
7/6/07 -0.0876
7/13/07 -0.0852
7/20/07 -0.0971
7/27/07 -0.0937
8/3/07 -0.1017
8/10/07 -0.1121
8/17/07 -0.136
8/24/07 -0.1229
8/31/07 -0.113
9/7/07 -0.1049
9/14/07 -0.0859
9/21/07 -0.097
9/28/07 -0.1197
10/5/07 -0.1154
10/12/07 -0.1296
10/19/07 -0.1425
10/26/07 -0.1238
11/2/07 -0.1273
11/9/07 -0.1368
11/16/07 -0.1477
11/23/07 -0.1539
11/30/07 -0.1375
12/7/07 -0.1195
12/14/07 -0.1185
12/21/07 -0.1169
12/28/07 -0.1122
1/4/08 -0.1142
1/11/08 -0.0879
1/18/08 -0.094
1/25/08 -0.0648
2/1/08 -0.0759
2/8/08 -0.0619
2/15/08 -0.0726
2/22/08 -0.0705
2/29/08 -0.0751
3/7/08 -0.0458
3/14/08 -0.0714
3/20/08 -0.0873
3/28/08 -0.0914
4/4/08 -0.1074
4/11/08 -0.1037
4/18/08 -0.0941
4/25/08 -0.061
5/2/08 -0.0851
5/9/08 -0.0867
5/16/08 -0.0727
5/23/08 -0.0717
5/30/08 -0.066
6/6/08 -0.0767
6/13/08 -0.0598
6/20/08 -0.0816
6/27/08 -0.0842
6/30/08 -0.0696
7/3/08 -0.1145
7/11/08 -0.0909
7/18/08 -0.0841
7/25/08 -0.1027
8/1/08 -0.1127
8/8/08 -0.1128
8/15/08 -0.1061
8/22/08 -0.1044
8/29/08 -0.1139
9/5/08 -0.1186
9/12/08 -0.0953
9/19/08 -0.1644
9/26/08 -0.2156
10/3/08 -0.2808
10/10/08 -0.5297
10/17/08 -0.2229
10/24/08 -0.2394
10/31/08 -0.0733
11/7/08 -0.1705
11/14/08 -0.2197
11/21/08 -0.3503
11/28/08 -0.1911
12/5/08 -0.2959
12/12/08 -0.2721
12/19/08 -0.2035
12/26/08 -0.1712
12/31/08 -0.1544
1/2/09 -0.0972
1/9/09 -0.1273
We have often observed year-end selling pressure in the Fund as investors
attempt to realize gains or losses for tax purposes. Given the sharp decline in
the Fund's price, this year appeared to be no different. We were heartened to
see some price recovery in December, which probably means the Fund's high
current yield on market price, 16.4% as of December 31st, has attracted new
investors.
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. As a result, the monthly dividend rate changed several times
this year. A portion of the distributions in calendar year 2008 were classified
as a tax return of capital rather than ordinary income.
Since the beginning of fiscal 2008, the monthly dividend has been reduced
from $0.1275 to $0.11. Most of the dividend reduction in 2008 can be attributed
to deleveraging. The reasons for deleveraging are discussed in detail below, but
the impact on the Fund's monthly dividend is fairly obvious - in order to redeem
or purchase a portion of its outstanding leverage, the Fund had to sell assets.
As a result, the smaller portfolio generated less income; and while a smaller
leverage balance helped reduce expenses, the net result was less income
available to common shareholders.
THE FUND'S LEVERAGE
Let's start with, "Why does the Fund use leverage?" The answer is that the
cost of leverage typically is lower than the yield on the Fund's portfolio and
provides a valuable net addition to income for common shareholders. FLC began
the year with $128.5 million of Auction Market Preferred Stock ("AMPS")
outstanding. Since the Fund's inception, AMPS have been the most effective form
of leverage for closed-end funds such as FLC, and an integral component of the
Fund's income objective. However, earlier this year the auction process became a
casualty of the liquidity crisis, and by February auctions were "failing". (This
unfortunate terminology is used when there are not enough new investors to
absorb the shares available for sale at or below the issue's maximum dividend
rate. It should not be confused with a default by the issuer.)
This past May, in response to problems in the auction market, the Fund
entered into a committed financing agreement (this is a fancy way of saying the
Fund borrowed from a financial institution) to replace a portion of the
outstanding AMPS. Funds have always had the ability to create leverage by
borrowing or issuing debt or preferred securities (or both), but until the
collapse of the auction preferred market, preferred was used much more widely.
As of November 30th, the Fund's leverage consists of $39.5 million of AMPS
and $29.5 million of bank borrowings. As a percentage of total net assets, these
amounts represent 25.2% and 18.7%, respectively, and 43.9% in the aggregate.
Notes 6 and 7 of the financial statements detail how the rates being paid on
both types of leverage are set. For our purposes here, it is only necessary to
know the rates move up and down with other types of short-term interest rates.
Fortunately, as Federal Reserve efforts to lower short-term interest rates
(including the benchmark commercial paper index) have finally started to work,
rates being paid by the Fund have dropped as well, and are now well below where
they were a year ago.
6
When the Fund was created, certain requirements designed to protect the
interest of lenders and AMPS investors were established. Among these, the Fund
must meet certain asset coverage requirements. Essentially, this calculation
compares the Fund's asset values (discounted according to a specific set of
rules) to the liquidation value of the AMPS plus the Fund's other liabilities.
If this discounted asset value does not meet or exceed this amount, the Fund may
not set aside, declare or pay dividends to common stock shareholders, and it
must take steps to "cure" this coverage test. To do this, the Fund may adjust
holdings (certain assets receive better asset coverage treatment than others)
and sell assets to raise cash. Proceeds from asset sales may be invested in
higher quality, lower yielding securities or held in cash, or in some cases used
to reduce leverage, to restore the required level of asset coverage. If market
values continue to decline, additional sales may be needed. If asset values move
higher, the asset coverage will improve and additional asset sales will not be
required.
If the Fund fails to meet this asset coverage test for ten business days,
it is required to declare its intention to redeem at least enough shares of AMPS
to once again pass the test (if you can't raise the bridge, you must lower the
water). In addition, the Fund has the OPTION of redeeming AMPS on any given
auction date or purchasing shares directly from AMPS holders in private
transactions. The Fund may also pay down debt balances at any time.
In order to pay common stock dividends, the Fund must also meet certain
requirements under the Investment Company Act of 1940. Among other things, the
Act requires the Fund to have at least 200% asset coverage for its AMPS and 300%
asset coverage for its debt before it may declare a dividend to be paid to
common stock shareholders. In other words, before declaring its dividend, a Fund
has to have at least $2 of assets for every $1 of AMPS outstanding and $3 for
every $1 of debt outstanding.
While we were able to make significant progress in meeting the asset
coverage tests by changing the composition of the portfolio, the Fund has
redeemed AMPS and debt over the past several months.
PREFERRED MARKET CONDITIONS
As we've mentioned, prices on almost all preferred securities are down in
recent months, and in some instances the declines are hard to fathom.
Traditional valuation techniques have not been very useful in this environment,
but one tool that helps frame the discussion is called DEFAULT tolerance.
We've posted a thorough discussion of our analysis on the Fund's website
under the heading PREFERRED VALUATION AFTER THE TARP, and we encourage
shareholders to check it out. For our purposes here, a summary will suffice.
The objective of the analysis is to answer the question "GIVEN CURRENT
VALUATIONS, WHAT PERCENTAGE OF THE PORTFOLIO WOULD HAVE TO DEFAULT TO LEAVE YOU
WORSE OFF THAN BUYING A TEN-YEAR US TREASURY NOTE?" As with any model, there are
assumptions made, but even with conservative assumptions, over the ten years
beginning December 31, 2008 51% of the Fund's current portfolio would have to
default in order for the Treasury note to produce a better return. This is an
extraordinarily high default rate.
Looking rationally at preferred securities valuation leads us to the firm
conclusion that preferreds are cheap. They are at historically wide spreads to
benchmark fixed-income asset classes. They can tolerate very high default rates
and still generate positive returns, and the government's actions to limit the
severity of the recession should substantially reduce the risk that defaults get
that severe. At more-reasonable default rates, preferreds can provide common
equity-like returns with lower risk. We believe that preferred securities remain
extremely attractive for long-term investors.
7
However, we recognize that markets today are far from completely rational.
Stung by losses, some leveraged preferred investors have been forced to exit the
market, and many will not come back. Others see short-term risk that they feel
outweighs preferreds' long-term potential, or they fear that new issue supply
will prevent preferreds from recovering. Still others genuinely fear that the
U.S. economy is headed for another Great Depression, despite all efforts to
prevent it.
We do not know precisely how this recession will play itself out. We can
only assess the factors that we think will affect preferred valuation and act
accordingly. All investing entails taking risks. Intelligent long-term investing
entails taking risks when the potential payoffs are high and the probability of
poor outcomes is low. We believe that in the preferred market, now is such a
time.
Although all companies have felt some strain from the recession and credit
crunch, banks, finance companies, broker-dealers and, more recently, insurance
companies have been most affected, given their direct and indirect exposure
initially to the problems in housing and subsequently to financial markets. The
pressure on preferred security valuations, especially those of financial
issuers, intensified in early September with the federal government taking
conservatorship of Fannie Mae and Freddie Mac (the GSEs), investing at a
position senior to existing preferred holders and suspending the payment of
preferred dividends. This proved a major catalyst for the collapse of preferred
valuations (most dramatically for DRD eligible issues) beginning in September.
These developments were closely followed by the bankruptcy of Lehman Brothers
Holdings and the rescue of AIG. The surviving major broker-dealers reacted
accordingly, with Merrill Lynch arranging a quick marriage with Bank of America
and Goldman Sachs and Morgan Stanley converting to bank holding company
registration, mandating a more conservative capital structure.
Beginning in mid-September, the federal government response to these
developments has been significant. After some resistance, Congress approved the
Treasury's Trouble Assets Relief Program (TARP). Although the funding was
initially envisioned to support asset valuations, on October 14th the Treasury
announced the Capital Purchase Program for banks and thrifts under the TARP,
with clarification that the government's equity investment will rank equal with
(and not rank senior than) existing DRD eligible preferred shareholders and
junior to taxable preferred securities. This restored confidence in a preferred
market that had been weakened significantly by the events beginning with the GSE
conservatorship, and should facilitate the eventual restoration of private
equity into these companies.
More recently, the Treasury announced a second round of preferred equity
financing for Citigroup under the TARP, in addition to joining various other
government agencies guaranteeing $306 billion of this systemically important
institution's troubled assets. In doing so, the Treasury returned to the
original focus of the TARP - stabilizing asset valuations. Having committed the
entire first tranche of TARP funding, the Treasury is now requesting the
additional funds included in the initial legislation from Congress.
In consultation with Treasury, over the same period the Federal Reserve and
the FDIC have established or announced a variety of funding facilities or
guarantee programs to help stabilize financial markets, the magnitude of which
dwarf the size of TARP. These include liquidity facilities for banks, primary
dealers, money market funds (using banks as intermediaries), commercial paper
issuers and, most recently, asset-backed commercial paper issuers. Recent
guarantee programs support intermediate bank debt issuers and money market
funds. Announced for February 2009 are the Term Asset-backed Securities Loan
Facility and the Government Sponsored Entities Purchase Program, to provide
liquidity for consumer lending and to holders of GSE debt.
8
The speed and magnitude of the federal government's response to
developments which climaxed in September have been unprecedented. While all
issuers of preferred securities face a difficult operating environment over the
next several years, this will be especially true for banks and other financial
companies. However, the federal government's prompt recent actions provide some
assurance that the financial system will continue to function.
TAX ADVANTAGES OF 2008 CALENDAR YEAR DISTRIBUTIONS
In 2008, the Fund passed on a portion of its income to individuals in the
form of qualified dividend income or QDI. QDI is taxed at a maximum 15% rate
instead of an individual's ordinary income tax rate. In calendar year 2008,
approximately 30.5% of distributions made by the Fund was eligible for QDI
treatment. For an individual in the 28% tax bracket, this means that the Fund's
total distributions will only be taxed at a blended 25.9% rate versus the 28%
rate which would apply to distributions by a fund containing traditional
corporate bonds. This tax advantage means that, all other things being equal, an
individual in the 28% tax bracket who held 100 shares of Common Stock of the
Fund for the calendar year would have had to receive approximately $163 in
distributions from a traditional corporate bond fund to net the same after-tax
amount as the $154 in distributions paid by the Fund.
For detailed information about the tax treatment of the particular
distributions received from the Fund, please see the Form 1099 you receive from
either the Fund or your broker.
Corporate shareholders also receive a federal tax benefit from the 19.1% of
distributions that were eligible for the inter-corporate dividends received
deduction or DRD.
It is important to remember that the composition of the portfolio and the
income distributions can change from one year to the next, and that the QDI or
DRD portions of next year's distributions may not be the same (or even similar)
to this year's.
RISKS OF THE FUND'S USE OF BORROWING FOR LEVERAGE
The use of leverage can be beneficial on a longer term basis depending on a
number of variables and market conditions. The following describes risks
associated with leveraging the common stock through the use of a combination of
AMPS and borrowing, which do not materially differ from the risks the Fund
previously faced through leveraging using only AMPS.
Because the investment risk associated with assets purchased with borrowed
money is borne solely by the Fund's common stock shareholders, resulting in
greater risk to these shareholders. Leverage creates risks for the Fund's common
stock shareholders, including the likelihood of greater volatility of the Fund's
net asset value and the market price of its shares, and the risk that
fluctuations in interest rates on borrowings or in the dividend rates on any
outstanding AMPS may affect the return to common stock shareholders. If the
income from the securities purchased with such funds is not sufficient to cover
the cost of leverage, the net income of the Fund would be less than if leverage
had not been used, and therefore the amount available for distribution to common
stock shareholders as dividends would be reduced. In such an event, the Fund
might nevertheless maintain its leveraged position to avoid capital losses on
securities purchased with the leverage that would need to be sold to generate
cash used to reduce the leverage. Further, all expenses associated with
borrowing, such as interest expenses and transaction costs, are borne solely by
the Fund's common stock shareholders.
9
Similarly, if the asset coverage for borrowing declines below the limits
specified in the the 1940 Act or, in the terms of the AMPS or, the financing
arrangement, the Fund may be forced to sell a portion of its investments when it
may not be advantageous to do so. In the extreme, sales of investments required
to meet asset coverage tests imposed by the Investment Company Act could also
cause a Fund to lose its status as a regulated investment company under the
Internal Revenue Code. If a Fund were unable to make adequate distributions to
shareholders because of asset coverage or other restrictions, it could fail to
qualify as a regulated investment company for federal income tax purposes and,
even if it did not fail to so qualify, it could become liable for income and
excise tax on the portion of its earnings which are not distributed on a timely
basis in accordance with applicable provisions of the Internal Revenue Code.
Pursuant to Rule 23c-1 under the Investment Company Act of 1940, the Fund
is authorized to repurchase AMPS on the open market or through negotiated
private transactions. Purchases of AMPS, if any, will be executed as market and
business conditions warrant on the open market or in negotiated or block trades.
The Fund is not obligated to repurchase any dollar amount or number of AMPS, and
the timing and amount of any AMPS repurchased will depend on market conditions,
share price, corporate and regulatory requirements, capital availability and
other factors. Authorization to repurchase AMPS is at the discretion of the
Fund's Board of Directors and may be limited or terminated at any time without
prior notice.
10
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OVERVIEW
NOVEMBER 30, 2008 (UNAUDITED)
FUND STATISTICS ON 11/30/08
Net Asset Value $ 9.00
Market Price $ 7.28
Discount 19.11%
Yield on Market Price 20.19%
Common Stock Shares Outstanding 9,776,333
MOODY'S RATINGS % OF PORTFOLIO
--------------- --------------
AA 5.4%
A 12.2%
BBB 48.5%
BB 22.0%
Below "BB" 0.3%
Not Rated 4.3%
-----
Below Investment Grade* 15.7%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.
(PIE CHART)
INDUSTRY CATEGORIES % OF PORTFOLIO
------------------- --------------
Banking 32%
Utilities 27%
Insurance 21%
Financial Services 5%
Energy 5%
Other 10%
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO
------------------------ --------------
Banco Santander 5.4%
Liberty Mutual Group 5.4%
Midamerican Energy 4.9%
National City 3.8%
Sovereign Bancorp 3.8%
Unum Group 3.3%
AON Corp 3.1%
Astoria Financial 3.1%
Entergy Louisiana 3.0%
Merrill Lynch 2.9%
% OF PORTFOLIO**
----------------
Holdings Generating Qualified Dividend Income (QDI) for
Individuals 27%
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. SEE ACCOMPANYING
NOTES TO THE FINANCIAL STATEMENTS FOR THE TAX CHARACTERIZATION OF 2008
DISTRIBUTIONS.
11
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 2008
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- 83.4%
BANKING -- 31.9%
$ 5,750,000 Astoria Capital Trust I, 9.75% 11/01/29, Series B .............................. $ 4,837,946(1)
Banco Santander:
401,100 6.50% Pfd. .................................................................. 6,041,569**(1)(2)
155,320 6.80% Pfd. .................................................................. 2,455,998**(1)(2)
$ 8,218,000 Capital One Capital III, 7.686% 08/15/36 ....................................... 3,801,482(1)
$ 10,000,000 CBG Florida REIT Corporation, 7.114%, 144A**** ................................. 2,000,000
40,000 Citizens Funding Trust I, 7.50% Pfd. 09/15/66 .................................. 483,752(1)
40,000 Cobank, ACB, 7.00% Pfd., 144A**** .............................................. 1,068,400*(1)
7,200 Colonial Capital Trust IV, 7.875% Pfd. 10/01/33 ................................ 86,400
$ 7,000,000 Comerica Capital Trust II, 6.576% 02/20/37 ..................................... 2,674,042
7,000 FBOP Corporation, Adj. Rate Pfd., 144A**** ..................................... 3,675,000*
$ 400,000 First Empire Capital Trust I, 8.234% 02/01/27 .................................. 301,742(1)
$ 1,900,000 First Hawaiian Capital I, 8.343% 07/01/27, Series B ............................ 1,581,212(1)(2)
1,000 First Tennessee Bank, Adj. Rate Pfd., 144A**** ................................. 512,500*
$ 100,000 First Tennessee Capital I, 8.07% 01/06/27, Series A ............................ 58,365(1)
$ 600,000 First Union Capital II, 7.95% 11/15/29 ......................................... 487,203(1)
2 FT Real Estate Securities Company, 9.50% Pfd., 144A**** ........................ 1,640,489
$ 1,729,000 Goldman Sachs Capital II, 5.793% ............................................... 649,685
$ 1,000,000 HBOS PLC, 6.657%, 144A**** ..................................................... 466,067**(2)
$ 855,000 HSBC USA Capital Trust II, 8.38% 05/15/27, 144A**** ............................ 791,515(1)(2)
82,000 Keycorp Capital IX, 6.75% Pfd. 12/15/66 ........................................ 1,122,375(1)
54,995 National City Corporation, 9.875% Pfd. ......................................... 1,154,345*(1)
$ 2,500,000 National City Preferred Capital Trust I, 12.00% ................................ 2,300,027
151,059 PFGI Capital Corporation, 7.75% Pfd. ........................................... 2,568,003(1)
$ 1,000,000 Regions Financing Trust II, 6.625% 05/15/47 .................................... 442,501
93,100 Sovereign Bancorp, 7.30% Pfd., Series C ........................................ 1,256,850*(1)
191,525 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36 ................................. 2,890,840
2,000 Sovereign REIT, 12.00% Pfd., Series A, 144A**** ................................ 1,792,660
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% .............................................. 365,654
84,900 Wachovia Preferred Funding, 7.25% Pfd., Series A ............................... 1,369,013
$ 2,800,000 Webster Capital Trust IV, 7.65% 06/15/37 ....................................... 1,179,604
------------
50,055,989
------------
The accompanying notes are an integral part of the financial statements.
12
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2008
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
FINANCIAL SERVICES -- 4.7%
CIT Group, Inc.:
13,900 5.189% Pfd., Series B ....................................................... $ 346,805*(1)
$ 3,250,000 6.10% 03/15/67 .............................................................. 684,255
68,800 6.35% Pfd., Series A ........................................................ 556,853*(1)
2,000 First Republic Preferred Capital Corporation, 10.50% Pfd., 144A**** ............ 1,848,920(1)
Goldman Sachs:
28,000 Cabco Trust Capital I, Adj. Rate Pfd. 02/15/34 .............................. 250,250(1)
1,500 STRIPES Custodial Receipts, Pvt. ............................................ 15*+
$ 3,000,000 Gulf Stream-Compass 2005 Composite Notes, 144A**** ............................. 962,760
Lehman Brothers Holdings, Inc.:
20,000 5.67% Pfd., Series D ........................................................ 5,150*++
85,000 7.95% Pfd. .................................................................. 187*++
Merrill Lynch:
160,000 6.25% Pfd. .................................................................. 2,030,000*(1)
80,000 Adj. Rate Pfd., Series 5 .................................................... 630,000*(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*+
------------
7,322,925
------------
INSURANCE -- 14.4%
$ 9,511,000 AON Capital Trust A, 8.205% 01/01/27 ........................................... 4,843,610(1)
Arch Capital Group Ltd.:
27,150 7.875% Pfd., Series B ....................................................... 437,794**(1)(2)
47,100 8.00% Pfd., Series A ........................................................ 805,118**(1)(2)
Axis Capital Holdings:
19,433 7.25% Pfd., Series A ........................................................ 271,456**(1)(2)
66,600 7.50% Pfd., Series B ........................................................ 3,548,535(1)(2)
160,000 Delphi Financial Group, 7.376% Pfd. 05/15/37 ................................... 1,535,008(1)
$ 5,500,000 Everest Re Holdings, 6.60% 05/15/37 ............................................ 2,294,242(1)
Liberty Mutual Group:
$ 6,200,000 7.80% 03/15/37, 144A**** .................................................... 3,176,161
$ 1,000,000 10.75% 06/15/58, 144A**** ................................................... 528,950
$ 1,500,000 MetLife Capital Trust X, 9.25% 04/08/38, 144A**** .............................. 999,592(1)
13,200 MetLife, Inc., 6.50% Pfd., Series B ............................................ 164,588*
The accompanying notes are an integral part of the financial statements.
13
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2008
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
$ 300,000 PartnerRe Finance II, 6.44% 12/01/66 ........................................... $ 152,589(1)(2)
109,000 Scottish Re Group Ltd., 7.25% Pfd. ............................................. 62,403**(2)+
$ 3,615,000 USF&G Capital, 8.312% 07/01/46, 144A**** ....................................... 3,056,721(1)
$ 1,500,000 ZFS Finance USA Trust V, 6.50% 05/09/37, 144A**** .............................. 796,065(1)
------------
22,672,832
------------
UTILITIES -- 26.8%
33,700 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ...................... 3,181,280*
205,000 Calenergy Capital Trust III, 6.50% Pfd. 09/01/27 ............................... 7,738,750(1)
$ 2,375,000 COMED Financing III, 6.35% 03/15/33 ............................................ 1,716,714
66,170 Constellation Energy Group, Inc., 8.625% Pfd. 06/15/63, Series A ............... 1,518,602(1)
$ 2,000,000 Dominion Resources Capital Trust I, 7.83% 12/01/27 ............................. 1,952,224(1)
$ 2,250,000 Dominion Resources, Inc., 7.50% ................................................ 1,148,836(1)
83,000 Entergy Arkansas, Inc., 6.45% Pfd. ............................................. 1,894,060*
50,000 Entergy Louisiana, Inc., 6.95% Pfd. ............................................ 4,771,000*
87,423 FPC Capital I, 7.10% Pfd., Series A ............................................ 1,844,083(1)
FPL Group Capital, Inc.:
$ 750,000 6.35% 10/01/66 .............................................................. 413,038(1)
$ 350,000 6.65% 06/15/67 .............................................................. 192,761(1)
2,500 Georgia Power Company, 6.50% Pfd., Series 07-A ................................. 217,500*(1)
30,445 Indianapolis Power & Light Company, 5.65% Pfd. ................................. 2,444,125*
$ 5,000,000 PECO Energy Capital Trust IV, 5.75% 06/15/33 ................................... 3,808,355(1)
$ 4,250,000 Puget Sound Energy, Inc., 6.974% 06/01/67 ...................................... 2,151,775
15,000 Southern California Edison, 6.00% Pfd., Series C ............................... 1,311,750*(1)
$ 1,500,000 Southern Union Company, 7.20% 11/01/66 ......................................... 837,976
5,000 Union Electric Company, $7.64 Pfd. ............................................. 513,125*
$ 4,500,000 Wisconsin Energy Corporation, 6.25% 05/15/67 ................................... 2,253,006(1)
85,137 Wisconsin Power & Light Company, 6.50% Pfd. .................................... 2,115,127*(1)
------------
42,024,087
------------
ENERGY -- 3.4%
$ 4,900,000 Enbridge Energy Partners LP, 8.05% 10/01/37 .................................... 3,254,330(1)
$ 4,000,000 Enterprise Products Partners, 7.034% 01/15/68 .................................. 2,082,804(1)
------------
5,337,134
------------
The accompanying notes are an integral part of the financial statements.
14
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2008
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
MISCELLANEOUS INDUSTRIES -- 2.2%
40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ............................ $ 3,429,600*
------------
3,429,600
------------
TOTAL PREFERRED SECURITIES
(Cost $218,476,605) ......................................................... 130,842,567
------------
CORPORATE DEBT SECURITIES -- 9.3%
FINANCIAL SERVICES -- 0.2%
$ 4,726,012 Lehman Brothers, Guaranteed Note, Variable Rate, 12/16/16, 144A**** ............ 333,184++
------------
333,184
------------
INSURANCE -- 6.5%
15,000 AAG Holding Company, Inc., 7.25% Pfd. .......................................... 179,100(1)
$ 7,577,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** ............................ 4,749,514
$ 7,000,000 UnumProvident Corporation, 7.25% 03/15/28, Senior Notes ........................ 5,234,698
------------
10,163,312
------------
ENERGY -- 1.6%
$ 4,000,000 Noble Energy, Inc., 7.25% 08/01/97 ............................................. 2,571,276(1)
------------
2,571,276
------------
MISCELLANEOUS INDUSTRIES -- 1.0%
16,500 Corp-Backed Trust Certificates, 7.00% 11/15/28, Series Sprint .................. 126,885(1)
------------
Pulte Homes, Inc.:
25,844 7.375% 06/01/46 ................................................................ 303,667
$ 2,160,000 7.875% 06/15/32 ................................................................ 1,134,000
------------
1,564,552
------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $26,958,355) .......................................................... 14,632,324
------------
The accompanying notes are an integral part of the financial statements.
15
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2008
SHARES/$ PAR VALUE
------------ ------------
MONEY MARKET FUND -- 1.7%
2,712,994 BlackRock Provident Institutional, T-Fund .......................... $ 2,712,994
------------
TOTAL MONEY MARKET FUND
(Cost $2,712,994) ............................................... 2,712,994
------------
TOTAL INVESTMENTS (Cost $248,147,954***) .......................................... 94.4% 148,187,885
OTHER ASSETS AND LIABILITIES (Net) ................................................ 5.6% 8,814,566
----- ------------
NET ASSETS BEFORE LOAN AND AMPS ................................................... 100.0%+++ $157,002,451
----- ------------
LOAN PRINCIPAL BALANCE ............................................................ (29,500,000)
AUCTION MARKET PREFERRED STOCK (AMPS) REDEMPTION VALUE ............................ (39,500,000)
------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ........................................ $ 88,002,451
============
----------
* Securities eligible for the Dividends Received Deduction and distributing
Qualified Dividend Income.
** Securities distributing Qualified Dividend Income only.
*** Aggregate cost of securities held.
**** Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration to qualified institutional buyers. These securities have been
determined to be liquid under the guidelines established by the Board of
Directors.
(1) All or a portion of this security is pledged as collateral for the Fund's
loan. The total value of such securities was $79,596,043 at November 30,
2008.
(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:
CABCO -- Corporate Asset Backed Corporation
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.
16
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2008
ASSETS:
Investments, at value (Cost $248,147,954) .................. $148,187,885
Receivable for investments sold ............................ 5,872,000
Dividends and interest receivable .......................... 3,112,048
Prepaid expenses .......................................... 71,783
------------
Total Assets ........................................... 157,243,716
LIABILITIES:
Loan Payable ............................................... $29,500,000
Dividends payable to Common Stock Shareholders ............. 231
Investment advisory fee payable ............................ 75,643
Administration, Transfer Agent and Custodian fees payable .. 26,904
Servicing agent fees payable ............................... 3,289
Professional fees payable .................................. 78,897
Directors' fees payable .................................... 872
Accrued expenses and other payables ........................ 45,318
Accumulated undeclared distributions to
Auction Market Preferred Stock Shareholders ............. 10,111
-----------
Total Liabilities .................................... 29,741,265
------------
AUCTION MARKET PREFERRED STOCK (1,580 SHARES OUTSTANDING)
REDEMPTION VALUE ........................................... 39,500,000
------------
NET ASSETS AVAILABLE TO COMMON STOCK .......................... $ 88,002,451
============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
Distributions in excess of net investment income ........... $ (434,755)
Accumulated net realized loss on investments sold .......... (42,491,181)
Unrealized depreciation of investments ..................... (99,960,069)
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 ........... $ 88,002,451
============
NET ASSET VALUE PER SHARE OF COMMON STOCK:
Common Stock (9,776,333 shares outstanding) ................ $ 9.00
============
The accompanying notes are an integral part of the financial statements.
17
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2008
INVESTMENT INCOME:
Dividends+ ................................................. $ 11,760,937
Interest ................................................... 11,006,729
-------------
Total Investment Income ................................. 22,767,666
EXPENSES:
Investment advisory fee .................................... $1,483,134
Servicing agent fee ........................................ 121,456
Administrator's fee ........................................ 230,513
Auction Market Preferred Stock broker commissions and
auction agent fees ...................................... 215,476
Professional fees .......................................... 182,030
Insurance expense .......................................... 133,905
Transfer Agent fees ........................................ 66,040
Directors' fees ............................................ 73,090
Custodian fees ............................................. 32,667
Compliance fees ............................................ 37,715
Interest expense ........................................... 1,173,471
Commitment fee ............................................. 227,500
Other ...................................................... 125,300
Total Expenses .......................................... 4,102,297
-------------
NET INVESTMENT INCOME ......................................... 18,665,369
-------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net realized loss on investments sold during the year ...... (25,533,127)
Net realized loss from written options during the year ..... (96,597)
Change in unrealized appreciation/depreciation of
investments ............................................. (78,210,324)
-------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS ............... (103,840,048)
-------------
DISTRIBUTIONS TO AUCTION MARKET PREFERRED STOCK SHAREHOLDERS:
From net investment income (including changes in accumulated
undeclared distributions) ............................... (4,264,640)
-------------
NET DECREASE IN NET ASSETS TO COMMON STOCK
RESULTING FROM OPERATIONS .................................. $ (89,439,319)
=============
----------
+ 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.
18
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
YEAR ENDED YEAR ENDED
NOVEMBER 30, 2008 NOVEMBER 30, 2007
----------------- -----------------
OPERATIONS:
Net investment income .......................................... $ 18,665,369 $ 21,889,848
Net realized loss on investments sold during the year .......... (25,629,724) (2,445,928)
Change in net unrealized depreciation of investments ........... (78,210,324) (32,552,743)
Distributions to AMPS* Shareholders from net investment income,
including changes in accumulated undeclared distributions ... (4,264,640) (6,874,365)
------------- ------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ........... (89,439,319) (19,983,188)
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock
Shareholders(1) ............................................. (15,043,583) (14,957,790)
Tax return of capital to Common Stock Shareholders ............. (251,490) --
------------- ------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ............... (15,295,073) (14,957,790)
NET DECREASE IN NET ASSETS AVAILABLE TO
COMMON STOCK FOR THE YEAR ...................................... $(104,734,392) $(34,940,978)
============= ============
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of year .............................................. $ 192,736,843 $227,677,821
Net decrease in net assets during the year ..................... (104,734,392) (34,940,978)
------------- ------------
End of year (including distributions in excess of net investment
income of $(434,755) and of $(290,982), respectively) ....... $ 88,002,451 $192,736,843
============= ============
----------
* 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.
19
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 30, 2008
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations ................ $ (89,439,319)
ADJUSTMENTS TO RECONCILE NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS TO NET CASH USED IN OPERATING ACTIVITIES:
Purchase of investment securities ................................... (118,044,452)
Proceeds from disposition of investment securities .................. 187,782,036
Purchase of purchased option securities ............................. (2,124,545)
Proceeds from disposition of purchased option securities ............ 932,559
Premiums received for written options ............................... 700,617
Payments to close written options ................................... (797,214)
Sale of short-term investment securities, net ....................... (3,121,570)
Decrease in securities lending collateral ........................... 4,905,720
Decrease in dividends and interest receivable ....................... 756,327
Increase in receivable for investments sold ......................... (5,750,752)
Decrease in Prepaid expenses ........................................ 2,979
Net amortization/(accretion) of premium/(discount) .................. 216,387
Decrease in payable for securities lending collateral ............... (4,905,720)
Decrease in accrued expenses and other liabilities .................. (56,266)
Unrealized depreciation on securities ............................... 78,210,324
Net realized loss from investments and written options .............. 25,629,724
-------------
Net cash provided in operating activities ........................ 74,896,835
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Loan payable ............................................ 29,500,000
Decrease in Auction Market Preferred Stock (AMPS) ................... (89,000,000)
Decrease in payable for AMPS ........................................ (36,278)
Decrease in dividend payable to common stock shareholders ........... (65,484)
Distributions to common stock shareholders from net investment income (15,295,073)
-------------
Net cash used by financing activities ............................ (74,896,835)
-------------
Net increase in cash ............................................. --
CASH:
Beginning of the year ............................................... --
-------------
End of the year ..................................................... $ --
-------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the year ....................................... 1,143,725
-------------
The accompanying notes are an integral part of the financial statements.
20
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
FINANCIAL HIGHLIGHTS
FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT EACH YEAR.
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.
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------
2008 2007 2006 2005 2004
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year ..................................... $ 19.71 $ 23.29 $ 22.40 $ 23.56 $ 24.33
-------- -------- -------- -------- --------
INVESTMENT OPERATIONS:
Net investment income .................................................. 1.91 2.24 2.04 1.94 1.95
Net realized and unrealized gain/(loss) on investments ................. (10.62) (3.59) 1.06 (0.86) (0.55)
DISTRIBUTIONS TO AMPS* SHAREHOLDERS:
From net investment income ............................................. (0.44) (0.70) (0.64) (0.41) (0.19)
-------- -------- -------- -------- --------
Total from investment operations ....................................... (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 ............................................. (1.53) (1.53) (1.57) (1.83) (1.99)
From return of capital ................................................. (0.03) -- -- -- --
-------- -------- -------- -------- --------
Total distributions to Common Stock Shareholders ....................... (1.56) (1.53) (1.57) (1.83) (1.99)
-------- -------- -------- -------- --------
Net asset value, end of year ........................................... $ 9.00 $ 19.71 $ 23.29 $ 22.40 $ 23.56
======== ======== ======== ======== ========
Market value, end of year .............................................. $ 7.28 $ 17.00 $ 22.08 $ 19.70 $ 24.15
Total investment return based on net asset value** ..................... (48.17%) (8.71%) 12.30% 3.27% 5.22%
Total investment return based on market value** ........................ (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 year (in 000's) ......................... $ 88,002 $192,737 $227,678 $219,015 $229,805
Operating expenses including interest expense(1) ................. 2.67% -- -- -- --
Operating expenses excluding interest expense .................... 1.91% 1.51% 1.50% 1.47% 1.51%
Net investment income + .......................................... 9.37% 6.94% 6.28% 6.51% 7.33%
SUPPLEMENTAL DATA:++
Portfolio turnover rate .......................................... 46% 57% 68% 38% 79%
Total net investments, end of year (in 000's) .................... $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 ............................ 1.54% -- -- -- --
Ratio of operating expenses excluding interest expense to net
assets before loan and AMPS ................................... 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.
+ 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.
21
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
PER SHARE OF COMMON STOCK
TOTAL DIVIDEND
DIVIDENDS NET ASSET NYSE REINVESTMENT
PAID+ VALUE CLOSING PRICE PRICE (1)
--------- --------- ------------- ------------
December 31, 2007 ................... $0.1300 $18.98 $16.88 $16.96
January 31, 2008 .................... 0.1300 19.35 17.97 18.09
February 29, 2008 ................... 0.1300 18.92 17.50 17.52
March 31, 2008 ...................... 0.1300 17.21 15.69 15.84
April 30, 2008 ...................... 0.1300 17.47 15.94 16.10
May 30, 2008 ........................ 0.1300 17.12 15.99 15.88
June 30, 2008. ...................... 0.1300 16.10 14.98 14.59
July 31, 2008 ....................... 0.1365 14.94 13.24 13.27
August 29, 2008 ..................... 0.1365 14.84 13.15 13.28
October 6, 2008 (2) ................. 0.1365 10.97 7.13 6.94
October 31, 2008 .................... 0.1225 9.82 9.10 8.82
November 28, 2008 ................... 0.1225 9.00 7.28 6.97
----------
+ May include distributions classified as a tax return of capital.
(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.
(2) September 30, 2008 distribution delayed; paid on October 6, 2008.
The accompanying notes are an integral part of the financial statements.
22
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
ASSET LIQUIDATION
TOTAL SHARES COVERAGE PREFERENCE
DATE OUTSTANDING (1) PER SHARE (2) PER SHARE (3)
-------- --------------- ------------- -------------
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.
The accompanying notes are an integral part of the financial statements.
23
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Flaherty & Crumrine/Claymore Total Return Fund Incorporated (the "Fund")
was incorporated as a Maryland corporation on July 18, 2003, and commenced
operations on August 29, 2003 as a diversified, closed-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
The Fund's primary investment objective is to provide its common shareholders
with high current income. The Fund's secondary investment objective is capital
appreciation.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of 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.
24
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (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 November 30,
2008 is as follows:
OTHER FINANCIAL
INSTRUMENTS
INVESTMENTS (UNREALIZED
IN SECURITIES APPRECIATION/
VALUATION INPUTS (MARKET VALUE) DEPRECIATION)*
---------------- -------------- ---------------
Level 1 - Quoted Prices .................................. $ 27,582,284 $--
Level 2 - Other Significant Observable Inputs ............ 119,309,657 --
Level 3 - Significant Unobservable Inputs ................ 1,295,944 --
------------ ---
TOTAL .................................................... $148,187,885 $--
* 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
November 30, 2008 the Fund does not have any other financial instruments.
25
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Following is a reconciliation of Level 3 investments for which significant
unobservable inputs were used to determine fair value:
OTHER FINANCIAL
INSTRUMENTS
INVESTMENTS (UNREALIZED
IN SECURITIES APPRECIATION/
(MARKET VALUE) DEPRECIATION)
-------------- ---------------
BALANCE AS OF 11/30/07. .................................. $6,945,554 $--
Accrued discounts/premiums ............................... -- --
Realized gain (loss) ..................................... -- --
Change in unrealized appreciation (depreciation) ......... (5,649,610) --
Net purchases (sales) .................................... -- --
Transfers in and/or out of Level 3 ....................... -- --
---------- ---
BALANCE AS OF 11/30/08 ................................... $1,295,944 $--
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities sold
are recorded on the specific identified cost basis. Dividend income is recorded
on ex-dividend dates. Interest income is recorded on the accrual basis. The Fund
also amortizes premiums and accretes discounts on fixed income securities using
the effective yield method.
OPTIONS: Purchases of options are recorded as an investment, the value of
which is marked-to-market at each valuation date. When the Fund enters into a
closing sale transaction, the Fund will record a gain or loss depending on the
difference between the purchase and sale price. The risks associated with
purchasing options and the maximum loss the Fund would incur are limited to the
purchase price originally paid.
When the Fund writes an option, an amount equal to the premium received by
the Fund is recorded as a liability, the value of which is marked-to-market at
each valuation date. When a written option expires, the Fund realizes a gain
equal to the amount of the premium originally received. When the Fund enters
into a closing purchase transaction, the Fund realizes a gain (or loss if the
cost of the closing purchase transaction exceeds the premium received when the
option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a call option is exercised, the Fund realizes a gain or loss from the sale
of the underlying security and the proceeds from such sale are increased by the
amount of the premium originally received. When a put option is exercised, the
amount of the premium originally received will reduce the cost of the security
which the Fund purchased upon exercise.
The risk in writing a call option is that the Fund may forego the
opportunity for profit if the market price of the underlying security increases
and the option is exercised. The risk in writing a put option is that the Fund
may incur a loss if the market price of the underlying security decreases and
the option is exercised.
26
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 November 30, 2008, 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.
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.
27
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Distributions from net realized gains for book purposes may include
short-term capital gains, which are included as ordinary income for tax
purposes, and may exclude amortization of premium on certain fixed income
securities, which are not reflected in ordinary income for tax purposes. The tax
character of distributions paid, including changes in accumulated undeclared
distributions to AMPS Shareholders, during 2008 and 2007 was as follows:
DISTRIBUTIONS PAID IN FISCAL YEAR 2008 DISTRIBUTIONS PAID IN FISCAL YEAR 2007
--------------------------------------- ----------------------------------------
ORDINARY LONG-TERM RETURN OF ORDINARY LONG-TERM
INCOME CAPITAL GAINS CAPITAL INCOME CAPITAL GAINS
----------- ------------- --------- ----------- -------------
Common $15,043,583 $0 $251,490 $14,957,790 $0
Preferred 4,264,640 $0 $ 0 $ 6,874,365 $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.
RECLASSIFICATION OF ACCOUNTS: During the year ended November 30, 2008,
reclassifications were made in the Fund's capital accounts to report these
balances on a tax basis, excluding temporary differences, as of November 30,
2008. Additional adjustments may be required in subsequent reporting periods.
These reclassifications have no impact on the net asset value of the Fund. The
calculation of net investment income per share in the financial highlights
excludes these adjustments. Below are the reclassifications:
PAID-IN UNDISTRIBUTED ACCUMULATED NET REALIZED
CAPITAL NET INVESTMENT INCOME GAIN ON INVESTMENTS
------- --------------------- ------------------------
$39,432 $499,081 $(538,513)
EXCISE TAX: The Internal Revenue Code of 1986, as amended, imposes a 4%
nondeductible excise tax on the Fund to the extent the Fund does not distribute
by the end of any calendar year at least (1) 98% of the sum of its net
investment income for that year and its capital gains (both long-term and
short-term) for its fiscal year and (2) certain undistributed amounts from
previous years. The Fund paid $20,284 of Federal excise taxes attributable to
calendar year 2007 in March 2008.
ADDITIONAL ACCOUNTING STANDARDS: 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.
28
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Management is currently evaluating the impact the adoption of SFAS 161 will have
on the Fund's financial statement disclosures.
3. INVESTMENT ADVISORY FEE, SERVICING AGENT FEE, ADMINISTRATION FEE, TRANSFER
AGENT FEE, CUSTODIAN FEE, DIRECTORS' FEES AND CHIEF COMPLIANCE OFFICER FEE
Flaherty & Crumrine Incorporated (the "Adviser") serves as the Fund's
investment adviser. The Fund pays the Adviser a monthly fee at an annual rate of
0.575% of the first $200 million of the Fund's average weekly total managed
assets, 0.50% of the next $300 million of the Fund's average weekly total
managed assets, and 0.45% of the Fund's average weekly total managed assets
above $500 million.
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"), formerly known as PFPC
Inc., serves as the Fund's Administrator. As Administrator, PNC calculates the
net asset value of the Fund's shares attributable to Common Stock and generally
assists in all aspects of the Fund's administration and operation. As
compensation for PNC's services as Administrator, the Fund pays PNC a monthly
fee at an annual rate of 0.10% of the first $200 million of the Fund's average
weekly total managed assets, 0.04% of the next $300 million of the Fund's
average weekly total managed assets, 0.03% of the next $500 million of the
Fund's average weekly total managed assets and 0.02% of the Fund's average
weekly total managed assets above $1 billion.
PNC also serves as the Fund's Common Stock dividend-paying agent and
registrar (Transfer Agent). As compensation for PNC's services, the Fund pays
PNC a fee at an annual rate of 0.02% of the first $150 million of the Fund's
average weekly net assets attributable to Common Stock, 0.0075% of the next $350
million of the Fund's average weekly net assets attributable to Common Stock,
and 0.0025% of the Fund's average weekly net assets attributable to Common Stock
above $500 million, plus certain out-of-pocket expenses. For purposes of
calculating such fee, the Fund's average weekly net assets attributable to the
Common Stock are deemed to be the average weekly value of the Fund's total
assets minus the sum of the Fund's liabilities. For this calculation, the Fund's
liabilities are deemed to include the aggregate liquidation preference of any
outstanding Fund preferred shares and the loan principal balance.
29
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PFPC Trust Company ("PFPC Trust") serves as the Fund's Custodian. PFPC
Trust is an indirect subsidiary of PNC Financial Services. As compensation for
PFPC Trust's services as custodian, the Fund pays PFPC Trust a monthly fee at
the annual rate of 0.010% of the first $200 million of the Fund's average weekly
total managed assets, 0.008% of the next $300 million of the Fund's average
weekly total managed assets, 0.006% of the next $500 million of the Fund's
average weekly total managed assets, and 0.005% of the Fund's average weekly
total managed assets above $1 billion.
The Fund currently pays each Director who is not a director, officer or
employee of the Adviser or the Servicing Agent a fee of $9,000 per annum, plus
$500 for each in-person meeting of the Board of Directors or any committee and
$150 for each telephone meeting. The Audit Committee Chairman receives an
additional annual fee of $2,500. The Fund also reimburses all Directors for
travel and out-of-pocket expenses incurred in connection with such meetings.
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 year ended November 30, 2008 the cost of purchases and proceeds
from sales of securities excluding short-term investments, aggregated
$120,168,997 and $188,714,595, respectively.
At November 30, 2008, the aggregate cost of securities for federal income
tax purposes was $249,030,121, the aggregate gross unrealized appreciation for
all securities in which there is an excess of value over tax cost was $1,502,500
and the aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $102,344,736.
Written option transactions during the year ended November 30, 2008 are
summarized as follows:
CONTRACT PREMIUMS
AMOUNTS RECEIVED
-------- ---------
Written options outstanding at beginning of year..... 0 $ 0
Options Opened....................................... 400 700,617
Options Exercised.................................... 0 0
Options Expired...................................... (0) (0)
Options Closed....................................... (400) (700,617)
-------- ---------
Written options outstanding at end of year........... 0 $ 0
30
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMON STOCK
At November 30, 2008, 240,000,000 shares of $0.01 par value Common Stock
were authorized. Common Stock Transactions were as follows:
YEAR ENDED YEAR ENDED
11/30/08 11/30/07
--------------- ---------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Shares issued under the Dividend Reinvestment
and Cash Purchase Plan.......................... -- $-- -- $--
------ ------ ------ ------
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.
On May 1, 2008, the Fund announced the redemption of approximately 70% 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. Redemption of 1,780 shares of Series T7 was completed on May
21, and redemption of 1,780 shares of Series W28 was completed on June 12. Total
consideration for the liquidation preference of the redemptions was $89 million
(See Note 7).
At November 30, 2008, 790 shares of Series T7 and 790 shares of Series W28
of AMPS were outstanding at the annualized rate of 3.51% and 3.95% 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
31
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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 November
30, 2008, the amount borrowed under the Financing Agreement was $29.5 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 will charge 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 period beginning on May 20, 2008 (initial use of the facility) and
ending on November 30, 2008, the daily weighted average annualized interest rate
on the drawn balance was 3.60% and the average daily loan balance was
$56,120,513. 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, approximately 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
32
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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.
33
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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 November 30, 2008, there were no
securities on loan by the fund. Income from securities lending for the year
ended November 30, 2008, was $19,435 and is included in interest income on the
Statement of Operations.
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
We have audited the accompanying statement of assets and liabilities of
Flaherty & Crumrine/Claymore Total Return Fund Incorporated, including the
portfolio of investments, as of November 30, 2008, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended, the statement of cash flows
for the year then ended, and the financial highlights for each of the years in
the five-year period then ended. These financial statements and financial
highlights are the responsibility of management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of November 30, 2008 by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Flaherty & Crumrine/Claymore Total Return Fund Incorporated as of November 30,
2008, and the results of its operations for the year then ended, the changes in
its net assets for each of the years in the two-year period then ended, its cash
flows for the year then ended, and the financial highlights for each of the
years in the five-year period then ended, in conformity with U.S. generally
accepted accounting principles.
(KPMG LLP)
Boston, Massachusetts
January 23, 2009
35
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
SUPPLEMENTARY TAX INFORMATION (UNAUDITED)
Distributions to Common Stock and Auction Market Preferred Stock (AMPS)
Shareholders are characterized as follows for purposes of Federal income taxes
(as a percentage of total distributions, including any tax return of capital):
FISCAL YEAR 2008
INDIVIDUAL SHAREHOLDER CORPORATE SHAREHOLDER
------------------------------ ------------------------------
ORDINARY TAX RETURN ORDINARY TAX RETURN
QDI INCOME OF CAPITAL DRD INCOME OF CAPITAL
----- -------- ---------- ------ -------- ----------
AMPS 30.91% 69.09% 0.00% 19.36% 80.64% 0.00%
Common Stock 30.38% 67.90% 1.72% 19.03% 79.25% 1.72%
CALENDAR YEAR 2008
INDIVIDUAL SHAREHOLDER CORPORATE SHAREHOLDER
------------------------------ ------------------------------
ORDINARY TAX RETURN ORDINARY TAX RETURN
QDI INCOME OF CAPITAL DRD INCOME OF CAPITAL
----- -------- ---------- ------ -------- ----------
AMPS 31.50% 68.50% 0.00% 19.57% 80.43% 0.00%
Common Stock 30.52% 67.81% 1.67% 19.09% 79.24% 1.67%
Qualified Dividend Income ("QDI") distributions are taxable at a maximum
15% personal tax rate.
SECTION 19 NOTICES
Section 19 of the 1940 Act 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.
Form 1099-DIV will be sent to shareholders in January 2009 reporting the
amount and tax characterization of distributions for the 2008 calendar year.
36
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 year ended November 30, 2008, $1,477 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.
37
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 August 31, 2008. 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.
38
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, 2008, 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.
39
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
POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
NAME, ADDRESS, 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: 59
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: 61 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 organizations;
Pasadena, CA 91101 from September 1985 to
Age: 47 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 2009 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, represents holders of shares of the Fund's Auction Market
Preferred Stock.
40
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
NAME, ADDRESS, AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR**
------------------------- -------------- ------------------ ------------------------- --------------- ---------------------
NON-INTERESTED
DIRECTORS:
ROBERT F. WULF Director/ Class III Director Financial Consultant; 4
P.O. Box 753 and Audit since Trustee, University of
Neskowin, OR 97149 Committee August 2003 Oregon Foundation;
Age: 71 Chairman Trustee, San Francisco
Theological Seminary
INTERESTED
DIRECTOR:
DONALD F. CRUMRINE+, ++ Director, Class III Director Chairman of the Board 4
301 E. Colorado Boulevard Chairman of since and Director of Flaherty
Suite 720 the Board August 2003 & Crumrine Incorporated
Pasadena, CA 91101 and 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 2009 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, represents 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.
41
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
PRINCIPAL
TERM OF OFFICE OCCUPATION(S)
POSITION(S) AND LENGTH OF DURING PAST
NAME, ADDRESS, AND AGE HELD WITH FUND TIME SERVED FIVE YEARS
------------------------- ------------------- -------------- ------------------------------------
OFFICERS:
ROBERT M. ETTINGER President Since President and Director of Flaherty &
301 E. Colorado Boulevard August 2003 Crumrine Incorporated
Suite 720
Pasadena, CA 91101
Age: 50
R. ERIC CHADWICK Chief Financial Since Director of Flaherty & Crumrine
301 E. Colorado Boulevard Officer, Vice July 2004 Incorporated since June 2006;
Suite 720 President and Vice President of Flaherty &
Pasadena, CA 91101 Treasurer Crumrine Incorporated
Age: 33
CHAD C. CONWELL Chief Compliance Since Chief Compliance Officer of
301 E. Colorado Boulevard Officer, Vice July 2005 Flaherty & Crumrine Incorporated
Suite 720 President and since September 2005; Vice
Pasadena, CA 91101 Secretary President of Flaherty & Crumrine
Age: 36 Incorporated since July 2005;
Attorney with Paul, Hastings,
Janofsky & Walker LLP from
September 1998 to June 2005
BRADFORD S. STONE Vice President Since Director of Flaherty & Crumrine
392 Springfield Avenue and Assistant August 2003 Incorporated since June 2006;
Mezzanine Suite Treasurer Vice President of Flaherty &
Summit, NJ 07901 Crumrine Incorporated
Age: 49
LAURIE C. LODOLO Assistant Since Assistant Compliance Officer of
301 E. Colorado Boulevard Compliance July 2004 Flaherty & Crumrine Incorporated
Suite 720 Officer, Assistant since August 2004; Secretary of
Pasadena, CA 91101 Treasurer and Flaherty & Crumrine Incorporated
Age: 45 Assistant Secretary since February 2004; Account
Administrator of Flaherty & Crumrine
Incorporated
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
Annual Report
November 30, 2008
www.fcclaymore.com
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report,
has adopted a code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the
registrant or a third party.
(c) There have been no amendments, during the period covered by this
report, to a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are
employed by the registrant or a third party, and that relates to any
element of the code of ethics description.
(d) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are
employed by the registrant or a third party, that relates to one or
more of the items set forth in paragraph (b) of this item's
instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the registrant's board of
directors has determined that David Gale, Karen H. Hogan and Robert F. Wulf are
each qualified to serve as an audit committee financial expert serving on its
audit committee and that they all are "independent," as defined by the
Securities and Exchange Commission.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
(a) The aggregate fees billed for each of the last two fiscal years for
professional services rendered by the principal accountant for the
audit of the registrant's annual financial statements or services that
are normally provided by the accountant in connection with statutory
and regulatory filings or engagements for those fiscal years are
$46,400 for 2008 and $42,800 for 2007.
AUDIT-RELATED FEES
(b) The aggregate fees billed in each of the last two fiscal years for
assurance and related services by the principal accountant that are
reasonably related to the performance of the audit of the
registrant's financial statements and are not reported under paragraph
(a) of this Item are $0 for 2008 and $0 for 2007.
TAX FEES
(c) The aggregate fees billed in each of the last two fiscal years for
professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning are $8,100 for 2008 and
$7,300 for 2007.
ALL OTHER FEES
(d) The aggregate fees billed in each of the last two fiscal years for
products and services provided by the principal accountant, other than
the services reported in paragraphs (a) through (c) of this Item are
$17,200 for 2008 and $15,500 for 2007. These services consist of the
principal accountant providing a "Quarterly Agreed-Upon-Procedures
Report on Articles Supplementary". These Agreed-Upon-Procedures
("AUP") are requirements arising from the Articles Supplementary
creating the Fund's preferred stock. Specifically, the credit rating
agencies require such AUP be undertaken in order to maintain the
preferred stock's rating.
(e)(1) The Fund's Audit Committee Charter states that the Audit Committee
shall have the duty and power to pre-approve all audit and non-audit
services to be provided by the auditors to the Fund, and all non-audit
services to be provided by the auditors to the Fund's investment
adviser and any service providers controlling, controlled by or under
common control with the Fund's investment adviser that provide ongoing
services to the Fund, if the engagement relates directly to the
operations and financial reporting of the Fund.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) of this Item that were approved by the audit committee
pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are
as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent employees
was 0%.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen
by another investment adviser), and any entity controlling, controlled
by, or under common control with the adviser that provides ongoing
services to the registrant for each of the last two fiscal years of
the registrant was $0 for 2008 and $0 for 2007.
(h) The registrant's audit committee of the board of directors has
considered whether the provision of non-audit services that were
rendered to the registrant's investment adviser (not including any
sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen
by another investment adviser), and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The registrant has a separately designated audit committee consisting of
all the independent directors of the registrant. The members of the audit
committee are: David Gale, Morgan Gust, Karen H. Hogan, and Robert F. Wulf.
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.
The Proxy Voting Policies are attached herewith.
ADVISER PROXY VOTING POLICIES AND PROCEDURES
Flaherty & Crumrine Incorporated ("F&C") acts as discretionary investment
adviser for various clients, including the following six pooled investment
vehicles (the "Funds"):
As adviser to the "U.S. Funds" Flaherty & Crumrine Preferred Income Fund
Flaherty & Crumrine Preferred Income Opportunity Fund
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
Flaherty & Crumrine/Claymore Total Return Fund
As sub-adviser
to the "Canadian Fund" Flaherty & Crumrine Investment Grade Fixed Income Fund
F&C's authority to vote proxies for its clients is established through the
delegation of discretionary authority under its investment advisory contracts
and the U.S. Funds have adopted these policies and procedures for themselves
PURPOSE
These policies and procedures are designed to satisfy F&C's duties of care and
loyalty to its clients with respect to monitoring corporate events and
exercising proxy authority in the best interests of such clients.
In connection with this objective, these policies and procedures are designed to
deal with potential complexities which may arise in cases where F&C's interests
conflict or appear to conflict with the interests of its clients.
These policies and procedures are also designed to communicate with clients the
methods and rationale whereby F&C exercises proxy voting authority.
This document is available to any client or Fund shareholder upon request and
F&C will make available to such clients and Fund shareholders the record of
F&C's votes promptly upon request and to the extent required by Federal law and
regulations.
FUNDAMENTAL STANDARD
F&C will be guided by the principle that, in those cases where it has proxy
voting authority, it will vote proxies, and take such other corporate actions,
consistent with the interest of its clients in a manner free of conflicts of
interest with the objective of client wealth maximization.
GENERAL
F&C has divided its discussion in this document into two major categories:
voting with respect to common stock and voting with respect to senior equity,
e.g., preferred stock and similar securities. In those events where F&C may have
to take action with respect to debt, such as in the case of amendments of
covenants or in the case of default, bankruptcy, reorganization, etc., F&C will
apply the same principles as would apply to common or preferred stock, MUTATIS
MUTANDIS.
These policies and procedures apply only where the client has granted
discretionary authority with respect to proxy voting. Where F&C does not have
authority, it will keep appropriate written records evidencing that such
discretionary authority has not been granted.
F&C may choose not to keep written copies of proxy materials that are subject to
SEC regulation and maintained in the SEC's EDGAR database. In other instances,
F&C will keep appropriate written records in its files or in reasonably
accessible storage.
Similarly, F&C will keep in its files, or reasonably accessible storage, work
papers and other materials that were significant to F&C in making a decision how
to vote.
For purposes of decision making, F&C will assume that each ballot for which it
casts votes is the only security of an issuer held by the client. Thus, when
casting votes where F&C may have discretionary authority with regard to several
different securities of the same issuer, it may vote securities "in favor" for
those securities or classes where F&C has determined the matter in question to
be beneficial while, at the same time, voting "against" for those securities or
classes where F&C has determined the matter to be adverse. Such cases
occasionally arise, for example, in those instances where a vote is required by
both common and preferred shareholders, voting as separate classes, for a change
in the terms regarding preferred stock issuance.
F&C will reach its voting decisions independently, after appropriate
investigation. It does not generally intend to delegate its decision making or
to rely on the recommendations of any third party, although it may take such
recommendations into consideration. F&C may consult with such other experts,
such as CPA's, investment bankers, attorneys, etc., as it regards necessary to
help it reach informed decisions.
Absent good reason to the contrary, F&C will generally give substantial weight
to management recommendations regarding voting. This is based on the view that
management is usually in the best position to know which corporate actions are
in the best interests of common shareholders as a whole.
With regard to those shareholder-originated proposals which are typically
described as "social, environmental, and corporate responsibility" matters, F&C
will typically give weight to management's recommendations and vote against such
shareholder proposals, particularly if the adoption of such proposals would
bring about burdens or costs not borne by those of the issuer's competitors.
In cases where the voting of proxies would not justify the time and costs
involved, F&C may refrain from voting. From the individual client's perspective,
this would most typically come about in the case of small holdings, such as
might arise in connection with spin-offs or other corporate reorganizations.
From the perspective of F&C's institutional clients, this envisions cases (1) as
more fully described below where preferred and common shareholders vote together
as a class or (2) other similar or analogous instances.
Ultimately, all voting decisions are made on a case-by-case basis, taking
relevant considerations into account.
VOTING OF COMMON STOCK PROXIES
F&C categorizes matters as either routine or non-routine, which definition may
or may not precisely conform to the definitions set forth by securities
exchanges or other bodies categorizing such matters. Routine matters would
include such things as the voting for directors and the ratification of auditors
and most shareholder proposals regarding social, environmental, and corporate
responsibility matters. Absent good reason to the contrary, F&C normally will
vote in favor of management's recommendations on these routine matters.
Non-routine matters might include, without limitation, such things as (1)
amendments to management incentive plans, (2) the authorization of additional
common or preferred stock, (3) initiation or termination of barriers to takeover
or acquisition, (4) mergers or acquisitions, (5) changes in the state of
incorporation, (6) corporate reorganizations, and (7) "contested" director
slates. In non-routine matters, F&C, as a matter of policy, will attempt to be
generally familiar with the questions at issue. This will include, without
limitation, studying news in the popular press, regulatory filings, and
competing proxy solicitation materials, if any. Non-routine matters will be
voted on a case-by-case basis, given the complexity of many of these issues.
VOTING OF PREFERRED STOCK PROXIES
Preferred stock, which is defined to include any form of equity senior to common
stock, generally has voting rights only in the event that the issuer has not
made timely payments of income and principal to shareholders or in the event
that a corporation desires to effectuate some change in its articles of
incorporation which might modify the rights of preferred stockholders. These are
non-routine in both form and substance.
In the case of non-routine matters having to do with the modification of the
rights or protections accorded preferred stock shareholders, F&C will attempt,
wherever possible, to assess the costs and benefits of such modifications and
will vote in favor of such modifications only if they are in the bests interests
of preferred shareholders or if the issuer has offered sufficient compensation
to preferred stock shareholders to offset the reasonably foreseeable adverse
consequences of such modifications. A similar
type of analysis would be made in the case where preferred shares, as a class,
are entitled to vote on a merger or other substantial transaction.
In the case of the election of directors when timely payments to preferred
shareholders have not been made ("contingent voting"), F&C will cast its votes
on a case-by-case basis after investigation of the qualifications and
independence of the persons standing for election.
Routine matters regarding preferred stock are the exception, rather than the
rule, and typically arise when the preferred and common shareholders vote
together as a class on such matters as election of directors. F&C will vote on a
case-by-case basis, reflecting the principles set forth elsewhere in this
document. However, in those instances (1) where the common shares of an issuer
are held by a parent company and (2) where, because of that, the election
outcome is not in doubt, F&C does not intend to vote such proxies since the time
and costs would outweigh the benefits.
ACTUAL AND APPARENT CONFLICTS OF INTEREST
Potential conflicts of interest between F&C and F&C's clients may arise when
F&C's relationships with an issuer or with a related third party conflict or
appear to conflict with the best interests of F&C's clients.
F&C will indicate in its voting records available to clients whether or not a
material conflict exists or appears to exist. In addition, F&C will communicate
with the client (which means the independent Directors or Director(s) they may
so designate in the case of the U.S. Funds and the investment adviser in the
case of the Canadian Funds) in instances when a material conflict of interest
may be apparent. F&C must describe the conflict to the client and state F&C's
voting recommendation and the basis therefor. If the client considers there to
be a reasonable basis for the proposed vote notwithstanding the conflict or, in
the case of the Funds, that the recommendation was not affected by the conflict
(without considering the merits of the proposal), F&C will vote in accordance
with the recommendation it had made to the client.
In all such instances, F&C will keep reasonable documentation supporting its
voting decisions and/or recommendations to clients.
AMENDMENT OF THE POLICIES AND PROCEDURES
These policies and procedures may be modified at any time by action of the Board
of Directors of F&C but will not become effective, in the case of the U.S.
Funds, unless they are approved by majority vote of the non-interested directors
of the U.S. Funds. Any such modifications will be sent to F&C's clients by mail
and/or other electronic means in a timely manner. These policies and procedures,
and any amendments hereto, will be posted on the U.S. Funds' websites and will
be disclosed in reports to shareholders as required by law.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
The following paragraphs provide certain information with respect to the
portfolio managers of the Fund and the material conflicts of interest that may
arise in connection with their management of the investments of the Fund, on the
one hand, and the investments of other client accounts for which they have
responsibility, on the other hand. Certain other potential conflicts of interest
with respect to personal trading and proxy voting are discussed above under
"Item 2 - Codes of Ethics" and "Item 7 - Proxy Voting Policies."
(A)(1) PORTFOLIO MANAGERS
R. Eric Chadwick, Donald F. Crumrine, Robert M. Ettinger and Bradford S. Stone
jointly serve as the Portfolio Managers of the Fund. Additional biographical
information about the portfolio managers is available in the Annual Report
included in Response to Item 1 above.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS
The tables below illustrate other accounts where each of the above-mentioned
four portfolio managers has significant day-to-day management responsibilities
as of November 30, 2008:
# of Accounts
Managed for which
Name of Portfolio Total Advisory Fee is
Manager or Team # of Accounts Total Assets Based on
Member Type of Accounts Managed (mm) Performance
--------------------- -------------------------------------- ------------- ------------ -----------------
1. Donald F. Crumrine Other Registered Investment Companies: 3 846,138 0
Other Pooled Investment Vehicles: 2 79 0
Other Accounts: 18 1,105 0
2. Robert M. Ettinger Other Registered Investment Companies: 3 846,138 0
Other Pooled Investment Vehicles: 2 79 0
Other Accounts: 18 1,105 0
3. R. Eric Chadwick Other Registered Investment Companies: 3 846,138 0
Other Pooled Investment Vehicles: 2 79 0
Other Accounts: 18 1,105 0
4. Bradford S. Stone Other Registered Investment Companies: 3 846,138 0
Other Pooled Investment Vehicles: 2 79 0
Other Accounts: 18 1,105 0
POTENTIAL CONFLICTS OF INTEREST
In addition to the Fund, the Portfolio Managers jointly manage accounts for
three other closed-end funds, two Canadian funds and other institutional
clients. As a result, potential conflicts of interest may arise as follows:
- ALLOCATION OF LIMITED TIME AND ATTENTION. The Portfolio Managers may
devote unequal time and attention to the management of all accounts.
As a result, the Portfolio Managers may not be able to formulate as
complete a strategy or identify equally attractive investment
opportunities for each of those accounts as might be the case if they
were to devote substantially more attention to the management of one
account.
- ALLOCATION OF LIMITED INVESTMENT OPPORTUNITIES. If the Portfolio
Managers identify an investment opportunity that may be suitable for
multiple accounts, the Fund may not be able to take full advantage of
that opportunity because the opportunity may need to be allocated
among other accounts.
- PURSUIT OF DIFFERING STRATEGIES. At times, the Portfolio Managers may
determine that an investment opportunity may be appropriate for only
some accounts or may decide that certain of these accounts should take
differing positions (i.e., may buy or sell the particular security at
different times or the same time or in differing amounts) with respect
to a particular security. In these cases, the Portfolio Manager
may place separate transactions for one or more accounts which may
affect the market price of the security or the execution of the
transaction, or both, to the detriment of one or more other accounts.
- VARIATION IN COMPENSATION. A conflict of interest may arise where the
financial or other benefits available to the Portfolio Manager differ
among accounts. While the Adviser only charges fees based on assets
under management and does not receive a performance fee from any of
its accounts, and while it strives to maintain uniform fee schedules,
it does have different fee schedules based on the differing advisory
services required by some accounts. Consequently, though the
differences in such fee rates are slight, the Portfolio Managers may
be motivated to favor certain accounts over others. In addition, the
desire to maintain assets under management or to derive other rewards,
financial or otherwise, could influence the Portfolio Managers in
affording preferential treatment to those accounts that could most
significantly benefit the Adviser.
The Adviser and the Fund have adopted compliance policies and procedures that
are designed to address the various conflicts of interest that may arise for the
Adviser and its staff members. However, there is no guarantee that such policies
and procedures will be able to detect and prevent every situation in which an
actual or potential conflict may arise.
(A)(3) PORTFOLIO MANAGER COMPENSATION
Compensation is paid solely by the Adviser. Each Portfolio Manager receives the
same fixed salary. In addition, each Portfolio Manager receives a bonus based on
peer reviews of his performance and the total net investment advisory fees
received by Flaherty & Crumrine (which are in turn based on the value of its
assets under management). The Portfolio Managers do not receive deferred
compensation, but participate in a profit-sharing plan available to all
employees of the Adviser; amounts are determined as a percentage of the
employee's eligible compensation for a calendar year based on IRS limitations.
Each Portfolio Manager is also a shareholder of Flaherty & Crumrine and receives
quarterly dividends based on his equity interest in the company.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
The following indicates the dollar range of beneficial ownership of shares by
each Portfolio Manager as of November 30, 2008:
Dollar Range of Fund Shares
Name Beneficially Owned*
------------------ ---------------------------
Donald F. Crumrine $50,001 to $100,000
Robert M. Ettinger $100,001 to $500,000
R. Eric Chadwick $10,001 to $50,000
Bradford S. Stone $10,001 to $50,000
* INCLUDES 4,198 SHARES HELD BY FLAHERTY & CRUMRINE INCORPORATED OF WHICH
EACH PORTFOLIO MANAGER HAS BENEFICIAL OWNERSHIP.
(B) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 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) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(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 1/28/09
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 1/28/09
By (Signature and Title)* /s/ R. Eric Chadwick
----------------------------------------
R. Eric Chadwick,
Chief Financial Officer, Treasurer, and
Vice President
(principal financial officer)
Date 1/28/09
* Print the name and title of each signing officer under his or her
signature.