UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21380
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FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND INCORPORATED
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(Exact name of registrant as specified in charter)
301 E. Colorado Boulevard, Suite 720
PASADENA, CA 91101
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(Address of principal executive offices) (Zip code)
Donald F. Crumrine
Flaherty & Crumrine Inc.
301 E. Colorado Boulevard, Suite 720
PASADENA, CA 91101
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(Name and address of agent for service)
registrant's telephone number, including area code: 626-795-7300
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Date of fiscal year end: NOVEMBER 30
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Date of reporting period: MAY 31, 2006
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
[GRAPHIC OMITTED]
FLAHERTY & CRUMRINE/CLAYMORE
============================
TOTAL RETURN FUND
SEMI-ANNUAL
REPORT
MAY 31, 2006
www.fcclaymore.com
FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND
To the Shareholders of the Flaherty & Crumrine/Claymore Total Return Fund
("FLC"):
The investment environment has been challenging during the first half of
fiscal 2006 as long-term interest rates increased substantially. Despite this
challenging environment, we are pleased to report the Fund's interest rate
hedging strategy has brought the Fund through the weak bond market to date in
relatively good shape. During the most recent fiscal quarter ended May 31st, the
Fund's total return on Net Asset Value ("NAV") declined 0.4%(1). Viewed over the
first two fiscal quarters of 2006, the total return on NAV INCREASED by a
respectable 2.5%(1). For a further discussion of the Fund's recent NAV
performance, please see the following Q&A section.
As shown in the table below, over longer time periods the Fund has
produced competitive results based on NAV, especially considering its interest
rate hedging strategy has, on balance, been a cost. For comparison purposes, we
have included the average total return earned on all funds in the Lipper
Domestic Investment Grade Bond Funds category(3). Because the investment
strategies including the interest rate hedge we use in the Fund typically differ
significantly from those of the bond funds, we believe that FLC provides a
superior way of accomplishing a similar income objective.
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TOTAL RETURN PER YEAR ON NET ASSET VALUE(1)
FOR PERIODS ENDED MAY 31, 2006
ONE TWO LIFE OF
YEAR YEAR FUND(2)
---- ---- -------
Flaherty & Crumrine/Claymore Total Return Fund .......... 0.5% 5.0% 4.8%
Lipper Domestic Investment Grade Bond Funds(3) .......... 1.6% 4.8% 5.1%
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(1) Based on data published by Lipper Inc. in each calendar month during the
relevant periods. Distributions are assumed to be reinvested at NAV in
accordance with Lipper's practice, which differs from the procedures used
elsewhere in this report.
(2) Since inception on August 29, 2003.
(3) Includes all U.S. Government bond, mortgage bond and term trust and
investment grade bond funds in Lipper's closed-end fund database at each
point in time.
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Long-term interest rates have been on the rise since last September, but
the trend accelerated during the past fiscal quarter. We began the quarter with
yields on long-term U.S. Treasury bonds hovering around 4.6%; by the end of May,
these yields were above 5.3%. When interest rates move like this, the impact on
bond prices is dramatic - the price of long-term Treasuries declined by more
than 9% during the quarter.
It is precisely for times like these that the Fund employs its "safety
net" hedging strategy. Rising long-term interest rates cause the value of the
Fund's investments to decline, but the Fund's interest rate hedges help moderate
the impact, limiting the net decline in the Fund's NAV.
Recall that our hedge positions are analogous to an insurance policy. We
make regular "premium" payments to buy protection against rising long-term
interest rates. In order to keep the cost of these payments down, we typically
structure the hedge with a "deductible," meaning some portion of the loss must
be absorbed by the Fund before we can collect on the policy. If long-term
interest rates increase significantly, the hedge position will help offset the
decline in the value of the portfolio. This was the experience during the 2nd
fiscal quarter.
In addition to helping protect the value of the portfolio in a weak
fixed-income market, the hedging strategy also helps support the Fund's dividend
through reinvestment of the hedge profits in income-producing securities. Please
see the following Q&A section for more on how the hedging strategies affect the
Fund's NAV and distributable income.
Good news for Fund shareholders arrived in the recently adopted tax bill,
which extended the 15% and 5% tax brackets on "Qualified Dividend Income"
("QDI") and long-term capital gains through 2010. Although the Fund does not
focus on securities paying QDI, over the past several years at least 25% of the
Fund's income has been eligible as QDI. While we can't predict the level of the
QDI percentage in the future, extension of these lower brackets will certainly
benefit shareholders.
Neither fish nor fowl, with characteristics of both debt and equity,
preferred securities can serve a wide range of financing needs. At the same
time, these mixed characteristics leave room for differing opinions on how to
view preferreds. Whether investor or issuer, credit agency or regulator,
accountants or the IRS; all have different approaches for treating preferred
securities. For a discussion of these mixed characteristics and how we attempt
to benefit from them, please take a look at the update on the preferred market
in the following Q&A section.
We hope investors will take advantage of the Fund's website,
WWW.FCCLAYMORE.COM. It contains a wide range of useful and up-to-date
information about the Fund. In addition, some of the topics mentioned above are
analyzed in greater depth in the Frequently Asked Questions section of the
website.
Sincerely,
/s/ Donald F. Crumrine /s/ Robert M. Ettinger
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
July 10, 2006
2
QUESTIONS & ANSWERS
WHAT WERE THE COMPONENTS OF THE FUND'S TOTAL RETURN ON NET ASSET VALUE?
One method we have used in the past to better communicate the Fund's net
asset value (NAV) performance is to begin with the total return on the Fund's
securities portfolio, and progressively adjust for the impact of hedging,
expenses and leverage to arrive at the total return based on NAV (which includes
all of these factors). As mentioned in the shareholder's letter, the bond market
weakened significantly over the three months ended May 31st, accelerating the
sell off which began last year. While preferred securities performed much better
than long-term U.S. Treasuries and many other sectors of the fixed-income
market, the Fund's unhedged securities portfolio still produced a negative total
return of -1.9% during the recent fiscal quarter, and only +1.3% over the fiscal
year-to-date.
The bright spot so far this fiscal year has been the degree to which the
interest rate hedge helped insulate the Fund's portfolio from a more significant
decline due to the recent rise in long-term interest rates. During the Fund's
2nd fiscal quarter, the hedge improved results by +2.4%. During the Fund's 1st
fiscal quarter, long-term interest rates actually declined and the interest rate
hedge cost the Fund money. Consequently, over the full fiscal year-to-date, the
hedge improved results by +1.7%.
The benefit of leverage and the cost of the Fund's expenses generally
offset each other to some extent, and they have again this year. However, as the
cost of the Fund's leverage has increased over the past two years (see the Q&A
regarding leverage below), less incremental income on the Fund's leveraged
investments is available to offset the expense burden. In both the 2nd fiscal
quarter and fiscal year-to-date, this was true. The total returns on NAV of
-0.4% for the quarter and +2.5% for the fiscal year-to-date discussed in the
shareholders' letter were below those of the hedged investment portfolio because
the total returns on NAV include the impact of leverage and expenses.
COULD YOU REMIND ME AGAIN THE PURPOSE OF THE INTEREST RATE HEDGE?
The interest rate hedge has two purposes. The first is to help offset a
decline in the value of the Fund's securities portfolio (and therefore its NAV)
caused by a significant rise in long-term interest rates. The Fund purchases
out-of-the-money put options on US Treasury futures whose price movements are
correlated (albeit not perfectly) with those of the Fund's securities portfolio.
During a period of rising long-term interest rates, the Fund will
initially experience a reduction in NAV, as the hedge tightens and only
partially offsets the decline in the value of the securities portfolio. However,
if interest rates continue to increase, the put options and/or related
derivatives would be expected to appreciate in value and offset an increasing
proportion of the decline in the value of the Fund's investments. As with
insurance premiums paid on a house, these types of hedging instruments expire
worthless if long-term interest rates either fall or do not change much,
analogous to paying for insurance when the house doesn't burn down.
The second purpose of the safety-net hedge is to generate additional
income following a significant increase in long-term interest rates. This can be
achieved by investing realized gains from the interest rate hedge in additional
income producing securities. If long-term interest rates increase sufficiently,
the additional income received helps support and possibly increase the Fund's
monthly dividend rate.
3
PLEASE UPDATE ME ON DEVELOPMENTS IN THE PREFERRED MARKET.
As we have previously discussed with readers, the preferred market
consists of two main segments -"traditional" preferred stock that pays dividends
eligible as Qualified Dividend Income ("QDI") and taxable or "hybrid" preferred
securities that pay fully taxable interest. These two preferred market segments
have always existed in a grey area on an issuer's balance sheet between debt and
equity, and differing viewpoints over their status have been a constant theme as
far back as we can remember. Early last year, Moody's Investors Services
attempted to reduce the confusion by clarifying their credit rating treatment
for securities issued in each segment. Their doing so prompted significant
growth in the preferred market, but confusion returned as various regulators
(representing both issuers and purchasers) have applied different approaches to
characterizing these newer preferreds. The result has been a great deal of
volatility in preferred securities' prices.
There is nothing unusual going on here. As long as clever Wall Street
bankers continue to cook up variants on the two basic segments, confusion will
persist. And in confusion lies opportunity, as the turmoil contributes to the
preferred market's inefficiency and allows us to attempt to benefit from these
inefficiencies to add value to the Fund. We look forward to being able to
continue to take advantage of the preferred market's inefficiencies in the
future.
ARE THERE ANY FEDERAL TAX ADVANTAGES TO INVESTING IN PREFERRED SECURITIES?
Yes, and these benefits have been recently extended until 2010. The Jobs
and Growth Tax Relief Reconciliation Act of 2003 lowered the maximum rate paid
by individuals on QDI to 15% or 5% (depending on an individual's income). As
mentioned in the shareholder's letter, the recently adopted Tax Increase
Protection and Reconciliation Act of 2005 extends these lowered QDI rates from
2008 until 2010. Prior to 2003, dividend income was typically taxed at the same
rate as ordinary income.
To be eligible for the lower tax rate as QDI, the dividend must be paid
from a company's after-tax income. For this reason, it is important to
understand the difference between taxable (or "hybrid") preferred securities and
traditional preferred stock. Hybrid preferreds pay interest, which the issuer
can deduct from revenue in determining its taxable income. Traditional
preferreds pay dividends, which are distributed from income after corporate
taxes have been paid. Because of the different tax treatment, hybrid preferred
securities normally have a higher yield than traditional preferred stocks.
For the investor, interest from hybrids is taxed as ordinary income, while
dividends from traditional preferreds may be taxed at the new, lower rate. As a
result, an investor in a low tax bracket or an IRA investor is more likely to
purchase taxable preferreds for the higher pre-tax income, while an investor in
a high tax bracket may prefer the QDI issue for the higher after-tax income. But
this isn't always the case. The market tends to offset the tax impact pretty
effectively, and securities that pay QDI will usually yield less (before taxes)
than those that pay interest.
Under normal conditions, the Fund will generally allocate a larger
proportion of its assets to hybrid preferred securities and corporate bonds than
traditional preferreds. However, in recent years the Fund has had in excess of
25% of its income eligible for QDI treatment. Of course, it is important to
remember the composition of the portfolio and the income distributions can
change from one year to the next, and the QDI portions of one year's
distributions may not be the same (or even similar) to another year's.
4
DOES LEVERAGE BENEFIT THE FUND EVEN WHEN THE U.S. TREASURY YIELD CURVE IS FLAT
OR INVERTED?
Yes, as long as short-term U.S. Treasury interest rates are not
dramatically above long-term rates, the Fund continues to benefit from the use
of leverage in a flat or inverted yield curve.
Leverage is the use of borrowed funds to improve one's rate of return from
an investment with a corresponding increase in risk. FLC acquires its additional
funds to enhance the total return of the portfolio through the issuance of
Auction Market Preferred Stock (AMPS).
Generally, the rate paid on the AMPS is well below the rate the Fund can
earn on the investment portfolio and, due to a tax advantage for qualified AMPS
investors, the rate the Fund pays on the AMPS is relatively low compared with
other means of financing. The additional cash flow generated by leverage
enhances the income available for distribution to Common Stock Shareholders.
The incremental income is greatest when the "spread" between the income
generated by the portfolio and the rate paid on the AMPS is wide. However, the
converse is also true; as the U.S Treasury yield curve "flattens" (short-term
rates and long-term rates approach equality), the amount of additional income
generated by the leverage will decrease. The Fund still benefits from additional
income generated by the leverage, just not as much as when the Treasury yield
curve is steeper. Of course, nothing is that simple. The Fund's income is
determined by several factors, the cost of leverage being only one.
In the case of an inverted U.S. Treasury yield curve (short-term rates are
higher than long-term rates) the Fund should continue to benefit from the use of
leverage. Preferred securities generally trade at yields higher than the
Treasury yields, commonly referred to as the "credit spread". So, although the
Treasury curve may be inverted, the preferred securities in the portfolio will
ordinarily continue to have a higher return than the short-term rates the Fund
pays for its leverage.
CAN I REINVEST DIVIDENDS DIRECTLY INTO THE FUND AND IS THERE ANY BENEFIT OVER
PURCHASING SHARES IN THE OPEN MARKET?
The answer to both questions is yes. The Fund's Dividend Reinvestment Plan
(the "DRIP") provides a means of acquiring additional shares of the Fund without
paying the full market premium, if any. When the market price is above NAV, new
shares will be issued to participants in the Plan at the higher of NAV or 95% of
the then current market price. Participating shareholders can therefore receive
a discount on their reinvested shares of up to 5% of the market price.
If the market price of the shares is below the NAV, the Plan purchases
shares in the open market. The brokerage commission charged for acquiring these
shares is competitive with most "discount" brokers.
Shareholders should be aware that not all broker-dealers participate in
the Fund's dividend reinvestment plan. If your shares are held in a brokerage
account, ask your broker if his/her firm is set up to participate. If you hold
your shares in certificate form, or if you would just like more information,
call PFPC Inc., at 1-800-331-1710.
PLEASE VISIT THE FREQUENTLY ASKED QUESTIONS SECTION ON THE FUND'S WEBSITE AT
WWW.FCCLAYMORE.COM FOR FURTHER DISCUSSION ON THE ABOVE TOPICS AS WELL AS OTHER
INFORMATION ABOUT THE FUND.
5
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Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OVERVIEW
MAY 31, 2006 (UNAUDITED)
-----------------------------------------------------------
FUND STATISTICS ON 05/31/06
--------------------------------------------------------------------------------
Net Asset Value $ 22.15
Market Price $ 19.60
Discount 11.51%
Yield on Market Price 7.81%
Common Shares Outstanding 9,776,333
INDUSTRY CATEGORIES % OF PORTFOLIO
--------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIALS.]
Other 6%
Oil and Gas 3%
Financial Services 7%
Banks 31%
REITs 8%
Insurance 18%
Utilities 27%
MOODY'S RATINGS % OF PORTFOLIO
--------------------------------------------------------------------------------
AAA 0.8%
AA 1.9%
A 26.7%
BBB 49.2%
BB 12.3%
B 1.6%
Not Rated 6.5%
--------------------------------------------------------------------------------
Below Investment Grade* 16.2%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO
--------------------------------------------------------------------------------
Wachovia Corp. 3.7%
North Fork Bancorporation 3.2%
Dominion Resources 3.0%
PS Business Parks 2.7%
Nexen, Inc. 2.6%
Midamerican Energy 2.3%
Interstate Power & Light 2.2%
FBOP Corporation 2.0%
St. Paul Travelers 2.0%
UnumProvident Corp. 2.0%
% OF PORTFOLIO**
-------------------------------------------------------------------------------------------------------------
Holdings Generating Qualified Dividend Income (QDI) for Individuals 27%
Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD) 19%
-------------------------------------------------------------------------------------------------------------
** 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.
6
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Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 2006 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- 79.0%
BANKING -- 30.9%
---------------------------------------------------------------------------------------------------------------------------
$ 5,750,000 Astoria Capital Trust I, 9.75% 11/01/29 Capital Security, Series B ............ $ 6,596,687
Auction Pass-Through Trust, CI. B:
15 Series 2006-5, Variable Rate Pfd., 144A**** ................................. 401,250*
15 Series 2006-6, Variable Rate Pfd., 144A**** ................................. 401,250*
10,900 BAC Capital Trust II, 7.00% Pfd. 02/01/32 ..................................... 274,244
12,750 BAC Capital Trust III, 7.00% Pfd. ............................................. 321,427
50,900 Bank One Capital Trust VI, 7.20% Pfd. ......................................... 1,279,371
$ 1,850,000 Barclays Bank PLC, Adj. Rate Pfd. ............................................. 1,704,914**(1)
33,750 Capital One Capital II, 7.50% Pfd. 06/15/66 ................................... 833,794
20,000 Citigroup Capital VIII, 6.95% Pfd. 09/15/31 ................................... 500,800
40,000 Cobank, ACB, 7.00% Pfd., 144A**** ............................................. 2,055,200*
20,000 Colonial Capital Trust IV, 7.875% Pfd. ........................................ 508,700
11,000 Comerica (Imperial) Capital Trust I, 7.60% Pfd. 07/01/50 ...................... 278,850
7,000 FBOP Corporation, Adj. Rate Pfd., 144A**** .................................... 7,052,500*
$ 2,000,000 First Chicago NBD Capital A, 7.95% 12/01/26 Capital Security, 144A**** ........ 2,092,130
$ 400,000 First Empire Capital Trust I, 8.234% 02/01/27 Capital Security ................ 421,166
$ 1,900,000 First Hawaiian Capital I, 8.343% 07/01/27 Capital Security, Series B .......... 2,016,736(1)
First Republic Bank:
160,000 6.25% Pfd. .................................................................. 3,881,600*
23,898 7.25% Pfd. .................................................................. 591,834
$ 1,000,000 Fleet Capital Trust II, 7.92% 12/11/26 Capital Security ....................... 1,048,350
23,100 Fleet Capital Trust VII, 7.20% Pfd. 12/15/31 .................................. 586,393
2 FT Real Estate Securities Company, 9.50% Pfd., 144A**** ....................... 2,601,469
$ 7,100,000 GreenPoint Capital Trust I, 9.10% 06/01/27 Capital Security ................... 7,596,574
$ 4,500,000 HBOS Capital Funding LP, 6.85% Pfd. ........................................... 4,389,615(1)
$ 3,000,000 Haven Capital Trust I, 10.46% 02/01/27 Capital Security ....................... 3,233,190
$ 855,000 HSBC Capital Trust II, 8.38% 05/15/27 Capital Security, 144A**** .............. 906,988(1)
22,000 HSBC Holdings PLC, 6.20% Pfd., Series A ....................................... 518,210**(1)
200,000 HSBC USA, Inc., 6.50% Pfd., Series H .......................................... 5,020,000*
ING Groep NV:
36,000 7.05% Pfd. .................................................................. 902,520**(1)
67,500 7.20% Pfd. .................................................................. 1,707,750**(1)
2,700 JPMorgan Chase Capital IX, 7.50% Pfd. 02/15/31 ................................ 68,189
3,200 JPMorgan Chase Capital X, 7.00% Pfd. 02/15/32, Series J ....................... 80,192
10 Marshall & Ilsley Investment II, 8.875% Pfd., 144A**** ........................ 1,018,244
$ 2,500,000 North Fork Capital Trust I, 8.70% 12/15/26 Capital Security ................... 2,631,750
$ 810,000 North Fork Capital Trust II, 8.00% 12/15/27 Capital Security .................. 859,552
The accompanying notes are an integral part of the financial statements.
7
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Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2006 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
BANKING -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------------
141,059 PFGI Capital Corporation, 7.75% Pfd. .......................................... $ 3,635,090
$ 4,000,000 RBS Capital Trust B, 6.80% Pfd. ............................................... 3,911,980**(1)
Roslyn Real Estate:
25 8.95% Pfd., Series C, 144A**** .............................................. 2,602,423
10 Adj. Rate Pfd., Series D, 144A**** .......................................... 1,008,750
35,000 Royal Bank of Scotland Group PLC, 6.75% Pfd., Series Q ........................ 861,700**(1)
33,100 Sovereign Bancorp, 7.30% Pfd., Series C ....................................... 848,188*
159,025 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36 ................................ 3,999,479
10,000 SunTrust Capital V, 7.05% Pfd. 12/15/31 ....................................... 252,050
$ 5,050,000 Union Planters Capital Trust, 8.20% 12/15/26 Capital Security ................. 5,294,269
19,000 USB Capital V, 7.25% Pfd. 12/15/31 ............................................ 481,650
12,600 USB Capital VIII, 6.35% Pfd. 12/29/65 ......................................... 297,297
17,500 USB Capital X, 6.50% Pfd. 04/12/66 ............................................ 418,075
$ 5,000,000 Wachovia Capital Trust I, 7.64% 01/15/27 Capital Security, 144A**** ........... 5,225,050
$ 670,000 Wachovia Capital Trust V, 7.965% 06/01/27 Capital Security, 144A**** .......... 705,889
257,500 Wachovia Preferred Funding, 7.25% Pfd., Series A .............................. 6,890,700
$ 1,800,000 Washington Mutual Preferred Funding, Variable Rate Pfd., 144A**** ............. 1,728,459
$ 4,000,000 Webster Capital Trust I, 9.36% 01/29/27 Capital Security, 144A**** ............ 4,255,920
---------------------------------------------------------------------------------------------------------------------------
106,798,408
---------------
FINANCIAL SERVICES -- 5.0%
---------------------------------------------------------------------------------------------------------------------------
200,000 Goldman Sachs Group, Inc., Adj. Rate Pfd., Series D ........................... 5,043,000*
$ 3,000,000 Gulf Stream-Compass 2005 Composite Notes, 144A**** ............................ 3,020,700
4,500 Merrill Lynch Capital Trust III, 7.00% Pfd. ................................... 113,715
121,150 Merrill Lynch Capital Trust V, 7.28% Pfd. ..................................... 3,119,612
3,000 Merrill Lynch Series II STRIPES Custodial Receipts, Pvt. ...................... 2,973,000*
17,200 Morgan Stanley Capital Trust II, 7.25% Pfd. ................................... 431,634
15,000 Morgan Stanley Capital Trust IV, 6.25% Pfd. ................................... 347,925
9,100 Morgan Stanley Capital Trust V, 5.75% Pfd. .................................... 197,197
85,700 Morgan Stanley Capital Trust VI, 6.60% Pfd. ................................... 2,073,512
---------------------------------------------------------------------------------------------------------------------------
17,320,295
---------------
INSURANCE -- 12.5%
---------------------------------------------------------------------------------------------------------------------------
15,000 AAG Holding Company, Inc., 7.25% Pfd. ......................................... 367,500
177,380 ACE Ltd., 7.80% Pfd., Series C ................................................ 4,542,702**(1)
30,000 Aegon NV, 6.50% Pfd. .......................................................... 718,650**(1)
The accompanying notes are an integral part of the financial statements.
8
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Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2006 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------------
$ 5,920,000 AON Capital Trust A, 8.205% 01/01/27 Capital Security ......................... $ 6,511,704
30,600 Arch Capital Group Ltd., 8.00% Pfd. ........................................... 763,317**(1)
Axis Capital Holdings:
54,550 7.25% Pfd., Series A ........................................................ 1,332,656**(1)
27,900 Variable Rate Pfd., Series B ................................................ 2,782,467(1)
70,900 Berkley W.R. Capital Trust II, 6.75% Pfd. 07/26/45 ............................ 1,645,235
29,400 Endurance Specialty Holdings, 7.75% Pfd. ...................................... 701,043**(1)
191,700 Everest Re Capital Trust II, 6.20% Pfd., Series B ............................. 4,077,459(1)
5,000 Lincoln National Corporation, 6.75% Pfd. 04/20/66 ............................. 118,575
PartnerRe Ltd.:
10,000 6.50% Pfd., Series D ........................................................ 223,800**(1)
33,000 6.75% Pfd., Series C ........................................................ 769,560**(1)
111,000 Principal Financial Group, 6.518% Pfd. ........................................ 2,952,045*
Renaissancere Holdings Ltd.:
128,350 6.08% Pfd., Series C ........................................................ 2,701,768**(1)
14,787 8.10% Pfd., Series A ........................................................ 370,414**(1)
109,000 Scottish Re Group Ltd., 7.25% Pfd. ............................................ 2,725,000**(1)
53,360 St. Paul Capital Trust I, 7.60% Pfd. 10/15/50 ................................. 1,348,407
$ 1,906,000 Sun Life Canada Capital Trust, 8.526% Capital Security, 144A**** .............. 2,013,632(1)
$ 4,815,000 USF&G Capital, 8.312% 07/01/46 Capital Security, 144A**** ..................... 5,560,482
30,000 XL Capital Ltd., 7.625% Pfd., Series B ........................................ 761,700**(1)
---------------------------------------------------------------------------------------------------------------------------
42,988,116
---------------
UTILITIES -- 19.8%
---------------------------------------------------------------------------------------------------------------------------
$ 357,000 AGL Capital Trust, 8.17% 06/01/37 Capital Security ............................ 377,083
20,000 Alabama Power Company, 5.20% Pfd. ............................................. 443,500*
45,700 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ..................... 4,750,286*
170,000 Calenergy Capital Trust III, 6.50% Pfd. 09/01/27 .............................. 7,793,650
$ 750,000 COMED Financing II, 8.50% 01/15/27 Capital Security, Series B ................. 789,727
$ 2,375,000 COMED Financing III, 6.35% 03/15/33 Capital Security .......................... 2,153,151
$ 2,500,000 Dominion Resources Capital Trust I, 7.83% 12/01/27 Capital Security ........... 2,645,112
10,000 Dominion Resources Capital Trust II, 8.40% Pfd. 01/30/41 ...................... 253,550
$ 6,750,000 Dominion Resources Capital Trust III, 8.40% 01/15/31 Capital Security ......... 7,557,773
20,000 Duquesne Light Company, 6.50% Pfd. ............................................ 1,019,500*
20,000 Energy East Capital Trust I, 8.25% Pfd. ....................................... 506,300
145,000 Entergy Arkansas, Inc., 6.45% Pfd. ............................................ 3,667,050*
50,000 Entergy Louisiana, Inc., 6.95% Pfd., 144A**** ................................. 5,076,500*
The accompanying notes are an integral part of the financial statements.
9
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2006 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------------
73,200 FPC Capital I, 7.10% Pfd., Series A ........................................... $ 1,821,582
48,700 Georgia Power Capital Trust V, 7.125% Pfd. 03/31/42 ........................... 1,237,954
$ 4,500,000 Houston Light & Power Capital Trust II, 8.257% 02/01/37 Capital Security ...... 4,718,205
30,445 Indianapolis Power & Light Company, 5.65% Pfd. ................................ 2,648,258*
Interstate Power & Light Company:
90,000 7.10% Pfd., Series C ........................................................ 2,356,650*
38,600 8.375% Pfd., Series B ....................................................... 1,204,513*
$ 5,000,000 PECO Energy Capital Trust IV, 5.75% 06/15/33 Capital Security ................. 4,307,475
16,200 PSEG Funding Trust II, 8.75% Pfd. ............................................. 424,035
$ 1,800,000 Puget Sound Energy Capital Trust, 8.231% 06/01/27 Capital Security, Series B .. 1,899,477
22,500 Southern California Edison, 6.00% Pfd. ........................................ 2,127,533*
151,100 Southern Union Company, 7.55% Pfd. 3,923,312*
10,000 Southwest Gas Capital II, 7.70% Pfd. .......................................... 257,850
5,000 Union Electric Company, $7.64 Pfd. ............................................ 517,925*
5,000 Virginia Electric & Power Company, $6.98 Pfd. ................................. 513,225*
30,000 Virginia Power Capital Trust, 7.375% Pfd. 07/30/42 ............................ 754,650
18,000 Vectren Utility Holdings, 7.25% Pfd. 10/15/31 ................................. 452,790
85,137 Wisconsin Power & Light Company, 6.50% Pfd. ................................... 2,123,317*
---------------------------------------------------------------------------------------------------------------------------
68,321,933
---------------
OIL AND GAS -- 0.8%
---------------------------------------------------------------------------------------------------------------------------
2,750 EOG Resources, Inc., 7.195% Pfd., Series B .................................... 2,857,195*
---------------------------------------------------------------------------------------------------------------------------
2,857,195
---------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 8.4%
---------------------------------------------------------------------------------------------------------------------------
BRE Properties, Inc.:
6,000 6.75% Pfd., REIT, Series C .................................................. 142,560
44,000 6.75% Pfd., REIT, Series D .................................................. 1,043,240
24,500 8.08% Pfd., REIT, Series B .................................................. 623,892
38,750 Carramerica Realty Corporation, 7.50% Pfd., REIT, Series E .................... 971,075
Duke Realty Corporation:
34,800 6.50% Pfd., REIT, Series K .................................................. 805,446
300 6.60% Pfd., REIT, Series L .................................................. 6,957
15,849 6.625% Pfd., REIT, Series J ................................................. 372,848
20,780 6.95% Pfd., REIT, Series M .................................................. 510,876
20,000 Equity Office Property Trust, 7.75% Pfd., REIT, Series G ...................... 503,000
85,000 Equity Residential Properties, 8.29% Pfd., REIT, Series K ..................... 4,918,950
The accompanying notes are an integral part of the financial statements.
10
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2006 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
REAL ESTATE INVESTMENT TRUST (REIT) -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------------
PS Business Parks, Inc.:
57,000 6.875% Pfd., REIT, Series I ................................................. $ 1,338,360
81,900 7.00% Pfd., REIT, Series H .................................................. 1,959,867
124,620 7.20% Pfd., REIT, Series M .................................................. 3,082,476
23,538 7.375% Pfd., REIT, Series O ................................................. 583,272
44,500 7.60% Pfd., REIT, Series L .................................................. 1,129,632
45,000 7.95% Pfd., REIT, Series K .................................................. 1,182,825
Public Storage, Inc.:
25,100 6.18% Pfd., REIT, Series D .................................................. 543,792
122,850 6.45% Pfd., REIT, Series F .................................................. 2,788,081
32,400 6.60% Pfd., REIT, Series C .................................................. 740,826
6,500 7.125% Pfd., REIT ........................................................... 159,250
44,200 7.50% Pfd., REIT, Series V .................................................. 1,112,956
1,400 7.625% Pfd., REIT, Series T ................................................. 34,937
48,600 8.00% Pfd., REIT, Series R .................................................. 1,217,187
125,000 Regency Centers Corporation, 7.25% Pfd., REIT ................................. 3,073,125
---------------------------------------------------------------------------------------------------------------------------
28,845,430
---------------
MISCELLANEOUS INDUSTRIES -- 1.6%
---------------------------------------------------------------------------------------------------------------------------
2,250 Centaur Funding Corporation, 9.08% Pfd. 04/21/20 144A**** ..................... 2,540,835
40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ........................... 3,086,800*
---------------------------------------------------------------------------------------------------------------------------
5,627,635
---------------
TOTAL PREFERRED SECURITIES
(Cost $274,282,867) ......................................................... 272,759,012
---------------
CORPORATE DEBT SECURITIES -- 19.2%
FINANCIAL SERVICES -- 1.6%
---------------------------------------------------------------------------------------------------------------------------
$ 4,867,000 Lehman Brothers, Guaranteed Note, Variable Rate, 12/16/16, 144A**** ........... 4,444,179
40,900 Saturns-GS, 6.00% 02/15/33, Series GS ......................................... 907,980
---------------------------------------------------------------------------------------------------------------------------
5,352,159
---------------
INSURANCE -- 5.3%
---------------------------------------------------------------------------------------------------------------------------
20,000 American Financial Group, Inc., 7.125% 02/03/34, Senior Note .................. 489,200
$ 2,000,000 Farmers Exchange Capital, 7.20% 07/15/48, 144A**** ............................ 1,914,700
The accompanying notes are an integral part of the financial statements.
11
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2006 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
CORPORATE DEBT SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------------
$ 5,591,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** ........................... $ 5,285,480
$ 3,700,000 OneAmerica Financial Partners, 7.00% 10/15/33, 144A**** ....................... 3,661,427
$ 7,000,000 UnumProvident Corporation, 7.25% 03/15/28, Senior Notes ....................... 6,822,830
---------------------------------------------------------------------------------------------------------------------------
18,173,637
---------------
UTILITIES -- 7.2%
---------------------------------------------------------------------------------------------------------------------------
27,200 Corp-Backed Trust Certificates, 7.875% 02/15/32, Series Duke Capital .......... 702,848
$ 1,800,000 Duke Capital Corporation, 8.00% 10/01/19, Senior Notes ........................ 2,062,791
$ 4,000,000 Duquesne Light Holdings, 6.25% 08/15/35 ....................................... 3,603,020
5,000 Entergy Mississippi, Inc., 7.25%, 1st Mortgage ................................ 125,550
$ 4,000,000 Indianapolis Power & Light Company, 6.60% 01/01/34, 1st Mortgage, 144A**** .... 3,969,140
$ 4,000,000 Interstate Power & Light Company, 6.45% 10/15/33, Senior Notes ................ 3,889,060
$ 2,070,000 Oncor Electric Delivery Company, 7.25% 01/15/33 ............................... 2,234,441
$ 2,500,000 PSEG Power LLC, 8.625% 04/15/31 ............................................... 3,102,925
$ 1,200,000 TXU Corporation, 6.50% 11/15/24 ............................................... 1,103,922
$ 4,000,000 Wisconsin Electric Power Company, 6.875% 12/01/95 ............................. 4,146,780
---------------------------------------------------------------------------------------------------------------------------
24,940,477
---------------
OIL AND GAS -- 2.6%
---------------------------------------------------------------------------------------------------------------------------
356,200 Nexen, Inc., 7.35% Subordinated Notes ......................................... 8,956,649(1)
---------------------------------------------------------------------------------------------------------------------------
8,956,649
---------------
MISCELLANEOUS INDUSTRIES -- 2.5%
---------------------------------------------------------------------------------------------------------------------------
19,625 Ford Motor Company, 7.50% 06/10/43, Senior Notes .............................. 332,252
$ 6,265,000 General Motors Corporation, 8.80% 03/01/21 .................................... 4,818,067
25,140 Maytag Corporation, 7.875% 08/01/31 ........................................... 636,545
Pulte Homes, Inc.:
25,844 7.375% 06/01/46 ............................................................. 645,066
$ 2,160,000 7.875% 06/15/32, Senior Notes ............................................... 2,294,341
---------------------------------------------------------------------------------------------------------------------------
8,726,271
---------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $70,728,919) ......................................................... 66,149,193
---------------
The accompanying notes are an integral part of the financial statements.
12
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2006 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
OPTION CONTRACTS -- 1.2%
2,275 September Put Options on September U.S. Treasury Bond Futures, Expiring 08/25/06 $ 4,286,250+
---------------------------------------------------------------------------------------------------------------------------
TOTAL OPTION CONTRACTS
(Cost $4,679,879) .......................................................... 4,286,250
---------------
MONEY MARKET FUND -- 0.8%
2,629,510 BlackRock Provident Institutional, TempFund ................................... 2,629,510
---------------------------------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost $2,629,510) ........................................................... 2,629,510
---------------
TOTAL INVESTMENTS (Cost $352,321,175***) ....................................... 100.2% 345,823,965
OTHER ASSETS AND LIABILITIES (Net) ............................................. (0.2)% (756,435)
------- ---------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK AND PREFERRED STOCK ................. 100.0%++ $ 345,067,530
------- ---------------
AUCTION MARKET PREFERRED STOCK (AMPS) REDEMPTION VALUE ....................................... (128,500,000)
---------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ................................................... $ 216,567,530
===============
----------
* 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) Foreign Issuer
+ Non-income producing.
++ The percentage shown for each investment category is the total value of
that category as a percentage of net assets available to Common and
Preferred Stock.
ABBREVIATIONS:
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
13
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2006 (UNAUDITED)
-----------------------------------------------------------
ASSETS:
Investments, at value (Cost $352,321,175) ................................ $ 345,823,965
Receivable for Investments sold .......................................... 5,022,253
Dividends and interest receivable ........................................ 4,412,608
Prepaid expenses ......................................................... 173,909
-------------
Total Assets ................................................... 355,432,735
LIABILITIES:
Payable for securities purchased ......................................... $9,832,059
Dividends payable to Common Stock Shareholders ........................... 98,227
Investment advisory fee payable .......................................... 159,717
Administration, Transfer Agent and Custodian fees payable ................ 55,504
Servicing Agent fees payable ............................................. 16,656
Professional fees payable ................................................ 44,931
Directors' fees payable .................................................. 5,406
Accrued expenses and other payables ...................................... 20,907
Accumulated undeclared distributions to Auction Market Preferred
Stock Shareholders .................................................... 131,798
----------
Total Liabilities .............................................. 10,365,205
-------------
AUCTION MARKET PREFERRED STOCK (5,140 SHARES OUTSTANDING)
REDEMPTION VALUE ......................................................... 128,500,000
-------------
NET ASSETS AVAILABLE TO COMMON STOCK ....................................... $ 216,567,530
=============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
Distributions in excess of net investment income ......................... $ (1,407,192)
Accumulated net realized loss on investments sold ........................ (6,721,960)
Unrealized depreciation of investments ................................... (6,497,210)
Par value of Common Stock ................................................ 97,763
Paid-in capital in excess of par value of Common Stock ................... 231,096,129
-------------
Total Net Assets Available to Common Stock ............... $ 216,567,530
=============
NET ASSET VALUE PER SHARE OF COMMON STOCK:
Common Stock (9,776,333 shares outstanding) ............................ $ 22.15
=============
The accompanying notes are an integral part of the financial statements.
14
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2006 (UNAUDITED)
-----------------------------------------------------------
INVESTMENT INCOME:
Dividends+ ............................................................ $ 5,812,869
Interest .............................................................. 5,714,668
------------
Total Investment Income .......................................... 11,527,537
EXPENSES:
Investment advisory fee ............................................... $ 942,435
Servicing Agent fee ................................................... 98,734
Administrator's fee ................................................... 131,995
Auction Market Preferred broker commissions and
auction agent fees ................................................. 162,410
Professional fees ..................................................... 67,413
Insurance expense ..................................................... 102,340
Transfer Agent fees ................................................... 44,982
Directors' fees ....................................................... 39,130
Custodian fees ........................................................ 21,019
Chief Compliance Officer fees ......................................... 19,694
Other ................................................................. 33,434
Total Expenses ................................................... 1,663,586
------------
NET INVESTMENT INCOME ...................................................... 9,863,951
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net realized gain on investments sold during the period ............... 6,440,311
Change in unrealized appreciation/depreciation of investments
held during the period ............................................. (8,025,203)
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS ............................ (1,584,892)
------------
DISTRIBUTIONS TO AUCTION MARKET PREFERRED
STOCK SHAREHOLDERS:
From net investment income (including changes in accumulated
undeclared distributions) .......................................... (2,880,779)
------------
NET INCREASE IN NET ASSETS TO COMMON STOCK RESULTING
FROM OPERATIONS .......................................................... $ 5,398,280
============
----------
+ For Federal income tax purposes, a significant portion of this amount may
not qualify for the inter-corporate dividends received deduction ("DRD")
or as qualified dividend income ("QDI") for individuals.
The accompanying notes are an integral part of the financial statements.
15
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
----------------------------------------------------------------
SIX MONTHS ENDED
MAY 31, 2006 YEAR ENDED
(UNAUDITED) NOVEMBER 30, 2005
---------------- -----------------
OPERATIONS:
Net investment income ......................................................... $ 9,863,951 $ 18,987,463
Net realized gain/(loss) on investments sold during the period ................ 6,440,311 (132,916)
Change in net unrealized appreciation/depreciation of investments
held during the period ..................................................... (8,025,203) (8,284,351)
Distributions to AMPS* Shareholders from net investment income,
including changes in accumulated undeclared distributions ................ (2,880,779) (3,970,354)
------------ ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .......................... 5,398,280 6,599,842
DISTRIBUTIONS:
Dividends paid from net investment income to Common
Stock Shareholders(1) ...................................................... (7,845,507) (17,926,932)
------------ ------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS .............................. (7,845,507) (17,926,932)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment and
Cash Purchase Plan ......................................................... -- 536,884
------------ ------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK
RESULTING FROM FUND SHARE TRANSACTIONS ..................................... -- 536,884
NET DECREASE IN NET ASSETS AVAILABLE TO COMMON ------------ ------------
STOCK FOR THE PERIOD ........................................................... $ (2,447,227) $(10,790,206)
============ ============
-------------------------------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ........................................................... $219,014,757 $229,804,963
Net decrease in net assets during the period .................................. (2,447,227) (10,790,206)
------------ ------------
End of period (including distributions in excess of net investment
income of ($1,407,192) and ($544,857), respectively) ....................... $216,567,530 $219,014,757
============ ============
----------
* Auction Market Preferred Stock.
(1) May include income earned, but not paid out, in prior fiscal year.
The accompanying notes are an integral part of the financial statements.
16
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
-----------------------------------------------------------
Contained below is per share operating performance data, total investment
returns, ratios to average net assets and other supplemental data. This
information has been derived from information provided in the financial
statements and market price data for the Fund's shares.
FOR THE
SIX MONTHS YEAR YEAR PERIOD FROM
ENDED ENDED ENDED AUGUST 29, 2003(1)
MAY 31, 2006 NOVEMBER 30, NOVEMBER 30, THROUGH
(UNAUDITED) 2005 2004 NOVEMBER 30, 2003
------------ ------------ ------------ ------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............................. $ 22.40 $ 23.56 $ 24.33 $ 23.82(2)
-------- -------- -------- --------
INVESTMENT OPERATIONS:
Net investment income ............................................ 1.01 1.94 1.95 0.30
Net realized and unrealized gain/(loss) on investments ........... (0.17) (0.86) (0.55) 0.55
DISTRIBUTIONS TO AMPS* SHAREHOLDERS:
From net investment income ....................................... (0.29) (0.41) (0.19) (0.01)
From net realized capital gains .................................. -- -- -- --
-------- -------- -------- --------
Total from investment operations ................................. 0.55 0.67 1.21 0.84
-------- -------- -------- --------
COST OF ISSUANCE OF AMPS* ........................................ -- -- 0.01 (0.17)
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income ....................................... (0.80) (1.83) (1.99) (0.16)
From net realized capital gains .................................. -- -- -- --
-------- -------- -------- --------
Total distributions to Common Stock Shareholders ................. (0.80) (1.83) (1.99) (0.16)
-------- -------- -------- --------
Net asset value, end of period ................................... $ 22.15 $ 22.40 $ 23.56 $ 24.33
======== ======== ======== ========
Market value, end of period ...................................... $ 19.60 $ 19.70 $ 24.15 $ 25.16
======== ======== ======== ========
Total investment return based on net asset value** ............... 2.92%**** 3.27% 5.22% 2.82%****(3)
======== ======== ======== ========
Total investment return based on market value** .................. 3.55%**** (11.41%) 4.30% 1.31%****(3)
======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
TO COMMON STOCK SHAREHOLDERS:
Total net assets, end of period (in 000's) .................. $216,568 $219,015 $229,805 $235,499
Operating expenses .......................................... 1.52%*** 1.47% 1.51% 1.34%***
Net investment income + .................................... 6.36%*** 6.51% 7.33% 4.86%***
-----------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate ..................................... 38%**** 38% 79% 56%****
Total net assets available to Common and Preferred Stock,
end of period (in 000's) .................................. $345,068 $347,515 $358,305 $363,999
Ratio of operating expenses to total average net assets
available to Common and Preferred Stock ................... 0.96%*** 0.94% 0.97% 1.11%***
* Auction Market Preferred Stock.
** Assumes reinvestment of distributions at the price obtained by the Fund's
Dividend Reinvestment and Cash Purchase Plan.
*** Annualized.
**** Not annualized.
+ The net investment income ratios reflect income net of operating expenses
and payments to AMPS* Shareholders. Information presented under heading
Supplemental Data includes AMPS*.
(1) Commencement of operations.
(2) Net asset value at beginning of period reflects the deduction of the sales
load of $1.125 per share and offering costs of $0.05 per share paid by the
shareholder from the $25.00 offering price.
(3) Total return on net asset value is calculated assuming a purchase at the
offering price of $25.00 less the sales load of $1.125 and offering costs
of $0.05 and the ending net asset value per share. Total return on market
value is calculated assuming a purchase at the offering price of $25.00 on
the inception date of trading (August 29, 2003) and the sale at the
current market price on the last day of the period. Total return on net
asset value and total return on market value are not computed on an
annualized basis.
The accompanying notes are an integral part of the financial statements.
17
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
PER SHARE OF COMMON STOCK (UNAUDITED)
-----------------------------------------------------------
TOTAL DIVIDEND
DIVIDENDS NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE(1)
--------- --------- ------------- ------------
December 31, 2005 ................. $0.1400 $22.59 $19.16 $19.39
January 31, 2006 .................. 0.1400 22.58 20.43 20.52
February 28, 2006 ................. 0.1400 22.62 20.69 20.87
March 31, 2006 .................... 0.1275 22.41 19.81 19.89
April 30, 2006 .................... 0.1275 22.18 19.45 19.62
May 31, 2006 ...................... 0.1275 22.15 19.60 19.80
----------
(1) Whenever the net asset value per share of the Fund's Common Stock is less
than or equal to the market price per share on the payment date, new
shares issued will be valued at the higher of net asset value or 95% of
the then current market price. Otherwise, the reinvestment shares of
Common Stock will be purchased in the open market.
The accompanying notes are an integral part of the financial statements.
18
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
-----------------------------------------------------------
The table below sets out information with respect to Auction Market
Preferred Stock (AMPS) currently outstanding.
INVOLUNTARY AVERAGE
ASSET LIQUIDATING MARKET
TOTAL SHARES COVERAGE PREFERENCE VALUE
DATE OUTSTANDING (1) PER SHARE (2) PER SHARE PER SHARE(1)(3)
----------- --------------- ------------- ----------- ---------------
05/31/06* 5,140 $67,159 $25,000 $25,000
11/30/05 5,140 67,650 25,000 25,000
11/30/04 5,140 69,732 25,000 25,000
11/30/03 5,140 70,831 25,000 25,000
----------
(1) See note 6.
(2) Calculated by subtracting the Fund's total liabilities (excluding the
AMPS) from the Fund's total assets and dividing that amount by the number
of AMPS shares outstanding.
(3) Excludes accumulated undeclared dividends.
* Unaudited
The accompanying notes are an integral part of the financial statements.
19
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
-----------------------------------------------------------
1. ORGANIZATION
Flaherty & Crumrine/Claymore Total Return Fund Incorporated (the "Fund")
was incorporated as a Maryland corporation on July 18, 2003, and commenced
operations on August 29, 2003 as a diversified, closed-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
The Fund's primary investment objective is to provide its common shareholders
with high current income. The Fund's secondary investment objective is capital
appreciation.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with accounting principles
generally accepted in the United States of America and requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities in the financial statements and the reported amounts of increases
and decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
PORTFOLIO VALUATION: The net asset value of the Fund's Common Stock is
determined by the Fund's Administrator no less frequently than on the last
business day of each week and month. It is determined by dividing the value of
the Fund's net assets available to Common Stock by the number of shares of
Common Stock outstanding. The value of the Fund's net assets attributable to
Common 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").
Securities listed on a national securities exchange are valued on the
basis of the last sale on such exchange on the day of valuation, except as
described hereafter. In the absence of sales of listed securities and with
respect to (a) securities for which the most recent sale prices are not deemed
to represent fair market value and (b) unlisted securities (other than money
market instruments), securities are valued at the mean between the closing bid
and asked prices when quoted prices for investments are readily available.
Investments in over-the-counter derivative instruments, such as interest rate
swaps and options thereon ("swaptions"), are valued at the prices obtained from
the broker/dealer or bank that is the counterparty to such instrument, subject
to comparison of such valuation with a valuation obtained from a broker/dealer
or bank that is not a counterparty to the particular derivative instrument.
Investments for which market quotations are not readily available or for which
management determines that the prices are not reflective of current market
conditions are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund, including reference to
valuations of other securities which are comparable in quality, maturity and
type. Investments in money market instruments, which mature in 60 days or less,
are valued at amortized cost. Investments in money market funds are valued at
the net asset value of such funds.
20
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities sold
are recorded on the identified cost basis. Dividend income is recorded on
ex-dividend dates. Interest income is recorded on the accrual basis. The Fund
also amortizes premiums and accretes discounts on certain fixed income
securities.
OPTIONS: Purchases of options are recorded as an investment, the value of
which is marked-to-market at each valuation date. When the Fund enters into a
closing sale transaction, the Fund will record a gain or loss depending on the
difference between the purchase and sale price. The risks associated with
purchasing options and the maximum loss the Fund would incur are limited to the
purchase price originally paid.
When the Fund writes an option, an amount equal to the premium received by
the Fund is recorded as a liability, the value of which is marked-to-market at
each valuation date. When a written option expires, the Fund realizes a gain
equal to the amount of the premium originally received. When the Fund enters
into a closing purchase transaction, the Fund realizes a gain (or loss if the
cost of the closing purchase transaction exceeds the premium received when the
option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a call option is exercised, the Fund realizes a gain or loss from the sale
of the underlying security and the proceeds from such sale are increased by the
amount of the premium originally received. When a put option is exercised, the
amount of the premium originally received will reduce the cost of the security
which the Fund purchased upon exercise.
The risk in writing a call option is that the Fund may forego the
opportunity for profit if the market price of the underlying security increases
and the option is exercised. The risk in writing a put option is that the Fund
may incur a loss if the market price of the underlying security decreases and
the option is exercised.
REPURCHASE AGREEMENTS: The Fund may engage in repurchase agreement
transactions. The Fund's investment adviser reviews and approves the eligibility
of the banks and dealers with which the Fund may enter into repurchase agreement
transactions. The value of the collateral underlying such transactions is at
least equal at all times to the total amount of the repurchase obligations,
including interest. The Fund maintains possession of the collateral through its
custodian and, in the event of counterparty default, the Fund has the right to
use the collateral to offset losses incurred. There is the possibility of loss
to the Fund in the event the Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities.
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.
21
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
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.
Income and capital gain distributions are determined and characterized in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to (1) differing
treatments of income and gains on various investment securities held by the
Fund, including timing differences, (2) the attribution of expenses against
certain components of taxable investment income, and (3) federal regulations
requiring proportionate allocation of income and gains to all classes of
shareholders.
Distributions from net realized gains for book purposes may include
short-term capital gains, which are included as ordinary income for tax
purposes, and may exclude amortization of premium on 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 2006 and 2005 was as follows:
DISTRIBUTIONS PAID IN FISCAL YEAR 2006 DISTRIBUTIONS PAID IN FISCAL YEAR 2005
-------------------------------------- --------------------------------------
ORDINARY INCOME LONG-TERM CAPITAL GAINS ORDINARY INCOME LONG-TERM CAPITAL GAINS
--------------- ----------------------- --------------- -----------------------
Common N/A N/A $17,926,932 $0
Preferred N/A N/A $ 3,970,354 $0
As of November 30, 2005, 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)
--------------------------- --------------- -------------- ---------------------------
($10,046,633) $758,939 $0 ($177,148)
At November 30, 2005, the composition of the Fund's $10,046,633
accumulated realized capital losses was $573,838, $8,529,240 and $943,555 in
2003, 2004 and 2005, respectively. These losses may be carried forward and
offset against any future capital gains through 2011, 2012 and 2013,
respectively. The Fund also had a Post October Capital loss deferral of
$1,410,497.
22
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
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 $8,401 of Federal excise taxes attributable to
calendar year 2005 in March 2006.
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 to the Adviser, Servicing Agent,
Administrator and Custodian, the Fund's average weekly total managed assets
means the total assets of the Fund minus the sum of accrued liabilities. 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.
PFPC Inc., a member of the PNC Financial Services Group, Inc. ("PNC
Financial Services"), serves as the Fund's Administrator. As Administrator, PFPC
Inc. calculates the net asset value of the Fund's shares attributable to Common
Stock and generally assists in all aspects of the Fund's administration and
operation. As compensation for PFPC Inc.'s services as Administrator, the Fund
pays PFPC Inc. a monthly fee at an annual rate of 0.10% of the first $200
million of the Fund's average weekly total managed assets, 0.04% of the next
$300 million of the Fund's average weekly total managed assets, 0.03% of the
next $500 million of the Fund's average weekly total managed assets and 0.02% of
the Fund's average weekly total managed assets above $1 billion.
PFPC Inc. also serves as the Fund's Common Stock dividend-paying agent and
registrar (Transfer Agent). As compensation for PFPC Inc.'s services, the Fund
pays PFPC Inc. a fee at an annual rate of 0.02% of the first $150 million of the
Fund's average weekly net assets attributable to Common Stock, 0.0075% 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
purpose 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 and accumulated
dividends, if any, on Fund preferred shares. For this calculation, the Fund's
liabilities are deemed to include the aggregate liquidation
23
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
preference of any outstanding Fund preferred shares.
PFPC Trust Company ("PFPC Trust") serves as the Fund's Custodian. PFPC
Trust is an indirect subsidiary of PNC Financial Services. As compensation for
PFPC Trust's services as custodian, the Fund pays PFPC Trust a monthly fee at
the annual rate of 0.010% of the first $200 million of the Fund's average weekly
total managed assets, 0.008% of the next $300 million of the Fund's average
weekly total managed assets, 0.006% of the next $500 million of the Fund's
average weekly total managed assets, and 0.005% of the Fund's average weekly
total managed assets above $1 billion.
The Fund currently pays each Director who is not a director, officer or
employee of the Adviser or the Servicing Agent a fee of $9,000 per annum, plus
$500 for each in-person meeting of the Board of Directors or any committee and
$150 for each telephone meeting. The Audit Committee Chairman receives an
additional annual fee of $2,500. The Fund also reimburses all Directors for
travel and out-of-pocket expenses incurred in connection with such meetings.
The Fund currently pays the Adviser a fee of $37,500 per annum for Chief
Compliance Officer services and reimburses out-of-pocket expenses incurred in
connection with providing services in this role.
4. PURCHASES AND SALES OF SECURITIES
For the six months ended May 31, 2006, the cost of purchases and proceeds
from sales of securities excluding short-term investments, aggregated
$138,716,679 and $129,651,607, respectively.
At May 31, 2006, the aggregate cost of securities for federal income tax
purposes was $354,026,316, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $1,673,581 and
the aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $9,875,932.
5. COMMON STOCK
At May 31, 2006, 240,000,000 shares of $0.01 par value Common Stock were
authorized.
Common Stock Transactions were as follows:
SIX MONTHS ENDED YEAR ENDED
5/31/06 11/30/05
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- ---------
Shares issued under the Dividend Reinvestment and
Cash Purchase Plan .................................. -- $ -- 22,381 $ 536,884
--------- --------- --------- ---------
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 results in the
financial leveraging of the Common Stock. Such leveraging tends to magnify
24
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
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.
At May 31, 2006, 2,570 shares for each Series T7 and W28 of Auction Market
Preferred Shares were outstanding at the annualized rate of 4.80% and 4.932% for
Series T7 and W28, respectively. The dividend rate, as set by the auction
process, is generally expected to vary with short-term interest rates. These
rates may vary in a manner unrelated to the income received on the Fund's
assets, which could have either a beneficial or detrimental impact on net
investment income and gains available to Common Stock Shareholders. While the
Fund expects to structure its portfolio holdings and hedging transactions to
lessen such risks to Common Stock Shareholders, there can be no assurance that
such results will be attained.
7. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY
The Fund invests primarily in a diversified portfolio of preferred and
debt securities. This includes fully taxable (hybrid) preferred securities and
traditional preferred stocks eligible for the inter-corporate dividends received
deduction ("DRD"). Under normal market conditions, at least 50% of the value of
the Fund's total assets will be invested in preferred securities. Also, under
normal market conditions, the Fund invests at least 25% of its total assets in
securities issued by companies in the utility industry and at least 25% of its
total assets 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 either case, at the time
of purchase. However, these securities must be issued by an issuer having a
class of senior debt rated investment grade outstanding.
The Fund may invest up to 15% of its total assets in common stocks, which
total includes those convertible securities that trade in close relationship to
the underlying common stock of an issuer.
25
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
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.
8. SPECIAL INVESTMENT TECHNIQUES
The Fund may employ certain investment techniques in accordance with its
fundamental investment policies. These may include the use of when-issued and
delayed delivery transactions. Securities purchased or sold on a when-issued or
delayed delivery basis may be settled within 45 days after the date of the
transaction. Such transactions may expose the Fund to credit and market
valuation risk greater than that associated with regular trade settlement
procedures. The Fund may also enter into transactions, in accordance with its
investment policies, involving any or all of the following: short sales of
securities, 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.
9. 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.
26
--------------------------------------------------------------------------------
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 their own name will
have all distributions reinvested automatically by PFPC Inc. as agent under the
Plan, unless the shareholder elects to receive cash. Distributions with respect
to shares registered in the name of a broker-dealer or other nominee (that is,
in "street name") may be reinvested by the broker or nominee in additional
shares under the Plan, but only if the service is provided by the broker or
nominee, unless the shareholder elects to receive distributions in cash. A
shareholder who holds Common Stock registered in the name of a broker or other
nominee may not be able to transfer the Common Stock to another broker or
nominee and continue to participate in the Plan. Investors who own Common Stock
registered in street name should consult their broker or nominee for details
regarding reinvestment.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price per share of the Fund's Common Stock is equal to or exceeds the
net asset value per share on the valuation date, participants in the Plan will
be issued new shares valued at the higher of net asset value or 95% of the then
current market value. Otherwise, PFPC Inc. will buy shares of the Fund's Common
Stock in the open market, on the New York Stock Exchange or elsewhere, on or
shortly after the payment date of the dividend or distribution and continuing
until the ex-dividend date of the Fund's next distribution to holders of the
Common Stock or until it has expended for such purchases all of the cash that
would otherwise be payable to the participants. The number of purchased shares
that will then be credited to the participants' accounts will be based on the
average per share purchase price of the shares so purchased, including brokerage
commissions. If PFPC Inc. commences purchases in the open market and the then
current market price of the shares (plus any estimated brokerage commissions)
subsequently exceeds their net asset value most recently determined before the
completion of the purchases, PFPC Inc. will attempt to terminate purchases in
the open market and cause the Fund to issue the remaining dividend or
distribution in shares. In this case, the number of shares received by the
participant will be based on the weighted average of prices paid for shares
purchased in the open market and the price at which the Fund issues the
remaining shares. These remaining shares will be issued by the Fund at the
higher of net asset value or 95% of the then current market value.
Plan participants are not subject to any charge for reinvesting dividends
or capital gains distributions. Each Plan participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to PFPC
Inc.'s open market purchases in connection with the reinvestment of dividends or
capital gains distributions. For the six months ended May 31, 2006, $1,030 in
brokerage commissions were incurred.
The automatic reinvestment of dividends and capital gains distributions
will not relieve Plan participants of any income tax that may be payable on the
dividends or capital gains distributions. A participant in the Plan will be
treated for Federal income tax purposes as having received, on the dividend
payment date, a dividend or distribution in an amount equal to the cash that the
participant could have received instead of shares.
27
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
In addition to acquiring shares of Common Stock through the reinvestment
of cash dividends and distributions, a shareholder may invest any further
amounts from $100 to $3,000 semi-annually at the then current market price in
shares purchased through the Plan. Such semi-annual investments are subject to
any brokerage commission charges incurred.
A shareholder whose Common Stock is registered in his or her own name may
terminate participation in the Plan at any time by notifying PFPC Inc. in
writing, by completing the form on the back of the Plan account statement and
forwarding it to PFPC Inc. or by calling PFPC Inc., directly. A termination will
be effective immediately if notice is received by PFPC Inc. not less than 10
days before any dividend or distribution record date. Otherwise, the termination
will be effective, and only with respect to any subsequent dividends or
distributions, on the first day after the dividend or distribution has been
credited to the participant's account in additional shares of the Fund. Upon
termination and according to a participant's instructions, PFPC Inc. will either
(a) issue certificates for the whole shares credited to the shareholder's Plan
account and a check representing any fractional shares or (b) sell the shares in
the market. Shareholders who hold Common Stock registered in the name of a
broker or other nominee should consult their broker or nominee to terminate
participation.
The Plan is described in more detail in the Fund's Plan brochure.
Information concerning the Plan may be obtained from PFPC Inc. at
1-800-331-1710.
ADDITIONAL COMPENSATION AGREEMENT
The Adviser has agreed to compensate Merrill Lynch from its own resources
at an annualized rate of 0.15% of the Fund's total managed assets for certain
services, including after-market support services designed to maintain the
visibility of the Fund.
PROXY VOTING POLICIES AND PROXY VOTING RECORD ON FORM N-PX
The Fund files Form N-PX with its complete proxy voting record for the 12
months ended June 30th no later than August 31st of each year. The Fund filed
its latest Form N-PX with the Securities and Exchange Commission ("SEC") on
August 17, 2005. This filing, as well as the Fund's proxy voting policies and
procedures, are available (i) without charge, upon request, by calling the
Fund's transfer agent at 1-800-331-1710 and (ii) on the SEC's website at
WWW.SEC.GOV. In addition, the Fund's proxy voting policies and procedures are
available on the Fund's website at WWW.FCCLAYMORE.COM.
PORTFOLIO SCHEDULE ON FORM N-Q
The Fund files a complete schedule of portfolio holdings with the SEC for
the first and third fiscal quarters on Form N-Q, the latest of which was filed
for the quarter ended February 28, 2006. 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.
28
--------------------------------------------------------------------------------
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
Donald F. Crumrine, as the Fund's Chief Executive Officer, has certified
to the New York Stock Exchange that, as of May 22, 2006, he was not aware of any
violation by the Fund of applicable NYSE corporate governance listing standards.
The Fund's reports to the SEC on Forms N-CSR and N-Q contain certifications by
the Fund's principal executive officer and principal financial officer that
relate to the Fund's disclosure in such reports and that are required by rule
30a-2(a) under the 1940 Act.
MEETING OF SHAREHOLDERS
On April 21, 2006, the Fund held its Annual Meeting of Shareholders (the
"Meeting") for the following purpose: election of Directors of the Fund
("Proposal 1"). The results of the proposal are as follows:
PROPOSAL 1: ELECTION OF DIRECTORS.
NAME FOR WITHHELD
---- --- --------
COMMON STOCK
Morgan Gust .......................................... 9,052,930 132,865
NAME FOR WITHHELD
---- --- --------
PREFERRED STOCK
Karen H. Hogan ....................................... 3,223 3
Donald F. Crumrine, David Gale, and Robert F. Wulf continue to serve in
their capacities as Directors of the Fund.
29
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
INFORMATION ABOUT FUND DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the direction of
the Fund's Board of Directors. Information pertaining to the Directors and
officers of the Fund is set forth below.
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
------- -------------- ------------ ---------- ----------- ----------------
NON-INTERESTED
DIRECTORS:
DAVID GALE+ Director Class I Director President & CEO of 4 Metromedia
Delta Dividend Group, Inc. since Delta Dividend International Group, Inc.
220 Montgomery Street August 2003 Group, Inc. (telecommunications);
Suite 426 (investments). Director, Flaherty &
San Francisco, CA 94104 Crumrine Preferred
Age: 57 Income Fund, Flaherty
& Crumrine Preferred
Income Opportunity
Fund and Flaherty &
Crumrine/Claymore
Preferred Securities
Income Fund.
MORGAN GUST Director Class II Director President of Giant 4 CoBiz, Inc. (financial
Giant Industries, Inc. since Industries, Inc. services); Flaherty &
23733 N. Scottsdale Road August 2003 (petroleum refining Crumrine Preferred
Scottsdale, AZ 85255 and marketing) since Income Fund,Flaherty
Age: 59 March 2002; and for more & Crumrine Preferred
than five years prior Income Opportunity
thereto, Executive Vice Fund and Flaherty &
President, and various Crumrine/Claymore
other Vice President Preferred Securities
positions at Giant Income Fund.
Industries, Inc.
----------
* 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 2008
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
2007 Annual Meeting of Shareholders; directors may continue in
office until their successors are duly elected and qualified.
+ As a Director, represents holders of shares of the Fund's Auction Market
Preferred Stock.
30
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
-----------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
------- -------------- ------------ ---------- ----------- ----------------
NON-INTERESTED
DIRECTORS:
KAREN H. HOGAN+ Director Class II Director Retired; Community 4 Flaherty & Crumrine
301 E. Colorado Boulevard since Volunteer; from September Preferred Income Fund,
Suite 720 July 2005 1985 to January 1997, Flaherty & Crumrine
Pasadena, CA 91101 Senior Vice President of Preferred Income
Age: 45 Preferred Stock Opportunity Fund and
Origination at Lehman Flaherty & Crumrine/
Brothers and previously, Claymore Preferred
Vice President of New Securities Income Fund.
Product Development.
ROBERT F. WULF Director Class III Director Financial Consultant; 4 Flaherty & Crumrine
3560 Deerfield Drive South since Trustee, University of Preferred Income Fund,
Salem, OR 97302 August 2003 Oregon Foundation; Flaherty & Crumrine
Age: 69 Trustee, San Francisco Preferred Income
Theological Seminary. Opportunity Fund and
Flaherty & Crumrine/
Claymore Preferred
Securities Income Fund.
INTERESTED
DIRECTOR:
DONALD F. CRUMRINE++ Director, Class III Director Chairman of the Board 4 Flaherty & Crumrine
301 E. Colorado Boulevard Chairman since and Director of Flaherty & Preferred Income Fund,
Suite 720 of the Board August 2003 Crumrine Incorporated. Flaherty & Crumrine
Pasadena, CA 91101 and Chief Preferred Income
Age: 58 Executive Opportunity Fund and
Officer Flaherty & Crumrine/
Claymore Preferred
Securities Income Fund.
----------
* The Fund's Board of Directors is divided into three classes, each class
having a term of three years. Each year the term of office of one class
expires and the successor or successors elected to such class serve for a
three year term. The three year term for each class expires as follows:
CLASS I DIRECTOR - three year term expires at the Fund's 2008
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
2007 Annual Meeting of Shareholders; directors may continue in
office until their successors are duly elected and qualified.
+ As a Director, represents holders of shares of the Fund's Auction Market
Preferred Stock.
++ "Interested person" of the Fund as defined in the Investment Company Act
of 1940. Mr. Crumrine is considered an "interested person" because of his
affiliation with Flaherty & Crumrine Incorporated, which acts as the
Fund's investment adviser.
31
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
PRINCIPAL
TERM OF OFFICE OCCUPATION(S)
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST
AND AGE HELD WITH FUND TIME SERVED FIVE YEARS
------- -------------- ----------- ----------
OFFICERS:
ROBERT M. ETTINGER President Since President and Director of Flaherty &
301 E. Colorado Boulevard August 2003 Crumrine Incorporated.
Suite 720
Pasadena, CA 91101
Age: 47
R. ERIC CHADWICK Chief Financial Since Vice President and Director of
301 E. Colorado Boulevard Officer, Vice August 2003 Flaherty & Crumrine Incorporated;
Suite 720 President prior to August 2001, portfolio manager
Pasadena, CA 91101 and Treasurer of Flaherty & Crumrine Incorporated.
Age: 31
CHAD C. CONWELL Chief Compliance Since Chief Compliance Officer of Flaherty &
301 E. Colorado Boulevard Officer, Vice July 2005 Crumrine Incorporated since September
Suite 720 President and 2005; since July 2005, Vice President of
Pasadena, CA 91101 Secretary Flaherty & Crumrine Incorporated; from
Age: 33 September 1998 through June 2005,
Attorney with Paul, Hastings, Janofsky
& Walker LLP.
BRADFORD S. STONE Vice President Since Vice President and Director of
392 Springfield Avenue and Assistant August 2003 Flaherty & Crumrine Incorporated;
Mezzanine Suite Treasurer from June 2001 to April 2003, Director
Summit, NJ 07901 of US Market Strategy at Barclays
Age: 46 Capital.
NICHOLAS DALMASO Vice President Since Director of Claymore Group, LLC
2455 Corporate West Drive and Assistant August 2003 since January 2002. Senior Managing
Lisle, IL 60532 Secretary Director and General Counsel of
Age: 41 Claymore Securities, Inc. since
November 2001 and Claymore Advisors,
LLC since October 2003. Partner of DBN
Group, LLC since April 2001. Assistant
General Counsel of Nuveen Investments
from July 1999 to November 2001. Prior
to that, Vice President and Associate
General Counsel of Van Kampen
Investments.
32
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
PRINCIPAL
TERM OF OFFICE OCCUPATION(S)
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST
AND AGE HELD WITH FUND TIME SERVED FIVE YEARS
------- -------------- ----------- ----------
OFFICERS:
---------
CHRISTOPHER D. RYAN Vice President Since Vice President of Flaherty & Crumrine
301 E. Colorado Boulevard April 2005 Incorporated since February 2004;
Suite 720 October 2002 to February 2004,
Pasadena, CA 91101 Product Analyst of Flaherty & Crumrine
Age: 38 Incorporated. From 1999 to 2002, graduate
student.
LAURIE C. LODOLO Assistant Since Assistant Compliance Officer of Flaherty
301 E. Colorado Boulevard Compliance July 2004 & Crumrine Incorporated since August
Suite 720 Officer, Assistant 2004; since February 2004, Secretary of
Pasadena, CA 91101 Treasurer and Flaherty & Crumrine Incorporated; Since
Age: 42 Assistant Secretary January 1987, Account Administrator of
Flaherty & Crumrine Incorporated.
33
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF CONTINUANCE OF INVESTMENT ADVISORY AGREEMENT
During the six month period ended May 31, 2006, the Board of Directors of
the Fund approved the continuation of the investment advisory agreement with the
Adviser (the "Agreement"). The following paragraphs summarize the material
information and factors considered by the Board, including the Independent
Directors, as well as their conclusions relative to such factors.
NATURE, EXTENT AND QUALITY OF SERVICES
The Board members reviewed in detail the nature and extent of the services
provided by the Adviser and the quality of those services over the past year and
since inception. The Board members noted that these services included managing
the Fund's investment program, as well as providing significant administrative
services beyond what the Agreement required. The Board members noted that the
Adviser also provided, generally at its expense: office facilities for use by
the Fund; personnel responsible for supervising the performance of
administrative, accounting and related services; and investment compliance
monitoring. The Board members also considered the Adviser's sound financial
condition and the Adviser's commitment to its business, as evidenced by its
hiring additional personnel as the business has grown. The Board members
evaluated the Adviser's services based on their direct experience serving as
Directors for many years, focusing on (i) the Adviser's knowledge of the
preferred securities market generally and the sophisticated hedging strategies
the Fund employs and (ii) the Adviser's culture of compliance. The Board members
reviewed the personnel responsible for providing services to the Fund and
observed that, based on their experience and interaction with the Adviser: (1)
the Adviser's personnel exhibited a high level of personal integrity, diligence
and attention to detail in carrying out their responsibilities under the
Agreement; (2) the Adviser was responsive to requests of the Board and its
personnel were available between Board meetings to answer questions from Board
members; and (3) the Adviser had kept the Board apprised of developments
relating to the Fund. The Board members also considered the continued efforts
undertaken by the Adviser to maintain an effective compliance program. The Board
members concluded that the nature and extent of the services provided were
reasonable and appropriate in relation to the Fund's investment goals and
strategies, the corporate and regulatory environment in which the Fund operates,
and the level of services provided by the Adviser, and that the quality of the
Adviser's service continues to be high.
INVESTMENT PERFORMANCE
The Board members considered the Fund's performance since inception,
including its performance in recent fiscal periods, to determine whether the
Fund had met its investment objective. The Board members determined that the
Fund had done so, especially in light of existing extraordinary market
conditions, which include rising short-term rates and a relatively flat yield
curve, conditions that reduce hedging benefits. In reaching this conclusion, the
Board members reviewed the Fund's performance compared to relevant indices and
funds thought to be generally comparable to the Fund, considered the costs and
benefits of the Fund's hedging strategy in the relevant market environment and
examined the differences between the Fund and certain funds in the comparison
group, including the significant positions in common equities of a number of
preferred stock funds. The Board members specifically recognized that the Fund
had been in existence a relatively short time and that recent relative
underperformance was attributable largely to the Fund's stated
34
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-----------------------------------------------------------
hedging strategies, which over time are expected to benefit the Fund, and the
Fund's adherence to its respective investment mandate.
PROFITABILITY
The Board members considered the Adviser's methodology for determining its
profitability with respect to the Fund, and the Adviser's profit margin on an
after-tax basis attributable to managing the Fund. The Board members concluded
that the profitability to the Adviser was not excessive based on the
considerable services it provides to the Fund, the Fund's relative performance
over time, its success in meeting the Fund's investment objective and the Fund's
relatively low expense ratio compared to funds with similar investment
objectives and strategies. The Board members also considered that the Adviser
provided, at a lower cost, services to separate account clients and determined
that the difference was justified in light of the additional services and costs
associated with managing registered investment companies, such as the Fund. The
Board members accepted the Adviser's statement that it did not realize material
indirect benefits from its relationship with the Fund and did not obtain soft
dollar credits from securities trading.
ECONOMIES OF SCALE
The Board members noted that the Fund, as a closed-end investment company,
was not expected to increase materially in size; thus, the Adviser would not
benefit from economies of scale. The Board members considered whether economies
of scale could be realized because the Adviser advises other similar funds.
Based on their experience, the Board members accepted the Adviser's explanation
that significant economies of scale would not be realized because of the
complexity of managing preferred securities for separate funds and other
portfolios. Nonetheless, the Board members noted that the Fund's advisory fee
schedule declines as assets increase beyond a certain level (commonly known as a
"breakpoint"), and that breakpoints provide for a sharing with shareholders of
benefits derived as a result of economies of scale arising from increased
assets. Accordingly, the Board members determined that the existing advisory fee
levels reflect possible economies of scale.
In light of their discussions and considerations as described above, the
Board members made the following determinations as to the Fund:
o the nature and extent and quality of the services provided by the
Adviser are reasonable and appropriate and the quality of the
services is high;
o the Fund's overall performance was satisfactory, given market
conditions;
o the fee paid to the Adviser was reasonable in light of (i)
comparative performance and expense and advisory fee information,
(ii) the cost of the services provided and profits to be realized,
and (iii) the benefits derived or to be derived by the Adviser from
the relationship with the Fund; and
o there were not at this time significant economies of scale to be
realized by the Adviser in managing the Fund's assets, and the fee
was structured to provide for a sharing of the benefits of economies
of scale.
Based on these conclusions, the Board members determined that approval of
the Agreement was in the best interests of the Fund and its shareholders.
35
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
Nicholas Dalmaso
Vice President and Assistant Secretary
Christopher D. Ryan, CFA
Vice President
Laurie C. Lodolo
Assistant Compliance Officer,
Assistant Treasurer and
Assistant Secretary
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@pfdincome.com
QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN
FUND?
o If your shares are held in a Brokerage Account, contact your Broker.
o If you have physical possession of your shares in certificate form,
contact the Fund's Transfer Agent & Shareholder Servicing Agent --
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
1-800-331-1710
THIS REPORT IS SENT TO SHAREHOLDERS OF FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN
FUND INCORPORATED FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR
REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR
OF ANY SECURITIES MENTIONED IN THIS REPORT.
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments in securities of unaffiliated issuers as of the close of
the reporting period is included as part of the report to shareholders filed
under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR
240.14a-101), or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these
controls and procedures required by Rule 30a-3(b) under the 1940 Act
(17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the
Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND INCORPORATED
By (Signature and Title)* /S/ DONALD F. CRUMRINE
-------------------------------------------------------
Donald F. Crumrine, Director, Chairman of the Board
and Chief Executive Officer
(principal executive officer)
Date JULY 17, 2006
----------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /S/ DONALD F. CRUMRINE
-------------------------------------------------------
Donald F. Crumrine, Director, Chairman of the Board
and Chief Executive Officer
(principal executive officer)
Date JULY 17, 2006
----------------------------------------------------------------------------
By (Signature and Title)* /S/ R. ERIC CHADWICK
-------------------------------------------------------
R. Eric Chadwick, Chief Financial Officer,
Treasurer and Vice President
(principal financial officer)
Date JULY 17, 2006
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.