FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND
To the Shareholders of the Flaherty & Crumrine/Claymore Total Return Fund
("FLC"):
Beginning with issues arising in the subprime mortgage loan market, a
well-publicized series of events has roiled financial markets over the past
several months. The preferred stock market and closed-end funds have been
particularly impacted, and, consequently, for the Fund's third fiscal quarter
ended August 31, 2007, the Fund had a total return of -4.8% on the net asset
value (NAV) of its Common Stock.
As we've discussed in prior letters, problems in the subprime mortgage
loan market first bubbled up in January of this year. Throughout this year, the
Fund has had no direct exposure to subprime loans, and we avoided investing in
companies that had meaningful risks associated with the product. Our research
team closely monitors the loan quality and underwriting standards of each
financial company in the portfolio, and we invest only in companies that meet
our quality thresholds. We're not perfect, but we believe that the Fund's
portfolio is comprised of holdings in fundamentally sound companies.
In isolation, the impact of this weakness in the subprime loan market
should have been limited to direct participants in this market; unfortunately,
given the complexity of the financial system, few things happen in isolation.
When the subprime problems became more pronounced several months ago, the
fallout from this subprime weakness has been widespread and severe.
Fueled by low interest rates and relatively relaxed financing terms, a
great deal more leverage had become built into the system than even just a few
years ago. As investments directly associated with subprime mortgages declined
significantly in value during the quarter, they became very illiquid.
Highly-leveraged investors then were forced to sell other more liquid types of
assets like investment-grade preferred and debt securities to meet redemptions
or margin calls. Risk and liquidity premiums surged, indiscriminately taking
yields on all credit instruments with them. In short, excess leverage created
the financial powder keg and subprime loan problems provided the spark.
With yields on preferred securities rising more than yields on more senior
debt securities, the prices of the securities in our portfolio fell as the
supply of preferred securities exceeded demand. The rearview mirror is still a
bit foggy, but it appears that much of the selling pressure came from hedge
funds. Hedge funds had become the 800-pound gorilla in the credit markets
recently, and although they've been forced to slim down, they can still have a
big impact.
Hedge funds were not the only investors selling, but since they aren't
required to disclose their preferred securities holdings, no one knows how
extensive their selling pressure was. As a result, prospective buyers were
extremely cautious because they feared additional selling would further depress
prices. Wall Street brokers and dealers normally stand ready to provide
liquidity to sellers, but they appeared reluctant to buy. Long-term investors
like the Fund, as well as individual investors, insurance companies and pension
funds, also stayed on the sidelines for the most part. During the quarter, and
since it ended, we have added some positions at attractive levels, but we are
continuing to take a go-slow approach.
Subprime fallout also extended to the market for short-term, or
money-market, securities such as commercial paper and auction-rate securities.
This market was in a state of disarray throughout August and into early
September. Investors in money-market securities don't like risk, and, at the
slightest hint of trouble, they pull their money out and invest in short-term
government securities. While the perception of risk is real for a small segment
of borrowers, the reaction seems to be disproportionate.
These disruptions in the short-term market impacted the Fund in two
meaningful ways. First, they contributed to price weakness in many of the Fund's
investments, particularly in financial companies. While banks can fulfill their
short-term financing needs with customer deposits and through the Federal
Reserve, finance companies like broker-dealers need to rely on the short-term
securities market to run their day-to-day operations. This market is like oxygen
to most financial companies, and restricting their borrowing makes it more
expensive for them to operate. We continue to believe that none of the financial
companies in our portfolio face significant risks of default as a result of this
increased cost of borrowing, but it has clearly impacted their earnings outlooks
and the prices of their preferred securities.
Second, the rates paid by the Fund on its own auction-rate Preferred Stock
have risen significantly as a direct result of liquidity problems in the
financial markets. The frustrating irony is that the Fund's own Preferred Stock
is of very high quality with a rating of AAA and logic would dictate that rates
should fall as investors seek out higher quality investments. This high quality
is a function of the Investment Company Act (which governs the Fund) and the
guidelines imposed by the rating agencies. As Kevin Conery, Merrill Lynch's
Preferred Stock Strategist, recently observed about the Investment Company Act,
"while some have criticized it for being too conservative for its 200% asset
coverage test, at times like these in the market, we respect this discipline."
While we are beginning to see some improvement in the auction rates of our
Preferred Stock, and the recent interest rate cut by the Federal Reserve should
help over the coming months, we haven't yet returned to more normalized auction
rates.
The higher cost of our auction-rate Preferred Stock comes directly out of
money available for distribution as the monthly Common Stock dividend. On the
plus side, higher yields on preferred stock mean that we have been able to
increase the income earned on the portfolio. It will take some time to see how
these two offsetting factors affect income; in the meantime we are doing our
best to manage both. We are comfortable with the current dividend, but we strive
to pay out a rate that is sustainable and will make adjustments as conditions
warrant.
We have been through periods of fear and volatility before, and we remain
optimistic about long-term prospects for the Fund. Such periods create
opportunities to buy securities of sound companies at discounted prices, as many
shorter-term investors exit the market by selling both good and bad investments.
We expect both more rational pricing and reduced risk of early redemption of our
portfolio securities as markets settle down - both of which should benefit
future returns for long-term investors. In addition, our Preferred Stock auction
rates are likely to normalize in due course, as the market begins to better
recognize the credit quality of our Preferred Stock. While we cannot say with
certainty when, or if, these things will happen, as managers we are doing our
best to position the Fund to ride out the current storm and prepare for better
days ahead.
In volatile market conditions like these, we may provide more frequent
updates about the preferred securities market and the Fund's portfolio. We did
so this past quarter by adding special Questions and Answers regarding the
market price of the Fund's shares to the Fund's website at WWW.FCCLAYMORE.COM.
We encourage you to stay informed as shareholders by periodically visiting the
website for additional information about your Fund.
Sincerely,
/s/ Donald F. Crumrine /s/ Robert M. Ettinger
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
October 17, 2007
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OVERVIEW
AUGUST 31, 2007 (UNAUDITED)
-----------------------------------------------------------
FUND STATISTICS ON 08/31/07
--------------------------------------------------------------------------------
Net Asset Value $ 21.07
Market Price $ 18.69
Discount 11.30%
Yield on Market Price 8.19%
Common Stock Shares
Outstanding 9,776,333
MOODY'S RATINGS % OF PORTFOLIO
--------------------------------------------------------------------------------
AA 5.5%
A 17.9%
BBB 54.9%
BB 13.6%
Not Rated 5.0%
--------------------------------------------------------------------------------
Below Investment Grade* 15.0%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
INDUSTRY CATEGORIES % OF PORTFOLIO
--------------------------------------------------------------------------------
Banking 29%
Utilities 27%
Insurance 21%
Energy 7%
Financial Services 6%
REITs 5%
Other 5%
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO
--------------------------------------------------------------------------------
Midamerican Energy 5.0%
Banco Santander 4.1%
Liberty Mutual Group 3.9%
Entergy Louisiana 3.8%
Wachovia Corp 3.4%
AON Corp 3.0%
Wisconsin Energy 2.8%
Nexen 2.5%
Interstate Power & Light 2.3%
Capital One Financial 2.2%
% OF PORTFOLIO**
--------------------------------------------------------------------------------
Holdings Generating Qualified Dividend Income
(QDI) for Individuals 25%
Holdings Generating Income Eligible for the
Corporate Dividend Received Deduction (DRD) 16%
--------------------------------------------------------------------------------
** THIS DOES NOT REFLECT YEAR-END RESULTS OR ACTUAL TAX CATEGORIZATION OF
FUND DISTRIBUTIONS. THESE PERCENTAGES CAN, AND DO, CHANGE, PERHAPS
SIGNIFICANTLY, DEPENDING ON MARKET CONDITIONS. INVESTORS SHOULD CONSULT
THEIR TAX ADVISOR REGARDING THEIR PERSONAL SITUATION.
3
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS
AUGUST 31, 2007 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------- -----------------
PREFERRED SECURITIES -- 79.3%
BANKING -- 29.4%
----------------------------------------------------------------------------------------------------------------------------------
$ 5,750,000 Astoria Capital Trust I, 9.75% 11/01/29, Series B .................................... $ 6,502,053
Banco Santander:
381,000 6.50% Pfd., 144A**** .............................................................. 8,549,640**(1)
214,920 6.80% Pfd., 144A**** .............................................................. 5,005,486**(1)
50,900 Bank One Capital Trust VI, 7.20% Pfd. ................................................ 1,278,862
$ 6,865,000 Capital One Capital III, 7.686% 08/15/36 ............................................. 6,373,637
$ 6,800,000 CBG Florida REIT Corporation, 7.114%, 144A**** ....................................... 6,623,274
40,000 Citizens Funding Trust I, 7.50% Pfd. 09/15/66 ........................................ 986,252
40,000 Cobank, ACB, 7.00% Pfd., 144A**** .................................................... 2,054,400*
20,000 Colonial Capital Trust IV, 7.875% Pfd. ............................................... 498,000
$ 4,950,000 Comerica Capital Trust II, 6.576% 02/20/37 ........................................... 4,393,590
7,000 FBOP Corporation, Adj. Rate Pfd., 144A**** ........................................... 7,166,250*
$ 400,000 First Empire Capital Trust I, 8.234% 02/01/27 ........................................ 417,071
$ 1,900,000 First Hawaiian Capital I, 8.343% 07/01/27, Series B .................................. 1,982,821(1)
First Republic Bank:
160,000 6.25% Pfd. ........................................................................ 3,970,000*
23,898 7.25% Pfd. ........................................................................ 588,487
2,000 First Republic Preferred Capital Corporation, 10.50% Pfd., 144A**** .................. 2,239,640
20,000 Fleet Capital Trust VIII, 7.20% Pfd. 03/15/32 ........................................ 504,375
2 FT Real Estate Securities Company, 9.50% Pfd., 144A**** .............................. 2,740,013
$ 855,000 HSBC USA Capital Trust II, 8.38% 05/15/27, 144A**** .................................. 890,825(1)
ING Groep NV:
36,000 7.05% Pfd. ........................................................................ 892,530**(1)
10,000 7.20% Pfd. ........................................................................ 250,325**(1)
$ 1,100,000 JPMorgan Chase Capital XXIII, Adj. Rate 05/15/47 ..................................... 965,170
82,000 Keycorp Capital IX, 6.75% Pfd. 12/15/66 .............................................. 1,921,875
$ 1,000,000 Lloyds TSB Group PLC, 6.267% 144A**** ................................................ 924,213**(1)
4,995 National City Capital Trust II, 6.625% Pfd. 11/15/36 ................................. 109,578
$ 810,000 North Fork Capital Trust II, 8.00% 12/15/27 .......................................... 846,028
151,059 PFGI Capital Corporation, 7.75% Pfd. ................................................. 3,867,110
$ 700,000 Regions Financing Trust II, 6.625% 05/15/47 .......................................... 646,582
Roslyn Real Estate:
25 8.95% Pfd., Series C, 144A**** .................................................... 2,671,644
10 Adj. Rate Pfd., Series D, 144A**** ................................................ 1,013,438
33,100 Sovereign Bancorp, 7.30% Pfd., Series C .............................................. 884,184*
191,525 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36 ....................................... 4,877,912
4
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2007 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------- -----------------
PREFERRED SECURITIES -- (CONTINUED)
BANKING -- (CONTINUED)
----------------------------------------------------------------------------------------------------------------------------------
$ 500,000 Sovereign Capital Trust VI, 7.908% 06/13/36 .......................................... $ 538,550
U.S Bancorp, Auction Pass-Through Trust, Cl. B:
15 Series 2006-5, Variable Rate Pfd., 144A**** ....................................... 337,500*
15 Series 2006-6, Variable Rate Pfd., 144A**** ....................................... 337,500*
14,320 USB Capital X, 6.50% Pfd. 04/12/66 ................................................... 341,443
$ 5,000,000 Wachovia Capital Trust I, 7.64% 01/15/27, 144A**** ................................... 5,195,800
$ 670,000 Wachovia Capital Trust V, 7.965% 06/01/27, 144A**** .................................. 698,866
217,200 Wachovia Preferred Funding, 7.25% Pfd., Series A ..................................... 5,599,959
$ 2,300,000 Webster Capital Trust IV, 7.65% 06/15/37 ............................................. 2,273,513
15,300 Wells Fargo Capital Trust IV, 7.00% Pfd. 09/01/31 .................................... 384,413
----------------------------------------------------------------------------------------------------------------------------
98,342,809
-----------------
FINANCIAL SERVICES -- 4.3%
----------------------------------------------------------------------------------------------------------------------------------
$ 5,350,000 CIT Group, Inc., 6.10% ............................................................... 3,946,433
Goldman Sachs:
20,000 Adj. Rate Pfd., Series A .......................................................... 480,000*
36,000 Cabco Trust Capital l, Adj. Rate Pfd. 02/15/34 .................................... 810,450
1,500 STRIPES Custodial Receipts, Pvt. .................................................. 1,216,500*
$ 3,000,000 Gulf Stream-Compass 2005 Composite Notes, 144A**** ................................... 2,800,950
Merrill Lynch:
80,000 Adj. Rate Pfd., Series 5 .......................................................... 1,792,504*
20,000 Fixed Income Pass- through 2007-A, Cl. B, Adj. Rate Pfd, 144A**** ................. 206,000*
3,000 Series II STRIPES Custodial Receipts, Pvt. ........................................ 2,298,000*
11,000 SLM Corporation, Adj. Rate Pfd, Series B ............................................. 847,000*
----------------------------------------------------------------------------------------------------------------------------
14,397,837
-----------------
INSURANCE -- 15.8%
----------------------------------------------------------------------------------------------------------------------------------
189,680 ACE Ltd., 7.80% Pfd., Series C ....................................................... 4,806,965**(1)
$ 450,000 AMBAC Financial Group, Inc., 6.15% 02/15/37 .......................................... 345,460
$ 9,511,000 AON Capital Trust A, 8.205% 01/01/27 ................................................. 10,073,300
Arch Capital Group Ltd.:
28,650 7.875% Pfd., Series B ............................................................. 701,925**(1)
47,100 8.00% Pfd. ........................................................................ 1,173,087**(1)
AXA SA:
$ 3,000,000 6.379%, 144A**** .................................................................. 2,712,780**(1)
$ 500,000 6.463%, 144A**** .................................................................. 453,260**(1)
Axis Capital Holdings:
58,350 7.25% Pfd., Series A .............................................................. 1,392,377**(1)
54,300 7.50% Pfd., Series B .............................................................. 5,435,430(1)
5
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2007 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------- -----------------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
----------------------------------------------------------------------------------------------------------------------------------
65,200 Berkley W.R. Capital Trust II, 6.75% Pfd. 07/26/45 ................................... $ 1,533,015
145,000 Delphi Financial Group, 7.376% Pfd. 05/15/37 ......................................... 3,484,350
60,700 Everest Re Capital Trust II, 6.20% Pfd., Series B .................................... 1,360,439(2)
$ 3,500,000 Everest Re Holdings, 6.60% 05/15/37 .................................................. 3,265,322
$ 6,500,000 Liberty Mutual Group, 7.80% 03/15/37, 144A**** ....................................... 5,810,883
109,000 Scottish Re Group Ltd., 7.25% Pfd. ................................................... 1,900,688**(1)
26,000 Torchmark Capital Trust III, 7.10% Pfd. .............................................. 645,125
$ 3,615,000 USF&G Capital, 8.312% 07/01/46, 144A**** ............................................. 4,310,526
XL Capital Ltd.:
$ 2,150,000 6.50% Series E .................................................................... 1,901,161(1)
10,067 7.625% Pfd., Series B ............................................................. 252,304**(1)
1,500,000 ZFS Finance USA Trust V, 6.50% 05/09/37, 144A**** .................................... 1,405,917(1)
----------------------------------------------------------------------------------------------------------------------------
52,964,314
-----------------
UTILITIES -- 21.1%
----------------------------------------------------------------------------------------------------------------------------------
45,700 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ............................ 4,739,949*
347,000 Calenergy Capital Trust III, 6.50% Pfd. 09/01/27 ..................................... 16,607,420
$ 500,000 COMED Financing II, 8.50% 01/15/27, Series B ......................................... 502,500
$ 2,375,000 COMED Financing III, 6.35% 03/15/33 .................................................. 2,132,513
$ 4,500,000 Dominion Resources Capital Trust I, 7.83% 12/01/27 ................................... 4,693,824
145,000 Entergy Arkansas, Inc., 6.45% Pfd. ................................................... 3,742,450*
50,000 Entergy Louisiana, Inc., 6.95% Pfd. .................................................. 5,236,000*
133,500 FPC Capital I, 7.10% Pfd., Series A .................................................. 3,299,960
FPL Group Capital, Inc.:
$ 750,000 6.35% 10/01/66 .................................................................... 731,433
$ 750,000 6.65% 06/15/67 .................................................................... 746,286
30,445 Indianapolis Power & Light Company, 5.65% Pfd. ....................................... 2,861,830*
Interstate Power & Light Company:
90,000 7.10% Pfd., Series C .............................................................. 2,273,400*
38,600 8.375% Pfd., Series B ............................................................. 1,167,264*
$ 5,000,000 PECO Energy Capital Trust IV, 5.75% 06/15/33 ......................................... 4,307,000
$ 1,000,000 Puget Sound Energy, Inc., 6.974% 06/01/67 ............................................ 978,800
22,500 Southern California Edison, 6.00% Pfd. ............................................... 2,223,450*
130,550 Southern Union Company, 7.55% Pfd. ................................................... 3,334,247*
10,000 Southwest Gas Capital II, 7.70% Pfd. ................................................. 256,563(2)
5,000 Union Electric Company, $7.64 Pfd. ................................................... 513,500*
5,000 Virginia Electric & Power Company, $6.98 Pfd. ........................................ 509,219*
101,200 Virginia Power Capital Trust, 7.375% Pfd. 07/30/42 ................................... 2,546,445
6
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2007 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------- -----------------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
-----------------------------------------------------------------------------------------------------------------------------
$ 5,200,000 Wisconsin Energy Corporation, 6.25% 05/15/67 ......................................... $ 5,046,018
85,137 Wisconsin Power & Light Company, 6.50% Pfd. .......................................... 2,109,806*
----------------------------------------------------------------------------------------------------------------------------
70,559,877
-----------------
ENERGY -- 2.6%
-----------------------------------------------------------------------------------------------------------------------------
Enterprise Products Partners:
$ 4,000,000 7.034% 01/15/68 ................................................................... 3,608,936
$ 2,000,000 8.375% 08/01/66 ................................................................... 2,050,950
2,750 EOG Resources, Inc., 7.195% Pfd., Series B ........................................... 2,927,953*
----------------------------------------------------------------------------------------------------------------------------
8,587,839
-----------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 4.5%
-----------------------------------------------------------------------------------------------------------------------------
85,000 Equity Residential Properties, 8.29% Pfd., Series K .................................. 4,896,000
PS Business Parks, Inc.:
15,400 6.70% Pfd., Series P .............................................................. 338,320
5,700 6.875% Pfd., Series I ............................................................. 127,716
71,920 7.20% Pfd., Series M .............................................................. 1,681,130
23,538 7.375% Pfd., Series O ............................................................. 557,556
43,200 7.60% Pfd., Series L .............................................................. 1,047,600
45,000 7.95% Pfd., Series K .............................................................. 1,136,250
Public Storage, Inc.:
21,650 6.45% Pfd., Series F .............................................................. 484,419
76,300 6.625% Pfd., Series M ............................................................. 1,731,056
30,000 6.85% Pfd., Series Y .............................................................. 714,300
95,300 7.25% Pfd., Series K .............................................................. 2,352,719
----------------------------------------------------------------------------------------------------------------------------
15,067,066
-----------------
MISCELLANEOUS INDUSTRIES -- 1.6%
-----------------------------------------------------------------------------------------------------------------------------
1,395 Centaur Funding Corporation, 9.08% Pfd. 04/21/20, 144A**** ........................... 1,549,758
40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** .................................. 3,632,000*
----------------------------------------------------------------------------------------------------------------------------
5,181,758
-----------------
TOTAL PREFERRED SECURITIES
(Cost $271,775,331) ............................................................... 265,101,500
-----------------
7
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2007 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------- --------------
CORPORATE DEBT SECURITIES -- 19.5%
FINANCIAL SERVICES -- 1.9%
-------------------------------------------------------------------------------------------------------------------------------
$ 4,822,339 Lehman Brothers, Guaranteed Note, Variable Rate, 12/16/16, 144A**** .................... $ 4,118,760
$ 2,500,000 Lehman Brothers Holdings, 6.875% 07/17/37, Sub. Note ................................... 2,355,785
----------------------------------------------------------------------------------------------------------------------------
6,474,545
--------------
INSURANCE -- 5.1%
-------------------------------------------------------------------------------------------------------------------------------
15,000 AAG Holding Company, Inc., 7.25% Pfd. .................................................. 360,000
20,000 American Financial Group, Inc., 7.125% 02/03/34, Senior Note ........................... 465,000
$ 2,000,000 Farmers Exchange Capital, 7.20% 07/15/48, 144A**** ..................................... 1,946,400
$ 7,577,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** .................................... 7,259,524
$ 7,000,000 UnumProvident Corporation, 7.25% 03/15/28, Senior Notes ................................ 6,915,979
----------------------------------------------------------------------------------------------------------------------------
16,946,903
--------------
UTILITIES -- 6.0%
-------------------------------------------------------------------------------------------------------------------------------
27,200 Corp-Backed Trust Certificates, 7.875% 02/15/32, Series Duke Capital ................... 682,244
$ 1,000,000 Duke Capital Corporation, 8.00% 10/01/19, Senior Notes ................................. 1,123,007
Entergy Louisiana LLC:
$ 7,562,000 6.30% 09/01/35, 1st Mortgage ........................................................ 7,196,914
15,000 7.60% 04/01/32, 1st Mortgage ........................................................ 376,875
5,000 Entergy Mississippi, Inc., 7.25%, 1st Mortgage ......................................... 123,438
$ 4,000,000 Interstate Power & Light Company, 6.45% 10/15/33, Senior Notes ......................... 4,092,400
46,900 PPL Capital Funding, Inc., 6.85% 07/01/47 .............................................. 1,123,255
$ 1,015,000 Westar Energy, Inc., 5.95% 01/01/35 .................................................... 942,260
$ 4,000,000 Wisconsin Electric Power Company, 6.875% 12/01/95 ...................................... 4,220,352
----------------------------------------------------------------------------------------------------------------------------
19,880,745
--------------
ENERGY -- 4.3%
-------------------------------------------------------------------------------------------------------------------------------
$ 2,500,000 KN Energy, Inc., 7.45% 03/01/98 ........................................................ 2,166,785
328,300 Nexen, Inc., 7.35% Subordinated Notes .................................................. 8,207,500(1)
$ 4,000,000 Noble Energy, Inc., 7.25% 08/01/97 ..................................................... 4,109,952
----------------------------------------------------------------------------------------------------------------------------
14,484,237
--------------
MISCELLANEOUS INDUSTRIES -- 2.2%
-------------------------------------------------------------------------------------------------------------------------------
10,000 CBS Corporation, 6.75% 03/27/56 ........................................................ 240,125
20,000 Corp-Backed Trust Certificates, 7.00% 11/15/28, Series Sprint .......................... 483,000
19,625 Ford Motor Company, 7.50% 06/10/43, Senior Notes ....................................... 344,052
$ 4,265,000 General Motors Corporation, 8.80% 03/01/21 ............................................. 3,690,931
8
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2007 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------- --------------
CORPORATE DEBT SECURITIES -- (CONTINUED)
MISCELLANEOUS INDUSTRIES -- (CONTINUED)
-------------------------------------------------------------------------------------------------------------------------------
Pulte Homes, Inc.:
25,844 7.375% 06/01/46 ..................................................................... $ 530,900
$ 2,160,000 7.875% 06/15/32 ..................................................................... 1,958,057
----------------------------------------------------------------------------------------------------------------------------
7,247,065
--------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $68,430,316) .................................................................. 65,033,495
--------------
OPTION CONTRACTS -- 0.0%
-------------------------------------------------------------------------------------------------------------------------------
785 December Put Options on December U.S. Treasury Bond Futures, Expiring 11/20/07 49,063+
1,575 October Put Options on December U.S. Treasury Bond Futures, Expiring 09/21/07 31,641+
----------------------------------------------------------------------------------------------------------------------------
TOTAL OPTION CONTRACTS
(Cost $293,243) ..................................................................... 80,704
--------------
9
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2007 (UNAUDITED)
-----------------------------------------------------------
SHARES/$ PAR VALUE
------------- --------------
MONEY MARKET FUND -- 0.2%
-------------------------------------------------------------------------------------------------------------------------------
728,037 BlackRock Provident Institutional, TempFund ............................................ $ 728,037
----------------------------------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost $728,037) ...................................................................... 728,037
--------------
SECURITIES LENDING COLLATERAL -- 0.3%
-------------------------------------------------------------------------------------------------------------------------------
1,059,200 Institutional Money Market Trust ....................................................... 1,059,200
----------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES LENDING COLLATERAL
(Cost $1,059,200) .................................................................... 1,059,200
--------------
TOTAL INVESTMENTS (Cost $342,286,127***) ..................................................... 99.3% 332,002,936
OTHER ASSETS AND LIABILITIES (Net) ........................................................... 0.7% 2,460,789
------- --------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK AND PREFERRED STOCK ............................... 100.0%++ $ 334,463,725
------- --------------
AUCTION MARKET PREFERRED STOCK (AMPS) REDEMPTION VALUE .................................................... (128,500,000)
--------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ................................................................ $ 205,963,725
==============
----------
* 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.
(2) Security on loan.
+ 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
10
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Total Return Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
FOR THE PERIOD FROM DECEMBER 1, 2006 THROUGH AUGUST 31, 2007 (UNAUDITED)
------------------------------------------------------------------------
VALUE
-------------
OPERATIONS:
Net investment income ................................................................ $ 16,553,009
Net realized gain/(loss) on investments sold during the period ....................... (892,693)
Change in net unrealized appreciation/depreciation of investments held
during the period ................................................................. (21,086,188)
Distributions to AMPS* Shareholders from net investment income, including
changes in accumulated undeclared distributions ................................... (5,069,882)
-------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ................................. (10,495,754)
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders (2) ........... (11,218,342)
-------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ..................................... (11,218,342)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment
and Cash Purchase Plan ............................................................ --
-------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING
FROM FUND SHARE TRANSACTIONS ...................................................... --
NET DECREASE IN NET ASSETS AVAILABLE TO COMMON STOCK
-------------
FOR THE PERIOD .................................................................... $ (21,714,096)
=============
----------------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period .................................................................. $ 227,677,821
Net decrease in net assets during the period ......................................... (21,714,096)
-------------
End of period ........................................................................ $ 205,963,725
=============
----------
* Auction Market Preferred Stock.
(1) These tables summarize the nine months ended August 31, 2007 and should be
read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2006.
(2) May include income earned, but not paid out, in prior fiscal year.
11
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Flaherty & Crumrine/Claymore Total Return Fund Incorporated
FINANCIAL HIGHLIGHTS(1)
FOR THE PERIOD FROM DECEMBER 1, 2006 THROUGH AUGUST 31, 2007 (UNAUDITED)
FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT THE PERIOD.
-----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................................................. $ 23.29
-------------
INVESTMENT OPERATIONS:
Net investment income ................................................................ 1.69
Net realized and unrealized gain/(loss) on investments. .............................. (2.24)
DISTRIBUTIONS TO AMPS* SHAREHOLDERS:
From net investment income ........................................................... (0.52)
From net realized capital gains ...................................................... --
-------------
Total from investment operations ..................................................... (1.07)
-------------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income ........................................................... (1.15)
From net realized capital gains ...................................................... --
-------------
Total distributions to Common Stock Shareholders ..................................... (1.15)
-------------
Net asset value, end of period ....................................................... $ 21.07
=============
Market value, end of period .......................................................... $ 18.69
=============
Common Stock shares outstanding, end of period ....................................... 9,776,333
=============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income+ ............................................................... 6.94%**
Operating expenses ................................................................... 1.51%**
-------------------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate .............................................................. 48%***
Total net assets available to Common and Preferred Stock, end of period (in 000's) ... $ 334,464
Ratio of operating expenses to total average net assets available to
Common and Preferred Stock ........................................................ 0.96%**
(1) These tables summarize the nine months ended August 31, 2007 and should be
read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2006.
* Auction Market Preferred Stock.
** 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*.
12
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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, 2006 ............................ $0.1275 $22.99 $21.48 $21.68
January 31, 2007 ............................. 0.1275 23.01 21.70 21.78
February 28, 2007 ............................ 0.1275 23.37 21.62 21.84
March 31, 2007 ............................... 0.1275 22.87 22.35 22.24
April 30, 2007 ............................... 0.1275 22.98 21.63 21.66
May 31, 2007 ................................. 0.1275 22.53 20.81 20.96
June 30, 2007 ................................ 0.1275 22.24 20.39 20.46
July 31, 2007 ................................ 0.1275 21.44 19.36 19.14
August 31, 2007 .............................. 0.1275 21.07 18.69 18.84
----------
(1) Whenever the net asset value per share of the Fund's Common Stock is less
than or equal to the market price per share on the reinvestment date, new
shares issued will be valued at the higher of net asset value or 95% of
the then current market price. Otherwise, the reinvestment shares of
common stock will be purchased in the open market.
13
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Flaherty & Crumrine/Claymore Total Return Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
-----------------------------------------------------------
1. AGGREGATE INFORMATION FOR FEDERAL INCOME TAX PURPOSES
At August 31, 2007 the aggregate cost of securities for federal income tax
purposes was $344,264,967, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $2,132,608,
and the aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $14,394,639.
14
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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
Laurie C. Lodolo
Assistant Compliance Officer,
Assistant Treasurer and
Assistant Secretary
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@pfdincome.com
SERVICING AGENT
Claymore Securities, Inc.
1-866-233-4001
QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY & CRUMRINE/CLAYMORE
TOTAL RETURN FUND?
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 --
PFPC Inc. 1-800-331-1710
THIS REPORT IS SENT TO SHAREHOLDERS OF FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN
FUND INCORPORATED FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR
REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR
OF ANY SECURITIES MENTIONED IN THIS REPORT.
Flaherty & Crumrine/Claymore
[LOGO] ============================
TOTAL RETURN FUND
Quarterly
Report
August 31, 2007
www.fcclaymore.com