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 811-21129
FLAHERTY & CRUMRINE/CLAYMORE PREFERRED SECURITIES INCOME 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, 2003
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Date of reporting period: NOVEMBER 30, 2003
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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, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
FLAHERTY & CRUMRINE/CLAYMORE
PREFERRED SECURITIES INCOME FUND
Dear Shareholder:
The Flaherty & Crumrine/Claymore Preferred Securities Income Fund ("FFC")
concluded its inaugural fiscal year on November 30, 2003. During the fourth
fiscal quarter, the Fund earned +4.1% total return on net asset value ("NAV").
Over the ten months since the Fund's inception on January 29th, the total return
on NAV was +14.2%. The market price of the Fund's shares also produced very
strong returns. Investors who purchased in the initial public offering received
income and price appreciation that totaled +12.7%.
In early December, the Fund declared a special distribution to common
shareholders of $0.90 per share, in addition to the continuing regular monthly
dividend of $0.17 1/4. The special distribution was largely attributable to
gains made during the year on the Fund's hedges. As you know, a distinctive
feature of the Fund is the manner in which the income earned by shareholders
should increase if interest rates rise substantially, but be relatively
resistant to declines in rates. Shareholders who reinvested the special
distribution in shares of the Fund will increase their monthly income by almost
4% because the regular monthly dividend will be paid on an increased number of
shares. The special distribution is a textbook example of how the Fund's income
strategy is intended to work; we have an extensive discussion of this in the
Questions & Answers section which follows this letter.
A number of factors contributed to the outstanding performance of the Fund,
but three in particular stand out:
o A very favorable market for preferred securities;
o Successful execution of the Fund's hedging strategy; and
o Attractive financing rates on the Fund's Auction Market Preferred Stock
("AMPS").
The demand for preferred securities has increased steadily in recent years.
Clearly, one very efficient way for investors to participate in the preferred
securities market is to purchase shares of funds such as FFC. During the past
eighteen months, more than a dozen new closed-end funds that focus on preferred
securities have been created. As one would expect, the high level of demand has
given a real boost to the market. However, despite being one of the best
performing sectors of the fixed-income market over recent months, many preferred
securities still appear to us to be undervalued, and we continue to see upside
potential in a number of the Fund's holdings.
The Fund's hedging strategy played a very important role in fiscal 2003.
Since the Fund's inception in late January, interest rates were anything but
stable. The Fund's hedges performed well and actually benefited from the
volatility. An active hedging strategy enabled the Fund to make a lot of money
when interest rates declined during the spring and protected much of those gains
when rates spiked back up during the summer.
The Fund also benefited from low short-term interest rates, which kept the
average rate the Fund paid on its shares of AMPS below 1 1/4%. Keep in mind that
low short-term rates can be a double-edged sword--while reducing the cost of
leverage, low rates typically make the Fund's hedging strategy more expensive.
In the case of FFC, the cost of the leverage and the cost of the hedge should
move as if they
are on opposite ends of a teeter-totter--when one is going up, the other should
be falling (although not necessarily by the same amount). Over the past year,
however, we managed to "bend the board"--leverage cost was low and active
management of the hedge positions kept the hedge costs down.
During the past few months it seems as if each passing day has brought new
revelations of misdeeds by open-end mutual funds. The abuses have been almost
entirely the result of certain fund complexes permitting two different types of
trading strategies in funds they manage--after-hour trades and rapid or
excessive trading. NOT ONE OF THESE ALLEGED ABUSES HAS INVOLVED A CLOSED-END
FUND. Shares of closed-end funds, such as FFC, trade at prices determined in the
market place rather than at the net asset value computed at the market's close.
As a result, these abusive trading techniques simply can't work in closed-end
funds. We address this topic in greater detail in the Q&A section, but we want
our shareholders to know that in addition to the structural protection offered
by the Fund, we are committed to following both the letter and spirit of the
law, and to making certain that every investor is treated exactly the same.
Our approach to managing your Fund is straightforward. We intensively study
and monitor the fundamental credit quality of each potential investment, and
carefully evaluate the specific terms of each individual issue. If all this
research produces a suitable level of comfort, we then begin the process of
assessing the appropriate price for the security. Since our investment
philosophy is to own the issues that offer the best overall value within the
universe of eligible securities, it often means that we pass up the temptation
of issues offering higher absolute yields. If we make intelligent investments
and continue to successfully implement the hedging strategy, then the Fund will
have more money to invest and thus be able to generate more income over time.
The process is arduous and ongoing, but rarely do good things come without
substantial effort.
We encourage you to read the Questions and Answers section beginning on the
next page, which contains additional information on the Fund's strategy and
operation.
Sincerely,
/S/ DONALD F. CRUMRINE /S/ ROBERT M. ETTINGER
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
January 21, 2004
2
QUESTIONS & ANSWERS
WHY WAS THERE A $0.90 SPECIAL DISTRIBUTION?
The substantial rise in long-term-interest rates during June and July
generated large gains on the Fund's hedge position, but also resulted in a
decline in the value of the Fund's investment portfolio. The good news is the
gain exceeded the loss by a fair amount, as seen in the strength in the Fund's
net asset value (NAV) performance.
Under current tax law, the Fund must treat the entire gain on the hedge as
if it is realized during the year. Conversely, losses in the preferred portfolio
are realized only when a position is sold. For the year, FFC did not have
sufficient realized losses to offset the hedge gain, and, as a result, the Fund
paid the special distribution.
DOES REINVESTING THIS DISTRIBUTION INCREASE MY INCOME?
Yes! If you reinvested in additional shares of FFC, you now have about 4%
more shares, and, since each share is still paying the same monthly dividend of
$0.1725, your income has also gone up by about 4%. If you elected to take the
distribution in cash, but invested in any other income-producing asset, then
your total income also increased. Even if you chose to receive cash and did not
invest the money, your monthly income will remain unchanged!
HOW DOES THE HEDGING STRATEGY IMPACT MY INCOME?
A key feature of the Fund is the relationship between the hedging strategy
and the dividend income you earn. The hedging strategy is intended to result in
the Fund's income increasing in response to significant increases in interest
rates, while being relatively resistant to the impact of declines in interest
rates.
The strategy tends to work because the value of the hedge will normally
increase when interest rates rise, offsetting some of the decline in the value
of the Fund's investments and helping stabilize the Fund's net asset value. The
gain on the hedge can then be used to purchase additional preferred securities,
thus increasing the amount of income available for shareholders.
HOW DID THE RISE IN INTEREST RATES DURING THE SUMMER AFFECT THE FUND'S NAV
PERFORMANCE?
The following chart displays the Fund's NAV since inception, and, for
reference, the price of the 30-year U.S. Treasury bond. As interest rates
declined (and bond prices appreciated) prior to June, the Fund's NAV tracked the
price of long-term Treasuries. However, beginning in June interest rates
increased significantly and bond prices declined sharply. The Fund's hedging
strategy was largely responsible for limiting the impact of increasing interest
rates on the Fund's NAV.
3
FLAHERTY & CRUMRINE/CLAYMORE PREFERRED SECURITIES INCOME FUND (FFC)
NAV VS. 30 YEAR U.S. TREASURY PRICE
(ASSUMES REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS)
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
DATE NAV 30-YEAR TREASURY PRICE
1/31/03 $23.83 107.953
2/7/03 $23.85 108.766
2/14/03 $23.76 107.531
2/21/03 $23.82 108.078
2/28/03 $23.96 110.875
3/7/03 $24.00 110.859
3/14/03 $23.95 110.234
3/21/03 $23.52 105.047
3/28/03 $23.81 106.984
4/4/03 $23.66 106.203
4/11/03 $23.77 106.422
4/18/03 $23.98 107.297
4/25/03 $24.17 108.531
5/2/03 $24.26 108.234
5/9/03 $24.68 110.891
5/16/03 $25.38 114.969
5/23/03 $25.97 117.953
5/30/03 $25.85 116.203
6/6/03 $25.71 115.672
6/13/03 $26.20 119.703
6/20/03 $25.76 114.609
6/27/03 $25.61 112.297
7/4/03 $25.54 110.547
7/11/03 $25.35 110.703
7/18/03 $25.11 106.672
7/25/03 $25.00 103.672
8/1/03 $25.00 100.547
8/8/03 $24.75 101.828
8/15/03 $24.92 99.859
8/22/03 $25.06 101.641
8/29/03 $25.24 102.390
9/5/03 $25.14 102.797
9/12/03 $25.28 103.125
9/19/03 $25.63 104.484
9/26/03 $25.87 106.500
10/3/03 $25.78 104.141
10/10/03 $25.50 102.797
10/17/03 $25.63 101.766
10/24/03 $25.63 103.766
10/31/03 $25.72 103.484
11/7/03 $25.31 101.672
11/14/03 $25.72 104.703
11/21/03 $25.88 105.391
11/28/03 $25.74 103.531
12/5/03 $25.98 104.641
12/12/03 $25.75 104.125
12/19/03 $26.10 106.141
12/26/03 $26.13 106.016
HOW WILL I KNOW THE BREAKDOWN OF THE DIVIDENDS AND DISTRIBUTIONS FOR TAX
PURPOSES?
If you are an individual investor and have possession of your Fund share
certificate, you will receive Form 1099 from PFPC, the Fund's transfer agent. If
your shares are registered in the name of your brokerage firm, it will issue
Form 1099 directly to you. In either case, Box 1a of Form 1099 includes hybrid
preferred dividends, while Box 1b includes "Qualified dividends" eligible for
the lower tax rate.
IS THERE A BENEFIT TO PARTICIPATING IN THE DIVIDEND REINVESTMENT PLAN ("DRIP")
OVER PURCHASING IN THE OPEN MARKET?
Yes, when the market price is at a premium to 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%.
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. Please contact your financial consultant for
information on the DRIP.
ARE DIVIDENDS AND DISTRIBUTIONS TAXED DIFFERENTLY IF I REINVEST IN SHARES OF
THE FUND?
No, the tax consequences of any dividend or distribution will not be
affected by whether or not you participate in the DRIP.
4
IS FFC SUSCEPTIBLE TO TRADING ABUSES THAT HAVE BEEN IN THE NEWS RECENTLY?
In a word, the answer is NO!
A critical difference between closed-end funds such as FFC and open-end
mutual funds, which have been grabbing all the headlines, is the way in which
they are purchased and sold.
Orders to buy or sell shares of FFC on the NYSE can be placed throughout
the trading day, and limit prices can be specified. The investor has control
over the transaction price, and the trade takes place only if there is a willing
seller and buyer. This degree of control is not possible in an open-end mutual
fund because orders placed throughout the day are completed after the close of
business, based upon the closing net asset value.
Transactions in open-end mutual funds take place between the investor and
the mutual fund company. At the close of business (typically 4:00 PM Eastern
Time), the fund company computes the mutual fund's net asset value. This price
is used to redeem shares from sellers or issue new shares to buyers who placed
orders earlier that day. The rules prohibit fund companies from accepting orders
after the close of business, but some fund companies have permitted favored
clients to place orders after the close but at that day's NAV. All gains from
"late trading" are at the expense of the other investors in the fund.
The other frequently mentioned abuse in open-end mutual funds is fund
companies permitting "frequent trading" practices by favored clients. Although
not illegal, this practice may harm investors because these favored clients'
gains are again at the expense of the other investors in the fund and usually
force the fund to maintain larger cash positions than would otherwise be
appropriate. Managers of closed-end funds don't face this problem either. If a
holder of a closed-end fund wishes to sell shares, the market must facilitate
the trade, not the fund. Therefore a closed-end fund can remain fully invested
without regard to possible redemptions.
5
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Flaherty & Crumrine/Claymore Preferred Securities Income Fund
FINANCIAL DATA
PER SHARE OF COMMON STOCK
-------------------------------------------------------------
MONTH END MONTHLY DIVIDEND DATA
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TOTAL DIVIDEND
NET ASSET NYSE DIVIDENDS REINVESTMENT
VALUE CLOSING PRICE PAID (1) PRICE (2)
--------- ------------- --------- ------------
January 2003 ............... $ 23.82 $ 25.00 $ -- $ --
February 2003 .............. 23.96 25.03 -- --
March 2003 ................. 23.93 24.96 -- --
April 2003 ................. 24.39 24.75 0.1725 23.81
May 2003 ................... 25.85 25.25 0.1725 24.97
June 2003 .................. 25.64 25.48 0.1725 25.33
July 2003 .................. 25.03 24.89 0.1725 25.25
August 2003 ................ 25.24 25.17 0.1725 24.95
September 2003 ............. 26.03 25.50 0.1725 25.09
October 2003 ............... 25.72 25.99 0.1725 25.56
November 2003 .............. 25.74 26.66 0.1725 25.72
December 2003 .............. 25.12 26.76 0.1725 25.42
December 2003 EXTRA ........ 25.12 26.76 0.9000 25.42
------------------------------------
(1) The Fund's monthly dividend to Common Shareholders were paid on the 15th
day of each month or the next preceding business day if the 15th is not a
business day. Beginning in January 2004 the Fund's monthly dividend to
Common Shareholders will be paid on the last business day of each month.
(2) 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.
6
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Flaherty & Crumrine/Claymore Preferred Securities Income Fund
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 2003
-------------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
PREFERRED SECURITIES -- 79.8%
ADJUSTABLE RATE PREFERRED SECURITIES -- 3.7%
BANKING -- 3.3%
Fleet Boston Financial Corporation:
$ 3,000,000 BankBoston Capital Trust III,
Adj. Rate Pfd. 06/15/27
Capital Security ....................... $ 2,827,500
J.P. Morgan Chase & Co.:
375,000 Series H, FRAP ......................... 18,965,625*
248,600 Series A, Adj. Rate Pfd. ............... 23,927,750*
250,000 Series N, Adj. Rate Pfd. ............... 6,296,875*
--------------
TOTAL BANKING CORPORATE
DEBT SECURITIES ........................ 52,017,750
--------------
UTILITIES -- 0.4%
5,000 Northern Indiana Public
Service Company,
Series A, Adj. Rate Pfd. ............... 253,438*
Public Service Enterprise Group, Inc.:
$ 5,000,000 Enterprise Capital Trust II,
Adj. Rate Pfd. 06/30/28
Capital Security ....................... 3,900,000
$ 3,140,000 TXU Gas Capital I,
Adj. Rate Pfd. 07/01/28
Capital Security ....................... 1,993,900
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TOTAL UTILITIES ADJUSTABLE RATE
PREFERRED SECURITIES ................... 6,147,338
--------------
TOTAL ADJUSTABLE RATE
PREFERRED SECURITIES ................... 58,165,088
--------------
FIXED RATE PREFERRED SECURITIES -- 76.1%
BANKING -- 30.6%
108,197 Abbey National Group,
7.375% Pfd. ............................ 2,881,827**
ABN AMRO North America, Inc.:
2,015 6.46% Pfd., 144A**** ................... 2,107,902*
12,301 6.59% Pfd., 144A**** ................... 12,863,832*
5,000 6.968% Pfd., 144A**** .................. 5,524,125*
Bank of America Corporation:
1,259,000 BAC Capital Trust IV,
5.875% Pfd. ............................ 31,323,920
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
528,100 Bank of New York Capital V,
5.95% Pfd. ............................. $ 13,191,938
Bank One Corporation:
$ 5,600,000 First Chicago NBD Capital A,
7.95% 12/01/26 Capital Security,
144A**** ............................... 6,315,092
486,535 Citigroup Capital IX,
6.00% Pfd. ............................. 12,187,702
60,000 Cobank, ABC,
7.00% Pfd., 144A**** ................... 3,087,300*
Comerica, Inc.:
27,900 Comerica (Imperial) Capital Trust I,
7.60% Pfd. ............................. 751,486
$11,000,000 Cullen/Frost Capital Trust I,
8.42% 02/01/27 Capital Security,
Series A ............................... 12,490,995
Deutsche Bank:
$ 500,000 BT Capital Trust B,
7.90% 01/15/27
Capital Security, Series B1 ............ 561,057
$ 5,035,000 Dresdner Funding Trust I,
8.151% 06/30/31
Capital Security, 144A**** ............. 5,601,714
$ 3,000,000 First Midwest Capital Trust I,
6.95% 12/01/33
Capital Security, 144A**** ............. 3,082,575
Fleet Boston Financial Corporation:
$ 1,240,000 BankBoston Capital Trust I,
8.25% 12/15/26 Capital Security ........ 1,430,892
$16,155,000 BankBoston Capital Trust II,
7.75% 12/15/26
Capital Security, Series B ............. 17,917,268
55,000 Fleet Capital Trust VII,
7.20% Pfd. ............................. 1,324,400
79,100 Fleet Capital Trust VIII,
7.20% Pfd. ............................. 2,129,372
2 FT Real Estate Securities Company,
9.50% Pfd., 144A**** ................... 2,369,441
GreenPoint Financial Corporation:
$40,050,000 GreenPoint Capital Trust I,
9.10% 06/1/27 Capital Security ......... 46,558,526
The accompanying notes are an integral part of the financial statements.
7
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Flaherty & Crumrine/Claymore Preferred Securities Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2003
-------------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
PREFERRED SECURITIES (CONTINUED)
FIXED RATE PREFERRED SECURITIES (CONTINUED)
BANKING (CONTINUED)
$19,350,000 HBOS Capital Funding LP,
6.85% 03/23/09 ......................... $ 18,796,590
HSBC USA, Inc.:
$15,600,000 Republic New York Capital I,
7.750% 11/15/26 Capital Security ....... 17,134,650
$17,127,000 Republic New York Capital II,
7.53% 12/4/26 Capital Security,
STOPS .................................. 18,486,798
J.P. Morgan Chase & Co.:
401,250 5.875% Pfd. ............................ 9,750,375
$ 5,000,000 Chase Capital I,
7.67% 12/01/26 Capital Security ........ 5,508,350
$13,527,000 J.P. Morgan Capital Trust I,
7.54% 01/15/27 Capital Security ........ 14,700,400
$11,661,000 J.P. Morgan Capital Trust II,
7.95% 02/27/27 Capital Security ........ 13,079,619
$12,595,000 Keycorp Institutional Capital A,
7.826% 12/01/26
Capital Security, Series A ............. 13,921,883
$ 4,000,000 Lloyds TSB Bank PLC, Tier I,
6.90% 10/22/49 Capital Security ........ 4,016,580
Marshall & Ilsley Corporation:
$25,280,000 M&I Capital Trust A,
7.65% 12/01/26 Capital Security ........ 27,901,662
20 Marshall & Ilsley Investment II,
8.875% Pfd., REIT, 144A**** ............ 2,244,973
North Fork Bancorporation:
$ 1,000,000 North Fork Capital Trust II,
8.00% 12/15/27 Capital Security ........ 1,104,255
10 Roslyn Real Estate,
8.95% Pfd., Pvt., REIT, Series C ....... 996,110
Royal Bank of Scotland Group PLC:
679,000 5.75% Pfd. ............................. 16,560,810**
$16,750,000 RBS Capital Trust B,
6.80% 12/29/49 ......................... 16,448,416**
Union Planters Corporation:
60 Union Planters Preferred Funding,
7.75% Pfd., Series 144A**** ............ 5,977,444
$14,167,000 Union Planters Capital Trust,
8.20% 12/15/26 Capital Security ........ 15,765,392
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
6,000 U.S. Bancorp,
USB Capital IV, 7.35% Pfd. ............. $ 161,370
23,500 VNB Capital Trust I,
7.75% Pfd. ............................. 640,258
Wachovia Corporation:
2,177,200 Wachovia Preferred Funding,
7.25% Pfd., Series A ................... 60,286,668
Washington Mutual, Inc.:
$ 500,000 Great Western Finance Trust II,
8.206% 02/01/27 Capital Security,
Series A ............................... 572,348
$20,750,000 8.36% 12/01/26
Capital Security, 144A**** ............. 23,938,860
$ 8,000,000 Webster Capital Trust II,
10.00% 04/01/27 Capital Security ....... 9,541,840
365,000 Wells Fargo Capital Trust VII,
5.85% Pfd. ............................. 8,968,050
--------------
TOTAL BANKING FIXED RATE
PREFERRED SECURITIES ................... 490,205,065
--------------
FINANCIAL SERVICES -- 15.4%
Bear Stearns Companies, Inc.:
150,000 5.49% Pfd., Series G ................... 7,483,500*
225,300 5.72% Pfd., Series F ................... 11,404,686*
200,300 6.15% Pfd., Series E ................... 10,716,050*
30,000 CIT Group, Inc.:
Corporate-Backed Trust Certificates,
7.75% Pfd., Series CIT ................. 836,850
Countrywide Financial Corporation:
1,047,600 Countrywide Capital IV,
6.75% Pfd. ............................. 26,928,558
$15,459,000 Countrywide Capital I,
8.00% 12/15/26 Capital Security ........ 16,857,653
Fannie Mae:
155,100 4.75% Pfd. ............................. 6,650,688*
700,000 5.10% Pfd., Series E ................... 32,228,000*
108,900 5.125% Pfd. ............................ 5,038,258*
78,600 Freddie Mac,
5.79% Pfd. ............................. 3,902,097*
687,900 General Electric Capital Corporation,
5.875% Pfd. ............................ 17,703,107
The accompanying notes are an integral part of the financial statements.
8
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Flaherty & Crumrine/Claymore Preferred Securities Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2003
-------------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
PREFERRED SECURITIES (CONTINUED)
FIXED RATE PREFERRED SECURITIES (CONTINUED)
FINANCIAL SERVICES (CONTINUED)
Lehman Brothers Holdings, Inc.:
25,000 5.94% Pfd., Series C ................... $ 1,283,500*
1,384,750 6.50% Pfd., Series F ................... 36,661,256*
1,065,000 Lehman Capital Trust III,
6.375% Pfd. Series K ................... 27,029,700
Morgan Stanley:
1,074,900 Morgan Stanley Capital Trust III,
6.25% Pfd. ............................. 26,883,249
202,000 Morgan Stanley Capital Trust IV,
6.25% Pfd. ............................. 5,104,540
160,000 SLM Corporation,
6.97% Pfd., Series A ................... 9,123,200*
--------------
TOTAL FINANCIAL SERVICES FIXED
RATE PREFERRED SECURITIES .............. 245,834,892
--------------
INSURANCE -- 13.9%
ACE Ltd.:
1,719,980 7.80 Pfd., Series C .................... 45,863,267**
73,600 Capital Re LLC,
7.65% MIPS ............................. 1,867,968
AON Corporation:
$13,626,000 AON Capital Trust A,
8.205% 1/1/27 Capital Security ......... 15,138,350
48,100 Corporate-Backed Trust Certificates,
8.00% Pfd., Series AON ................. 1,241,942
106,000 Corts-AON Capital,
8.205% Pfd. ............................ 2,896,450
94,900 Saturns-AON 2003-3,
8.00% Pfd., Series AON ................. 2,512,952
2,000 Fortis Funding Trust,
7.68% Pfd., 144A**** ................... 2,278,140*
The Hartford Financial Services Group, Inc.:
11,300 Hartford Life Capital I,
7.20% Pfd., Series A, TRUPS ............ 285,494
344,000 ING Groep NV,
7.20% Pfd. ............................. 9,184,800**
270,989 PartnerRe Ltd.,
6.75% Pfd., Series C ................... 6,975,257**
332,235 Renaissancere Holding,
7.30% Pfd., Series B ................... 8,937,121
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
SAFECO Corporation:
$19,989,000 SAFECO Capital Trust I,
8.072% 07/15/37 Capital Security ....... $ 22,446,648
56,000 Saturns-SAFC 2001-7,
8.25% Pfd., Series SAFC ................ 1,511,720
The St. Paul Companies, Inc.:
$ 2,200,000 MMI Capital Trust I,
7.625% 12/15/27 Capital Security,
Series B ............................... 2,348,071
22,390 St. Paul Capital Trust I,
7.60% Pfd. ............................. 599,940
$ 5,275,000 USF&G Capital,
8.312% 07/01/46 Capital Security,
144A**** ............................... 6,124,750
$16,750,000 USF&G Capital I,
8.50% 12/15/45 Capital Security,
144A**** ............................... 19,868,766
UnumProvident Corporation:
37,000 Corts-UnumProvident Corporation,
8.50% Pfd. ............................. 927,960
$ 8,000,000 Provident Financing Trust I,
7.405% 03/15/38 Capital Security ....... 6,908,600
XL Capital Ltd.:
15,000 7.625% Pfd., Series B .................. 413,475**
$10,000,000 Mangrove Bay Passthru Trust,
6.102% 07/11/33 Capital Security,
144A**** ............................... 9,877,200
Zurich RegCaps Fund Trust I:
32,900 6.01% Pfd., 144A**** ................... 33,090,162*
21,500 6.58% Pfd., 144A**** ................... 21,712,742*
--------------
TOTAL INSURANCE FIXED RATE
PREFERRED SECURITIES ................... 223,011,775
--------------
UTILITIES -- 12.7%
AEP Texas Central Company:
38,200 CPL Capital I,
8.00% Pfd., Series A, QUIPS ............ 972,190
AGL Resources, Inc.:
$ 3,750,000 AGL Capital Trust,
8.17% 06/01/37 Capital Security ........ 4,205,250
10,000 Allete Capital I,
8.05% QUIPS ............................ 254,800
The accompanying notes are an integral part of the financial statements.
9
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2003
-------------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
PREFERRED SECURITIES (CONTINUED)
FIXED RATE PREFERRED SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
6,146 Appalachian Power Company,
5.92% Sinking Fund Pfd. ................ $ 618,472*
50,000 Baltimore Gas & Electricity,
7.125% Pfd., Series 1993 ............... 5,257,000*
CenterPoint Energy, Inc.:
135,300 Houston Light & Power,
Capital Trust I,
8.125% QUIPS ........................... 3,392,647
$17,262,000 Houston Light & Power,
Capital Trust II,
8.257% 02/01/37 Capital Security,
Series B ............................... 17,311,628
35,000 Central Maine Power,
5.25% Pfd., Pvt. ....................... 3,125,850*
Commonwealth Edison Company:
$ 5,700,000 COMED Financing II,
8.50% 01/15/27 Capital Security,
Series B ............................... 6,559,303
$30,395,000 COMED Financing III,
6.35% 03/15/33 Capital Security ........ 29,584,365
23,883 Delmarva Power & Light,
5.00% Pfd. ............................. 2,187,086*
Dominion Resources, Inc.:
50,000 Dominion CNG Cap Trust I,
7.80% Pfd. ............................. 1,352,250
Duke Energy Corporation:
85,385 4.50% Pfd., Pvt., Series C ............. 6,933,689*
59,662 7.04% Pfd., Series Y ................... 6,170,841*
51,331 7.85% Pfd., Series S ................... 5,331,751*
159,600 Duke Capital Finance Trust II,
7.375% Pfd., Series U .................. 4,062,618
700,000 Duke Capital Finance Trust III,
8.375% Pfd. ............................ 18,130,000
7,800 Duke Energy Capital Trust II,
7.20% TOPrS ............................ 198,900
67,700 Energy East Capital Trust I,
8.25% TOPrS ............................ 1,816,729
Entergy Arkansas, Inc.:
10,240 4.56% Pfd., Series 1965 ................ 742,298*
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
5,692 7.40% Pfd. ............................. $ 593,505*
10,850 Entergy Louisiana, Inc.,
8.00% Pfd., Series 92 .................. 274,071*
105,000 Entergy Louisiana Capital I,
9.00% Pfd., Series A ................... 2,723,175
Florida Power Company:
49,750 4.40% Pfd. ............................. 4,011,840*
37,088 4.58% Pfd. ............................. 3,127,816*
21,585 4.60% Pfd. ............................. 1,819,723*
10,000 FPC Capital I,
7.10% Pfd., Series A ................... 252,600
12,442 Great Plains Energy, Inc.,
4.20% Pfd. ............................. 855,885*
Indiana Michigan Power Company:
5,000 5.90% Sinking Fund Pfd. ................ 505,900*
25,999 6.875% Sinking Fund Pfd. ............... 2,636,949*
107,100 Indianapolis Power & Light Company,
5.65% Pfd. ............................. 8,979,800*
110,000 Interstate Power & Light Company,
7.10% Pfd., Series C ................... 2,946,900*
The Laclede Group, Inc.:
32,300 Laclede Capital Trust I,
7.70% Pfd. ............................. 871,939
OGE Energy Corporation:
3,800 OGE Energy Capital Trust I,
8.375% Pfd. ............................ 99,864
$ 2,300,000 PECO Energy Capital Trust III,
7.38% 04/06/28 Capital Security,
Series D ............................... 2,518,523
$20,000,000 PECO Energy Capital Trust IV,
5.75% 06/15/33 Capital Security ........ 17,945,000
Pacific Enterprises:
4,550 $4.40 Pfd. ............................. 362,635*
23,085 $4.75 Pfd. ............................. 1,986,233*
4,510 $4.50 Pfd. ............................. 367,633*
4,000 PacifiCorp,
7.48% Sinking Fund Pfd. ................ 415,480*
Potomac Electric Power Company:
65,488 $3.40 Sinking Fund Pfd. ................ 3,281,604*
11,000 Potomac Electric Power Trust I,
7.375% Pfd. TOPrS ...................... 277,035
14,845 Portland General Electric,
7.75%, Sinking Fund Pfd. ............... 1,542,989*
The accompanying notes are an integral part of the financial statements.
10
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2003
-------------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
PREFERRED SECURITIES (CONTINUED)
FIXED RATE PREFERRED SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
Public Service Company of Oklahoma:
53,300 PSO Capital I,
8.00% TOPrS ............................ $ 1,357,018
Public Service Enterprise Group, Inc.:
215,750 PSEG Funding Trust II,
8.75% Pfd. ............................. 6,026,976
19,646 Public Service Electric & Gas,
4.30% Pfd., Series C ................... 1,444,374*
Puget Sound Energy, Inc.:
$ 6,000,000 Puget Capital Trust,
8.231% 06/01/27 Capital Security,
Series B ............................... 6,418,560
2,500 Rochester Gas & Electric,
6.60% Sinking Fund Pfd., Series V ...... 251,888*
160,000 Southern Union Company,
7.55% Pfd. ............................. 4,162,400*
TXU US Holdings Company:
10,000 TXU Capital I,
7.25% Pfd., Series A ................... 253,300
$ 2,500,000 Union Electric Company,
7.69% 12/15/36 Capital Security,
Series A ............................... 2,771,563
Virginia Electric & Power Company:
14,985 $4.12 Pfd. ............................. 1,158,715*
21,684 $4.80 Pfd. ............................. 1,953,403*
--------------
TOTAL UTILITIES FIXED RATE
PREFERRED SECURITIES ................... 202,402,963
--------------
OIL AND GAS -- 1.8%
12,700 EOG Resources, Inc.,
7.195% Pfd., Series B .................. 13,818,616*
$13,315,000 Phillips 66 Capital Trust II,
8.00% 01/15/37 Capital Security ........ 15,328,095
--------------
TOTAL OIL AND GAS FIXED RATE
PREFERRED SECURITIES ................... 29,146,711
--------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
MISCELLANEOUS INDUSTRIES -- 1.7%
130,000 AMB Property Corporation,
6.50% Pfd., REIT, Series L ............. $ 3,216,200
4,750 Centaur Funding Corporation,
9.08% Pfd., 144A**** ................... 5,727,170
$ 5,500,000 Delphi Trust II,
6.197% 11/15/33 Capital Security ....... 5,503,547
19,100 Equity Office Property Trust,
7.75% Pfd., Series G ................... 514,841
Health Care Property Investment:
25,000 7.25% Pfd., REIT, Series E ............. 647,625
160,000 7.10% Pfd., REIT, Series F ............. 3,939,200
100,000 Ocean Spray Cranberries, Inc.,
6.25% Pfd., 144A**** ................... 7,563,000*
14,700 Public Storage, Inc.,
7.625% Pfd. ............................ 395,724
--------------
TOTAL MISCELLANEOUS
INDUSTRIES FIXED RATE
PREFERRED SECURITIES ................... 27,507,307
--------------
TOTAL FIXED RATE
PREFERRED SECURITIES ................... 1,218,108,713
--------------
TOTAL PREFERRED SECURITIES
(Cost $1,247,226,539) .................. 1,276,273,801
--------------
CORPORATE DEBT SECURITIES -- 13.9%
FINANCIAL SERVICES -- 2.1%
$20,000,000 General Motors Acceptance Corporation,
8.00% 11/01/31 Capital Security,
Senior Bonds ........................... 21,026,900
$10,000,000 Lehman Brothers,
Guaranteed Note
0.00% 10/15/15
Capital Security, 144A**** ............. 9,990,000
$ 2,200,000 Morgan Stanley Finance,
8.03% 02/28/17 Capital Units ........... 2,395,844
--------------
TOTAL FINANCIAL SERVICES
CORPORATE DEBT SECURITIES .............. 33,412,744
--------------
The accompanying notes are an integral part of the financial statements.
11
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2003
-------------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
CORPORATE DEBT SECURITIES (CONTINUED)
INSURANCE -- 0.5%
239,000 Delphi Financial,
8.00% 05/15/33 Senior Notes ............ $ 6,231,925
$ 1,000,000 UnumProvident Corporation,
7.25% 03/15/28 Capital Security,
Senior Notes ........................... 981,430
--------------
TOTAL INSURANCE CORPORATE
DEBT SECURITIES ........................ 7,213,355
--------------
OIL & GAS -- 0.6%
$ 9,295,000 KN Energy, Inc.,
7.45% 03/01/98 ......................... 10,084,239
--------------
UTILITIES -- 10.4%
$34,000,000 AEP Texas Central Company,
6.65% 02/15/33 144A**** ................ 35,739,780
$ 9,000,000 CenterPoint Energy, Inc.,
6.95% 03/15/33 Capital Security,
144A**** ............................... 9,937,890
$10,000,000 Constellation Energy Group,
7.60% 04/01/32 Capital Security,
Senior Notes ........................... 11,818,250
$ 1,000,000 DTE Energy Company,
6.375% 04/15/33 Capital Security,
Senior Notes ........................... 986,820
Duke Capital Corporation:
$11,179,000 6.75% 02/15/32 Capital Security,
Senior Notes ........................... 11,311,862
$10,000,000 8.00% 10/01/19 Senior Notes ............ 11,647,000
$ 5,000,000 Entergy Gulf States,
6.20% 07/01/33 Capital Security,
144A**** ............................... 4,557,725
Georgia Power Company:
125,000 6.00% Senior Bonds ..................... 3,169,375
567,015 5.90% 04/15/33, Senior Notes ........... 14,439,037
40,000 Mississippi Power Company,
5.625% Pfd., Senior Notes .............. 983,200
40,000 Northern States Power Company,
8.00% PINES ............................ 1,106,200
34,600 Ohio Power Company,
7.375%, Senior Notes ................... 879,013
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
Public Service Enterprise Group, Inc.:
$18,220,000 PSEG Power LLC,
8.625% 04/15/31 Capital Security ....... $ 23,521,747
TXU US Holding Company:
$10,000,000 Oncor Electric,
7.25% 01/15/33 144A**** ................ 11,324,850
$15,000,000 TXU Energy Company,
7.00% 03/15/13 Capital Security,
144A**** ............................... 16,521,525
66,000 Virginia Power Capital Trust,
7.375% 07/30/42 ........................ 1,781,340
$ 6,000,000 Wisconsin Electric Power Company,
6.875% 12/01/95 ........................ 6,582,060
--------------
TOTAL UTILITIES CORPORATE
DEBT SECURITIES ........................ 166,307,674
--------------
MISCELLANEOUS -- 0.3%
BellSouth Corporation:
$ 390,000 BellSouth Telecommunication,
7.00% 12/01/95 Capital Security ........ 416,401
$ 5,000,000 Ford Motor Company,
7.45% 07/16/31 ......................... 4,716,100
--------------
TOTAL MISCELLANEOUS
CORPORATE DEBT SECURITIES .............. 5,132,501
--------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $209,520,983) .................... 222,150,513
--------------
COMMON STOCKS AND CONVERTIBLE SECURITIES -- 3.8%
INSURANCE -- 0.2%
20,000 Hartford Financial Services,
7.00% Pfd. Convertible ................. 1,142,200
45,000 UnumProvident Corporation,
8.25% Pfd. Convertible ................. 1,446,750
--------------
TOTAL INSURANCE COMMON STOCKS
AND CONVERTIBLE SECURITIES ............. 2,588,950
--------------
MISCELLANEOUS -- 0.2%
65,000 Alltel Corporation,
7.75% Pfd. Convertible ................. 3,149,250
--------------
The accompanying notes are an integral part of the financial statements.
12
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2003
-------------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
COMMON STOCKS AND CONVERTIBLE SECURITIES (CONTINUED)
Utilities -- 3.4%
170,700 Ameren Corporation,
9.75% Pfd. Convertible ................. $ 4,828,249
215,000 American Electric Power,
9.25% Pfd. Convertible ................. 9,041,825
300,000 Duke Energy Corporation .................. 5,421,000*
295,300 FPL Group, Inc.,
8.50% Pfd. Convertible ................. 16,666,732
100,000 Keyspan Corporation,
8.75% Pfd. Convertible ................. 5,136,000
445,000 TXU Corporation,
8.75% Pfd. Convertible ................. 14,280,050
--------------
TOTAL UTILITIES COMMON STOCKS
AND CONVERTIBLE SECURITIES ............. 55,373,856
--------------
TOTAL COMMON STOCKS AND
CONVERTIBLE SECURITIES
(Cost $55,567,202) ..................... 61,112,056
--------------
OPTION CONTRACTS -- 1.2% (Cost $17,798,505)
11,080 Put Option on U.S. Treasury,
Bond Futures,
Expiring 02/21/04 ...................... 19,426,875+
--------------
MONEY MARKET FUND -- 0.4% (Cost $6,685,011)
6,685,011 BlackRock Provident Institutional
TempFund, 0.95% ........................ 6,685,011
--------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
TOTAL INVESTMENTS
(Cost $1,536,798,240***) ..................... 99.1% $1,585,648,256
OTHER ASSETS AND LIABILITIES (Net) ........... 0.9% 14,913,679
----- --------------
TOTAL NET ASSETS AVAILABLE TO COMMON
STOCK AND PREFERRED STOCK .................... 100.0%++ $1,600,561,935
----- --------------
AUCTION MARKET PREFERRED STOCK (AMPS)
REDEMPTION VALUE (542,000,000)
ACCUMULATED UNDECLARED DISTRIBUTIONS
TO AMPS (109,633)
--------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK $1,058,452,302
==============
--------------
* Securities eligible for the Dividends Received Deduction and distributing
Qualified Dividend Income.
** Securities distributing Qualified Dividend Income only.
*** Aggregate cost of securities held.
**** Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may by resold in transactions exempt from
registration to qualified institutional buyers.
+ Non-income producing.
++ The percentage shown for each investment category is the total value of
that category as a percentage of net assets available to Common and
Preferred Stock.
ABBREVIATIONS (Note 7):
FRAP -- Fixed/Adjustable Rate Preferred Stock
MIPS -- Monthly Income Preferred Securities
PINES -- Public Income Notes
QUIPS -- Quarterly Income Preferred Securities
REIT -- Real Estate Investment Trust
STOPS -- Semi-Annual Trust Originated Pass Through Securities
TOPRS -- Trust Originated Preferred Securities
TRUPS -- Trust Preferred Securities
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
Capital Securities are treated as debt instruments for financial statement
purposes and the amounts shown in the Shares/$ Par column are dollar amounts of
par value.
The accompanying notes are an integral part of the financial statements.
13
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2003
-------------------------------------------------------------
ASSETS:
Investments, at value (Cost $1,536,798,240)
(See accompanying Portfolio of Investments) ............. $1,585,648,256
Receivable for Investments sold ........................... 249,988
Dividends and interest receivable ......................... 21,045,919
Prepaid expenses .......................................... 122,432
--------------
Total Assets ...................................... 1,607,066,595
LIABILITIES:
Payable for securities purchased .......................... $5,427,282
Offering cost payable ..................................... 50,000
Investment advisory fee payable ........................... 557,771
Administration, Transfer Agent and Custodian fees and
expenses payable ........................................ 135,266
Servicing agent fees payable .............................. 163,959
Professional fees payable ................................. 91,875
Directors' fees payable ................................... 3,010
Accrued expenses and other payables ....................... 75,497
Accumulated undeclared distributions to Auction Market
Preferred Stock Shareholders ............................ 109,633
----------
Total Liabilities ................................. 6,614,293
--------------
AUCTION MARKET PREFERRED STOCK (21,680 SHARES
OUTSTANDING) REDEMPTION VALUE ........................... 542,000,000
--------------
NET ASSETS AVAILABLE TO COMMON STOCK ......................... $1,058,452,302
==============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
Undistributed net investment income ....................... $ 747,494
Accumulated net realized gain on investments sold ......... 34,739,287
Unrealized appreciation of investments .................... 48,850,016
Par value of Common Stock ................................. 411,137
Paid-in capital in excess of par value of Common Stock .... 973,704,368
--------------
Total Net Assets Available to Common Stock ........ $1,058,452,302
==============
NET ASSET VALUE PER SHARE OF COMMON STOCK:
Common Stock (41,113,748 shares outstanding) .............. $ 25.74
==============
The accompanying notes are an integral part of the financial statements.
14
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 31, 2003* THROUGH NOVEMBER 30, 2003
---------------------------------------------------------------
INVESTMENT INCOME:
Dividends ................................................. $ 32,839,160
Interest .................................................. 35,861,060
------------
Total Investment Income .............................. 68,700,220
EXPENSES:
Investment advisory fee ................................... $5,027,087
Servicing agent fee ....................................... 1,427,075
Administrator's fee ....................................... 461,161
Auction Market Preferred broker commissions and auction
agent fees ............................................. 852,067
Professional fees ......................................... 134,177
Insurance expense ......................................... 183,239
Shareholder transfer and payment agent fees and expenses .. 189,211
Directors' fees and expenses .............................. 78,259
Custodian fees and expenses ............................... 91,916
Other ..................................................... 118,189
----------
Total Expenses ....................................... 8,562,381
------------
NET INVESTMENT INCOME .......................................... 60,137,839
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net realized gain on investments sold during the period ... 35,783,891
Change in net unrealized appreciation of investments held
during the period ...................................... 48,850,016
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ................ 84,633,907
------------
DISTRIBUTIONS TO AUCTION MONEY MARKET PREFERRED
STOCK SHAREHOLDERS:
From net investment income (including changes in
accumulated undeclared distributions) .................. (3,898,996)
------------
NET INCREASE IN NET ASSETS TO COMMON STOCK RESULTING
FROM OPERATIONS ............................................. $140,872,750
============
-----------------
* Commencement of operations.
The accompanying notes are an integral part of the financial statements.
15
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
STATEMENTS OF CHANGES IN NET ASSETS
-------------------------------------------------------------
FOR THE PERIOD FROM
JANUARY 31, 2003* THROUGH
NOVEMBER 30, 2003
-------------------------
OPERATIONS:
Net investment income ..................................................... $ 60,137,839
Net realized gain on investments sold during the period ................... 35,783,891
Change in net unrealized appreciation of investments held during
the period ............................................................. 48,850,016
Distributions to Auction Market Preferred Stock (AMPS**) Shareholders
from net investment income, including changes in
accumulated undeclared distributions ................................... (3,898,996)
--------------
Net increase in net assets resulting from operations ...................... 140,872,750
DISTRIBUTIONS:
Dividends paid from net investment income to Common
Stock Shareholders ..................................................... (56,535,953)
Distributions paid from net realized capital gains to Common
Stock Shareholders ..................................................... --
--------------
FUND SHARE TRANSACTIONS:
Increase from Common Stock transactions ................................... 981,761,703
Decrease due to Cost of Common Stock offering ............................. (1,851,215)
Decrease due to Cost of AMPS** Issuance ................................... (5,895,000)
--------------
Net increase in net assets available to Common Stock
resulting from Fund share transactions ................................. 974,015,488
--------------
NET INCREASE IN NET ASSETS AVAILABLE TO
COMMON STOCK FOR THE PERIOD ............................................... 1,058,352,285
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ....................................................... 100,017
--------------
End of period (including undistributed net investment
income of $747,494) .................................................... $1,058,452,302
==============
--------------------
* Commencement of operations.
** Auction Market Preferred Stock.
The accompanying notes are an integral part of the financial statements.
16
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE 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 PERIOD
FROM JANUARY 31,
2003* THROUGH
NOVEMBER 30,
2003
----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................................................................ $ 23.82(1)
INVESTMENT OPERATIONS:
Net investment income ............................................................................... 1.46
Net realized and unrealized gain on investments ..................................................... 2.07
DISTRIBUTIONS TO AMPS** SHAREHOLDERS:
From net investment income .......................................................................... (0.09)
From net realized capital gains ..................................................................... --
-------------
Total from investment operations .................................................................... 3.44
-------------
COST OF ISSUANCE OF AMPS** .......................................................................... (0.14)
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income .......................................................................... (1.38)
From net realized capital gains ..................................................................... --
-------------
Total distributions to Common Shareholders .......................................................... (1.38)
-------------
Net asset value, end of period ...................................................................... $ 25.74
=============
Market value, end of period ......................................................................... $ 26.66
=============
Total investment return based on net asset value*** ................................................. 14.15%(2)(4)
=============
Total investment return based on market value *** ................................................... 12.65%(2)(4)
=============
RATIOS TO AVERAGE NET ASSETS AVAILABLE
TO COMMON STOCK SHAREHOLDERS:
Total net assets, end of period (in 000's) .................................................... $ 1,058,452
Operating expenses ............................................................................ 1.01%(3)
Net Investment Income **** .................................................................... 6.65%(3)
------------------------------------------
SUPPLEMENTAL DATA:+
Portfolio turnover rate ....................................................................... 101%(4)
Total net assets available to Common and Preferred Stock, end of period (in 000's) ............ $ 1,600,452
Ratio of operating expenses to total average net assets available to Common and Preferred Stock 0.72%(3)
* Commencement of operations.
** Auction Market Preferred Stock.
*** Assumes reinvestment of distributions at the price obtained by the Fund's
Dividend Reinvestment Plan.
**** 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) 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.
(2) Total investment 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 (January 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.
(3) Annualized.
(4) Not annualized.
The accompanying notes are an integral part of the financial statements.
17
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
-------------------------------------------------------------
The table below sets out information with respect to Auction Market
Preferred Stock (AMPS) currently outstanding.
AVERAGE
ASSET LIQUIDATING MARKET
TOTAL SHARES COVERAGE PREFERENCE VALUE
AT PERIOD END OUTSTANDING PER SHARE (1) PER SHARE PER SHARE (2)
------------- ------------ ------------- ----------- -------------
11/30/03 21,680 $73,827 $25,000 $25,000
---------------
(1) 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.
(2) Excludes accumulated undeclared dividends.
The accompanying notes are an integral part of the financial statements.
18
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------
1. ORGANIZATION
Flaherty & Crumrine/Claymore Preferred Securities Income Fund Incorporated
(the "Fund"), (formerly known as F&C/Claymore Preferred Securities Income Fund
Incorporated) was incorporated as a Maryland corporation on May 23, 2002, and
commenced operations on January 31, 2003 as a diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended. The
Fund's investment objective is to provide its common shareholders with high
current income consistent with the preservation of capital.
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 attributable to common shares by the number of shares of
Common Stock outstanding. The value of the Fund's net assets available to common
stock is deemed to equal the value of the Fund's total assets less (i) the
Fund's liabilities, (ii) the aggregate liquidation value of its Auction Market
Preferred Stock ("AMPS"), and (iii) accumulated and unpaid dividends on 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.
19
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
NOTES TO FINANCIAL STATEMENTS (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.
Furthermore, in recording investment income, the Fund also amortizes premiums
and accretes discounts on those fixed income securities, such as capital
securities and bonds, which trade and are quoted on an "accrual income" basis.
OPTIONS: Upon the purchase of an option by the Fund, the total purchase
price paid is recorded as an investment. The market valuation is determined as
set forth in the preceding portfolio valuation paragraph. 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.
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.
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 gains may be used by the Fund's Shareholders as a credit against their
own tax liabilities.
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.
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.
20
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------
Distributions from net realized gains for book purposes may include
short-term capital gains, which are included as ordinary income for tax purposes
and may exclude amortization of premium on "accrued 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 2003 was as follows:
DISTRIBUTIONS PAID IN FISCAL YEAR 2003
--------------------------------------
ORDINARY INCOME LONG-TERM CAPITAL GAINS
--------------- -----------------------
Common $56,535,953 --
Preferred $ 3,898,996 --
As of November 30, 2003, 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 UNREALIZED
ORDINARY INCOME LONG-TERM GAIN APPRECIATION/(DEPRECIATION)
--------------- -------------- ---------------------------
$22,377,817 $19,658,198 $45,987,747
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 is subject to pay an estimated $155,000 of Federal excise taxes
attributable to calendar year 2003.
3. INVESTMENT ADVISORY FEE, SERVICING AGENT FEE, ADMINISTRATION FEE, CUSTODIAN
FEE, TRANSFER AGENT FEE AND DIRECTORS' FEES
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
0.525% on the first $200 million of the Fund's average weekly total managed
assets, 0.45% of the next $300 million of the Fund's average weekly total
managed assets, and 0.40% on the Fund's average weekly total managed assets
above $500 million.
For purposes of calculating such fee and the fees to the Servicing Agent,
the Administrator and the Custodian (described below), the Fund's average weekly
total managed assets means the total assets of the Fund (including assets
attributable to any AMPS outstanding or otherwise attributable to the use of
leverage) minus the sum of accrued liabilities (other than debt representing
financial leverage). For purposes of determining total managed assets, the
liquidation preference of any AMPS issued by the Fund is not treated as a
liability.
Claymore Securities, Inc. (the "Servicing Agent") serves as the Fund's
servicing agent. In this capacity, it acts as shareholder servicing agent to the
Fund. 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
21
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------
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 value of the Fund's net assets attributable to common shares
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% on the first $200 million of the
Fund's average weekly total managed assets, 0.04% on the next $300 million of
the Fund's average weekly total managed assets, 0.03% on the next $500 million
of the Fund's average weekly total managed assets and 0.02% on 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 and, as compensation for PFPC Inc.'s services as such, the Fund pays
PFPC Inc. a fee at an annual rate of 0.02% on the first $150 million of the
Fund's average weekly net assets attributable to common shares, 0.01% on the
next $350 million of the Fund's average weekly net assets attributable to common
shares, 0.005% on the next $500 million of the Fund's average weekly net assets
attributable to the common shares and 0.0025% on the Fund's average weekly net
assets attributable to the common shares above $1 billion, plus certain
out-of-pocket expenses. For purpose of calculating such fee, the Fund's average
weekly net assets attributable to the common shares will be 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 AMPS. For this calculation,
the Fund's liabilities are deemed to include the aggregate liquidation
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% on the first $200 million of the Fund's average weekly
total managed assets, 0.008% on the next $300 million of the Fund's average
weekly total managed assets, 0.006% on the next $500 million of the Fund's
average weekly total managed assets, and 0.005% on 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
$100 for each telephone meeting. Effective October 17, 2003, the Audit Committee
Chairman will receive an annual fee of $2,500. In addition, the Fund will
reimburse all Directors for travel and out-of-pocket expenses incurred in
connection with such meetings.
4. PURCHASES AND SALES OF SECURITIES
For the period from inception through November 30, 2003, the cost of
purchases of U.S. Government and other securities, excluding short-term
investments, aggregated $977,121,054 and $1,790,899,825, respectively. Proceeds
from sales of U.S. Government and other securities, excluding short-term
investments, aggregated $980,712,749 and $275,862,494, respectively.
22
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------
At November 30, 2003, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $55,726,529
and aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $9,738,782.
5. COMMON STOCK
There are 250,000,000 shares of capital stock authorized of which
240,000,000 are classified as Common Stock, par value $0.01 per share. At
November 30, 2003, there were 41,113,748 shares of Common Stock issued and
outstanding.
ORGANIZATION EXPENSES AND COSTS OF THE COMMON STOCK OFFERING: Organization
expenses relating to organizing the Fund of $24,113 have been paid by the
Adviser. Costs of the Common Stock offering were estimated to be approximately
$2,042,500. The Adviser has also agreed to pay offering costs (excluding sales
charges) that exceed $0.05 per share. Costs of the Common Stock offering up to
$0.05 per share and sales charges will be borne by the Fund and its shareholders
and are accounted for as a reduction to paid-in capital. Based on the initial
offering of 36,500,000 shares, and the subsequent offering of 4,350,000 shares
through exercise of the underwriters' over-allotment option in connection with
the initial offering, all of the offering costs will be borne by the Fund.
Common Stock transactions are reflected in the following table:
PERIOD ENDED 11/30/03 (FUND INCEPTION TO DATE)
----------------------------------------------
SHARES GROSS AMOUNT SALES LOAD NET AMOUNT
------ ------------ ---------- ----------
Beginning Capitalization 4,198 $100,017 $0 $100,017
Initial Public Offering
on 1/29/03 36,500,000 912,500,000 41,062,500 871,437,500
Shares offered through
exercise of underwriters'
over-allotment option
On 2/18/03 2,500,000 62,500,000 2,812,500 59,687,500
On 3/19/03 1,850,000 46,250,000 2,081,250 44,168,750
Issued under the Dividend
Reinvestment and Cash
Purchase Plan 259,550 6,467,953 0 6,467,953
---------- -------------- ----------- ------------
Total 41,113,748 $1,027,817,970 $45,956,250 $981,861,720
23
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------
6. AUCTION MARKET PREFERRED STOCK ("AMPS")
The Fund's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of $0.01 par value preferred stock. The AMPS, which consists
of Series M7, T7, W7, Th7, F7, T28 and W28, are senior to the Common Stock and
results in the financial leveraging of the Common Stock. Such leveraging tends
to magnify both the risks and opportunities to Common Stock Shareholders.
Dividends on 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 M7, T7,
W7, Th7 and F7 and every 28 days for Series T28 and 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 between auction dates.
On April 23, 2003, the Fund issued 3,200 shares each for Series M7, T7, W7,
Th7 and F7 and 2,840 shares each for Series T28 and W28 totaling 21,680 shares
of AMPS. The AMPS represent a par value of $80 million each for Series M7, T7,
W7, Th7 and F7, and $71 million each for Series T28 and W28 or $542 million in
total, with an initial dividend rate equal to 1.35% for all Series.
The underwriters' sales load of 1% of the $542 million face value totaled
$5,420,000 and was immediately charged to common equity capital upon completion
of the offering.
Costs of the issue, including legal, printing, registration, rating agency
fees, etc. of $475,000 were charged against common equity capital. The sum of
underwriters' sales load and cost of the issue totaled $5,895,000.
At November 30, 2003, 3,200 shares for Series M7, T7, W7, Th7 and F7 and
2,840 shares for Series T28 and W28 of Auction Market Preferred Shares were
outstanding at the annual rate of 1.15%, 1.17%, 1.10%, 1.19%, 1.15%, 1.119%,
1.05%, for Series M7, T7, W7, Th7, F7, T28 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.
24
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------
7. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY
The Fund invests primarily in diversified portfolio of preferred
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 80% of the value of
the Fund's total assets will be invested in preferred securities. Under normal
market conditions, the Fund invests at least 25% of its total assets in
securities issued by companies in the utilities industry and at least 25% of its
total assets in securities issued by companies in the banking industry. Because
of the Fund's concentration of investments in the utility industry and in the
banking industry, the ability of the Fund to maintain its dividend and the value
of the Fund's investments could be adversely affected by the possible inability
of companies in these industries to pay dividends and interest on their
securities and the ability of holders of securities of such companies to realize
any value from the assets of the issuer upon liquidation or bankruptcy.
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 judged to be
comparable in quality, 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, and, under normal market conditions,
may invest up to 20% of its total assets in debt securities. Certain of its
investments in hybrid, i.e., fully taxable, preferred securities, such as TOPrS,
QUIPS, MIPS, TrUPS, QUIDS, QUIBS, CorTS, Trust Preferred Securities, capital
securities, and other similar or related investments, will be subject to the
foregoing 20% limitation to the extent that, in the opinion of the Fund's
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.
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
fundamental investment policies, involving any or all of the following: lending
of portfolio securities, short sales of securities, futures contracts, interest
rate swaps, options on futures contracts, options on securities and swaptions.
As in the case of when-issued securities, the use of over-the-counter
derivatives, such as interest rate swaps and swaptions, may expose the Fund to
25
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------
greater credit, operations, and market value risk than is the case with
regulated, exchange traded futures and options. With the exception of purchasing
securities on a when-issued or delayed delivery basis and lending portfolio
securities, these transactions are used for hedging or other appropriate
risk-management purposes or, under certain other circumstances, to increase
income. As of November 30, 2003, the Fund owned put options on U.S. Treasury
bond futures contracts. 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.
26
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Flaherty & Crumrine/Claymore Preferred Securities Income Fund Incorporated:
We have audited the accompanying statement of assets and liabilities of
Flaherty & Crumrine/Claymore Preferred Securities Income Fund Incorporated
(formerly, F&C/Claymore Preferred Securities Income Fund Incorporated),
including the fund's portfolio of investments, as of November 30, 2003, and the
related statement of operations, statement of changes in net assets and
financial highlights for the period from January 31, 2003 (commencement of
operations) to November 30, 2003. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform our audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of November 30, 2003 by correspondence with the custodian
and brokers. As to securities purchased or sold but not yet received or
delivered, we performed other appropriate auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Flaherty & Crumrine/Claymore Preferred Securities Income Fund Incorporated as of
November 30, 2003, the results of its operations, changes in its net assets and
financial highlights for the period from January 31, 2003 (commencement of
operations) to November 30, 2003 in conformity with accounting principles
generally accepted in the United States of America.
/S/ KPMG LLP
Boston, Massachusetts
January 16, 2004
27
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
SUPPLEMENTARY TAX INFORMATION (UNAUDITED)
-------------------------------------------------------------
For Fiscal 2003, the distributions attributable both to Common Stock and
AMPS are characterized as follows for purposes of Federal income taxes: for
individual investors, 12.63% consisted of Qualified Dividend Income ("QDI")
eligible for the maximum 15% personal tax rate, 68.18% consisted of ordinary
income taxable at regular personal tax rates, and 19.19% consisted of long term
capital gains. For corporate investors, 9.05% consisted of income eligible for
the inter-corporate Dividends Received Deduction ("DRD"), 71.76% consisted of
ordinary income taxable at regular corporate rates, and 19.19% consisted of long
term capital gains.
For Calendar 2003, the distributions to Common Stock are characterized as
follows for purposes of Federal income taxes. Of the $1.99205 per share
distributed out of net investment income, for individual investors, 17.70%
consisted of Qualified Dividend Income ("QDI") eligible for the maximum 15%
personal tax rate while 82.30% consisted of ordinary income taxable at regular
personal tax rates. For this same $1.99205 per share, distributions to corporate
investors were comprised 13.37% consisted of income eligible for the
inter-corporate Dividends Received Deduction ("DRD") while 86.63% consisted of
ordinary income taxable at regular corporate rates. In addition, for both
individual and corporate investors, $0.46045 per share of the December special
distribution was comprised of long term capital gains.
28
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
ADDITIONAL INFORMATION (UNAUDITED)
-------------------------------------------------------------
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
a shareholder whose Common Stock is registered in his 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 period from inception through November 30,
2003, $5,155 in brokerage commissions were incurred.
29
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
-------------------------------------------------------------
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.
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.
PROXY VOTING POLICIES
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,
(ii) on the Fund's website at www.fcclaymore.com and (iii) on the Securities and
Exchange Commission's website at www.sec.gov.
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, Stimes, 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 beginning
on page 31.
30
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
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:
--------------
MARTIN BRODY Director Class II Director Retired 4 Director, Jaclyn, Inc.
c/o HMK Associates since (luggage and
30 Columbia Turnpike January 2003 accessories). Director
Florham Park, NJ 07932 Emeritus, Smith Barney
Age: 82 Mutual Funds (18 Funds).
Flaherty & Crumrine
Preferred Income Fund,
Flaherty & Crumrine
Preferred Income Opportunity
Fund and Flaherty &
Crumrine/Claymore Total
Return Fund.
DAVID GALE Director Class I Director President & CEO of 4 Director Golden
Delta Dividend Group, Inc. since Delta Dividend State Vintners, Inc.
220 Montgomery Street January 2003 Group, Inc. (investments). (wine pressing).
Suite 426 Flaherty & Crumrine
San Francisco, CA 94104 Preferred Income Fund,
Age: 54 Flaherty & Crumrine
Preferred Income
Opportunity Fund and
Flaherty & Crumrine/
Claymore Total Return
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 initial term for each class expires as follows:
CLASS I DIRECTORS - one year term expires at
the Fund's 2005 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS II DIRECTORS - two year term expires at
the Fund's 2006 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.
31
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
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:
--------------
MORGAN GUST+ Director Class II Director From March 2002, 4 Flaherty & Crumrine
Giant Industries, Inc. since President of Giant Preferred Income Fund,
23733 N. Scottsdale Road January 2003 Industries, Inc. (petroleum Flaherty & Crumrine
Scottsdale, AZ 85255 refining and marketing); Preferred Income
Age: 56 and for more than five Opportunity Fund and
years prior thereto, Flaherty & Crumrine/
Executive Vice President, Claymore Total Return
and various other Vice Fund.
President positions at
Giant Industries, Inc.
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 January 2003 Oregon Foundation; Flaherty & Crumrine
Age: 66 Trustee, San Francisco Preferred Income
Theological Seminary. Opportunity Fund and
Flaherty & Crumrine/
Claymore Total Return
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 initial term for each class expires as follows:
CLASS I DIRECTORS - one year term expires at
the Fund's 2005 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS II DIRECTORS - two year term expires at
the Fund's 2006 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.
32
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
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
-------------- -------------- -------------- ------------- --------------- -------------------
INTERESTED
DIRECTORS:
----------
DONALD F. CRUMRINE++ Director, Class III Director Chairman of the Board, 4 Flaherty & Crumrine
301 E. Colorado Boulevard Chairman since Director of Flaherty & Preferred Income Fund,
Suite 720 of the Board January 2003 Crumrine Incorporated. Flaherty & Crumrine
Pasadena, CA 91101 and Chief Preferred Income
Age: 56 Executive Officer Opportunity Fund and
Flaherty & Crumrine/
Claymore Total Return
Fund.
NICHOLAS DALMASO+, ++ Director, Class I Director Senior Managing Director 2 Trustee, Dreman/
210 N. Hale Street Vice President since and General Counsel of Claymore Dividend and
Wheaton, IL 60187 and Assistant January 2003 Claymore Securities, Inc. Income Fund, Advent
Age: 38 Secretary since November, 2001, and Claymore Equity Income
Claymore Advisors, LLC Fund, MBIA Capital/
since October 2003. Claymore Managed
Partner of DBN Group Duration Investment
since April 2001. Grade Municipal Fund,
Associate General Counsel Western Asset/Claymore
of Nuveen Investments U.S. Treasury Inflation
from July 1999 to Protection Securities
November 2001. Prior to Fund and Director of
that, Associate General Flaherty & Crumrine/
Counsel of Van Kampen Claymore Total Return
Investments. 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 initial term for each class expires as follows:
CLASS I DIRECTORS - one year term expires at
the Fund's 2005 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS II DIRECTORS - two year term expires at
the Fund's 2006 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. Mr. Dalmaso is considered an "interested person" because
of his affiliation with Claymore Securities, Inc. which acts as the Fund's
servicing agent.
33
--------------------------------------------------------------------------------
Flaherty & Crumrine/Claymore Preferred Securities Income Fund
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
-------------- -------------- -------------- ------------- --------------- -------------------
OFFICERS:
---------
ROBERT M. ETTINGER President Since President and Director 2 Flaherty & Crumrine
301 E. Colorado Boulevard January 2003 of Flaherty & Crumrine Preferred Income Fund
Suite 720 Incorporated. and Flaherty & Crumrine
Pasadena, CA 91101 Preferred Income
Age: 45 Opportunity Fund.
PETER C. STIMES Chief Since Vice President of -- --
301 E. Colorado Boulevard Financial January 2003 Flaherty & Crumrine
Suite 720 Officer, Incorporated.
Pasadena, CA 91101 Chief
Age: 48 Accounting
Officer,
Vice President,
Treasurer,
and Assistant
Secretary
BRADFORD S. STONE Vice President Since Since May 2003, Vice -- --
392 Springfield Avenue and Assistant July 2003 President of Flaherty &
Mezzanine Suite Treasurer Crumrine; from June 2001
Summit, NJ 07901 2001 to April 2003,
Age: 44 Director of US Market
Strategy at Barclays
Capital; from February
1987 to June 2001, Vice
President of Goldman,
Sachs & Company as
Director of US Interest
Rate Strategy and,
previously, Vice
President of Interest
Rate Product Sales.
R. ERIC CHADWICK Vice President, Since Since August 2001, -- --
301 E. Colorado Boulevard Secretary and January 2003 Vice President of
Suite 720 Assistant Flaherty & Crumrine
Pasadena, CA 91101 Treasurer Incorporated; from
Age: 28 January 1997 through
November 1998, portfolio
manager of Koch
Industries, Inc.
34
Notice to: Owners of Common Stock of Flaherty & Crumrine/Claymore Preferred
Securities Income Fund Incorporated (NYSE: "FFC")
As required by Section 19 of the Investment Company Act of 1940, we are
providing you the following information. Please be aware that the information
below is provided according to Federal statute and principles that differ from
those which control the characterization of amounts for individual and corporate
Federal income tax purposes.
SHAREHOLDERS ARE ADVISED TO DISREGARD THE FOREGOING PER-SHARE AMOUNTS IN
THE COMPUTATION OF THEIR INCOME TAX LIABILITIES AND ONLY UTILIZE THE INFORMATION
PROVIDED ON FORM 1099-DIV.
The special distribution of $0.90 per FFC share which was declared December
4, 2003, and payable December 31, 2003, to shareholders of record on December
11, 2003, included $0.87 per share which would be characterized as gains from
disposition of securities under generally accepted accounting principles
("GAAP") and $0.03 per share which would be characterized as net investment
income under GAAP.
THESE AMOUNTS DIFFER FROM THOSE WHICH WILL APPEAR ON THE FORM 1099-DIV THAT
WILL BE PROVIDED TO SHAREHOLDERS IN JANUARY 2004. THE REASON FOR THE DIFFERENCES
ARE SET FORTH IN NOTE 2 OF THE FINANCIAL STATEMENTS OF THE FUND'S ANNUAL REPORT
TO SHAREHOLDERS.
After giving effect to the distribution of $0.87 per share characterized as
gains, the difference between the Fund's undistributed net realized profit and
net unrealized appreciation or depreciation of portfolio securities (as of
November 30, 2003) is $48,816,402.90. (Of this amount $9,734,432.64 represents
unrealized depreciation.)
For additional information, please contact the investment adviser, Flaherty
& Crumrine Incorporated, at 626/795-7300.
DIRECTORS
Martin Brody
Donald F. Crumrine, CFA
Nicholas Dalmaso
David Gale
Morgan Gust
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chairman of the Board
and Chief Executive Officer
Robert M. Ettinger, CFA
President
Peter C. Stimes, CFA
Chief Financial Officer,
Chief Accounting Officer,
Vice President, Treasurer,
and Assistant Secretary
Nicholas Dalmaso
Vice President and
Assistant Secretary
Bradford S. Stone
Vice President and
Assistant Treasurer
R. Eric Chadwick, CFA
Vice President, Secretary and
Assistant Treasurer
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@fin-mail.com
QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY &
CRUMRINE/CLAYMORE PREFERRED SECURITIES
INCOME 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 PREFERRED
SECURITIES INCOME FUND 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.
[LOGO OMITTED]
LIGHTHOUSE
FLAHERTY & CRUMRINE/CLAYMORE
PREFERRED SECURITIES
INCOME FUND
ANNUAL
REPORT
NOVEMBER 30, 2003
web site: www.fcclaymore.com
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party.
(b) There have been no amendments, during the period covered by this
report, to a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are employed
by the registrant or a third party, and that relates to any element of
the code of ethics description.
(c) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are employed
by the registrant or a third party, that relates to one or more of the
items set forth in paragraph (b) of this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the registrant's board of
directors has determined that David Gale and Robert F. Wulf are each qualified
to serve as an audit committee financial expert serving on its audit committee
and that they both are "independent," as defined by the Securities and Exchange
Commission.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
FLAHERTY & CRUMRINE INCORPORATED (THE "ADVISER")
POLICIES AND PROCEDURES FOR VOTING PROXIES FOR CLIENTS
(The definition of clients includes Flaherty & Crumrine Preferred Income Fund
Incorporated, Flaherty & Crumrine Preferred Income Opportunity Fund
Incorporated, Flaherty & Crumrine/Claymore Preferred Securities Income Fund
Incorporated, and Flaherty & Crumrine/Claymore Total Return Fund Incorporated
- collectively, the "Funds")
PURPOSE
These Policies and Procedures are designed to satisfy the Adviser's duties
of care and loyalty to its clients with respect to monitoring corporate
events and exercising proxy authority in the best interests of such
clients.
In connection with this objective, these Policies and Procedures are
designed to deal with potential complexities which may arise in cases where
the Adviser's interests conflict or appear to conflict with the interests
of its clients.
These Policies and Procedures are also designed to communicate with clients
the methods and rationale whereby the Adviser exercises proxy authority.
This document is available to any client or Fund shareholder upon request
and the Adviser will make available to such clients and Fund shareholders
the record of the Adviser's votes promptly upon request and to the extent
required by Federal law and regulations. 1
FUNDAMENTAL STANDARD
The Adviser will be guided by the principle that, in those cases where it
has discretion, it is bound to vote proxies and take such other corporate
actions consistent with the interest of its clients with regard to the
objective of wealth maximization.
GENERAL
The Adviser has divided its discussion in this document into two major
categories: voting with respect to common stock and voting with respect to
senior equity, e.g., preferred stock and similar securities. In those
events where the Adviser may have to take action with respect to debt, such
as in the case of amendments of covenants or in the case of default,
bankruptcy, reorganization, etc., the Adviser will apply the same
principles as would apply to common or preferred stock, MUTATIS MUTANDIS.
--------
1 This will include Fund web site reporting of proxy votes on Form N-PX
no later than 8/31/2004 for the twelve month period ended 6/30/2004.
These Policies and Procedures apply only where the client has granted
discretionary authority with respect to proxy voting of an issuer. Where
the Adviser does not have authority, it will keep appropriate written
records evidencing that such discretionary authority has not been granted.
The Adviser may choose not to keep written copies of proxy materials that
are subject to SEC regulation and maintained in the SEC's EDGAR database.
In other instances, the Adviser will keep appropriate written records in
its files or in reasonably accessible storage.
Similarly, the Adviser will keep in its files, or reasonably accessible
storage, work papers and other materials that were significant to the
Adviser in making a decision how to vote.
For purposes of decision making, the Adviser will assume that each ballot
for which it casts votes is the only security of an issuer held by the
client. Thus, when casting votes where the Adviser may have discretionary
authority with regard to several different securities of the same issuer,
it may vote securities "in favor" for those securities or classes where the
Adviser has determined the matter in question to be beneficial while, at
the same time, voting "against" for those securities or classes where the
Adviser has determined the matter to be adverse. Such cases occasionally
arise, for example, in those instances where a vote is required by both
common and preferred shareholders, voting as separate classes, for a change
in the terms regarding preferred stock issuance.
The Adviser will reach its voting decisions independently, after
appropriate investigation. It does not generally intend to delegate its
decision making or to rely on the recommendations of any third party,
although it may take such recommendations into consideration. The Adviser
may consult with such other experts, such as CPA's, investment bankers,
attorneys, etc., as it regards necessary to help it reach informed
decisions.
Absent good reason to the contrary, the Adviser will generally give
substantial weight to management recommendations regarding voting. This is
based on the view that management is usually in the best position to know
which corporate actions are in the best interests of common shareholders as
a whole.
With regard to those shareholder-originated proposals which are typically
described as "social, environmental, and corporate responsibility" matters,
the Adviser will typically give weight to management's recommendations and
vote against such shareholder proposals, particularly if the adoption of
such proposals would bring about burdens or costs not borne by those of the
issuer's competitors.
In cases where the voting of proxies would not justify the time and costs
involved, the Adviser may refrain from voting. From the individual client's
perspective, this would most typically come about in the case of small
holdings, such as might arise in connection with spin-offs or other
corporate reorganizations. From the perspective of the Adviser's
institutional clients, this envisions cases (1) as more fully described
below where preferred and common shareholders vote together as a class or
(2) other similar or analogous instances.
Ultimately, all voting decisions are made on a case-by-case basis, taking
relevant considerations into account.
VOTING OF COMMON STOCK PROXIES
The Adviser categorizes matters as either routine or non-routine, which
definition may or may not precisely conform to the definitions set forth by
securities exchanges or other bodies categorizing such matters. Routine
matters would include such things as the voting for directors and the
ratification of auditors and most shareholder proposals regarding social,
environmental, and corporate responsibility matters. Absent good reason to
the contrary, the Adviser normally will vote in favor of management's
recommendations on these routine matters.
Non-routine matters might include, without limitation, such things as (1)
amendments to management incentive plans, (2) the authorization of
additional common or preferred stock, (3) initiation or termination of
barriers to takeover or acquisition, (4) mergers or acquisitions, (5)
changes in the state of incorporation, (6) corporate reorganizations, and
(7) "contested" director slates. In non-routine matters, the Adviser, as a
matter of policy, will attempt to be generally familiar with the questions
at issue. This will include, without limitation, studying news in the
popular press, regulatory filings, and competing proxy solicitation
materials, if any. Non-routine matters will be voted on a case-by-case
basis, given the complexity of many of these issues.
VOTING OF PREFERRED STOCK PROXIES
Preferred stock, which is defined to include any form of equity senior to
common stock, generally has voting rights only in the event that the issuer
has not made timely payments of income and principal to shareholders or in
the event that a corporation desires to effectuate some change in its
articles of incorporation which might modify the rights of preferred
stockholders. These are non-routine in both form and substance.
In the case of non-routine matters having to do with the modification of
the rights or protections accorded preferred stock shareholders, the
Adviser will attempt, wherever possible, to quantify the costs and benefits
of such modifications and will vote in favor of such modifications only if
they are in the bests interests of preferred shareholders or if the issuer
has offered sufficient compensation to preferred stock shareholders to
offset the reasonably foreseeable adverse consequences of such
modifications. A similar type of analysis would be made in the case where
preferred shares, as a class, are entitled to vote on a merger or other
substantial transaction.
In the case of the election of directors when timely payments to preferred
shareholders have not been made ("contingent voting"), the Adviser will
cast its votes on a case-by-case basis after investigation of the
qualifications and independence of the persons standing for election.
Routine matters regarding preferred stock are the exception, rather than
the rule, and typically arise when the preferred and common shareholders
vote together as a class on such matters as election of directors. The
Adviser will vote on a case-by-case basis, reflecting the principles set
forth elsewhere in this document. However, in those instances where the
common shares of an issuer are held by a holding company and where, because
of that, the election outcome is not in doubt, the Adviser does not intend
to vote such proxies since the time and costs would outweigh the benefits.
ACTUAL AND APPARENT CONFLICTS OF INTEREST
Potential conflicts of interest between the Adviser and the Adviser's
clients may arise when the Adviser's relationships with an issuer or with a
related third party conflict or appear to conflict with the best interests
of the Adviser's clients.
The Adviser will indicate in its voting records available to clients
whether or not a material conflict exists or appears to exist. In addition,
the Adviser will communicate with the client (which shall mean the
independent Directors or Director(s) they may so designate in the case of
the Funds) in instances when a material conflict of interest may be
apparent. The Adviser shall describe the conflict to the client and state
the Adviser's voting recommendation and the basis therefore. If the client
considers there to be a reasonable basis for the proposed vote
notwithstanding the conflict or, in the case of the Funds, that the
recommendation was not affected by the conflict (without considering the
merits of the proposal), the Adviser shall vote in accordance with the
recommendation it had made to the client.
In all such instances, the Adviser will keep reasonable documentation
supporting its voting decisions and/or recommendations to clients.
AMENDMENT OF THE POLICIES AND PROCEDURES
These Policies and Procedures may be modified at any time by action of the
Board of Directors of the Adviser but will not become effective, in the
case of the Funds, unless they are approved by majority vote of the
non-interested Directors of the Funds. Any such modifications will be made
to the Adviser's clients by mail and/or other electronic means in a timely
manner. These Policies and Procedures, and any amendments thereto, will be
posted on the Funds' webs sites and will be disclosed in reports to
shareholders as required by law.
Dated: 7/24/2003
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 10. 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 last fiscal
half-year (the registrant's second fiscal half-year in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting.
ITEM 11. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to 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 PREFERRED SECURITIES INCOME 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 JANUARY 29, 2004
----------------------------------------------------------------------------
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 JANUARY 29, 2004
----------------------------------------------------------------------------
By (Signature and Title)* /S/PETER C. STIMES
-------------------------------------------------------
Peter C. Stimes, Chief Financial and Accounting
Officer, Vice President, Treasurer & Assistant
Secretary
(principal financial officer)
Date JANUARY 29, 2004
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.