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
F&C/CLAYMORE PREFERRED SECURITIES INCOME FUND INCORPORATED
----------------------------------------------------------------------
(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
F&C/Claymore Preferred Securities Income Fund 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: May 31, 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.
F&C/CLAYMORE PREFERRED SECURITIES INCOME FUND INCORPORATED
Dear Shareholder:
The F&C/Claymore Preferred Securities Income Fund is off to a strong start
since its initial public offering in late January. It has been a busy four
months, but we are right on schedule. In April, the Fund issued $542 million of
Auction Market Preferred Stock ("AMPS") to leverage the portfolio as planned.
Monthly dividends commenced on April 15th at the initial rate of 17 1/4 cents
per share. The dividend equates to a yield of 8.28% on the issue price of $25.
The Fund's net asset value ("NAV") climbed to $25.85 per share of common stock
as of May 31, 2003. Despite the increase in the net asset value, the market
price of the Fund's shares has remained close to the initial price of $25.
The Fund's investment portfolio is shaping up much as anticipated. As of
May 31st, approximately 60% of the portfolio was invested in preferred
securities, 15% in corporate debt securities, 20% in US Treasury and Agency
bonds, 4% in common stocks and convertible securities and the balance in cash
and hedge instruments. The allocation to Treasury and Agency bonds will continue
to decline as we identify attractive investments in the preferred and corporate
markets. Under normal conditions, the Fund will have at least 80% of the
portfolio in preferred securities (as of this writing we are approximately
70%!).
The allocation of the preferred securities, corporate debt, and common
stock positions to various industry groups is also in line with the Fund's
concentration policy. As of this writing, approximately 32% of the portfolio is
invested in the banking industry and almost 25% in utilities. Under normal
conditions, the Fund will invest at least 25% of the portfolio in each of these
two industries.
Spurred by declining interest rates and increased demand for preferred
securities, the Fund performed impressively during its first months of
operation. For the four months ending May 31st, the Fund produced a 10.1% total
return on NAV (despite only having the leverage in place for a fraction of the
period). The return on the market value of the Fund's shares was somewhat lower
as the premium of the market price over the NAV declined during the quarter. For
the period, the total return based upon the market value of the Fund's shares
equaled 2.4%. Please keep in mind, however, that past performance does not
guarantee future results.
Despite a quick and successful outcome to the Iraq war, the domestic
economy has not yet demonstrated that it is on the road to recovery. The Federal
Reserve has kept short-term interest rates at historic lows, and many believe
that further reductions will be necessary. With inflation subdued and
substantial slack in output capacity and labor markets (suggesting that
short-term rates are likely to remain low for an extended period), long-term
interest rates have also declined. Since the Fund began investing, yields on
two-year and ten-year US Treasuries have declined by roughly 0.5%. Lower
short-term interest rates provide a direct benefit by reducing the variable cost
of the Fund's AMPS. Recently, the rates have been running below 1 1/4%.
When long-term interest rates decline, we expect to lose money on the
Fund's hedges and make money on the securities in the portfolio. The hedging
strategy, however, is intended to tilt the playing field in the Fund's favor,
and it has been working! Since the hedge is constructed by purchasing put
options on US Treasury bond futures, the Fund's loss on the hedge is limited to
the cost of the puts. On the other
hand, with the right issues in the portfolio, the gains on our preferred
securities have more than offset the cost of the hedge, and the NAV has
increased.
Our fundamental investment philosophy is to own the issues that offer the
best value within the preferred securities universe. While this may seem
obvious, it often means that we pass up issues offering higher yields. If we
make sound investments with attractive yields and avoid serious credit losses,
then the Fund will have more money to invest to generate income over time. This
strategy should enable the Fund to produce a high sustainable dividend rate for
shareholders.
Preferred securities can be divided into two basic types - traditional
preferreds, which pay dividends, and taxable (or "hybrid") preferreds, which pay
interest. The Fund currently expects that its portfolio of preferred securities
will consist primarily of hybrid preferreds. On May 31st, about 82% of the
Fund's holdings of preferred securities were invested in hybrid preferreds,
while approximately 18% were invested in traditional preferreds.
The distinction between types of preferreds is important. In late May,
Congress passed The Jobs and Growth Tax Relief Reconciliation Act of 2003. Among
other things, the legislation established temporarily lower tax rates on certain
types of dividend income received by individuals. As a general rule, dividends
paid from common stock, traditional preferred stock and a small class of foreign
preferred securities will be entitled to the lower tax rates.
Investors are still evaluating the new tax law and determining how to
incorporate it into investment decisions (more on this in the Q&A section).
While the market tries to sort it all out, we'll stick to the basic game plan
and keep looking for the best bargains within the various sectors of the
preferred market. However, right now we expect the Fund's focus to remain
primarily on hybrid preferreds.
It is important to remember that the investment objective of the Fund is to
produce high current income consistent with preservation of capital. While no
one will apologize for the NAV returns of the past four months, it would be
imprudent to expect them to be repeated very often. Of course, that doesn't mean
we won't try, but when yields on long-term US Treasuries are well below 5% and
money market funds are earning less than 1%, investors need to keep their
expectations realistic. The Fund is well positioned to participate in a
continuation of the rally in the bond market, but its hedging strategy is there
to help protect the Fund should interest rates rise significantly.
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, including a description of the new information that we intend to post
to the Fund's web site in the near future, and discussion of a possible change
in the Fund's name.
Sincerely,
/S/ SIGNATURE /S/ SIGNATURE
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
June 30, 2003
2
QUESTIONS & ANSWERS
HOW DO YOU DETERMINE THE DIVIDENDS PAID BY THE FUND?
Over the course of the year, it is pretty simple - substantially all of the
Fund's net investment income must be distributed to shareholders if FFC is to
avoid being taxed, and we have every intention of doing so. The tricky part is
trying to project a sustainable dividend rate over a period of time.
We try to be conservative when setting the dividend. If there is
undistributed income left over at the end of the year, depending on the amount
it will either be paid out as an extra dividend or rolled into the next year's
income. If it becomes apparent the dividend rate is too high or too low, we will
examine the circumstances, and, if necessary, make the appropriate adjustment.
WHAT IS THE OUTLOOK FOR THE CURRENT DIVIDEND RATE PAID BY THE FUND?
The decline in interest rates since the Fund came to market has had two
offsetting impacts. First, the rate that the Fund is paying on its AMPS shares
has declined, saving a substantial sum. Second, the income earned by the Fund is
a bit lower than projected, as we have had to purchase securities at lower
yields with the proceeds of the AMPS offering. For now, these two have roughly
offset, and, at this point, we remain comfortable with the Fund's current
dividend rate.
WHAT IS THE CREDIT QUALITY OF THE FUND?
Currently, the portfolio is approximately 97% in securities that are rated
investment grade, with a dollar-weighted average credit rating of "A3" by
Moody's. You should be aware that the Fund may purchase up to 20% of "BB" rated
securities in companies that have senior debt rated investment grade by either
Moody's or S&P.
Although we currently believe that lower rated securities are overvalued
relative to the balance of the preferred market, there may be times when the
Fund will hold a higher percentage of non-investment grade issues. This will
generally be in securities that we believe have improving credit stories or are
currently undervalued.
WHY IS THE FUND TRADING AT A DISCOUNT TO NET ASSET VALUE?
Let's first understand that the current discount has been caused by the
significant increase in the NAV, with the market price just not keeping up.
While we would all love to see the market price track the NAV, supply and demand
for shares ultimately determines the market price of the Fund.
We attempt to affect the market price by effectively managing the NAV. For
the period from the initial public offering on January 29th to May 31st, the NAV
appreciated from $23.82 to $25.85, an increase of 8.5%. Over time, we believe
the performance of the NAV will prove the overriding factor in determining the
market price of the Fund.
COULD YOU REMIND ME AGAIN ABOUT HOW THE HEDGE IS SUPPOSED TO WORK?
The Fund attempts to protect against the risk of a significant rise in the
overall level of interest rates. Currently the Fund has purchased put options on
Treasury bond futures contracts. The Fund is also authorized, subject to
limitations, to purchase over-the-counter options to be a "fixed rate payer" in
3
interest rate swaps (a/k/a "pay-fixed swaptions"). Both types of hedging
instruments would expire worthless if interest rates either fall or do not
change much. In many ways, this is analogous to paying the cost of insurance. In
the event of a significant increase in interest rates, however, put options
and/or pay-fixed swaptions would be expected to appreciate in value.
Such hedge value appreciation would cushion the drop in the Fund's NAV.
Further, any gains on hedging could be reinvested in additional income producing
securities. This strategy is designed to enable the Fund to raise the dividend
in the event of a significant increase in interest rates. (Please see Note 8 to
the accompanying Financial Statements for an explanation of some of the risks of
these hedging strategies.)
HOW WILL THE NEW TAX LAW TREAT PREFERRED SECURITIES?
On May 28, 2003, President Bush signed the Jobs and Growth Tax Relief
Reconciliation Act of 2003. The cornerstone of the Act is a provision to lower
the maximum rate paid by individuals on certain types of qualified dividend
income ("QDI") to 15%. Prior to this legislation, dividend income was typically
taxed at the same rate as ordinary income.
Back in January, the Bush Administration proposed eliminating the double
taxation of dividends. When a company distributes a dividend to its
shareholders, it does so with income left over after it has already paid taxes.
Prior to the new legislation, shareholders were required to pay taxes at their
maximum tax rate on that same dividend. So a dollar earned by a company could be
taxed twice if it was distributed to the shareholders of the company. By
lowering the tax rate, the new law reduces, but doesn't eliminate, this double
taxation.
To be eligible for the lower tax rate as QDI, the dividend must be paid
from the company's after-tax income. For this reason it is important to
understand the difference between taxable (or "hybrid") preferred securities and
traditional preferred stock. Hybrid preferreds pay interest, which the issuer
can deduct from revenue in determining its taxable income. Traditional
preferreds pay dividends, which are distributed from income after taxes have
been paid. Because of the different tax treatment, hybrid preferred securities
normally have a higher yield than traditional preferred stocks.
For the investor, interest from hybrids is taxed as ordinary income, while
dividends from traditional preferreds may be taxed at the new, lower rate. As a
result, an investor in a low tax bracket or an IRA investor is more likely to
purchase taxable preferreds for the higher pre-tax income, while an investor in
a high tax bracket may prefer the QDI issue for the higher after-tax income. But
this isn't always the case. The market tends to offset the tax impact pretty
effectively, and securities that pay QDI will usually yield less (before taxes)
than those that pay interest.
HOW WILL THE NEW TAX LAW IMPACT THE FUND?
We take all of this into consideration when making investments for the
Fund. Currently, most of the holdings in the portfolio are hybrid preferred
securities. We do however find opportunities from time to time to own
traditional preferred stock without sacrificing income. At present, slightly
more than 10% of the Fund is invested in traditional preferreds, and an
additional 8% is in other securities that pay QDI.
These allocations are likely to change over time, so investors should not
assume there is a target level for traditional preferreds or other securities
that pay QDI. The Fund will own these securities when
4
we think they are more attractive than hybrid preferreds, taking all factors
including taxes into account (even if the yield is lower). But if we are right
and relationships move back in line, we are likely to sell the traditional
preferred and buy hybrid preferreds.
HOW WILL THE FUND REPORT THE BREAKDOWN BETWEEN DIVIDENDS AND INTEREST?
At the end of the year, the Fund will calculate the breakdown according to
the new rules and expects to report it to shareholders on Form 1099. We will
also publish the breakdown on the Fund's web site and in the Annual Report to
Shareholders.
CAN I REINVEST DIVIDENDS DIRECTLY INTO THE FUND?
Yes, the Fund's Dividend Reinvestment Plan (the "DRIP") provides a means of
acquiring additional shares of the Fund without paying the full market premium.
When the market price is at or above NAV, DRIP participants' dividends are
reinvested into new shares acquired directly from the Fund at NAV. The only
limitation is the IRS rule that the purchase cannot be more than 5% below the
market price. If the shares are selling at a discount from NAV, reinvestments
are executed in the market to take advantage of the discount.
More information on the DRIP is available. If your shares are held in a
brokerage account, ask your broker if his/her firm is set up to participate. If
you hold your shares in certificate form, or if you would just like more
information, call the DRIP's agent, PFPC Inc., at 1-800-331-1710.
DOES THE FUND HAVE A WEB SITE?
Yes, check out www.fcclaymore.com, the web site for the Fund. You can find
current information there on market prices, net asset values, discounts, yields,
dividends, performance and portfolio holdings, as well as news items and general
information about the Fund. In the near future, we intend to post on a monthly
basis the industry concentrations, the top 10 issuers held in the portfolio and
the credit quality breakdown of holdings in the portfolio. In addition, we will
post weekly the Fund's 1940 Act asset coverage ratio, which calculates the ratio
of the liquidation value of the Fund's Auction Market Preferred Stock (AMPS)
relative to the Fund's total net assets. We continue to improve the site, but we
need to know what additionally would be helpful. Please let us hear from you.
IS THE FUND CONSIDERING CHANGING ITS NAME?
Yes. Fund management thinks it is important to have a name that more
effectively distinguishes it from the myriad of other preferred funds. To
minimize the chances of confusion, we are considering changing the name to one
that is more clearly associated with the adviser.
5
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F&C/Claymore Preferred Securities Income Fund Incorporated
FINANCIAL DATA
PER SHARE OF COMMON STOCK (UNAUDITED)
----------------------------------------------------------
TOTAL DIVIDEND
DIVIDENDS NET ASSET NYSE REINVESTMENT
PAID (1) VALUE CLOSING PRICE PRICE (2)
--------- --------- ------------- ------------
January 31, 2003 ........... -- 23.82 25.00 --
February 28, 2003 .......... -- 23.96 25.03 --
March 31, 2003 ............. -- 23.93 24.96 --
April 30, 2003 ............. 0.1725 24.39 24.75 23.81
May 31, 2003 ............... 0.1725 25.85 25.25 24.97
----------------
(1) The Fund's monthly dividend to Common Shareholders are paid on the 15th day
of each month or the next succeeding business day if the 15th is not a
business day.
(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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F&C/Claymore Preferred Securities Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 2003 (UNAUDITED)
----------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
PREFERRED SECURITIES -- 58.9%
ADJUSTABLE RATE PREFERRED SECURITIES -- 1.6%
BANKING -- 1.3%
Fleet Boston Financial Corporation:
$ 3,000,000 BankBoston Capital Trust III,
Adj. Rate Pfd. 6/15/27
Capital Security ............... $ 2,745,000
J.P. Morgan Chase & Co.:
100,000 4.96% FRAP Fixed to 6/03 ... 5,066,250*
68,900 Series A, Adj. Rate Pfd. ....... 6,786,650*
255,000 Series N, Adj. Rate Pfd. ....... 6,390,937*
--------------
TOTAL BANKING ADJUSTABLE RATE
PREFERRED SECURITIES ........... 20,988,837
--------------
UTILITIES -- 0.3%
Public Service Enterprise Group, Inc.:
$ 5,000,000 Enterprise Capital Trust II,
Adj. Rate Pfd. 06/30/28
Capital Security ............... 2,762,500
$ 3,140,000 TXU Gas Capital I,
Adj. Rate Pfd. 07/01/28
Capital Security ............... 1,766,250
--------------
TOTAL UTILITIES ADJUSTABLE RATE
PREFERRED SECURITIES ........... 4,528,750
--------------
TOTAL ADJUSTABLE RATE
PREFERRED SECURITIES ........... 25,517,587
--------------
FIXED RATE PREFERRED SECURITIES -- 57.3%
BANKING -- 22.9%
108,197 Abbey National Group,
7.375% Pfd. .................... 2,923,483
ABN AMRO North America, Inc.:
1,500 6.46% Pfd., Pvt., 144A*** ...... 1,663,177*
5,551 6.59% Pfd., Pvt., 144A*** ...... 6,113,344*
Bank of America Corporation:
1,324,000 BAC Capital Trust IV,
5.875% Pfd. .................... 33,755,380
528,100 Bank of New York Capital V,
5.95% Pfd. ..................... 13,426,942
Bank One Corporation:
$ 5,600,000 First Chicago NBD Capital A,
7.95% 12/01/26
Capital Security, 144A*** ...... 6,742,148
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
536,535 Citigroup Capital IX,
6.00% Pfd. ..................... $ 13,826,507
Comerica, Inc.:
27,900 Comerica (Imperial)
Capital Trust I,
7.60% Pfd. ..................... 773,249
$ 11,000,000 Cullen/Frost Capital Trust I,
8.42% 2/01/27 Capital Security,
Series A ....................... 13,160,290
Deutsche Bank:
$ 500,000 BT Capital Trust B,
7.90% 1/15/27
Capital Security, Series B1 .... 578,625
Fleet Boston Financial Corporation:
$ 1,240,000 BankBoston Capital Trust I,
8.25% 12/15/26 Capital Security 1,500,846
$ 15,300,000 BankBoston Capital Trust II,
7.75% 12/15/26 Capital Security
Series B ....................... 17,807,900
55,000 Fleet Capital Trust VII,
7.20% Pfd. ..................... 1,499,850
79,100 Fleet Capital Trust VIII,
7.20% Pfd. ..................... 2,162,594
GreenPoint Financial Corporation:
$ 40,050,000 GreenPoint Capital Trust I,
9.10% 06/1/27 Capital Security 48,453,692
$ 16,350,000 HBOS Capital Funding LP,
6.85% 03/23/09 Capital Security 17,303,859
HSBC USA, Inc.:
$ 15,600,000 Republic New York Capital I,
7.750% 11/15/26 Capital Security 17,974,944
$ 16,200,000 Republic New York Capital II,
7.53% 12/4/26
Capital Security, STOPS ........ 18,349,011
J.P. Morgan Chase & Co.:
$ 4,000,000 Chase Capital I,
7.67% 12/01/26 Capital Security 4,597,920
$ 13,262,000 J.P. Morgan Capital Trust I,
7.54% 01/15/27 Capital Security 15,039,572
$ 11,661,000 J.P. Morgan Capital Trust II,
7.95% 02/27/27 Capital Security 13,643,545
The accompanying notes are an integral part of the financial statements.
7
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F&C/Claymore Preferred Securities Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2003 (UNAUDITED)
----------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
PREFERRED SECURITIES (CONTINUED)
FIXED RATE PREFERRED SECURITIES (CONTINUED)
BANKING (CONTINUED)
$ 12,150,000 Keycorp Institutional Capital A,
7.826% 12/01/26 Capital Security,
Series A ....................... $ 14,251,889
Marshall & Ilsley Corporation:
$ 25,280,000 M&I Capital Trust A,
7.65% 12/01/26 Capital Security 29,807,016
North Fork Bancorporation:
$ 1,000,000 North Fork Capital Trust II,
8.00% 12/15/27 Capital Security 1,185,710
Union Planters Corporation:
60 Union Planters Preferred Funding,
7.75% Pfd., 144A*** ............ 6,219,120
$ 8,000,000 Union Planters Capital Trust,
8.20% 12/15/26 Capital Security 9,380,960
6,000 U.S. Bancorp,
USB Capital IV, 7.35% Pfd. ..... 162,960
23,500 VNB Capital Trust I,
7.75% Pfd. ..................... 635,793
Wachovia Corporation:
437,800 Wachovia Preferred Funding,
7.25% Pfd., Series A ........... 12,105,170
Washington Mutual, Inc.:
$ 500,000 Great Western Finance Trust II,
8.206% 02/01/27
Capital Security, Series A ..... 593,505
$ 20,750,000 8.36% 12/01/26
Capital Security, 144A*** ...... 24,956,959
$ 6,000,000 Webster Capital Trust II,
10.00% 04/01/27 Capital Security 7,065,930
365,000 Wells Fargo Capital Trust VII,
5.85% Pfd. ..................... 9,316,625
--------------
TOTAL BANKING FIXED RATE
PREFERRED SECURITIES ........... 366,978,515
--------------
FINANCIAL SERVICES -- 13.7%
CIT Group, Inc.:
30,000 Corporate-Backed Trust Certificates,
7.75% Pfd., Series CIT ......... 809,700
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
Countrywide Financial Corporation:
$ 15,459,000 Countrywide Capital I,
8.00% 12/15/26 Capital Security $ 17,866,044
1,009,000 Countrywide Capital IV,
6.75% Pfd. ..................... 26,123,010
Fannie Mae:
700,000 5.10% Pfd. Series E ............ 35,609,000*
500,000 5.125% Pfd. .................... 25,785,000*
799,000 General Electric Capital Corporation,
5.875% Pfd. .................... 20,789,980
Household International, Inc.:
80,000 Household Capital Trust IV,
7.25% Pfd., Series P, TOPrS .... 2,041,200
Lehman Brothers Holdings, Inc.:
25,000 5.94% Pfd., Series C ........... 1,330,875*
1,655,000 Lehman Capital Trust III,
6.375% Pfd. Series K ........... 42,864,500
Morgan Stanley:
87,900 MSDW Capital Trust I,
7.10% Pfd. TOPrS ............... 2,229,144
1,114,900 Morgan Stanley Capital Trust III,
6.25% Pfd. ..................... 28,541,440
202,000 Morgan Stanley Capital Trust IV,
6.25% Pfd. ..................... 5,227,760
160,000 SLM Corporation,
6.97% Pfd. Series A ............ 8,929,600*
61,500 Transamerica Finance Corporation,
7.10% Pfd. QUIBS ............... 1,563,945
--------------
TOTAL FINANCIAL SERVICES FIXED
RATE PREFERRED SECURITIES ...... 219,711,198
--------------
INSURANCE -- 10.2%
ACE, Ltd.:
1,669,980 7.80% Pfd., Series C ........... 43,578,128
73,600 Capital Re LLC,
7.65% MIPS ..................... 1,862,080
AON Corporation:
94,900 Saturns-AON 2003-3,
8.00% Pfd. Series AON .......... 2,441,777
The Hartford Financial
Services Group, Inc.:
11,300 Hartford Life Capital I,
7.20% Pfd. Series A, TRUPS ..... 285,382
The accompanying notes are an integral part of the financial statements.
8
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F&C/Claymore Preferred Securities Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2003 (UNAUDITED)
----------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
PREFERRED SECURITIES (CONTINUED)
FIXED RATE PREFERRED SECURITIES (CONTINUED)
INSURANCE (CONTINUED)
564,000 ING Groep NV,
7.20% Pfd. ..................... $ 15,405,660
270,989 PartnerRe Ltd.,
6.75% Pfd., Series C ........... 6,988,806
332,235 Renaissancere Holding,
7.30% Pfd. Series B ............ 8,669,672
SAFECO Corporation:
$ 19,989,000 SAFECO Capital Trust I,
8.072% 07/15/37 Capital Security 23,668,575
56,000 Saturns-SAFC 2001-7,
8.25% Pfd. Series SAFC ......... 1,486,800
The St. Paul Companies, Inc.:
$ 2,200,000 MMI Capital Trust I,
7.625% 12/15/27 Capital Security,
Series B ....................... 2,365,935
12,285 St. Paul Capital Trust I,
7.60% Pfd. ..................... 320,761
$ 500,000 USF&G Capital,
8.312% 07/01/46
Capital Security, Pvt. 144A*** . 589,363
$ 16,750,000 USF&G Capital I,
8.50% 12/15/45
Capital Security 144A*** ....... 20,170,601
UnumProvident Corporation:
37,000 Corts-UnumProvident Corporation,
8.50% Pfd. ..................... 885,410
$ 8,000,000 Provident Financing Trust I,
7.405% 03/15/38 Capital Security 7,363,960
XL Capital Ltd.:
15,000 7.625% Pfd. Series B ........... 412,725
18,000 8.00% Pfd. Series A ............ 502,110
$ 2,900,000 Zurich Capital Trust I,
8.376% 06/01/37
Capital Security, 144A*** ...... 3,156,273
Zurich RegCaps Fund Trust I:
5,000 6.01% Pfd. Pvt. 144A*** ........ 4,797,050*
18,200 6.58% Pfd. Pvt. 144A*** ........ 17,674,020*
--------------
TOTAL INSURANCE FIXED RATE
PREFERRED SECURITIES ............. 162,625,088
--------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
MISCELLANEOUS INDUSTRIES -- 0.8%
4,750 Centaur Funding Corporation,
9.08% Pfd, 144A*** ............. $ 6,259,692
19,100 Equity Office Property Trust,
7.75% Pfd. Series G ............ 510,734
54,000 Ocean Spray Cranberries, Inc.,
6.25% Pfd., Pvt., 144A*** ...... 4,791,690*
14,700 Public Storage, Inc.,
7.625% Pfd. .................... 397,562
--------------
TOTAL MISCELLANEOUS
INDUSTRIES FIXED RATE
PREFERRED SECURITIES ........... 11,959,678
--------------
OIL AND GAS -- 1.7%
9,700 EOG Resources, Inc.,
7.195% Pfd., Series B .......... 11,167,416*
$ 13,315,000 Phillips 66 Capital Trust II,
8.00% 01/15/37 Capital Security 15,761,498
--------------
TOTAL OIL AND GAS FIXED RATE
PREFERRED SECURITIES ........... 26,928,914
--------------
UTILITIES -- 8.0%
AEP Texas Central Company:
38,200 CPL Capital I,
8.00% Pfd. Series A, QUIPS ..... 975,246
AGL Resources, Inc.:
$ 3,750,000 AGL Capital Trust,
8.17% 06/01/37 Capital Security 4,403,175
10,000 Allete Capital I,
8.05% QUIPS .................... 262,150
CenterPoint Energy, Inc.:
$ 11,262,000 Houston Light & Power,
Capital Trust II,
8.257% 02/01/37
Capital Security, Series B ..... 11,119,705
Commonwealth Edison Company:
$ 4,700,000 COMED Financing II,
8.50% 01/15/27
Capital Security, Series B ..... 5,897,090
$ 26,220,000 COMED Financing III,
6.35% 03/15/33 Capital Security 27,888,903
The accompanying notes are an integral part of the financial statements.
9
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2003 (UNAUDITED)
----------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
PREFERRED SECURITIES (CONTINUED)
FIXED RATE PREFERRED SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
Dominion Resources, Inc.:
50,000 Dominion CNG Capital Trust I,
7.80% Pfd. ..................... $ 1,367,250
14,985 Virginia Electric & Power Company,
$4.12 Pfd. ..................... 1,174,075*
21,684 Virginia Electric & Power Company,
$4.80 Pfd. ..................... 1,978,665*
Duke Energy Corporation:
51,000 4.50% Pfd., Series C, Pvt. ..... 3,614,115*
10,000 7.04% Pfd. Series Y ............ 1,033,350*
51,331 7.85% Pfd., Series S ........... 5,326,874*
700,000 Duke Capital Finance Trust III,
8.375% Pfd. .................... 18,634,000
7,800 Duke Energy Capital Trust II,
7.20% TOPrS .................... 205,491
42,500 Energy East Capital Trust I,
8.25% TOPrS .................... 1,159,400
10,240 Entergy Arkansas, Inc.,
4.56% Pfd. Series 1965 ......... 695,808*
10,850 Entergy Louisiana, Inc.,
8.00% Pfd., Series 92 .......... 277,977*
12,442 Great Plains Energy, Inc.,
4.20% Pfd. ..................... 857,503*
25,999 Indiana Michigan Power Company,
6.875% Sinking Fund Pfd. ....... 2,634,739*
107,100 Indianapolis Power & Light Company,
5.65% Pfd. ..................... 8,620,479*
10,000 Interstate Power & Light Company,
7.875% Pfd. Series A ........... 254,300
The Laclede Group, Inc.:
32,300 Laclede Capital Trust I,
7.70% Pfd. ..................... 852,397
Northern States Power Company:
177,351 NSP Financing I,
7.875% Pfd. TOPrS .............. 4,525,997
OGE Energy Corporation:
3,800 OGE Energy Capital Trust I,
8.375% Pfd. .................... 101,821
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
$ 2,300,000 PECO Energy Capital Trust III,
7.38% 04/6/28,
Capital Security, Series D ..... $ 2,681,018
Pacific Enterprises:
4,550 $4.40 Pfd. ..................... 351,101*
1,370 $4.75 Pfd., Series 53 .......... 114,128*
Potomac Electric Power Company:
69,669 $3.40 Pfd. Sinking Fund ........ 3,490,068*
11,000 Potomac Electric Power Trust I,
7.375% Pfd. TOPrS .............. 277,585
140,600 Public Service Company of Colorado,
Capital Trust I,
7.60% TOPrS .................... 3,595,142
Public Service Company of Oklahoma:
53,300 PSO Capital I,
8.00% TOPrS .................... 1,360,216
Public Service Enterprise Group, Inc.:
215,750 PSEG Funding Trust II,
8.75% Pfd. ..................... 5,908,314
Puget Energy, Inc.:
$ 2,000,000 Puget Capital Trust,
8.231% 06/01/27
Capital Security, Series B ..... 2,154,990
94,100 Southwestern Public Service Capital I,
7.85% Pfd. Series A ............ 2,374,143
58,800 Swepco Capital I,
7.875% TOPrS, Series A ......... 1,499,988
$ 500,000 Union Electric Company,
7.69% 12/15/36 Capital Security,
Series A, 144A*** .............. 605,190
--------------
TOTAL UTILITIES FIXED RATE
PREFERRED SECURITIES ........... 128,272,393
--------------
TOTAL FIXED RATE
PREFERRED SECURITIES ........... 916,475,786
--------------
TOTAL PREFERRED SECURITIES
(Cost $891,377,764) ............ 941,993,373
--------------
The accompanying notes are an integral part of the financial statements.
10
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2003 (UNAUDITED)
----------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
CORPORATE DEBT SECURITIES -- 16.4%
FINANCIAL SERVICES -- 2.5%
General Motors Acceptance Corporation:
20,000 7.25% 2/7/33 PINES ............. $ 501,700
$ 20,000,000 8.00% 11/01/31 Capital Security,
Senior Bonds ................... 20,880,600
Household International, Inc.:
600,000 Household Financial Corporation,
6.875% Pfd. Senior Notes ....... 16,245,000
$ 2,200,000 Morgan Stanley Finance,
8.03% 02/28/17 Capital Units ... 2,448,798
--------------
TOTAL FINANCIAL SERVICES
CORPORATE DEBT SECURITIES ...... 40,076,098
--------------
INSURANCE -- 2.5%
369,000 Delphi Financial,
8.00% 05/15/33 Senior Notes .... 9,533,115
$ 27,000,000 Travelers Property Casualty,
6.375% 03/15/33
Capital Security, Senior Notes . 30,295,890
--------------
TOTAL INSURANCE CORPORATE
DEBT SECURITIES ................ 39,829,005
--------------
OIL AND GAS -- 0.7%
$ 9,295,000 KN Energy, Inc.,
7.45% 03/01/98 Capital Security 10,826,119
--------------
UTILITIES -- 10.1%
$ 34,000,000 AEP Texas Central Company,
6.65% 02/15/33
Capital Security 144A*** ....... 38,312,220
235,190 Appalachian Power Corporation,
7.20% 03/31/38
Series A, Senior Notes ......... 6,012,632
$ 9,000,000 CenterPoint Energy, Inc.,
6.95% 03/15/33
Capital Security Pvt. 144A*** .. 10,685,655
$ 10,000,000 Constellation Energy Group,
7.60% 04/1/32
Capital Security, Senior Notes . 12,433,700
$ 1,000,000 DTE Energy Company,
6.375% 04/15/33
Capital Security, Senior Notes . 1,092,670
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
Duke Capital Corporation:
$ 11,179,000 6.75% 02/15/32
Capital Security, Senior Notes . $ 10,842,680
$ 10,000,000 8.00% 10/1/19
Capital Security, Senior Notes . 10,969,350
567,015 Georgia Power Company,
5.90% 04/15/33 Senior Notes .... 14,569,451
50,000 Mississippi Power Company,
5.625% Pfd., Senior Notes ...... 1,284,750
34,600 Ohio Power Company,
7.375% Senior Notes ............ 882,992
Public Service Enterprise Group, Inc.:
$ 18,220,000 PSEG Power LLC,
8.625% 04/15/31 Capital Security 24,519,838
TXU US Holding Company:
$ 10,000,000 Oncor Electric,
7.25% 01/15/33
Capital Security, Pvt. 144A*** . 12,115,650
$ 15,000,000 TXU Energy Company,
7.00% 03/15/13
Capital Security 144A*** ....... 16,814,100
66,000 Virginia Power Capital Trust,
7.375% 07/30/42 ................ 1,801,800
--------------
TOTAL UTILITIES CORPORATE
DEBT SECURITIES ................ 162,337,488
--------------
MISCELLANEOUS -- 0.6%
BellSouth Corporation:
$ 390,000 BellSouth Telecommunication,
7.00% 12/01/95 Capital Security 479,017
15,780 Corporate-Backed Trust Certificates,
7.00% 12/01/95 Series BLS ...... 417,539
$ 5,000,000 Ford Motor Company,
7.45% 07/16/31 Capital Security 4,705,075
$ 4,000,000 Pulte Homes, Inc.,
6.375% 05/15/33
Capital Security, Senior Notes . 4,032,840
--------------
TOTAL MISCELLANEOUS CORPORATE
DEBT SECURITIES ................ 9,634,471
--------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $240,194,873) ............ 262,703,181
--------------
The accompanying notes are an integral part of the financial statements.
11
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2003 (UNAUDITED)
----------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
COMMON STOCKS AND CONVERTIBLE SECURITIES -- 3.8%
INSURANCE -- 0.1%
20,000 Hartford Financial Services,
7.00% Pfd. Convertible ......... $ 1,034,200
20,000 UnumProvident Corporation,
8.25% Pfd. Convertible ......... 586,100
--------------
TOTAL INSURANCE COMMON STOCKS
AND CONVERTIBLE SECURITIES ..... 1,620,300
--------------
MISCELLANEOUS -- 0.2%
65,000 Alltel Corporation,
7.75% Pfd. Convertible ......... 3,217,175
--------------
UTILITIES -- 3.5%
170,700 Ameren Corporation,
9.75% Pfd. Convertible ......... 4,852,147
215,000 American Electric Power,
9.25% Pfd. Convertible ......... 9,268,650
300,000 Duke Energy Corporation .......... 5,797,500*
295,300 FPL Group, Inc.,
8.50% Pfd. Convertible ......... 17,486,190
100,000 Keyspan Corporation,
8.75% Pfd. Convertible ......... 5,184,500
445,000 TXU Corporation,
8.75% Pfd. Convertible ......... 13,439,000
--------------
TOTAL UTILITIES COMMON STOCKS
AND CONVERTIBLE SECURITIES ..... 56,027,987
--------------
TOTAL COMMON STOCKS
AND CONVERTIBLE SECURITIES
(Cost $54,750,752) ............. 60,865,462
--------------
U.S. GOVERNMENT AND AGENCY DEBT SECURITIES -- 19.0%
$ 75,000,000 Fannie Mae,
6.625% 11/15/30 ................ 95,371,875
$ 65,000,000 Freddie Mac,
4.50% 01/15/13 ................. 69,724,200
$110,000,000 United States Treasury Bond,
6.125% 08/15/29 ................ 138,408,600
--------------
TOTAL U.S. GOVERNMENT AND
AGENCY DEBT SECURITIES
(Cost $290,800,615) ............ 303,504,675
--------------
VALUE
SHARES/$ PAR (NOTE 2)
------------ --------
OPTION CONTRACTS -- 0.6% (Cost $9,639,553)
10,000 Put Option on U.S. Treasury
Bond September Futures,
Expiring 08/23/03 .............. $ 9,695,313+
--------------
MONEY MARKET FUND -- 0.7% (Cost $11,765,398)
11,765,398 BlackRock Provident Institutional
TempFund, 1.19% ................ 11,765,398
--------------
TOTAL INVESTMENTS
(Cost $1,498,528,955**) ............ 99.4% 1,590,527,402
OTHER ASSETS AND LIABILITIES (Net).. 0.6% 9,604,602
----- --------------
TOTAL NET ASSETS AVAILABLE TO COMMON
STOCK AND PREFERRED STOCK .......... 100.0%++ $1,600,132,004
----- --------------
AUCTION MARKET PREFERRED STOCK (AMPS)
REDEMPTION VALUE (542,000,000)
ACCUMULATED UNDECLARED DISTRIBUTIONS
TO AMPS (108,654)
--------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK $1,058,023,350
==============
--------------
* Securities eligible for the Dividends Received Deduction.
** Aggregate cost of securities held.
*** Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration to qualified institutional buyers.
+ Non-income producing.
++ The percentage shown for each investment category is the total value of
that category as a percentage of net assets available to Common and
Preferred Stock.
ABBREVIATIONS (Note 7):
FRAP -- Fixed/Adjustable Rate Preferred Stock
MIPS -- Monthly Income Preferred Securities
PINES -- Public Income Notes
QUIBS -- Senior Quarterly Interest Bonds
QUIPS -- Quarterly Income Preferred Securities
STOPS -- Semi-Annual Trust Originated Pass Through Securities
TOPRS -- Trust Originated Preferred Securities
TRUPS -- Trust Preferred Securities
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
Capital Securities are treated as debt instruments for financial statement
purposes and the amounts shown in the Shares/$ Par column are dollar amounts of
par value.
The accompanying notes are an integral part of the financial statements.
12
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2003 (UNAUDITED)
----------------------------------------------------------
ASSETS:
Investments, at value (Cost $1,498,528,955)
(See accompanying schedule) .......................... $1,590,527,402
Cash and Receivable for Investments sold ............... 2,243,520
Dividends and interest receivable ...................... 19,694,855
Prepaid expenses ....................................... 260,944
--------------
Total Assets ................................... 1,612,726,721
LIABILITIES:
Payable for securities purchased ....................... $10,777,390
Offering costs payable ................................. 757,141
Investment advisory fee payable ........................ 568,867
Administration, Transfer Agent and Custodian fees and
expenses payable ..................................... 166,913
Servicing agent fees payable ........................... 166,613
Professional fees payable .............................. 31,803
Accrued expenses and other payables .................... 125,990
Accumulated undeclared distributions to Auction Market
Preferred Stock Shareholders ......................... 108,654
-----------
Total Liabilities .............................. 12,703,371
--------------
AUCTION MARKET PREFERRED STOCK (21,680 SHARES
OUTSTANDING) REDEMPTION VALUE ........................ 542,000,000
--------------
NET ASSETS AVAILABLE TO COMMON STOCK ...................... $1,058,023,350
==============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
Undistributed net investment income .................... $1,793,394
Accumulated net realized (loss) on investments sold .... (4,938,493)
Unrealized appreciation on investments ................. 91,998,447
Par value of Common Stock .............................. 409,262
Paid-in capital in excess of par value of Common Stock . 968,760,740
--------------
Total Net Assets Available to Common Stock ..... $1,058,023,350
==============
NET ASSET VALUE PER SHARE OF COMMON STOCK:
Common Stock (40,926,173 shares outstanding) ........... $ 25.85
==============
The accompanying notes are an integral part of the financial statements.
13
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 31, 2003* THROUGH MAY 31, 2003 (UNAUDITED)
----------------------------------------------------------------------
INVESTMENT INCOME:
Dividends++ ................................................ $ 6,757,717
Interest ................................................... 12,750,623
------------
Total Investment Income ............................... 19,508,340
EXPENSES:
Investment advisory fee .................................... $1,644,248
Servicing agent fee ........................................ 434,264
Administrator's fee ........................................ 163,926
Auction Market Preferred broker commissions and auction
agent fees .............................................. 146,792
Shareholder transfer and payment agent fees and expenses ... 128,456
Insurance expense .......................................... 61,109
Professional fees .......................................... 45,031
Custodian fees and expenses ................................ 30,465
Directors' fees and expenses ............................... 23,985
Other ...................................................... 146,355
----------
Total Expenses ........................................ 2,824,631
------------
NET INVESTMENT INCOME ........................................... 16,683,709
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net realized (loss) on investments sold during the period .. (4,938,493)
Change in unrealized appreciation of investments held
during the period ....................................... 91,998,447
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ................. 87,059,954
------------
DISTRIBUTIONS TO AUCTION MARKET PREFERRED
STOCK SHAREHOLDERS:
From net investment income (including changes in
accumulated, but undeclared distributions) .............. (783,201)
------------
NET INCREASE IN NET ASSETS TO COMMON STOCK RESULTING
FROM OPERATIONS .............................................. $102,960,462
============
-----------------
* Commencement of operations.
++ For Federal income tax purposes, a significant portion of this amount does
NOT qualify for the inter-corporate dividends received deduction ("DRD") or
as Qualified Dividend Income ("QDI") for individuals.
The accompanying notes are an integral part of the financial statements.
14
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK
-------------------------------------------------------------
FOR THE PERIOD
FROM JANUARY 31,
2003* THROUGH
MAY 31, 2003
(UNAUDITED)
----------------
OPERATIONS:
Net investment income ...................................................... $ 16,683,709
Net realized (loss) on investments sold during the period .................. (4,938,493)
Change in net unrealized appreciation of investments held during
the period .............................................................. 91,998,447
Distributions to Auction Market Preferred Stock (AMPS)
Shareholders from net investment income ................................. (783,201)
--------------
Net increase in net assets resulting from operations ....................... 102,960,462
DISTRIBUTIONS:
Distributions paid from net investment income to Common
Stock Shareholders ...................................................... (14,107,114)
Distributions paid from net realized capital gains to Common
Stock Shareholders ...................................................... --
--------------
FUND SHARE TRANSACTIONS:
Increase from Common Stock transactions .................................... 977,007,485
Decrease due to Cost of Common Stock offering .............................. (2,042,500)
Decrease due to Cost of AMPS Issuance ...................................... (5,895,000)
--------------
Net increase in net assets available to Common Stock
resulting from Fund share transactions .................................. 969,069,985
--------------
NET INCREASE IN NET ASSETS AVAILABLE TO
COMMON STOCK FOR THE PERIOD ................................................ 1,057,923,333
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ........................................................ 100,017
--------------
End of period (including undistributed net investment
income of $1,793,394) ................................................... $1,058,023,350
==============
-----------------
* Commencement of operations.
The accompanying notes are an integral part of the financial statements.
15
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
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 MAY 31, 2003
(UNAUDITED)
----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ...................... $ 23.82(1)
INVESTMENT OPERATIONS:
Net investment income ..................................... 0.41
Net realized and unrealized gain on investments ........... 2.12
DISTRIBUTIONS TO AMPS** SHAREHOLDERS:
From net investment income ................................ (0.02)
From net realized capital gains ........................... --
----------
Total from investment operations .......................... 2.51
----------
COST OF ISSUANCE OF AMPS** ................................ (0.14)
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income ................................ (0.34)
From net realized capital gains ........................... --
----------
Total distributions to Common Shareholders ................ (0.34)
----------
Net asset value, end of period ............................ $ 25.85
==========
Market value, end of period ............................... $ 25.25
==========
Total investment return based on net asset value*** ....... 10.06%(2)(4)
==========
Total investment return based on market value *** ......... 2.43%(2)(4)
==========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
TO COMMON STOCK SHAREHOLDERS:
Total net assets, end of period (in 000's) ........... $1,058,023
Operating expenses ................................... 0.74%(3)
Net Investment Income **** ........................... 4.14%(3)
--------------------------------------------
SUPPLEMENTAL DATA:+
Portfolio turnover rate .............................. 87%(4)
Total net assets available to Common and Preferred Stock,
end of period (in 000's) ........................... $1,600,023
Ratio of operating expenses to total average net assets
available to Common and Preferred Stock ............ 0.61%(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 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.
16
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED) (UNAUDITED)
----------------------------------------------------------
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)
------------- ------------ -------------- ----------- -------------
05/31/03* 21,680 $73,802 $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.
* Unaudited.
The accompanying notes are an integral part of the financial statements.
17
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------
1. ORGANIZATION
F&C/Claymore Preferred Securities Income Fund Incorporated (the "Fund") 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 attributable to
common shares 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 one or more valuations obtained from one or
more broker/dealers or banks that are not counterparties 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.
18
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
----------------------------------------------------------
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities sold
are recorded on the identified cost basis. Dividend income is recorded on
ex-dividend dates. Interest income is recorded on the accrual basis.
Furthermore, in recording investment income, the Fund also amortizes premiums
and accretes discounts on those fixed income securities, such as capital
securities, 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. 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.
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.
19
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
----------------------------------------------------------
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 average weekly total managed assets and 0.15% of the
Fund's average weekly total managed assets above $500 million.
PFPC Inc., a member of the PNC Financial Services Group, Inc. ("PNC
Financial Services"), serves as the Fund's Administrator. As Administrator, PFPC
Inc. calculates the net asset value of the Fund's shares 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 and 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 Transfer Agent,
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 Stock, 0.01% on the next $350 million of the Fund's average weekly net
assets attributable to Common Stock, and 0.005% on the next $500 million of the
Fund's average weekly net assets attributable to Common Stock and 0.0025% on the
Fund's average weekly net assets attributable to Common Stock above $1 billion,
plus certain out-of-pocket expenses. For purpose of calculating such fee, the
Fund's average weekly net assets attributable to Common Stock 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 include the aggregate liquidation preference
of any outstanding Fund preferred shares.
20
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
----------------------------------------------------------
PFPC Trust Company ("PFPC Trust") serves as the Fund's Custodian. PFPC
Trust is an indirect subsidiary of PNC Financial Services. As compensation for
PFPC Trust's services as custodian, the Fund pays PFPC Trust a monthly fee at
the annual rate of 0.010% 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. 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 May 31, 2003, the cost of purchases
of US Government and other securities, excluding short-term investments,
aggregated $882,226,500 and $1,235,441,436, respectively. Proceeds from sales of
US Government and other securities, excluding short-term investments, aggregated
$597,504,375 and $48,422,391, respectively.
At May 31, 2003, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost was $92,540,920 and aggregate
gross unrealized depreciation for all securities in which there is an excess of
tax cost over value was $542,473.
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 May
31, 2003, there were 40,926,173 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.
21
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
----------------------------------------------------------
Common Stock transactions are reflected in the following table:
FOUR MONTHS ENDED 5/31/03 (FUND INCEPTION TO DATE)
--------------------------------------------------
SHARES GROSS AMOUNT SALES LOAD NET AMOUNT
---------- -------------- ----------- ------------
Beginning Capitalization 4,198 $ 100,017 $ 0 $ 100,017
Initial Public Offering
on 3/31/03 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 71,975 1,713,735 0 1,713,735
---------- -------------- ----------- ------------
Total 40,926,173 $1,023,063,752 $45,956,250 $977,107,502
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. AMPS, which consists of
Series M7, T7, W7, Th7, F7, T28 and W28, are senior to the Common Stock and
their issuance 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 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. AMPS have an aggregate
22
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
----------------------------------------------------------
liquidation 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, and were issued
with an initial dividend rate equal to 1.35% for all Series.
The underwriters' discount of 1% of the $542 million face value of AMPS
totaled $5,420,000 and was immediately charged to common equity capital upon
completion of the offering.
Costs of the AMPS issue, including legal, printing, registration, rating
fees, etc. of $475,000, were charged against common equity capital. The sum of
underwriters' discount and cost of the issue totaled $5,895,000.
At May 31, 2003, 3,200 shares for Series M7, T7, W7, Th7 and F7 and 2,840
shares for Series T28 and W28 of AMPS were outstanding, with an annual dividend
rate of 1.33%, 1.30%, 1.30%, 1.33%, 1.32%, 1.288%, 1.28%, 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.
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 current
market conditions, the Fund expects that its portfolio of preferred securities
will consist principally of "hybrid" or taxable preferreds. Also, under normal
market conditions, the Fund invests at least 25% of its total assets in
securities issued by companies in the utilities industry and at least 25% of its
total assets in securities issued by companies in the banking industry. 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
23
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
----------------------------------------------------------
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
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 or 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 May 31, 2003, the Fund owned put options on US 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.
24
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED)
----------------------------------------------------------
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
a shareholder whose Common Stock is registered in his 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 May 31, 2003,
$1,852 in brokerage commissions were incurred.
25
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
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.
26
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
----------------------------------------------------------
INFORMATION ABOUT FUND DIRECTORS AND OFFICERS
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 Since inception Retired 3 Director, Jaclyn, Inc.
c/o HMK Associates (luggage and
30 Columbia Turnpike accessories). Director
Florham Park, NJ 07932 Emeritus, Smith Barney
Age: 81 Mutual Funds (18 Funds).
DAVID GALE Director Since inception President & CEO of 3 Director, Golden State
Delta Dividend Group, Inc. Delta Dividend Vintners, Inc.
220 Montgomery Street Group, Inc. (investments).
Suite 426
San Francisco, CA 94104
Age: 54
MORGAN GUST+ Director Since inception Since March 2002, 3 --
Giant Industries, Inc. President and previously
23733 N. Scottsdale Road held other officerships of
Scottsdale, AZ 85255 Giant Industries, Inc.
Age: 56 (petroleum refining and
marketing)
ROBERT F. WULF Director Since inception Financial Consultant; 3 --
3560 Deerfield Drive South Trustee, University of
Salem, OR 97302 Oregon Foundation;
Age: 66 Trustee, San Francisco
Theological Seminary.
-------------------
+ As a Director, represents holders of shares of the Fund's Auction Market
Preferred Stock.
27
--------------------------------------------------------------------------------
F&C/Claymore Preferred Securities Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
----------------------------------------------------------
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
-------------- -------------- -------------- ------------- --------------- -------------------
INTERESTED
DIRECTORS:
DONALD F. CRUMRINE++ Director, Since inception Chairman of the Board, 3 --
301 E. Colorado Boulevard Chairman Director of Flaherty &
Suite 720 of the Board Crumrine Incorporated.
Pasadena, CA 91101 and Chief
Age: 55 Executive Officer
NICHOLAS DALMASO+, ++ Director, Since inception Chief Operations Officer 1 Trustee of
210 N. Hale Street Vice President and General Counsel of Advent Claymore
Wheaton, IL 60187 and Assistant Claymore Securities, Inc. Convertible Securities
Age: 37 Secretary since November, 2001. and Income Fund
Associate General Counsel
of Nuveen Investments
from July 1999 to
November, 2001. Prior to
that, Associate General
Counsel of Van Kampen
Investments.
OFFICERS:
ROBERT M. ETTINGER President Since inception President and Director of 2 --
301 E. Colorado Boulevard Flaherty & Crumrine
Suite 720 Incorporated.
Pasadena, CA 91101
Age: 44
PETER C. STIMES Chief Financial Since inception Vice President of -- --
301 E. Colorado Boulevard Officer, Flaherty & Crumrine
Suite 720 Chief Accounting Incorporated.
Pasadena, CA 91101 Officer, Vice
Age: 47 President, Treasurer,
and Assistant Secretary
ROBERT E. CHADWICK Vice President, Since inception Since August 2001, -- --
301 E. Colorado Boulevard Secretary Vice President of
Suite 720 and Assistant Flaherty & Crumrine
Pasadena, CA 91101 Treasurer Incorporated, from January
Age: 28 1997 through November
1998, portfolio manager of
Koch Industries, Inc.
-------------------
+ 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.
28
[This page intentionally left blank]
[This page intentionally left blank]
[This page intentionally left blank]
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
Robert E. Chadwick, CFA
Vice President, Secretary and
Assistant Treasurer
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@fin-mail.com
QUESTIONS CONCERNING YOUR SHARES OF F&C/
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 F&C/ CLAYMORE PREFERRED SECURITIES INCOME
FUND INCORPORATED FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR
REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR
OF ANY SECURITIES MENTIONED IN THIS REPORT.
[GRAPHIC OMITTED]
F&C CLAYMORE LOGO ART
SEMI-ANNUAL
REPORT
MAY 31, 2003
web site: www.fcclaymore.com
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer or officers and principal
financial officer or 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
(17 CFR 270.30a-3(c))) are effective, based on their evaluation of
these controls and procedures as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph.
(b) There were no significant changes in the registrant's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
ITEM 10. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 are attached hereto.
(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) F&C/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 JULY 30, 2003
----------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)*/S/ DONALD F. CRUMRINE
--------------------------------------------------------
Donald F. Crumrine, Director, Chairman of the Board
and Chief Executive Officer
(principal executive officer)
Date JULY 30, 2003
----------------------------------------------------------------------------
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 JULY 30, 2003
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.